-----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, CG9tVlMEKUHmImuxAgiiruyZKaqIDm0qJFkgxFIv2e7XNPHhMDXTobJc0I229Yqf tMq9JKQf3bYirTRIEPKM3Q== 0000912057-96-005788.txt : 19960402 0000912057-96-005788.hdr.sgml : 19960402 ACCESSION NUMBER: 0000912057-96-005788 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA COMMERCIAL BANKSHARES CENTRAL INDEX KEY: 0000704886 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953819471 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 002-78788 FILM NUMBER: 96542943 BUSINESS ADDRESS: STREET 1: 4100 NEWPORT PLACE CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 7148632300 MAIL ADDRESS: STREET 1: 4100 NEWPORT PLACE CITY: NEWPORT BEACH STATE: CA ZIP: 92660 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended 12/31/95 [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934. For the transition period to Commission File number 2-78788 CALIFORNIA COMMERCIAL BANKSHARES -------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 95-3748495 (State or other jurisdiction of (IRS Employer incorporation or organization) identification No.) 4100 NEWPORT PLACE, NEWPORT BEACH, CALIFORNIA 92660 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 863-2300 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Not applicable. The aggregate market value of voting stock held by non-affiliates of the registrant was $9,410,000 on March 11, 1995, based on the average bid and asked price of $5.50 share as reported on the National Daily Quotation Service "Pink Sheets". 2,944,000 --------- (Number of shares of Common Stock outstanding as of March 13, 1996) PART I. ITEM 1. BUSINESS. BUSINESS OF THE COMPANY California Commercial Bankshares (the "Company") is a bank holding company, incorporated under the laws of the State of California on June 16, 1982, and is registered under the Bank Holding Company Act of 1956, as amended. The Company's primary purpose is to be a bank holding company for its wholly-owned subsidiary, National Bank of Southern California, a national banking association organized under the laws of the United States (the "Bank"). At December 31, 1995, the Company had total assets of $334 million and total shareholders' equity of $21 million. On January 10, 1983, the Company purchased 450,000 shares of the Bank's common stock, which constituted all of the issued and outstanding capital stock of the Bank. The Bank's charter was granted by the Comptroller of the Currency (the "Comptroller") on January 10, 1983, and the Bank began operations as a full-service commercial bank on that date. During 1985, the Company activated another subsidiary, Venture Partners, Inc., a California corporation incorporated on March 11, 1983 ("Venture"), which acts primarily an intermediary for tax deferred exchanges, a service function for the escrow department of the Bank. The Company has no other subsidiaries or affiliated businesses other than the Bank and Venture. The Company's executive offices are located at 4100 Newport Place, Newport Beach, California 92660. Its telephone number is 714-863-2300. BUSINESS OF THE BANK The Bank's accounts are insured by the Federal Deposit Insurance Corporation ("FDIC") and it is a member of the Federal Reserve System. In addition to its headquarters office in Newport Beach, California, the Bank presently operates four branches located in Santa Ana, El Toro, Orange and Fountain Valley, California. At December 31, 1995, the Bank had total assets of $334 million, gross loans and leases of $195 million, total deposits of $309 million and total shareholders' equity of $23 million. The Bank is engaged in substantially all of the services customarily conducted by community banks in California including checking, savings and time deposit accounts, commercial, interim construction, personal, home improvement, mortgage, automobile and other installment and term loans, leasing, traveler's checks, safe deposit boxes, collection services, night depository facilities, wire transfers and automatic teller machines. See distribution of assets, liabilities and shareholders' equity, interest rates and interest differential at pages 16, 17 and 18. 2 LOANS AND LEASES The aggregate balances of loans and leases, including loans available for sale and excluding deferred fees, outstanding at the indicated dates are shown in the following table according to the type of loan. All loans are domestic loans.
AT DECEMBER 31: $ in 000's 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Real Estate: Miniperms (Real estate secured with 1-5 years maturity) $ 62,466 $ 66,102 $ 62,799 $ 52,479 $ 47,688 Equity Lines 7,039 8,691 10,838 11,191 14,281 Construction 24,954 29,792 38,563 56,703 66,996 ------------------------------------------------------------ Total Real Estate 94,459 104,585 112,200 120,373 128,965 Commercial 84,271 82,600 86,887 103,576 128,750 Installment and Other 13,120 10,845 11,290 15,506 20,544 Leases 3,064 3,615 3,970 5,590 8,109 ------------------------------------------------------------ Total Loans And Leases $194,914 $201,645 $214,347 $245,045 $286,368 ------------------------------------------------------------ ------------------------------------------------------------
The declining balance of loans from 1991 through 1995 reflects the Bank's commitment of its financial and human resources to identifying and collecting problem loans and leases and to disposing of other real estate owned obtained through foreclosure. The Bank concentrates its lending activities in three principal areas: (1) REAL ESTATE LOANS Real estate loans are comprised of construction loans, miniperm loans collateralized by first or junior trust deeds on specific properties and equity lines of credit. The properties collateralizing real estate loans are principally located in the Bank's primary market area of Orange County and contiguous communities. The construction loans are comprised of loans on residential and income producing properties, generally have terms less than two years and typically bear an interest rate that floats with prime. The miniperm loans finance the purchase and/or ownership of income producing properties. Miniperm loans generally are made on a thirty year amortization schedule with a lump sum, balloon payment due in 1-5 years. Equity lines of credit are revolving lines of credit collateralized by junior trust deeds on real properties. They bear a rate of interest that floats with prime and have maturities of five to seven years. The Bank also makes a small number of loans on 1-4 family residential properties and 5 or more unit residential properties. From time to time, the Bank purchases participation interests in loans made by other institutions. These loans are subject to the same underwriting criteria and approval processes as loans made directly by the Bank. During 1995, the Bank purchased $339,000 of participations in real estate loans from other institutions. At December 31, 1995, the Bank had $2,279,000 outstanding in real estate participation loans purchased from other institutions. (2) COMMERCIAL LOANS are granted to finance operations or for specific purposes, such as to finance the purchase of equipment. Since cash flows from operations are generally the primary source of repayment, the Bank's policies provide specific guidelines regarding required debt coverage and other important financial ratios. Lines of credit are made to businesses or individuals based on the financial strength and integrity of the borrower, are generally collateralized by inventory and accounts receivable, but may be uncollateralized, and generally have a maturity of one year or less. They generally bear an interest rate that floats with prime. 3 Commercial term loans are typically made to finance the acquisition of fixed assets, refinance short term debt originally used to purchase fixed assets or, in rare cases, to finance purchases of businesses. Commercial term loans generally have a term of from one to five years. Commercial term loans may be collateralized by the asset being acquired or other available assets. (3) CONSUMER LOANS include personal loans, auto loans, boat loans, home improvement loans, equipment loans, revolving lines of credit and other loans typically made by banks to individual borrowers. The Bank also makes leases on new and used automobiles. These leases may be closed-end or commercial leases, have a term of one to five years and bear interest at a fixed rate. The following tables show the amount of loans of the Bank outstanding as of December 31, 1995 which, based on remaining scheduled repayments of principal, (1) are due in the period indicated and (2) for the amounts due after one year, are fixed rate or floating rate.
MATURING IN MATURING IN MATURING AFTER 1996 1997-2000 2000 TOTAL $ IN 000'S ---------- Commercial and other $61,926 $37,230 $ 9,415 $108,571 Real Estate and Construction 33,971 32,456 19,916 86,343 ---------------------------------------------------- TOTAL $95,897 $69,686 $29,331 $194,914 ---------------------------------------------------- ----------------------------------------------------
$ IN 000'S INTEREST SENSITIVITY ---------------------------- FIXED RATE VARIABLE RATE Due After One But Within Five Years $25,498 $44,188 Due After Five Years 14,281 15,050 ---------------------------- TOTAL $39,779 $59,238 ---------------------------- ----------------------------
The prime rate with which the interest rate floats may be the prime rate of a specific money center bank, the prime rate posted in the Wall Street Journal or the Bank's own posted prime rate. The Bank's prime rate is set by Bank management. The Bank's prime rate at December 31, 1995 was 9.50%. The following table shows the concentration of loans by categories.
$ IN 000'S DECEMBER 31, 1995 1994 BALANCE PERCENTAGE BALANCE PERCENTAGE ------- ---------- ------- ---------- Real Estate Loans: Mortgage $62,466 32.05% $66,102 32.78% Equity Lines 7,039 3.61% 8,691 4.31% Construction 24,954 12.80% 29,792 14.78% --------------------------------------------- TOTAL REAL ESTATE LOANS $94,459 48.46% $104,585 51.87% Commercial Loans 84,271 43.24% 82,600 40.96% Installment and Other 13,120 6.73% 10,845 5.38% Leases 3,064 1.57% 3,615 1.79% --------------------------------------------- TOTAL LOANS & LEASES $194,914 100.00% $201,645 100.00% Less: Deferred Loan Origination Fees (702) (782) Less: Allowance for Loan and Lease Losses (6,542) (5,660) --------------------------------------------- NET LOANS & LEASES $187,670 $195,203 --------------------------------------------- ---------------------------------------------
4 There are no concentrations of loans exceeding 10% of total loans which were not otherwise disclosed as a category of loans in the above table. CLASSIFIED ASSETS AND NONPERFORMING ASSETS. The Company maintains an internal loan review program. All loans are categorized into one of the five following groups: Pass loans: loans that contain strong credit quality and ability to repay. Special mention loans: loans that have an identified weakness which requires correction to protect the Bank (not considered a classified loan). Substandard loans: loans that exhibit some weakness and require immediate attention to correct the deficiency. Doubtful loans: loans that exhibit a significant weakness and whose full collection is improbable. Loss loans: Loans that are charged off upon identification of being loss loans. The following table shows the amounts of special mention loans, classified loans (substandard or doubtful) and the amount of other real estate owned as of the dates indicated (see ITEM 1. BUSINESS, BUSINESS OF THE BANK, ALLOWANCE FOR LOAN AND LEASE LOSSES FOR A DISCUSSION OF LOANS AND LEASES CHARGED OFF):
$ IN 000'S AT DECEMBER 31, 1995 1994 1993 ---- ---- ---- Special Mention $10,458 $12,822 $11,988 ----------------------------- Substandard 14,704 37,451 39,314 Doubtful 317 1,505 4,156 ----------------------------- Total Classified Loans 15,021 38,956 43,470 Other Real Estate Owned 2,165 2,676 2,289 ----------------------------- TOTAL SPECIAL MENTION LOANS, CLASSIFIED LOANS AND OTHER REAL ESTATE OWNED $27,644 $54,454 $57,747 -----------------------------
Special mention loans, classified loans and other real estate owned decreased significantly in 1995 as compared to 1994. The balances decreased as a result of the Bank's high staffing levels of personnel dedicated to problem loan identification and workout and the disposal of other real estate owned. It is generally the Company's policy to discontinue the accrual of interest on a loan when any installment payment of interest or principal is 90 days or more past due, when management otherwise determines the collectibility of the interest or principal on the loan is unlikely or when the loan is deemed to be a potential foreclosure. Accrued but unpaid interest on loans placed on nonaccrual status is generally reversed from income. In certain cases where the value of the collateral is sufficiently in excess of the balance of principal and interest owing, the Bank may continue to accrue interest or may not reverse accrued but unpaid interest from income. 5 The following table shows the aggregate amount and percentage of the portfolio of delinquent loans and nonaccrual loans as of December 31, 1995:
LOANS DELINQUENT AT DECEMBER 31, 1995 ------------------------------------- $ IN 000'S 30-89 DAYS 90 DAYS AND OVER TOTAL LOANS ---------- ---------- ---------------- ----------- PERCENT OF PERCENT OF PERCENT OF AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO ------ ---------- ------ ---------- ------ ----------- NONACCRUAL LOANS Real Estate $7,688 3.93% $6,111 3.12% $13,799 7.05% Commercial 205 .10% 735 .38% 940 .48% Installment and Prime Equity 171 .09% 636 .33% 80 7.42% Leases 0 0% 27 .01% 27 .01% -------------------------------------------------------------------------- Total Nonaccrual Loans $8,064 4.12% $7,509 3.84% $15,573 7.96% -------------------------------------------------------------------------- -------------------------------------------------------------------------- DELINQUENT ACCRUING LOANS Real Estate 53 .03% 0 0 53 .03% Commercial 584 .30% 0 0 584 .30% Installment and Prime Equity 606 .31% 0 0 606 .31% Leases 0 .0% 0 0 0 0 -------------------------------------------------------------------------- Total Accruing Delinquent Loans 1,243 .64% 0 0 1,243 .64% -------------------------------------------------------------------------- Total Delinquent Loans $9,307 4.76% $7,509 3.84% $16,816 8.60% -------------------------------------------------------------------------- --------------------------------------------------------------------------
6 The following table sets forth information regarding the Company's nonperforming assets at December 31, 1995:
$ in 000's SPECIFIC ALLL PROPERTY DESCRIPTION LOCATION BALANCE ALLOCATION - -------------------- -------- ------- ------------ NON-ACCRUAL LOANS Commercial Building Los Angeles County $859 0 Apartment Complex Orange County 968 0 Commercial Building Orange County 2,576 0 Retail Complex Riverside County 1,698 0 Apartment Complex Riverside County 881 0 Commercial Building & Finished Lots Los Angeles County 880 0 29 Condos Units Orange County 1,287 0 Medical Center Riverside County 410 0 Commercial Building Orange County 401 0 Commercial Building Los Angeles County 1,381 0 Auto Service Center Orange County 843 0 Motel Orange County 592 0 Retail Center Orange County 824 0 22 Other Loans Various 1,973 0 --------------------------- TOTAL NONACCRUAL $15,573 0 OTHER REAL ESTATE OWNED Condo Orange County 50 Finished Residential Lots Orange County 184 Commercial Building Orange County 235 Auto Service Center & Los Angeles County 1,232 Car Wash Vacant Lot Orange County 43 Commercial Building Riverside County 26 Land San Mateo County 395 --------------------------- TOTAL OTHER REAL ESTATE OWNED 2,165 --------------------------- TOTAL NONACCRUAL LOANS AND OTHER REAL ESTATE OWNED $17,738 0 --------------------------- ---------------------------
ALLOWANCE FOR LOAN AND LEASE LOSSES The allowance for loan and lease losses is based on an analysis of the portfolio and reflects an amount which, in management's opinion, is adequate to provide for potential losses after giving consideration to the portfolio, current economic conditions, past loss experience and other pertinent factors. Management and the internal credit review function monitor delinquency reports, new loans, renewals and reports of on-site inspections to identify credits requiring special attention. Annual examinations of the loan portfolio are also performed by an independent, third party credit review professional. 7 On a quarterly basis, senior management, in conjunction with the board of directors, reviews the adequacy of the allowance for loan and lease losses. Loan officers prepare Special Asset Credit Reports ("SAC reports") for each loan on the special asset report. SAC reports include all pertinent details about the loan, a write-up of current status, steps being taken to correct any problems, a detailed workout plan and recommendations as to classification of the loans as pass, special mention, substandard, doubtful or loss (see ITEM 1. BUSINESS, BUSINESS OF THE BANK, CLASSIFIED ASSETS AND NONPERFORMING ASSETS) and specific allocation of the Allowance for Loan and Lease Losses. Loans classified as loss are charged against the Allowance for Loan and Lease Losses. Specific allowances are established for loans designated by management. Quarterly, the credit review function is responsible for preparing a historical migration analysis of loans as part of the determination of the required balance of the Allowance for Loan and Lease Losses. The migration analysis tracks charged off loans to their original classifications and assigns a risk factor to each loan in the portfolio based upon classifications of such loans as pass, special mention, substandard or doubtful. The amount of the general portion of the allowance is determined by multiplying the aggregate principal balance of loans in each category by the specified percentage. The amount of the required general portion of the allowance is added to the specific allowances previously established to form the total balance of the allowance. The amount of the allowance is based upon management's evaluation of this analysis and other factors, including adequacy of collateral, economic conditions, collateral value trends, nonperforming asset data, delinquencies and other material. Management utilizes its best judgement in providing for possible loan losses and establishing the allowance for loan and lease losses. However, the allowance is an estimate which is inherently uncertain and depends on the outcome of future events. Adverse economic conditions and a declining real estate market in California have adversely affected certain borrowers' ability to repay loans. A continuation of these conditions or a further decline in the California economy could result in further deterioration in the quality of the loan portfolio and could require increased provisions for loan and lease losses that cannot reasonably be predicted at this date. In January 1994, a severe earthquake occurred in the San Fernando Valley of Los Angeles, causing over 50 deaths, destroying property valued in the billions of dollars, causing major impediments to Southern California transportation networks and affecting the business community. Damage in the Bank's service area was relatively minimal and, after contacting customers and investigating its potential exposure, the Bank is not aware of any of its borrowers who were directly affected by the earthquake. Since the calculation of the adequacy of the allowance for credit losses is based largely on loan classification categories and not only whether a loan is performing or nonperforming, changes in the amount of nonperforming loans will not necessarily be reflected in corresponding changes in the ratio of the allowance for loan and lease losses to nonperforming loans. The following table shows the ratios of the allowance for loan and lease losses to total loans and the balance of the allowance for loan and lease losses to nonperforming loans as of December 31:
AT DECEMBER 31, 1995 1994 ---- ---- Ratio of the Allowance for Loan and Lease Losses to Total Loans 3.36% 2.81% Ratio of the Allowance for Loan and Lease Losses to Nonperforming Loans 42.01% 38.32%
8 SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes loan and lease balances of the Bank at December 31, 1995, 1994, 1993, 1992 and 1991, changes in the allowance for possible loan losses arising from loans charged off, additions to the allowance for loan and lease losses which have been charged to expense and the ratio of net charge-offs during the periods to average loans and leases:
$ in 000's December 31, 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Amount of Gross Loans and Leases Outstanding at the End of the Period $194,914 $201,645 $214,347 $245,045 $286,368 Balance of Allowance for Loan and Lease Losses at the Beginning of the Period $5,660 $7,221 $6,253 $7,107 $3,705 Loans and Leases Charged Off (1) (6,212) (6,082) (4,664) (6,434) (3,722) ---------------------------------------------------- Recoveries of Previously Charged Off Loans and Leases (1) 494 1,156 743 805 261 ---------------------------------------------------- Net Loans Charged Off (5,718) (4,926) (3,921) (5,629) (3,461) Additions to the Allowance Charged to Expense 6,600 3,365 4,889 4,775 6,863 Balance of the Allowance for Loan and Lease Losses at the Ending of the Period $6,542 $5,660 $7,221 $6,253 $7,107 ---------------------------------------------------- Ratio of Net Charge-offs During the Period to Average Loans Outstanding 2.93% 2.44% 1.74% 2.08% 1.25% ---------------------------------------------------- ----------------------------------------------------
(1) See the table below for summary of the amounts of loans and leases charged off and recoveries of loans and leases previously charged off.
$ IN 000'S 1995 1994 1993 1992 1991 ---------- ---- ---- ---- ---- ---- Loans and Leases Charged Off: Commercial $1,332 $1,150 $2,763 $5,712 $3,463 Real Estate - Mortgage and Construction 4,569 4,764 1,274 344 102 Installment & Other 300 120 507 252 131 Leases 11 48 120 126 26 -------------------------------------------------- Total Loans and Leases Charged Off $6,212 $6,082 $4,664 $6,434 $3,722 Recoveries of Loans and Leases Previously Charged off: Commercial $35 $593 $669 $795 $255 Real Estate - Mortgage and Construction 408 461 0 0 0 Installment & Other 17 50 62 7 4 Lease 34 52 13 3 2 -------------------------------------------------- Total Recoveries of Loans and Leases $494 $1,156 $743 $805 $261 -------------------------------------------------- Net Loans and Leases Charged Off $5,718 $4,926 $3,921 $5,629 $3,461 -------------------------------------------------- --------------------------------------------------
9 The allowance for loan and lease losses has been allocated between the following categories of loans and leases according to the amount deemed adequate to provide for the possibility of losses being incurred at the dates indicated:
At December 31, 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Ratio of Ratio of Ratio of Ratio of Ratio of Allowance to Allowance to Allowance to Allowance to Allowance to Outstanding Outstanding Outstanding Outstanding Outstanding $ in 000's Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans Commercial $1,838 2.14% $1,151 1.39% $2,573 2.96% $4,256 4.11% $3,995 3.10% Real Estate- Construction 796 3.27% 2,516 8.45% 3,095 8.03% 1,500 2.65% 1,563 2.33% Real Estate- Mortgage 2,122 3.38% 1,355 2.05% 100 .16% 67 .10% 954 1.54% Installment 556 2.80% 352 1.90% 281 2.50% 250 1.60% 260 1.27% Leases 47 1.55% 88 2.43% 85 2.14% 125 2.24% 125 1.54% Not Allocated 1,183 .60% 198 .10% 1,087 55 210 --------------------------------------------------------------------------------------------------------------------- TOTAL $6,542 $5,660 $7,221 $6,253 $7,107 --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------
In accordance with SFAS 114, as of December 31, 1995, the Company had written down all its nonperforming loans to the current collateral value or had established specific reserves that the management believes, are adequate to cover future exposure. 10 INVESTMENT PORTFOLIO The following table sets forth the book value and estimated fair value of investment securities available for sale as of December 31, 1995 and investment securities of the Company as of December 31, 1994 and 1993:
DESCRIPTION 1995 1994 1993 ----------- ---- ---- ---- $ in 000's Amortized Estimated Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value Cost Fair Value --------------------------------------------------------------------- U.S. Government securities $35,314 $35,457 $60,099 $58,778 $59,420 $59,946 U.S. Government agencies or insured obligations 23,611 23,656 9,657 9,262 18,052 18,158 State political subdivisions 423 416 1,509 1,274 619 619 Mortgage-backed securities- U.S. agencies 1,047 1,070 1,186 1,132 1,644 1,650 Other securities 1,697 1,684 1,653 1,629 1,402 1,443 --------------------------------------------------------------------- Total Securities $62,092 $62,283 $74,104 $72,075 $81,137 $81,816 --------------------------------------------------------------------- ---------------------------------------------------------------------
As of January 1, 1995 the Bank had classified all its Debt Securities as "Available for Sale." As of December 31, 1995 the Bank had no derivatives. The following table sets forth the maturities of investment securities of the Company at December 31, 1995 and the weighted average yields of such securities (calculated available for sale on the basis of the cost and effective yields weighted for the scheduled maturity of each security):
$ IN 000'S 1996 1997-2001 2002-2006 OVER 2006 AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------ ----- ------ ----- ------ ----- ------ ----- U. S. government securities $25,226 5.29% $10,231 5.81% $0 0 $0 0 U.S. government agencies or insured obligations 5,000 6.49% 18,657 6.11% 0 0 0 0 State political subdivisions 0 0 416 4.88% 0 0 0 0 Other 0 0 0 0 0 0 66 .55% ------------------------------------------------------------------ Total $30,226 5.49% $29,304 5.99% $0 0% $66 .55% ------------------------------------------------------------------ ------------------------------------------------------------------
DEPOSITS The Bank's major source of funds for lending and other investment purposes is deposits. In addition to deposits, the Bank derives funds from principal and interest repayments on loans, maturities and sales of investment securities, and Federal funds sold. The Bank's deposit strategy has been to emphasize business deposits through its five branch offices and by a network of couriers employed by the Bank. From time to time retail deposits and time certificates of deposits have also been gathered through listings in various national publications. 11 Business demand deposits earn credits for collected balances against which the Bank charges fees for various products and services used by the customer. In some cases, the Bank pays for data processing fees for business customers with significant balances. The Bank has four business customers each of which maintains demand deposit balances in excess of 1% of total deposits. The balances in these accounts averaged an aggregate of $33 million and $38.7 million during 1995 and 1994, respectively, and totaled an aggregate of $35.7 million and $37.3 million, or 11.6% and 13.4% , respectively, at December 31, 1995 and 1994. Guidelines by federal regulatory agencies specify that time certificates of deposit may be considered to be brokered if the rate on the deposit exceeds 75 basis points over (i) the average rate paid locally for certificates of deposit of similar maturities or (ii) 120% of the rate for treasury bills and notes of similar maturities. Time certificates of deposit generated through publication of rates in national publications totaled an aggregate of $895,000 at December 31, 1995. As of December 31, 1995, the Bank had no brokered deposits. Under the prompt corrective action provisions of FDICIA, the Bank must obtain prior approval from the FDIC in order to acquire or roll over brokered time certificates of deposit. On January 31, 1994, the Bank completed the acquisition of approximately $12.5 million in deposits from a local Bank that decided to no longer be an insured depository institution. The Bank paid no premium for these demand, savings and time deposits and has retained most of the core deposits acquired. The following table shows the average daily amount of deposits and average interest rates paid for the periods indicated:
For the year 1995 For the year 1994 For the year 1993 $in 000's Daily Average Daily Average Daily Average Average Interest Average Interest Average Interest Balance Rate Paid Balance Rate Paid Balance Rate Paid ---------------------------------------------------------------- Demand Deposit $100,526 $101,022 $92,270 Money Market and Saving Deposits 121,110 2.82% 120,120 2.58% 120,600 2.84% Time Deposits Less than $100,000 31,620 5.55% 37,354 4.23% 67,985 4.42% Time Deposits $100,000 or More 32,632 5.68% 33,941 3.98% 34,888 3.89% ---------------------------------------------------------------- TOTAL $285,888 $292,437 $315,743 ---------------------------------------------------------------- ----------------------------------------------------------------
The following table shows the maturities and repricing data of time certificates of deposit of $100,000 or more at December 31, 1995:
$ in 000's FIXED RATE MATURITIES 3 Months or Less $9,205 Over 3 Through 6 Months 3,190 Over 6 Through 12 Months 3,030 Over 12 Months 250 ---------- Total Fixed 15,675 Variable Rate 19,043 ---------- Total $34,718 ---------- ----------
12 BORROWING ARRANGEMENTS In December 1988, the Company obtained a $3,000,000 term loan from another financial institution for the purpose of providing additional capital to the Bank. The Credit Agreement for this loan was amended pursuant to a Second Amendment to the credit agreement dated August 25, 1994. The loan, as amended, bears interest at a fluctuating rate per annum equal to .75% in excess of the lender's reference rate (8.50% at December 31, 1995). Interest was payable monthly on the unpaid principal balance of the loan. Principal was to be repaid on January 1, 1997. At December 31, 1995 and 1994, $2,351,000 remained outstanding on the loan. The Second Amendment was supported by a Support Agreement between a shareholder Director of the Company and the Company whereby the shareholder guaranteed the payment of the loan. To compensate the shareholder for signing the Support Agreement, the Company signed a Holding Company Support Agreement whereby the Company: (1) paid the shareholder a standby fee of $23,500 in 1994 and 1995, and (2) will issue to the shareholder on or prior to March 31, 1997 warrants to purchase 25,000 shares of common stock of the Company at an exercise price per share equal to 80% of the book value per share of the Company on December 31, 1996. In March of 1996 the shareholder paid off the outstanding balance of $2,350,000 to the lending financial institution to allow the Company to contribute the maximum amount from the proceeds of the stock offering into the Capital of the Bank. (See Note 17 to Notes to Consolidated Financial Statements) The new note bears an interest rate of 3% over prime rate with interest only payable quarterly for the first year and thereafter $125,000 plus interest payable quarterly. The remaining principal and interest is due on April 1, 1999. The Bank maintains three lines of credit with outside financial institutions for the purpose of purchasing Federal funds. The lines of credit bear interest at a floating rate and provide for borrowing up to $8,000,000, $5,000,000 and $2,000,000, respectively. At December 31, 1995 and 1994, no amounts were outstanding on these lines of credit. Under an agreement with the Federal Home Loan Bank, the Bank may obtain an extension of credit of up to 50% of total assets collateralized by real estate loans. At December 31, 1995, the Bank had pledged loans amounting to $4,413,000 and had available credit of $2,207,000 based on 50% of the outstanding balance of pledged loans. No amounts were outstanding on this line of credit at December 31, 1995 and 1994. 13 LIQUIDITY AND INTEREST RATE SENSITIVITY The following table shows the components of the Company's liquidity at the dates indicated:
AT DECEMBER 31, IN 000'S 1995 1994 1993 -------- ---- ---- ---- Cash and Due From Bank $28,549 $21,315 $20,781 Federal Funds Sold 45,000 2,000 6,000 Investment Securities 62,283 72,075 81,137 ---------------------------- 135,832 95,390 107,918 Restricted Balances ( 6,444) (4,029) (4,714) ---------------------------- TOTAL LIQUIDITY $129,388 $91,361 $103,204 ---------------------------- ---------------------------- Ratio of Liquidity to Total Assets 38.73% 30.39% 31.80% Reserves Held at the Federal Reserve Bank $6,720 $8,428 $8,028
The principal sources of asset liquidity are balances due from banks, Federal funds sold and short term investment securities. Secondary sources of liquidity are loan repayments, maturing investments, and loans and investments that can be used as collateral for other borrowings. In addition, in 1995, the Company obtained $3,200,000 from a private placement of its common stock. The majority of the Company's loans are short term and if paid in accordance with their terms, provide continuous additional cash inflow. The following chart shows the distribution of loans by their maturities and ratio to total loans and total assets as of December 31, 1995:
$in 000's Under 1 Year 1-5 Years Over 5 Years Total LOANS AND LEASES $95,896 $69,687 $29,331 $194,914 Ratio to Total Loans and Leases 49.20% 35.75% 15.05% 100.00% Ratio to Total Assets 28.71% 20.86% 8.78% 58.35%
Liability-based liquidity includes interest bearing and noninterest-bearing deposits, largely from local businesses and professionals, time deposits from financial institutions throughout the United States and obtained through listings in national publications and Federal funds purchased. From time to time the Bank has used brokered deposits as an additional source of funds; however, under conditions of its formal agreement (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION, FORMAL AGREEMENT) and regulations issued by the Federal banking agencies (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION, FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991, OTHER ITEMS, PASS THROUGH FDIC INSURANCE PROVISIONS), the Bank is currently precluded from accepting or rolling over brokered deposits. The Company maintains an Interest Rate Risk simulation model which enables management to measure the Bank's Interest Rate Risk (IRR) exposure using various assumptions and interest rate scenarios, and to incorporate alternative strategies for the reduction of IRR exposure. The Bank measures its IRR using several methods to provide a comprehensive view of its IRR from various perspectives. These methods include analysis of repricing and maturity mismatches, or gaps, between assets and liabilities, and analysis of the size and sources of basis risk. 14 Gap analysis measures the difference between financial assets and financial liabilities scheduled and expected to mature or reprice within a specified time period. The gap is positive when repricing and maturing assets exceed repricing and maturing liabilities. The gap is negative when repricing and maturing liabilities exceed repricing and maturing assets. A positive or negative cumulative gap indicates in a general way how the Bank's net interest income should respond to interest rate fluctuations. A positive cumulative gap for a period generally means that rising interest rates would be reflected sooner in financial assets than in financial liabilities, thereby increasing net interest income over that period. A negative cumulative gap for a period would produce an increase in net interest income over that period if interest rates declined. The following maturity and interest rate sensitivity analysis summarizes the asset and liability balances of the Company at December 31, 1995 on the basis of rate adjustments due to occur within the periods indicated: REPRICING OPPORTUNITIES
$ in 000'S 3 Months or Less 4 to 12 Months 1 to 5 Years Over 5 Years Total Interest Earning Assets $197,160 $37,734 $54,790 $12,322 $302,006 Interest-bearing Liabilities 159,997 15,568 2,279 177,844 ------------------------------------------------------------------------- Cumulative Interest Sensitivity Gap $37,163 $59,329 $111,840 $124,162
Interest earning assets include loans and leases on which the accrual of interest has been discontinued in the amount of $15,573,000. As of December 31, 1995 the Company had a positive gap of $124,162,000 with a cumulative positive gap of $59,329,000 over one year period. The Board of Directors has established limits on total net interest income exposure for a one year time horizon based on 1% rate change. While the gap analysis is a useful asset/liability management tool, it does not fully assess IRR. Gap analysis does not address the effects of customer options (such as early withdrawal of time deposits, withdrawal of deposits with no stated maturity, and options to prepay loans) and Bank strategies (such as delaying increases in interest rates paid on certain interest-bearing demand and money market deposit accounts) on the Bank's net interest income. In addition, the gap analysis assumes no changes in the spread relationships between market rates on interest-sensitive financial instruments (basis risk), or in yield curve relationships. Therefore, a gap analysis is only one tool with which to analyze IRR, and must be reviewed in conjunction with other asset/liability management reports. 15 INTEREST RATES AND INTEREST RATE DIFFERENTIAL. The following tables set forth the average amounts outstanding for major categories of interest earning assets, interest bearing liabilities, the average interest rates earned thereon and interest income/expenses for the Bank as of and for the years ended:
DECEMBER 31, 1995 DECEMBER 31, 1994 VARIANCE ----------------- ----------------- -------- AVERAGE AVERAGE AVERAGE ASSET/ AVERAGE ASSET/ AVERAGE ASSET/ AVERAGE LIAB INCOME/ YIELD/ LIAB INCOME/ YIELD/ LIAB INCOME/ YIELD $ IN 000'S AMOUNT EXPENSE COST (%) AMOUNT EXPENSE COST (%) AMOUNT EXPENSE COST (%) --------------------------------------------------------------------------------------------- ASSETS Federal Funds Sold $22,855 $1,333 5.83% $13,255 $501 3.78% $9,600 $832 2.05% Investment Securities 61,727 3,409 5.52% 76,796 3,873 5.04% (15,069) (414) .48% Loans and Leases (1) 200,757 19,094 9.51% 202,009 17,599 8.71% (1,252) 1,495 .80% Total Int. Earning Assets $285,339 $23,836 8.35% $292,060 21,973 7.52% (6,721) 1,863 .83% ---------------------------- ---------------------------- Due From Banks (Non-int) 22,289 23,326 Other Assets 4,239 3,743 ---------------------------------------- TOTAL ASSETS (2) $311,867 $319,129 ---------------------------------------- ---------------------------------------- LIABILITIES & EQUITY Savings Deposits $121,110 $3,412 2.82% $120,120 $3,103 2.58% $990 $309 .23% Time Deposits 64,252 3,610 5.62% 71,295 2,933 4.11% (7,043) 677 1.50% Securities Sold Under Repo 123 8 6.50% 1,135 59 5.20% (1,012) (51) 1.31% Capital Note 2,351 259 11.02% 2,351 241 10.25% 0 18 .77% --------------------------------------------------------------------------------------------- Total Int. Bearing Liab 187,836 7,289 3.88% 194,901 6,336 3.25% (7,065) 953 .63% ---------------- ---------------- ---------------------------- ---------------------------- Demand Deposits 100,526 101,022 Other Liabilities 1,810 2,160 Shareholders' Equity (2) 21,695 21,046 ---------------------------------------- TOTAL LIAB. & SHAREHOLDERS' EQUITY $311,867 $319,129 ---------------------------------------- ---------------------------------------- Net Yield on Int Earn. Assets $16,547 5.80% $15,637 5.35% ------------------------------------------------- -------------------------------------------------
(1) Average loans and leases include non-performing loans and leases, however, income does not include foregone interest. In addition, loan fees have not been included in interest income and in calculating the rate realized on loans and leases. (2) Average Assets and Average Equity do not include unrealized gains or losses on Investment Securities. 16
DECEMBER 31, 1994 DECEMBER 31, 1993 VARIANCE ----------------- ----------------- -------- AVERAGE AVERAGE AVERAGE ASSET/ AVERAGE ASSET/ AVERAGE ASSET/ AVERAGE LIAB INCOME/ YIELD/ LIAB INCOME/ YIELD/ LIAB INCOME/ YIELD $ IN 000'S AMOUNT EXPENSE COST (%) AMOUNT EXPENSE COST (%) AMOUNT EXPENSE COST (%) --------------------------------------------------------------------------------------------- ASSETS Federal Funds Sold $13,255 $501 3.78% $17,514 $477 2.72% ($4,259) $24 1.07% Investment Securities 76,796 3,873 5.04% 70,224 3,261 4.64% 6,572 612 .40% Loans and Leases (1) 202,009 17,599 8.71% 224,978 18,775 8.35% (22,969) (1,176) .36% --------------------------------------------------------------------------------------------- Total Int. Earning Assets $292,060 $21,973 7.52% 312,716 22,513 7.20% ($20,656) ($540) .32% ----------------------------- ----------------------------- Due From Banks (Non-int) 23,326 22,227 Other Assets 3,743 9,577 ---------------------------------------- TOTAL ASSETS (2) $319,129 $344,520 ---------------------------------------- ---------------------------------------- LIABILITIES & EQUITY Savings Deposits $120,120 $3,103 2.58% $120,600 $3,430 2.84% ($480) ($327) (.26)% Time Deposits 71,295 2,933 4.11% 102,873 4,360 4.24% (31,578) (1,427) (.13)% Securities So Under Repo 1,135 59 5.20% 1,615 62 3.84% (480) (3) 1.35% Capital Note 2,351 241 10.25% 2,837 234 8.25% (486) 7 2.05% --------------------------------------------------------------------------------------------- Total Int. Bearing Liab. $194,901 6,336 3.25% 227,925 8,086 3.55% ($33,024) ($1,750) (.30)% ---------------- ---------------- ----------------------------- ----------------------------- Demand Deposits 101,022 92,270 Other Liabilities 2,160 4,138 Shareholders' Equity (2) 21,046 20,187 ---------------------------------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $319,129 $344,520 ---------------------------------------- ---------------------------------------- Net Yield on Int Earn. Assets $15,637 5.35% $14,427 4.61% ------------------------------------------------- -------------------------------------------------
(1) Average loans and leases include non-performing loans and leases, however, income does not include foregone interest. In addition, loan fees have not been included in interest income and in calculating the rate realized on loans and leases. (2) Average Assets and Average Equity do not include unrealized gains or losses on Investment Securities. 17 INTEREST EARNED AND INTEREST INCURRED RESULTING FROM CHANGES IN VOLUME AND CHANGES IN RATES. The following table sets forth, for the periods indicated, a summary of the changes in interest earned and interest incurred resulting from changes in volume and changes in rates:
1995 COMPARED TO 1994 1994 COMPARED TO 1993 --------------------- --------------------- $ in 000's Volume Old Volume Net Volume Old Volume Net Change X Volume X Change Effect Change X Volume Change Effect Old Rate Rate X Rate Old Rate X Rate X Rate Change Change Change Change -------------------------------------------------------------------------------- INTEREST EARNED ON: Federal Funds Sold $363 $270 $196 $829 ($116) $185 ($45) $24 Investment Securities (760) 372 (73) (461) 305 281 26 612 Loans (109) 1,614 (10) 1,495 (1,917) 825 (84) (1,176) -------------------------------------------------------------------------------- TOTAL INTEREST EARNING ASSETS ($506) $2,256 $113 $1,863 ($1,728) $1,291 ($103) ($540) INTEREST PAID ON: Savings Deposits $26 $281 $2 $309 ($14) ($314) $1 ($327) Time Deposits (290) 1,073 (106) 677 (1,338) (128) 39 (1,427) Securities Sold Under Agreement to Repurchase (53) 15 (13) (51) (19) 22 (6) (3) Note Payable 0 19 0 19 (40) 58 (10) 8 -------------------------------------------------------------------------------- TOTAL INTEREST BEARING LIABILITIES ($317) $1,388 ($117) $954 ($1,411) ($362) $24 ($1,749) -------------------------------------------------------------------------------- NET INTEREST EARNINGS ($189) $868 $230 $909 ($317) $1,653 ($127) $1,209 -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
In calculating interest rates and volumes and related changes, non-performing loans and leases have been included in loan and lease volumes; however, foregone interest has been excluded. Loan fees were not included in interest income in calculating the rate realized on loans. COMPETITION The banking business in California generally, and in the Bank's service area in particular, is highly competitive with respect to both loans and deposits and is dominated by a relatively small number of major banks which have many offices operating throughout wide geographic areas. In addition, there are numerous other independent commercial banks within the Bank's primary service areas. The primary factors in competing for deposits are interest rates, personalized services, quality and range of financial services, convenience of office locations and banking hours. The Bank competes for deposits and loans principally with banks, savings and loan associations, thrift and loan associations, credit unions, mortgage companies, insurance companies, other lending institutions, money market and mutual funds and other investment alternatives. Competition for loans comes primarily from other commercial banks, savings institutions, mortgage banking firms, credit unions and other financial intermediaries. Among the advantages that some of these institutions have over the Bank is their ability to undertake extensive advertising campaigns and to allocate their investment assets to areas of highest yield and demand. Many of the major commercial banks operating in the Bank's service area offer certain other services which are not offered directly by the Bank, such as trust, investment and international banking services, and by virtue of their greater total capitalization, such banks have substantially higher lending limits than the Bank. In competing for deposits, the Bank is subject to certain limitations not applicable to non-bank financial institutions. 18 SUPERVISION AND REGULATION THE COMPANY The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "Act"), and is subject to supervision by the Federal Reserve Board. As a bank holding company, the Company is required to file with the Federal Reserve Board an annual report and such other additional information as the Federal Reserve Board may require pursuant to the Act. The Federal Reserve Board may also make examinations of the Company and each of its subsidiaries. The costs of any examination by the Federal Reserve Bank are paid by the Company. The Federal Reserve Board has significant supervisory and regulatory authority over the Company and its subsidiaries. The Federal Reserve Board requires the Company to maintain certain levels of capital (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION, CAPITAL ADEQUACY GUIDELINES). The Federal Reserve Board also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, or violates certain laws, regulations or conditions imposed by the Federal Reserve Board in writing (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION, FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 AND FORMAL AGREEMENT). The Act requires prior approval of the Federal Reserve Board for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than five percent of the voting shares, or substantially all the assets, of any bank or for merger or consolidations by a bank holding company with any other bank holding company. The Act also prohibits the acquisition by a bank holding company or any of its subsidiaries of voting shares or substantially all the assets of any bank located in a state other than the state in which the operations of the bank holding company's bank subsidiaries are principally conducted, unless the statutes of the state in which the bank to be acquired is located expressly authorizes such an acquisition. (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION, MEMORANDUM OF UNDERSTANDING). One shareholder who purchased 289,000 shares at $6.75 per share (9.9% of the total shares outstanding) through private placement offered in November, 1995, has an option to purchase an additional 267,000 shares at $6.75 per share (which would bring the total shares owned by the shareholder to 556,000 shares or 17.4% of the total shares which would then be outstanding). The option is subject to the approval by the Federal Reserve Board and it will expire on May 1, 1996. With certain limited exceptions, a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking, managing or controlling banks or furnishing services to or performing services for its authorized subsidiaries. A bank holding company may, however, engage or acquire an interest in a company that engages in activities which the Federal Reserve Board has determined to be closely related to banking or managing or controlling banks or properly incident thereto. In making such a determination, the Federal Reserve Board is required to consider whether the performance of such activities can reasonably be expected to increase competition, or produce gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. The Federal Reserve Board is also empowered to differentiate between activities commenced de-novo and activities commenced by acquisition, in whole or in part, of a going concern. Additional statutory provisions prohibit a bank holding company and any subsidiary banks from engaging in certain tie-in arrangements in connection with the extension of credit. Thus, a subsidiary bank may not extend credit, lease or sell property, or furnish any services, or fix or vary the concentration for any of the foregoing on the condition that: (i) the customer must obtain or provide some additional credit, property or 19 service from, or to, such bank other than a loan, discount, deposit or trust service; (ii) the customer must obtain or provide some additional credit, property or service from or to the Company or any other subsidiary of the Company; (iii) the customer may not obtain some other credit, property or service from competitors, except under reasonable requirements to assure the soundness of credit extended. The Federal Reserve Board generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded through borrowing or other arrangements that might adversely affect a bank holding company's financial position. The Federal Reserve Board's policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. Transactions between the Company and its subsidiaries are subject to a number of other restrictions. Federal Reserve Board policies forbid the payment by bank subsidiaries of management fees which are unreasonable in amount or exceed the fair market value of the services rendered (or, if no market exists, actual costs plus a reasonable profit). Nor is the holding company allowed to transfer to the Bank any nonperforming loans or other assets. As a creditor and a financial institution, the Bank is subject to certain regulations promulgated by the Federal Reserve Board, including, without limitation: Regulation B (Equal Credit Opportunity), Regulation D (Reserves), Regulation E (Electronic Funds Transfer Act), Regulation F (Interbank Liabilities), Regulation Z (Truth in Lending), Regulation CC (Expedited Funds Availability Act) and Regulation DD (Truth in Savings Act). As creditors on loans secured by real property and as owners of real property, the Bank has liability under various statutes and regulations applicable to property owners, generally including statutes and regulations relating to the environmental condition of the property. THE BANK The Bank is a national banking association whose deposits are insured by the Bank Insurance Fund ("BIF") as administered by the FDIC, up to the maximum legal limits of the FDIC ($100,000), and is subject to regulation, supervision, and regular examination by the Comptroller of the Currency.The Bank is a member of the Federal Reserve System, and as such is subject to certain provisions of the Federal Reserve Board. The Bank is also subject to applicable provisions of California law, insofar as they do not conflict with, or are not preempted by, federal law. The regulations of these various agencies govern most aspects of the Bank's business, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowing, dividends, and locations of branch offices. California law exempts banks from the California usury laws. LEGISLATIVE AND REGULATORY CHANGES Over the past few years the volume and complexity of banking regulations and the intensity of the regulatory examination process have increased dramatically. Banking institutions are subject to closer scrutiny today than ever before. This increased scrutiny is designed to reduce the number of failing institutions and to require immediate corrective actions by troubled institutions. Many of the recent statutory changes have been directed at giving the various bank regulatory agencies increased enforcement powers to take "prompt corrective actions" (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION, FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991) when an insured financial institution's capital falls below certain levels. In addition, more stringent capital requirements have been imposed to provide more 20 protection against potential losses. Premiums for deposit insurance have increased to record levels and are now based upon risk evaluations. While the Company and the Bank have not directly measured the full impact and cost of compliance with these new requirements, such compliance represents an ever increasing expense for the Company and the Bank and requires a significant amount of staff and officer time. DIVIDEND LIMITATIONS On January 1, 1991, the Comptroller changed the interpretations of the dividend regulations to simplify the calculation of a bank's dividend paying capacity and make them more consistent with generally accepted accounting principles. The dividend limit is based on retained "net profits" for the current year plus the two previous years, less any required transfers to surplus or a fund for the retirement of preferred stock. "Net profits" are defined as the net income as reported in the bank's call report with no adjustments. The Formal Agreement also prohibits the payment of any cash dividends by the Bank without the prior written consent of the Comptroller or by the Company without prior notice to the Federal Reserve Bank of San Francisco (see ITEM 1. BUSINESS, SUPERVISION AND REGULATIONS, FORMAL AGREEMENT AND MEMORANDUM OF UNDERSTANDING). In addition, a national bank may not pay any dividends or make other capital distributions if the capital distribution would cause the national bank to be undercapitalized, with the exception of repurchases or redemptions of the national bank's shares that are made in connection with the issuance of additional shares, or that will impair the national bank's financial condition. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted. Set forth below is a brief discussion of certain portions of this law and implementing regulations that have been adopted or proposed by the Federal Reserve Board, Comptroller and the FDIC (collectively, the "federal banking agencies"). BIF RECAPITALIZATION. FDICIA provides the FDIC with three additional sources of funds to protect deposits insured by the BIF administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the U.S. Treasury; borrow from the Federal Financing Bank up to 90% of the fair market value of the assets of institutions acquired by the FDIC as receiver; and borrow from financial intermediaries that are members of the BIF. Any borrowing not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. IMPROVED EXAMINATIONS. All insured depository institutions must undergo a full-scope, on-site examination by their appropriate federal banking agency at least once every 12 months. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate federal banking agency against each institution or affiliate as it deems necessary or appropriate. STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires the federal banking agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating to internal control, loan documentation, credit underwriting, interest rate exposure and asset growth. Standards must also be prescribed for classified loans, earnings and the ratio of market value to book value for publicly traded shares. FDICIA also requires the federal banking agencies to issue uniform regulations prescribing standards for real estate lending that are to consider such factors as the risk to the deposit insurance fund, the need for safe and sound operation of insured depository institutions and the availability of credit. Further, FDICIA requires the federal banking agencies to establish standards prohibiting compensation, fees and benefit arrangements that are excessive or could lead to financial loss. In 1995 guidelines were adopted in the areas of excessive compensation, internal controls, information systems, documentation, credit underwriting, interest risk exposure, asset growth and compliance with laws and regulations. Under the excessive compensation standard, the Comptroller will analyze a person's compensation history, post-employment benefits, the financial condition of the institution, compensation practices at comparable institutions and other relevant information. The final rule authorizes, rather than requires, the Comptroller to seek a compliance plan from institutions failing to meet the safety and soundness guidelines. Asset quality and earnings standards have also been proposed that would require monitoring and reporting systems to identify emerging problems and corrective actions to resolve them. In December 1992, the federal banking agencies issued final regulations prescribing uniform guidelines for real estate lending. The regulations, which became effective March 19, 1993, require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit collateralized by real estate. The policies must address loan portfolio management, underwriting standards and loan-to-value limits that do not exceed the supervisory limits prescribed by the regulations. In December 1993, pursuant to the mandate of FDICIA, the federal banking agencies issued an interagency policy statement regarding the allowance for loan and lease losses ("ALLL"). Insured depository institutions are required to maintain a level of ALLL that is adequate to absorb "estimated credit losses" associated with the loan and lease portfolio, including all binding commitments to lend. "Estimated credit losses" are defined as an estimate of the current amount of the loan and lease portfolio that is not likely to be collected given the facts and circumstances as of the evaluation date. These estimated credit losses should meet the criteria for accrual of a loss contingency set forth in generally accepted accounting principles as stated in Statement on Financial Accounting Standards No. 5 ("SFAS 5"). The policy statement describes the responsibility of the board of directors and management to maintain the ALLL at an adequate level and prescribes that the ALLL should be no less than the sum of the following items: (1) For loans and leases classified substandard or doubtful,whether analyzed and provided individually or as part of pools, all estimated credit losses over the remaining effective lives of these loans. (2) or components of the loan and lease portfolio not classified, all estimated credit losses over the upcoming 12 months. (3) Amounts for estimated losses from transfer risk on international loans. The board of directors and management are also responsible to ensure: (1) the institution has an effective loan review system; (2) loans or portions of loans are promptly charged off if determined uncollectible; and (3) the process for determining an adequate level for the ALLL is based on a comprehensive, adequately documented and consistently applied analysis of the loan and lease portfolio. 22 The policy statement describes components of the portfolio which should be reviewed and factors to consider in the estimation of credit losses. Furthermore, the policy statement specifies the steps which will be followed by examiners of the federal banking agencies in examining the adequacy of the ALLL for individual institutions. These steps include analyzing an institution's policies, practices and historical credit loss experience, and a further check of the reasonableness of management's methodology by comparing the reported ALLL (after deduction of all loans, or portions thereof, classified as loss) against the sum of the following amounts: (1) 50 percent of the portfolio that is classified doubtful; (2) 15 percent of the portfolio that is classified substandard; and (3) for the portions of the portfolio that have not been classified (including those loans designated special mention), estimated credit losses over the upcoming twelve months given the facts and circumstances as of the evaluation date (based on the institution's average annual rate of net charge-offs experienced over the previous two or three years on similar loans, adjusted for current conditions and trends). The policy statement cautions that "the amount is neither a 'floor' nor a 'safe harbor' level for an institution's ALLL. However, examiners will view a shortfall relative to this amount as indicating a need to more closely review management's analysis to determine whether it is reasonable and supported by the weight of available evidence, and that all relevant factors have been appropriately considered." The Bank's ALLL is more than that which would be established under the policy statement guidelines. PROMPT CORRECTIVE REGULATORY ACTION. FDICIA requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions that fall below one or more prescribed minimum capital ratios. The purpose of this law is to resolve the problems of insured depository institutions at the least possible long-term cost to the appropriate deposit insurance fund. The law required each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized (significantly exceeding the required minimum capital requirements), adequately capitalized (meeting the required capital requirements), undercapitalized (failing to meet any one of the capital requirements), significantly undercapitalized (significantly below any one capital requirement) and critically undercapitalized (failing to meet all capital requirements). In September 1992, the federal banking agencies issued uniform final regulations implementing the prompt corrective action provisions of FDICIA. Under the regulations, an insured depository institution will be deemed to be: -"well capitalized" if it (i) has total risk-based capital of 10% or greater, Tier 1 risk-based capital of 6% or greater and a leverage capital ratio of 5% or greater and (ii) is not subject to an order, written agreement capital directive or prompt corrective action directive to meet and maintain a specific capital level of any capital measure; -"adequately capitalized" if it has total risk-based capital of 8% or greater, Tier 1 risk-based capital of 4% or greater and a leverage capital ratio of 4% or greater (or a leverage ratio of 3% or greater if the institution is rated composite 1 under the applicable regulatory rating system in its most recent report of examination); 23 -"undercapitalized" if it has total risk-based capital that is less than 8%, Tier 1 risk-based capital that is less than 5% or a leverage capital ratio that is less than 4% (or a leverage capital ratio that is less than 3% if the institution is rated composite 1 under the applicable regulatory rating system in its most recent report of examination); -"significantly undercapitalized" if it has a total risk-based capital that is less than 6%, Tier 1 risk-based capital that is less than 3% or a leverage capital ratio that is less than 3%; and -"critically undercapitalized " if it has a ratio of tangible equity to total assets that is equal to or less than 2%. An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized or undercapitalized may be reclassified to the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, (i) determines that the institution is in an unsafe or unsound condition or (ii) deems the institution to be engaging in an unsafe or unsound practice and not to have corrected the deficiency. At each successive lower capital category, an insured depository institution is subject to more restrictions and federal banking agencies are given less flexibility in deciding to deal with it. The law prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transactions the institutions would be undercapitalized. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency, subject to asset growth restrictions and required to obtain prior regulatory approval for acquisitions, branching and engaging in new lines of business. Any undercapitalized depository institution must submit an acceptable capital restoration plan to the appropriate federal banking agency 45 days after becoming undercapitalized. The appropriate federal banking agency cannot accept a capital plan unless, among other things, it determines that the plan (1) specifies the steps the institution will take to become adequately capitalized on an average basis during each of four consecutive calendar quarters and must otherwise provide adequate assurances of performance. The aggregate liability of such guarantee is limited to the lesser of (a) an amount equal to 5% of the depository institutions's total assets at the time the institution became undercapitalized or (b) the amount which is necessary to bring the institution into compliance with all capital standards applicable to such institution as of the time the institution fails to comply with its capital restoration plan. Finally, the appropriate federal banking agency may impose any of the additional restrictions or sanctions that it may impose on significantly undercapitalized institutions if it determines that such action will further the purpose of the prompt corrective provisions. An insured depository institution that is significantly undercapitalized, or is undercapitalized and fails to submit, or in a material respect to implement, an acceptable capital restoration plan, is subject to additional restrictions and sanctions. These include, among other things: (1) a forced sale of the voting shares to raise capital or, if grounds exist for appointment of a receiver or conservator, a forced merger; (ii) restrictions on transactions with affiliates; (iii) further limitations on interest rates paid on deposits; (iv) further restrictions on growth or required shrinkage; (v) modification or termination of specified activities; (vi) replacement of directors or senior executive officers, subject to certain grandfather provisions for those elected prior to enactment of FDICIA; (vii) prohibitions on the receipt of deposits from correspondent institutions; (viii) restrictions on capital distributions by the holding companies of such institutions; (ix) required divestiture of subsidiaries by the institution; or (x) other restrictions as determined by the appropriate federal banking agency. 24 Although the appropriate federal banking agency has discretion to determine which of the foregoing restrictions or sanctions it will seek to impose, it is required to force a sale of voting shares or merger, impose restrictions on affiliate transactions and impose restrictions on rates paid on deposits unless it determines that such actions would not further the purpose of the prompt corrective action provisions. In addition, without the prior written approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to its senior executive officers or provide compensation to any of them at a rate that exceeds such officer's average rate of base compensation during the 12 calendar months preceding the month in which the institution became undercapitalized. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. For example, a critically undercapitalized institution generally would be prohibited from engaging in any material transaction other than in the ordinary course of business without prior regulatory approval and could not, with certain exceptions, make any payment of principal or interest on its subordinated debt beginning 60 days after becoming critically undercapitalized. Most importantly, however, except under limited circumstances, the appropriate federal banking agency, not later than 270 days after an insured depository institution becomes critically undercapitalized, is required to appoint a conservator or receiver for the institution. The board of directors of an insured depository institution would not be liable to the institution's shareholders or creditors for consenting in good faith to the appointment of a receiver or conservator or to an acquisition or merger as required by the regulator. As of December 31, 1995, the Bank had a total risk-based capital of 11.36%, a Tier 1 risk-based capital ratio of 10.11% and a leverage capital ratio of 6.76% Based solely upon these ratios, the Bank would be deemed to be well capitalized as of December 31, 1995; however, because the Bank is subject to a written agreement with the Comptroller and the Company with the Federal Reserve Bank, the Bank and the Company are deemed to be adequately capitalized. (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION, FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991, FORMAL AGREEMENT AND MEMORANDUM OF UNDERSTANDING). In addition, under the prompt corrective action provision of FDICIA, a subsequent reduction in the Bank's capital could cause it to fall within a lower capital category and subject it to the mandatory and discretionary sanctions applicable to the category. OTHER ITEMS. FDICIA also, among other things, (i) limits the percentage of interest paid on brokered deposits and limits the unrestricted use of such deposits to only those institutions that are well capitalized; (ii) requires the FDIC to charge insurance premiums based on the risk profile of each institution; (iii) eliminates "pass through" deposit insurance for certain employee benefit accounts unless the depository institution is well capitalized or, under certain circumstances, adequately capitalized; (iv) prohibits insured state chartered banks from engaging as principal in any type of activity that is not permissible for a national bank unless the FDIC permits such activity and the bank meets all of its regulatory capital requirements; (v) directs the appropriate federal banking agency to determine the amount of readily marketable purchased mortgage servicing rights that may be included in calculating such institutions' tangible, core and risk-based capital; and (vi) provides that, subject to certain limitations, any national bank may acquire or be acquired by any insured depository institution. BROKERED DEPOSITS. FDICIA prohibits "undercapitalized" institutions from accepting funds obtained, directly or indirectly, by or through a deposit broker. Undercapitalized institutions also are prohibited from soliciting deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on insured deposits in the institutions' normal market areas, or in the market area in which the deposits would otherwise be accepted. 25 "Adequately capitalized" institutions may accept brokered funds only if they first obtain a waiver granted the FDIC. Adequately capitalized institutions that solicit brokered deposits pursuant to a waiver granted by the FDIC may pay a rate of interest on brokered funds that significantly exceeds the rate paid on deposits of similar maturity in the institution's normal market area or the "national rate" paid on deposits of comparable maturity for deposits accepted outside the institution's normal market area. The term "deposit broker" also includes any insured depository institution, or employee thereof, that solicits deposits by offering rates of interest that are significantly higher than the prevailing rates of interest offered by other insured depository institutions having the same type of charter in the offering institution's normal market area. The effect of this definition, and the other limits on brokered deposits, is to preclude an institution that is only "adequately capitalized" from offering rates of interest that are significantly more than local or national rates. PASS THROUGH FDIC INSURANCE PROVISIONS. As of December 19, 1992, pro rata, or "pass through" deposit insurance is available for deposits attributable to participants in or beneficiaries of certain employee benefit plans, only if the institution in which the deposits are placed is permitted to accept brokered deposits or qualifies for a second exception. Under the brokered deposits exception, deposit insurance "passes through" to the participants or beneficiaries (i.e., with coverage up to $100,000 per person) only if the institution is well capitalized, or if the institution was adequately capitalized with a waiver from the FDIC that allowed it to accept brokered deposits. In the latter case, at the time the deposit was made the depositor must receive a written statement from the institution that the deposit was eligible for insurance coverage on a "pass through" basis. The second exception is available for deposits placed in an institution that meets each applicable capital standard set forth by the institution's appropriate Federal banking agency. The exception is also subject to the requirement that the depositor be given written notice, at the time the deposit is made that the deposit is entitled to insurance or a pass-through basis. The Bank has obtained a waiver from the FDIC under the first exception category. RISK-BASED DEPOSIT INSURANCE PREMIUMS. As required by FDICIA, the FDIC adopted a transitional risk-based assessment system for deposit insurance premiums which became effective January 1, 1993. Under the transitional regulations, insured depository institutions were required to pay insurance premiums within a range of 23 cents per $100 of deposits to 31 cents per $100 of deposits depending on their risk classification. To determine the risk-based assessment for each institution, the FDIC categorized an institution as well-capitalized, adequately capitalized or undercapitalized based on its capital ratios, a review by the institutions' primary federal or state regulator, statistical analyses of financial statements and other information relevant to evaluating the risk posed by the institution. As a result, the assessment rates within each of three capital categories until August 1995 were as follows (expressed as cents per $100 of deposits):
SUPERVISORY SUBGROUP -------------------- A B C -- -- -- WELL CAPITALIZED 23 26 29 ADEQUATELY CAPITALIZED 26 29 30 UNDERCAPITALIZED 29 30 31
In August 1995, the FDIC reduced the deposit insurance premiums paid by most commercial banks insured by BIF. The new assessment rate within each of three capital categories are as follows( expressed as cents per $100 of deposits).
SUPERVISORY SUBGROUP -------------------- A B C -- -- -- WELL CAPITALIZED 0 03 17 ADEQUATELY CAPITALIZED 03 10 24 UNDERCAPITALIZED 10 24 27
The Bank currently pays deposit insurance to the FDIC at the rate of 17 cents per $100 of deposits. 26 FORMAL AGREEMENT An on-site examination of the Bank was conducted by the Comptroller as of July 31, 1991. As a result of that examination, the Comptroller requested the Bank to take certain actions to improve the condition of the Bank, and the Bank agreed, pursuant to a formal agreement entered into with the Comptroller on April 8, 1992 (the "Formal Agreement"), to take such actions. Under the terms of the Formal Agreement, the Bank agreed to (a) conduct studies of various parts of its operations and develop written action plans and policies designed to address any issues raised by those studies, (b) develop and implement a program designed to reduce the Bank's level of criticized assets, (c) implement an effective and ongoing loan review system, (d) establish a program for maintaining an adequate allowance for loan and lease losses, (e) develop and implement a program to improve the Bank's loan administration, (f) update the Bank's real estate appraisal program and procedures, (g) develop a program for the management of the Bank's other real estate owned (OREO), (h) develop a capital program and maintain total capital at least equal to 9% of risk-weighted assets, and Tier 1 capital at least equal to 6% of actual adjusted total assets, (I) maintain liquidity at a level sufficient to sustain the Bank's operations, and (j) develop a program for Board supervision over the Bank's management team. The Formal Agreement also prohibits the payment of any cash dividends by the Bank without the prior written consent of the Comptroller. The Comptroller conducted another examination of the Bank as of July 31, 1992. As a result of that examination, the Comptroller requested, and on November 27, 1992, management and the Board of Directors of the Bank agreed to certain commitments to take specific actions to assure compliance with the Formal Agreement. The Comptroller conducted its annual examinations as of August 31, 1993 and September 30, 1994 and 1995. The Bank was found to be in full, substantial or partial compliance with all terms and commitments under the Formal Agreement. Management believes the Bank is now in substantial compliance with all the terms of the Formal Agreement. MEMORANDUM OF UNDERSTANDING On May 27, 1993, the Company executed a Memorandum of Understanding ("memorandum") with the Federal Reserve Bank of San Francisco (the "Fed") in which the Company agreed to submit a summary of actions to improve conditions in the Bank, not declare cash dividends without prior notice to the Fed, and obtain prior approval of changes in Directors or executive officers. Management of the Company believes the Company is in substantial compliance with the Memorandum. CAPITAL ADEQUACY GUIDELINES The Federal Reserve Board, FDIC and Comptroller have issued guidelines to implement the new risk-based capital requirements. The guidelines are intended to establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, takes off-balance sheet items into account in assessing capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Under these guidelines, assets and credit equivalent amounts of off-balance sheet items, such as letters of credit and outstanding loan commitments, are assigned to one of several risk categories, which range from 0% for risk-free assets, such as cash and certain U.S. government securities, to 100% for relatively high-risk assets, such as loans and investments in fixed assets, premises and other real estate owned. 27 A banking organization's qualifying capital consists of two components: Tier 1 capital (core capital) and Tier 2 capital (supplementary capital). Tier 1 capital consists primarily of common stock, related surplus and retained earnings, qualifying noncumulative perpetual preferred stock (plus, for bank holding companies, qualifying cumulative perpetual preferred stock an amount to 25% of Tier 1 capital) and minority interests in the equity accounts of consolidated subsidiaries. Intangibles, such as goodwill, and deferred tax assets are generally deducted from Tier 1 capital; however, purchased mortgage servicing rights and purchased credit card relationships may be included, subject to certain limitations. At least 50% of the banking organization's total regulatory capital must consist of Tier 1 capital. The Company has established an allowance of $1,202,000 against its tax asset of $3,451,000 as of December 31, 1995. Tier 2 capital may consist of (i) the allowance for loan and lease losses in an amount up to 1.25% of risk-weighted assets; (ii) cumulative perpetual preferred stock and long-term preferred stock (which for bank holding companies must have an original maturity of 20 years or more) and related surplus; (iii) hybrid capital instruments (with characteristics of both debt and equity), perpetual debt and mandatory convertible debt securities; and (iv) eligible term subordinated debt and intermediate-term preferred stock with an original maturity of five years or more, including related surplus, in an amount up to 50% of Tier 1 capital. The inclusion of the foregoing elements of Tier 2 capital is subject to certain requirements and limitations of the federal banking authorities. The federal banking authorities have also adopted a minimum ratio of Tier 1 capital to average total assets of 3% for the highest rated banks. This risk- based leverage capital ratio is only a minimum and applies only to the highest rated banks. Institutions experiencing or anticipating significant growth or those with other than minimum risk profiles are expected to maintain capital well above the minimum level. Furthermore, higher leverage capital ratios are required to be considered well capitalized or adequately capitalized under the prompt corrective action provisions of FDICIA (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION, FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991, PROMPT CORRECTIVE ACTION). Thus, the effective minimum risk-based leverage ratio, for all practical purposes, is at least 4% or 5%. The federal banking authorities have issued a joint advance notice of proposed rule making, in accordance with FDICIA, seeking public comment of methods to take account of interest rate risk, concentrations of credit risk and the risks of nontraditional activities in calculating risk-based capital. Although the notice does not contain any agency proposals relating to concentration of credit risk and risks of nontraditional activities, the notice includes a general framework for taking account of interest rate risk. Under that framework, institutions with interest rate risk exposure in excess of a certain threshold would be required to hold capital proportionate to that excess risk. Exposures would be measured in terms of the change in the present value of an institution's assets minus the change in the present value of its liabilities and off-balance sheet positions for an assumed 100 basis point parallel shift in interest rate markets. COMMUNITY REINVESTMENT ACT The Community Reinvestment Act ("CRA") requires each national bank, as well as other lenders, to identify the communities served by the national bank's offices and to identify the types of credit the national bank is prepared to extend to such communities. The CRA also requires the Comptroller to assess the performance of the national bank in meeting the credit needs of its community and to take such assessment into consideration in reviewing applications for mergers, acquisitions and other transactions. An unsatisfactory CRA rating may be the basis for denying such an application. 28 In connection with its assessment of CRA performance, the Comptroller assigns a rating of "outstanding," "satisfactory," "needs to improve" or "substantial noncompliance." Based on an examination conducted during May of 1993 and February of 1995, the Bank was rated Outstanding. ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG- LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF and SFAS No. 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS, an amendment to FASB Statement No. 65. The provisions of these statements are effective for financial statements for fiscal years beginning after December 15, 1995. The Company has not completed the process of evaluating the impact that will result from adopting these statements and is therefore unable to disclose the impact of adopting such statements. However, the Company does not believe the application of SFAS Nos. 121 and 122 will have a material impact on its financial condition and results of operations when adopted. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which requires adoption of the disclosure provisions no later than fiscal years beginning after December 15, 1995 and adoption of the recognition and measurement provisions for nonemployee transactions no later than after December 15, 1995. The new standard defines a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to the new standard, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but would be required to disclose in a note to the financial statements pro forma net income and, if presented, earnings per share as if the company had applied the new method of accounting. The accounting requirements of the new method are effective for all employee awards granted after the beginning of the fiscal year of adoption. The Company has not yet determined if it will elect to change to the fair value method, nor has it determined the effect the new standard will have on net income and earnings per share should it elect to make such a change. Adoption of the new standard will have no effect on the Company's cash flows. EMPLOYEES The Bank currently employs approximately 178 persons in varying capacities. The Company does not have any full-time employees at this time. (See ITEM 11. EXECUTIVE COMPENSATION, for further information). 29 ITEM 2. PROPERTIES. On December 29, 1982, the Company entered into a sublease (the "Sublease") for the premises covering approximately 6,147 square feet on the ground floor of a building located at 3951 South Coast Plaza Drive, Santa Ana, California 92704. The Sublease the ("old Sublease") had an initial term of 10 years, which expired on January 31, 1993. The Sublease was amended effective February 1, 1993 for a term of 24 months, terminating on January 31, 1995. It has further been amended to expire on January 31, 1998. The rent for the premises at the end of the term of the old Sublease was $2.61 per square foot per month. The rent under the terms of the "new Sublease" is $1.38 per square foot per month. The Company has assigned the Sublease to the Bank for the purpose of conducting banking operations on the premises. The Company does not independently occupy any part of the premises. On May 4, 1988, the Bank entered into a lease expiring June 30, 2000 for the branch located at 22831 Lake Forest Drive, El Toro, California. The El Toro premises consist of approximately 6,672 square feet and the current monthly rent is $1.73 per square foot. On September 19, 1989, the Bank entered into a lease expiring September 18, 1993 for the Service Center located at 17252 Armstrong, Suite H, Irvine, California. These premises consist of approximately 7,900 square feet. On June 20, 1995, the Company revised and extended the lease for a period of twelve months, expiring September 17, 1996, at the current monthly rent of $.70 per square foot. On October 4, 1989, the Bank entered into a lease expiring December 31, 1999 for the Orange regional office located at 625 The City Drive, Orange, California. These premises consist of approximately 8,257 square feet and the current monthly rent is $2.10 per square foot. On November 29, 1991, the Bank entered into a lease for a branch facility, commercial loan department and escrow division space covering approximately 14,866 square feet on the ground floor and 14,103 square feet for its headquarters office on the ninth floor of a building located at 4100 Newport Place, Newport Beach, California 92660. The Lease has an initial term of 10 years. The current rent for the premises is $1.64 per square foot per month on the ground floor and $1.62 per square foot per month for the ninth floor. Pursuant to the Lease, the Bank has an option to lease additional space on the ninth floor. The Bank is using the ground floor for banking operations and is using the ninth floor for administrative offices. On November 1, 1995 the Bank entered into a lease expiring October 31, 2005 for the Beach Cities Regional Office located at 17330 Brookhurst, Fountain Valley, CA. These premises consist of approximately 5534 square feet and the currrent monthly rent is $1.25 per square foot. All of the premises leased by the Company are used by the Bank and there are no immediate plans to utilize any of the leased premises for any other purpose. ITEM 3. LEGAL PROCEEDINGS. From time to time, the Company or the Bank is a party to claims and legal proceedings arising in the ordinary course of business. Management of the Company evaluates the Company's or Bank's exposure to the cases individually and in the aggregate and provides for potential losses on such litigation if the amount of the loss is determinable and if the incurrence of the loss is probable. As of December 31, 1995, a judgement in the amount of $361,000 plus interest had been entered against the Bank. The Bank has accrued $440,000 for the judgement. After taking into consideration information furnished by counsel to the Company and the Bank as to the current status of various remaining claims and legal proceedings to which the Company or the Bank is a party, management of the Company and the Bank believe that the ultimate aggregate liability represented thereby, if any, will not have a material adverse effect on the Company's consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to security holders during the fourth quarter of the fiscal year ended December 31, 1995. PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. As of February 29, 1996, there were approximately 298 shareholders of record of the Company's common stock. No shares of the Company's preferred stock have been issued or are outstanding. Although there are at least four broker/dealers purporting to make a market in the Company's common stock, there is limited trading activity in the Company's common stock. No cash dividends have been paid on shares of the Company's common stock since the formation of the Company, and the Company presently has no intention to pay cash dividends in the foreseeable future. The following table lists high and low bid prices of the Company's Common Stock in the over the counter market. Prices represent quotations by dealers making a market in the stock and reflect inter-dealer prices without adjustments for mark-ups, mark-downs or commissions and may not necessarily represent actual transactions. Trading in the Company's common stock is limited in volume and may not be a reliable indicator of its market value.
1995 1994 HIGH LOW HIGH LOW ---- --- ---- --- First Quarter $6.38 $5.00 $4.25 $4.25 Second Quarter $6.63 $6.00 $4.75 $4.25 Third Quarter $7.50 $6.57 $5.00 $4.63 Fourth Quarter $7.97 $7.40 $5.50 $4.63
In November, 1995, the Company sold 474,000 shares of its common stock through a private placement at $6.75 per share. 31 ITEM 6. SELECTED FINANCIAL DATA. The following table should be read in conjunction with, and is qualified in its entirety by, the Company's Consolidated Financial Statements and the notes thereto contained in Item 8 of this Form 10-K.
For the year ended December 31, $ in 000's 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- Operating Revenue $27,097 $24,849 $25,800 $30,912 $36,137 Interest & Fee Income 24,742 22,721 23,642 28,861 34,378 Net Interest and Fee Income 17,453 16,385 15,556 17,630 18,291 Net Income (Loss) (3,341) 859 (2,815) 507 319 Net Income (Loss) Per Share (1.30) 0.35 (1.14) 0.20 0.12 Cash Dividends Declared Per Share 0 0 0 0 0 =============================================================================================
As of December 31, $ in 000's 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- Total Assets $334,043 $300,665 $324,550 $372,762 $368,159 Total Deposits 308,504 277,389 299,726 343,137 341,607 Total Liabilities 312,924 280,937 304,363 350,067 346,481 Net Loans & Leases 187,670 195,203 206,370 237,884 278,408 Long Term Debt 2,351 2,351 2,351 3,000 3,000 Total Shareholders' Equity 21,119 19,728 20,187 22,695 21,678
32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. The purpose of this discussion is to provide additional information about the Company's financial condition and results of operations which is not otherwise apparent from the consolidated financial statements included in this annual report. Since the banking subsidiary represents most of the Company's activity and investment, the following discussion relates primarily to the financial condition and operations of the Bank. It should be read in conjunction with the consolidated financial statements of the Company and the notes thereto contained in Item 8 of this Form 10-K. FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 Summary The following chart shows comparative data for selected items of the financial statements:
$ in 000's Except Increase Increase Earnings Per Share Data 1995 (Decrease) 1994 (Decrease) 1993 -------------------------- -------- ---------- ---------- ---------- ---------- Average Total Assets $311,877 ($7,252) $319,129 ($25,391) $344,520 (2.3)% (7.4)% Average Loans and Leases $200,758 ($1,251) $202,009 ($22,969) $224,978 (0.6)% (10.2)% Average Deposits $285,888 ($6,549) $292,437 ($23,306) $315,743 (2.2)% (7.4)% Net Interest Income $ 17,453 $1,068 $16,385 $829 $15,556 6.5% 5.3% Provision for Loan and Lease Losses $6,600 $3,235 $3,365 ($1,524) $4,889 96.1% (31.2)% Net Income (Loss) ($3,341) ($4,200) $859 $3,674 ($2,815) N/A N/A Income (Loss) Per Share ($1.30) ($1.65) $0.35 $1.49 ($1.14) N/A N/A Return on Average Assets (1.07)% (1.34)% .27% 1.09% ($.82)% N/A N/A Return on Average Equity (1) (15.56)% (19.75)% 4.19% 17.14% ($12.95)% N/A N/A Ratio of Average Equity to Average Assets 6.88% $0.42 6.45% .14 6.31% 6.7% 2.20% Cash Dividends declared 0 N/A 0 N/A 0
1) Average equity computed based on month end balances The average assets, average loans and leases and average deposits decreased from 1993 through 1995 as the Company continued improving asset quality and collecting loans rather than on generating new business. Net interest income increased in 1995 due to improved spreads in interest earning assets. During 1995, the Company made a provision for loan and lease losses in the amount of $6,600,000 and charged off loans which amounted to $5,718,000 net of recoveries. Increased legal expenses and losses on foreclosed properties contributed to a net loss of $3,341,000 in 1995. Total deposits increased by $31,115,000 on December 31, 1995 from the same period in 1994. The increase in demand and saving deposit amounted to $22,341,000 and $8,774,000 in time deposits. No deposits were acquired through national publications. 33 RESULTS OF OPERATIONS
Increase Increase $ in 000's 1995 (Decrease) 1994 (Decrease) 1993 ---------- ------- ---------- ------- ---------- ------- Total Interest and Fee Income $24,742 $2,021 $22,721 ($921) $23,642 8.9% (3.90)% Total Interest Expense 7,289 $953 6,336 ($1,750) 8,086 15.0% (21.64)% - ---------------------------------------------------------------------------------------------- Net Interest Income Before Provision for Loan and Lease Losses $17,453 $1,068 $16,385 $829 $15,556 6.5% 5.33% ============================================================================================== Net Interest and Fee Income Earned as a Percentage of Average Interest Earning Assets 6.12% .51% 5.61% .64% 4.97%
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE LOSSES. Net interest income increased in 1995 and in 1994 from 1993 as the interest spread continued to improve on interest earning assets due to rising interest rates and increased average non-interest bearing deposits. The average non-interest bearing deposits increased from $92,270,000 in 1993 to $101,022,000 in 1994 and $100,525,000 in 1995. The net yield on interest earning assets increased to 6.12% in 1995 from 5.61% in 1994. As of December 31, 1995, the Company had a total of $225,358,000 in interest earning assets that would reprice within one year as compared to $175,879,000 interest bearing liabilities that would reprice within the same period of time. The short term impact of any rise or decline in interest rates would therefore be insignificant.
Increase Increase $ in 000's 1995 (Decrease) 1994 (Decrease) 1993 ---------- ------- ---------- -------- ---------- -------- Average Nonaccrual Loans $12,760 ($4,127) $ 16,887 $3,213 $13,674 (24.4)% 23.5% Interest Income Not Recognized During the Period on Nonaccrual Loans $41,189 $221 $951 ($218) $1,169 22.8% (18.65)% Interest Income Recognized During the Period on Nonaccrual Loans ($20) $20 ($73) $93 (100.0)% (78.49)% Average Loans and Leases to Average Deposits 70.2% 1.1% 69.1% (2.2)% 71.3% 1.6% (3.1)% Average Interest Earning Assets $285,339 ($6,721) $292,060 ($20,656) $312,716 (2.3)% (6.6)%
During the three-year period, loan production and average outstanding loans declined as the Company focused on monitoring the performance of the outstanding loans, identifying potential problems and collecting identified problem loans and real estate owned. At the same time, the Company refined its loan underwriting and approval process, seeking higher quality credits which reduced the volume of loans meeting the tightened criteria. 34
Average Balances, Percent Percent Percent $ in 000's of Total of Total of Total - ----------------- -------- Interest -------- Interest -------- 1995 Rate 1994 Rate 1993 Rate ---- -------- ---- -------- ---- ---- Savings Deposits $121,110 42.36% 2.82% $120,120 41.08% 2.58% $120,600 38.20% 2.84% Time Deposits 64,252 22.48% 5.62% 71,295 24.38% 4.11% 102,873 32.58% 4.24% - --------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 185,362 64.84% 3.79% 191,415 65.46% 3.15% 223,473 70.78% 3.49% Demand Deposits 100,526 35.16% N/A 101,022 34.54% N/A 92,270 29.22% N/A - --------------------------------------------------------------------------------------------------------------------- Total Deposits $285,888 100.00% $292,437 100.00% $315,743 100.00% =====================================================================================================================
Interest expense declined as interest rates fell in 1994 and interest expense increased as the interest rates increased in 1995. In addition, during 1993, and continuing in 1994, the Company established a policy not to renew brokered certificates of deposit and deposits gathered through listings in national publications listing the rates offered on time deposits by a large number of banks around the country. Although the rates paid on the certificates of deposit approximate the rates paid by the Bank on its other certificates of deposit, the decline in balances of these deposits caused a concurrent decline in interest expense. PROVISION FOR LOAN AND LEASE LOSSES The provision for loan and lease losses creates an allowance for estimated future loan and lease losses. When losses or recoveries occur, they are charged against or credited to the allowance.
Increase Increase $ In 000'S 1995 (Decrease) 1994 (Decrease) 1993 - ---------- ------ ---------- ------ ---------- ------ Loan and Lease Charge-offs (Net of Recoveries) $5,718 $792 $4,926 $1,005 $3,921 16.1% 25.6% - -------------------------------------------------------------------------- Provision for Loan and Lease Losses $6,600 $3,235 $3,365 ($1,524) $4,889 96.14% (31.17)% ==========================================================================
Due to continued high levels of nonperforming and classified loans and lease charge offs, substantial provisions for loan and lease losses have been necessitated. In addition to provision for loan and lease losses the Company incurred $1,070,000 in 1994 and $2,799,000 in 1995 in real estate owned expenses. Those expenses included, property taxes, selling costs, writedowns and losses on sale. The total real estate owned at December 31, 1994 and 1995 amounted to $2,676,000 and $2,165,000 respectively. Those properties have already been written down to their fair market values less estimated selling costs and therefore the Company does not expect any significant losses during 1996 related to these properties. 35 OTHER INCOME The following table sets forth information by category of other income and the changes in categories of other income between periods for the periods indicated:
Increase Increase $ in 000's 1995 (Decrease) 1994 (Decrease) 1993 ---------- ------ ---------- ----- ---------- ------ Escrow Fees $308 $4 $304 ($100) $404 1.30% (24.8)% Service Charges 983 $14 969 $(5) 974 1.4% (.5)% Securities (Losses) Gains (72) ($78) 6 $6 0 N/A N/A Other Income 1,136 $287 849 $69 780 33.8% 8.8% - ------------------------------------------------------------------------------- Total Other Income (Loss) $2,355 $227 $2,128 $(30) $2,158 10.70% (1.4)% ===============================================================================
The increase in other income (loss) from 1993 as compared to 1994 and 1995 is principally the result of the increase in rental income on REO properties and net master card merchant revenue. OTHER EXPENSE The following table sets forth information by category of other expense and the changes in categories of other expense between periods for the periods indicated:
Increase Increase $ in 000's 1995 (Decrease) 1994 (Decrease) 1993 ---------- ------- -------- ------ ---------- ------ Salaries and Employee Benefits $7,513 $1,059 $6,454 ($780) $ 7,234 16.4% (10.8)% Occupancy, Furniture and equipment 2,129 $121 2,008 ($474) 2,482 6.0% (19.1)% Data Processing For Customers' 184 $11 173 ($53) 226 6.4% (23.5)% Legal Fees and Related Costs 1,439 $779 660 $426 1,086 118.0% (39.2)% Regulatory Assessments 717 ($211) 928 ($28) 956 (22.7)% (2.9)% Supplies 321 $54 267 ($18) 285 20.2% (6.3)% Other Real Estate Owned 2,799 $1,729 1,070 ($1,094) 2,164 161.6% (50.6)% Other 3,377 $1,192 2,185 $23 2,162 54.6% 1.1% - -------------------------------------------------------------------------------------- Total Other Expenses $18,479 $4,734 $13,745 $2,850 $16,595 34.4% 17.17% ======================================================================================
In November 1993, the Bank reduced staff by 20 personnel at an annualized savings of salaries and benefits of approximately $700,000 and a one time cost of approximately $50,000. During 1995 the Company hired additional personnel for opening of its new branch in Fountain Valley and additional staff in the business development for its future projected growth. Occupancy expense was relatively constant during the period with exception of the costs related to the new headquarter and branch 36 Legal fees, other real estate owned expenses (including losses on sale) and other expenses have all remained high as a result of increases in delinquent loans, nonperforming loans and other real estate owned. (see ITEM 1 BUSINESS, BUSINESS OF THE BANK, LOANS, ALLOWANCE FOR LOAN AND LEASE LOSSES & ASSET QUALITY). Other real estate owned expenses included provisions for selling expenses of $177,000 and $243,000 in 1995 and 1994, respectively, and expenses and losses on sales of other real estate owned of $2,622,000 and $827,000 in 1995 and 1994, respectively. From time to time, the Company or the Bank is a party to claims and legal proceedings arising in the ordinary course of business. Management of the Company evaluates the Company's or Bank's exposure to the cases individually and in the aggregate and provides for potential losses on such litigation if the amount of the loss is determinable and if the incurrence of the loss is probable. As of December 31, 1995, a judgement in the amount of $361,000 plus interest has been entered against the Bank. The Bank has accrued $440,000 for the judgement. After taking into consideration information furnished by counsel to the Company as to the current status of various remaining claims and legal proceedings to which the Company or the Bank is a party, management of the Company believes that the ultimate aggregate liability represented thereby, if any, will not have a material adverse effect on the Company's consolidated financial statements. Regulatory assessments decreased due to the decline in deposit premium rate to $.17 per $100 in 1995 from $.29 per $100 in 1994 and 1993. INCOME TAX EXPENSE The following table shows the Company's income tax expense or benefit, related effective tax expense or benefit rate for the periods indicated and the changes between periods:
Increase Increase $ in 000's 1995 (Decrease) 1994 (Decrease) 1993 ---------- ------- ---------- ----- ---------- ------- Income Tax (Benefit) Expense ($1,930) ($2,474) $ 544 $1,499 ($ 955) N/A N/A Effective Income Tax (Benefit) Expense Rate (36.6)% 38.77% (25.33)%
The effective tax benefit rates are in accordance with the requirements of SFAS 109, adopted by the Company effective January 1, 1993, that limits the amount of tax benefit a company can recognize. 37 FINANCIAL CONDITION OVERVIEW The following table sets forth the book values and changes in book values of selected assets and liabilities of the Company as of December 31, 1995, 1994 and 1993:
Increase Increase $ in 000's 1995 (Decrease) 1994 (Decrease) 1993 - ---------- -------- ---------- -------- ---------- -------- Investment Securities $62,283 $(9,792) $72,075 $(9,062) $81,137 (13.6)% (11.17)% Net Loans and Leases $187,670 $(7,533) $195,203 $(11,167) $206,370 (3.9)% (5.41)% Other Real Estate Owned $2,165 $(511) $2,676 $387 $2,289 N/A 16.91% Total Assets $334,043 $33,378 $300,665 $(23,885) $324,550 11.1% (7.36)% Total Deposits $308,504 $31,115 $277,389 $(22,337) $299,726 11.2% (7.45)% Total Equity $21,119 $1,391 $19,728 $(459) $20,187 7.1% (2.27)%
During the years from 1993 through 1995 the Bank focused its human and financial resources on identifying and working our problem loans and other real estate owned. Other real estate owned remained low as the Bank applied significant resources to disposing of properties. Total assets and total deposits decreased significantly in 1994 as the Bank decreased its marketing efforts while concentrating on resolving asset quality issues. The increase in total assets and total deposits from 1994 to 1995 was a result of the Bank's business development efforts. During 1994 the Company continued its efforts on working out problem loans. The proceeds from loan collections and maturing investment securities were used to payoff time certificates of deposits acquired through listings on national publications resulting in a decline in investment securities, loans and deposits from 1993 to 1994. The decline in equity was due to unrealized losses on securities in 1994. The primary sources of funds for the Bank's lending programs are local deposits, loan payments and proceeds from the sale or maturity of investment securities. INFLATION The impact of inflation on a financial institution is significantly different from that exerted on an industrial concern, mainly because a financial institution's assets and liabilities consist almost entirely of monetary items. The relatively low portion of the Company's fixed assets to total assets reduces both the potential of inflated earnings resulting from understated depreciation, and the potential understatement of absolute asset values. 38 CAPITAL RESOURCES On December 31, 1990, new risk based capital requirements became effective. Under the requirements, holding companies and banks are required currently to maintain minimum ratios of total capital and "core" (Tier 1) capital to risk- weighted assets (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION, CAPITAL ADEQUACY GUIDELINES); however, under the terms of its formal agreement with the Comptroller, the Bank will be required to maintain capital in excess of this minimum requirement (see ITEM 1 BUSINESS, SUPERVISION AND REGULATION, FORMAL REGULATORY AGREEMENT). The regulatory capital requirements, capital requirements under the formal agreement and the Bank and Company's actual capital ratios are shown in the following table as of the dates indicated:
AT DECEMBER 31 1995 | 1994 EXCESS | EXCESS PER EXCESS TO | PER EXCESS TO MINIMUM FORMAL TO FORMAL | MINIMUM FORMAL TO FORMAL STATU- AGREE- STATU- AGREE- | STATU- AGREE- STATU- AGREE- TORY MENT ACTUAL TORY MENT | TORY MENT ACTUAL TORY MENT ------- ------ ------ ------ ------ | ------- ------ ------ ------ ------ | FOR THE BANK | RISK-BASED | CAPITAL: | TIER 1 4.00% N/A 10.11% 6.11% N/A | 4.00% N/A 10.82% 6.82% N/A TOTAL RISK-BASED 8.00% 9.00% 11.36% 3.36% 2.36% | 8.00% 9.00% 12.07% 4.07% 3.07% TIER 1 | LEVERAGE RATIO (1) 4.00% 6.00% 6.76% 2.76% .76% | 4.00% 6.00% 7.47% 3.47% 1.47% FOR THE COMPANY | RISK-BASED | CAPITAL: | TIER 1 4.00% N/A 9.45% 5.45% N/A | 4.00% N/A 10.00% 6.00% N/A TOTAL RISK-BASED 8.00% N/A 10.70% 2.70% N/A | 8.00% N/A 11.24% 3.24% N/A TIER 1 | LEVERAGE RATIO 4.00% N/A 6.32% 2.32% N/A | 4.00% N/A 6.97% 2.97% N/A
As of December 31, 1995 and 1994, the Bank and the Company were in compliance with statutory risk-based capital requirements and the Bank was in compliance with the more stringent capital requirements imposed by the Formal Agreement. (1)In some circumstances this minimum ratio may be 3%. During 1995, the Bank obtained $3,200,000 in proceeds from a private placement of the Company's common stock. One shareholder who purchased 289,000 shares at $6.75 per share (9.9% of the total shares outstanding) through private placement offered in November, 1995, has an option to purchase an additional 267,000 shares at $6.75 per share (which would bring the total shares owned by the shareholder to 556,000 shares or 17.4% of the total shares which would then be outstanding). The option is subject to the approval by the Federal Reserve Board and it will expire on May 1, 1996. 39 8. FINANCIAL STATEMENTS. CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number Independent Auditors' Report 42 Consolidated Balance Sheets, December 31, 1995 and 1994 43 Consolidated Statements of Operations For The Years Ended December 31, 1995, 1994 and 1993 44 Consolidated Statements of Shareholders' Equity For The Years Ended December 31, 1995, 1994 and 1993 45 Consolidated Statements of Cash Flows For The Years Ended December 31, 1995, 1994 and 1993 46 Notes to Consolidated Financial Statements For The Years Ended December 31, 1995, 1994 and 1993 48
40 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES Consolidated Financial Statements for the Years Ended December 31, 1995, 1994 and 1993 and Independent Auditors' Report 41 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CALIFORNIA COMMERCIAL BANKSHARES: We have audited the accompanying consolidated balance sheets of California Commercial Bankshares and subsidiaries (the Company) as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of California Commercial Bankshares and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. FEBRUARY 9, 1996 MARCH 18, 1996 AS TO NOTE 7 LOS ANGELES, CALIFORNIA 42 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994 ---- ---- CASH AND DUE FROM BANKS Noninterest bearing (Note 3) $28,549,000 $21,069,000 Interest bearing 246,000 FEDERAL FUNDS SOLD 45,000,000 2,000,000 ------------ ------------ TOTAL CASH AND CASH EQUIVALENTS 73,549,000 23,315,000 INVESTMENT SECURITIES Available for sale at estimated fair value (Note 4) 62,283,000 72,075,000 LOANS AND INVESTMENT IN LEASES, net (Notes 5 and 9) 178,050,000 195,203,000 LOANS AVAILABLE FOR SALE 9,620,000 ACCRUED INTEREST RECEIVABLE 2,649,000 2,846,000 PROPERTY - net (Note 6) 1,150,000 988,000 OTHER REAL ESTATE OWNED 2,165,000 2,676,000 OTHER ASSETS (Notes 8 and 10) 4,577,000 3,562,000 ------------ ------------ TOTAL $334,043,000 $300,665,000 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS: Demand: Noninterest bearing $130,660,000 $98,733,000 Interest bearing 65,301,000 79,695,000 Savings 45,312,000 40,504,000 Time certificates, $100,000 and over 34,718,000 28,896,000 Other time deposits 32,513,000 29,561,000 ------------ ------------ Total Deposits 308,504,000 277,389,000 INTEREST PAYABLE 221,000 149,000 NOTE PAYABLE (Note 7) 2,351,000 2,351,000 OTHER LIABILITIES (Note 8) 1,848,000 1,048,000 ------------ ------------ Total Liabilities 312,924,000 280,937,000 SHAREHOLDERS' EQUITY (Notes 7, 8 and 13): Preferred stock - no par value; authorized, 1,000,000 shares; outstanding, none Common stock - no par value; authorized, 10,000,000 shares; issued and outstanding, 2,922,000 in 1995 and 2,423,000 in 1994 14,077,000 10,782,000 Paid-in capital 470,000 475,000 Retained earnings 6,448,000 9,789,000 Net unrealized gain (loss) on investment securities available for sale, net of tax of $67,000 in 1995 and $711,000 in 1994 124,000 (1,318,000) ------------ ------------ Total Shareholders' Equity 21,119,000 19,728,000 ------------ ------------ TOTAL $334,043,000 $300,665,000 ------------ ------------ ------------ ------------
- -------------------------------------------------------------------------------- See notes to consolidated financial statements. 43 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
INTEREST AND FEE INCOME: 1995 1994 1993 ---- ---- ---- Loans and leases, including fees $20,000,000 $18,347,000 $19,904,000 Investment securities 3,409,000 3,873,000 3,261,000 Federal funds sold 1,333,000 501,000 477,000 ----------- ----------- ----------- Total Interest and Fee Income 24,742,000 22,721,000 23,642,000 ----------- ----------- ----------- INTEREST EXPENSE: Deposits 7,022,000 6,036,000 7,791,000 Securities sold under agreements to repurchase 8,000 59,000 62,000 Note payable (Note 7) 259,000 241,000 233,000 ----------- ----------- ----------- Total Interest Expense 7,289,000 6,336,000 8,086,000 ----------- ----------- ----------- NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE LOSSES 17,453,000 16,385,000 15,556,000 PROVISION FOR LOAN AND LEASE LOSSES (NOTE 5) 6,600,000 3,365,000 4,889,000 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 10,853,000 13,020,000 10,667,000 ----------- ----------- ----------- OTHER INCOME (LOSS): Escrow fees 308,000 304,000 404,000 Service charges 983,000 969,000 974,000 Securities gains (losses), net (72,000) 6,000 Other income 1,136,000 849,000 780,000 ----------- ----------- ----------- Total Other Income (Loss) 2,355,000 2,128,000 2,158,000 ----------- ----------- ----------- OTHER EXPENSES: Salaries and employee benefits (Note 8) 7,513,000 6,454,000 7,234,000 Occupancy, furniture and equipment (Note 11) 2,129,000 2,008,000 2,482,000 Data processing for customers 184,000 173,000 226,000 Legal fees and related costs (Note 12) 1,439,000 660,000 1,086,000 Loan collection and related costs 414,000 331,000 136,000 Lower of cost or market adjustment on loans available for sale 756,000 Regulatory assessments 717,000 928,000 956,000 Supplies 321,000 267,000 285,000 Other real estate owned 2,799,000 1,070,000 2,164,000 Other 2,207,000 1,854,000 2,026,000 ----------- ----------- ----------- Total Other Expenses 18,479,000 13,745,000 16,595,000 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) (5,271,000) 1,403,000 (3,770,000) INCOME TAX EXPENSE (BENEFIT) (NOTE 10) (1,930,000) 544,000 (955,000) ----------- ----------- ----------- NET INCOME (LOSS) ($3,341,000) $ 859,000 ($2,815,000) ----------- ----------- ----------- ----------- ----------- ----------- NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE ($1.30) $0.35 ($1.14) ----------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 2,564,000 2,427,000 2,459,000 ----------- ----------- ----------- ----------- ----------- -----------
- -------------------------------------------------------------------------------- See notes to consolidated financial statements. 44 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NET UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES TOTAL COMMON STOCK PAID-IN RETAINED AVAILABLE SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS FOR SALE EQUITY ----------------------------------------------------------------------------- Balance at January 1, 1993 2,345,000 $10,593,000 $357,000 $11,745,000 $22,695,000 Net Loss (2,815,000) (2,815,000) Stock Options Exercised (Note 8) 78,000 189,000 189,000 Tax Benefit of Stock Options Exercised 118,000 118,000 ----------------------------------------------------------------------------- Balance at December 31, 1993 2,423,000 10,782,000 475,000 8,930,000 20,187,000 Net Income 859,000 859,000 Change in net Unrealized Loss On Investment Securities Available For sale, net of tax of $711,000 ($1,318,000) (1,318,000) ----------------------------------------------------------------------------- Balance at December 31, 1994 2,423,000 10,782,000 475,000 9,789,000 (1,318,000) 19,728,000 Net Loss (3,341,000) (3,341,000) Stock Options Exercised (Note 8) 25,000 95,000 (83,000) 12,000 Tax Benefit of Stock Options Exercised 78,000 78,000 Common Shares Sold Under Private Placement (note 17) 474,000 3,200,000 3,200,000 Change in net Unrealized Gain on Investment Securities Available For Sale, net of tax of $67,000 1,442,000 1,442,000 ----------------------------------------------------------------------------- Balance at December 31, 1995 2,922,000 $14,077,000 $470,000 $6,448,000 $124,000 $21,119,000 ----------------------------------------------------------------------------- -----------------------------------------------------------------------------
- -------------------------------------------------------------------------------- See notes to consolidated financial statements. 45 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, 1993
1995 1994 1993 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ($3,341,000) $859,000 ($2,815,000) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 473,000 580,000 610,000 Amortization of discounts and premiums on investment securities available for sale 850,000 795,000 Amortization of discounts and premiums on investment securities 449,000 Provision for loan and lease losses 6,600,000 3,365,000 4,889,000 Provision for losses on other real estate owned 177,000 244,000 1,759,000 Deferred income taxes (1,627,000) 621,000 18,000 Loss (gain) on sale of investment securities available for sale 72,000 (6,000) Loans originated for sale (9,620,000) Loss (gain) on sale of other real estate owned 1,675,000 4,000 (167,000) Loss (gain) on sale of property 2,000 (7,000) (7,000) Decrease (increase) in accrued interest receivable 197,000 (359,000) 121,000 (Decrease) increase in deferred loan fees (80,000) 27,000 (153,000) Decrease in unearned lease income (145,000) (19,000) (384,000) (Increase) decrease in other assets (166,000) 686,000 (714,000) Net increase (decrease) in interest payable and other liabilities 872,000 (1,156,000) (385,000) ----------- ----------- ------------ Net cash from operating activities (4,061,000) 5,634,000 3,221,000 ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturity of investment securities available for sale 17,232,000 19,350,000 Proceeds from sale of investment securities available for sale 21,016,000 49,229,000 Purchase of investment securities available for sale (27,158,000) (62,335,000) Proceeds from maturities of investment securities 168,418,000 Purchases of investment securities (189,395,000) Net decrease (increase) in loans and investment in leases 3,260,000 (505,000) 26,159,000 Recoveries of loans and investment in leases 494,000 1,156,000 743,000 Payments received on in-substance foreclosures 93,000 210,000 Purchase of property (661,000) (251,000) (298,000) Proceeds from sale of property 24,000 18,000 7,000 Proceeds from sale of other real estate owned 5,683,000 6,872,000 9,616,000 Additions to other real estate owned (390,000) ----------- ----------- ------------ Net cash from investing activities 19,890,000 13,237,000 15,460,000 ----------- ----------- ------------
46 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
1995 1994 1993 ---- ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits $31,115,000 ($22,337,000) ($43,411,000) Decrease in securities sold under agreements to repurchase (2,500,000) Proceeds from sale of common stock and 3,290,000 189,000 exercise of common stock options Payments on note payable (649,000) ----------- ----------- ----------- Net cash from financing activities 34,405,000 (22,337,000) (46,371,000) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 50,234,000 (3,466,000) (27,690,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 23,315,000 26,781,000 54,471,000 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $73,549,000 $23,315,000 $26,781,000 ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 7,217,000 $ 6,327,000 $ 8,222,000 ----------- ----------- ----------- ----------- ----------- ----------- Income taxes $ 627,000 $ 602,000 $ 745,000 ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL INFORMATION ON NONCASH INVESTING ACTIVITIES: Property acquired through foreclosure $ 7,024,000 $ 7,143,000 $ 260,000 ----------- ----------- ----------- ----------- ----------- ----------- Assumption of debt through foreclosure $ $ 67,000 $ 1,359,000 ----------- ----------- ----------- ----------- ----------- ----------- Tax benefit for exercise of non-qualified stock options $ 78,000 $ $ 118,000 ----------- ----------- ----------- ----------- ----------- -----------
- -------------------------------------------------------------------------------- See notes to consolidated financial statements. 47 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1. GENERAL California Commercial Bankshares (the "Company") was incorporated on June 16, 1982 for the purpose of becoming a bank holding company. National Bank of Southern California (the "Bank") commenced operations as a wholly-owned subsidiary of the Company on January 10, 1983. The Bank operates five branches in Orange County, California. The Bank's primary source of revenue is providing loans to customers who are predominantly middle market businesses and middle income individuals. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION - The consolidated financial statements include the accounts of the Company, the Bank and Venture Partners, Inc. All significant intercompany balances and transactions have been eliminated. CONSOLIDATED STATEMENTS OF CASH FLOWS - Cash and cash equivalents for the purpose of the consolidated statements of cash flows are defined as cash and due from banks and Federal funds sold. USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS - The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and the reported amounts of liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT SECURITIES - The Bank adopted Statement of Financial Accounting Standards (SFAS) No.115, Accounting for Certain Investments in Debt and Equity Securities, as of January 1, 1994. SFAS No. 115 requires the classification of investments in debt and equity securities into three categories: held to maturity, trading, and available for sale. Debt securities that the Bank has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. The Bank has no trading securities. Debt and equity securities not classified as either held to maturity securities or trading securities are classified as available for sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of equity, net of deferred taxes. As of January 1, 1994, the cumulative effect of the adoption of the new statement was not material. The Bank designates investment securities as held to maturity or available for sale upon acquisition. Gain or loss on the sales of investment securities is determined on the specific identification method. Premiums and discounts on investment securities are amortized or accreted using the interest method over the expected lives of the related securities. LOANS AND INVESTMENT IN LEASES - Loans and leases are carried at principal amounts outstanding, net of deferred net loan origination fees, unearned lease income and the allowance for loan and lease losses. 48 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) Nonaccrual loans are those for which management has discontinued accrual of interest because (i) there exists reasonable doubt as to the full and timely collection of either principal or interest or (ii) such loans have become contractually past due ninety days with respect to principal or interest. Interest accruals may be continued for loans that have become contractually past due ninety days when such loans are well secured and in the process of collection and, accordingly, management has determined such loans to be fully collectible as to both principal and interest. For this purpose, loans are considered well secured if they are collateralized by property having a realizable value in excess of the amount of principal and accrued interest outstanding or are guaranteed by a financially capable party. Loans are considered to be in the process of collection if collection of the loan is proceeding so that management reasonably expects repayment of the loan or its restoration to a current status in the near future. When a loan is placed on nonaccrual status, all interest previously accrued but uncollected is reversed against current period operating results. Income on such loans is then recognized only to the extent that cash is received and where the ultimate collection of the carrying amount of the loan is probable, after giving consideration to borrowers' current financial condition, historical repayment performance and other factors. Accrual of interest is resumed only when (i) principal and interest are brought fully current and (ii) such loans are either considered, in management's judgement, to be fully collectible or otherwise become well secured and in the process of collection. Troubled debt restructured loans are those for which the Company has, for reasons related to borrowers' financial difficulties, granted concessions to borrowers (including reductions of either interest or principal) that it would not otherwise consider, whether or not such loans are secured or guaranteed by others. On January 1, 1995, the Bank adopted SFAS No.114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN , and SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN- INCOME RECOGNITION AND DISCLOSURES. SFAS No. 114 generally requires all creditors to account for impaired loans, except those loans that are accounted for at fair value or at the lower of cost or fair value, at the present value of the expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. SFAS No. 114 indicates that a creditor should evaluate the collectibility of both contractual interest and contractual principal when assessing the need for a loss accrual. The adoption of this statement did not have a material impact on the results of operations or the financial position of the Association, taken as a whole. The Bank considers a loan to be impaired when it is probable that the Bank will be unable to collect all contractual principal and interest payments in accordance with the terms of the original loan agreement. The Bank applies the measurement provisions of SFAS No. 114 to all loans in its portfolio except for single-family residence and installment loans which are collectively evaluated for impairment. LOAN ORIGINATION FEES - Loan origination fees, net of certain related direct incremental loan origination costs, are deferred and amortized to income over the term of the loans using the effective interest method. 49 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) ALLOWANCE FOR LOAN AND LEASE LOSSES - The allowance for loan and lease losses is based on an analysis of the loan and lease portfolio and reflects an amount which, in management's judgment, is adequate to provide for potential loan and lease losses after giving consideration to the loan and lease portfolio, current economic conditions, past loan and lease loss experience and other factors that deserve current recognition in estimating loan and lease losses. While management uses the best information available to provide for possible losses, future adjustments to the allowance may be necessary due to economic, operating, regulatory or other conditions that may be beyond the Company's control. In each reporting period, the allowance for loan and lease losses is increased by provisions for losses charged against operations in that period and recoveries of loans and leases previously charged off, and is reduced by charge-offs of loans and leases recognized in that period. LOANS AVAILABLE FOR SALE - Loans available for sale are recorded at the lower of cost or estimated market value, determined on an aggregate basis, and include loan origination costs and related fees. Any transfers of loans available for sale to the investment portfolio are recorded at the lower of cost or estimated market value on the transfer date. Gains or losses resulting from sales of loans are recorded at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold. OTHER REAL ESTATE OWNED - Other real estate owned, which represents real estate acquired in settlement of loans, is carried at fair value less estimated selling costs. Any subsequent operating expenses or income, reduction in estimated fair values, or gains or losses on disposition of such properties are charged or credited to current operations. PROPERTY - Property is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line basis over the estimated useful lives of the related assets (estimated to be one to five years) or, if shorter, the term of the lease in the case of leasehold improvements. INCOME TAXES - The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE - Net income (loss) per common and common equivalent share is based on the weighted average number of common and common equivalent shares (stock options) outstanding during the year. RECLASSIFICATION - Certain items in the previous years' consolidated financial statements have been reclassified to conform to the current year presentation. 50 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) 3. CASH AND DUE FROM BANKS The Bank is required to meet statutory reserve requirements. In part, the Bank meets these requirements by maintaining a balance in a non interest-bearing account at a Federal Reserve Bank. During 1995 and 1994, the average balance in this account was approximately $6,669,000 and $6,480,000, respectively 4. INVESTMENT SECURITIES Book value and market value of investment securities (in thousands of dollars) are summarized as of December 31 as follows:
1995 ---------------------------------------------- Amortized Estimated Gross Unrealized Cost Fair Value Gains Losses ---------------------------------------------- AVAILABLE FOR SALE: U.S. Government securities $35,314 $35,457 $168 ($25) U.S. Government agencies or insured obligations 23,611 23,657 61 (15) State political subdivisions 423 416 (7) Mortgage-backed securities- U.S. agencies 1,047 1,070 25 (2) Other securities 80 66 (14) Federal Reserve Bank and Federal Home Loan Bank stocks 1,617 1,617 ---------------------------------------------- Total $62,092 $62,283 $254 ($63) ---------------------------------------------- ----------------------------------------------
1994 ------------------------------------------------ Amortized Estimated Gross Unrealized Cost Fair Value Gains Losses ------------------------------------------------ AVAILABLE FOR SALE: U.S. Government securities $60,099 $58,778 $(1,321) U.S Government agencies or insured obligations 9,657 9,262 (395) State political subdivisions 1,509 1,274 (235) Mortgage-backed securities- U.S. agencies 1,186 1,132 (54) Other securities 97 73 (24) Federal Reserve Bank and Federal Home Loan Bank stocks 1,556 1,556 ------------------------------------------------ Total $74,104 $72,075 $(2,029) ------------------------------------------------ ------------------------------------------------
51 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,1995, 1994, 1993 (CONTINUED) The maturity distribution for investment securities available for sale at December 31,1995 is as follows (in thousands of dollars):
AMORTIZED ESTIMATED COST FAIR VALUE --------- ---------- ONE YEAR OR LESS $25,165 $25,226 OVER ONE THROUGH FIVE YEARS 34,183 34,303 OVER FIVE YEARS 80 67 ------- ------- 59,428 59,596 MORTGAGE-BACKED SECURITIES-U.S. AGENCIES 1,047 1,070 FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCKS 1,617 1,617 ------- ------- $62,092 $62,283 ------- ------- ------- -------
Proceeds from sales of investment securities available for sale were $21,016,000 for the year ended December 31, 1995. Gross realized losses from the sales of investment securities were $72,000 for the year ended December 31,1995. Proceeds from sale of investment securities available for sale were $49,229, 000 for the year ended December 31, 1994. Gross realized gains were $12,000 and gross realized losses were $6,000 from sales of investment securities available for sale for the year December 31, 1994. The carrying value of investment securities pledged as required or permitted by law amounted to $6,444,000 and $4,040,000 at December 31, 1995 and 1994, respectively. 52 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) 5. LOANS AND INVESTMENT IN LEASES The loan portfolio and net investment in direct financing leases (in thousands of dollars) at December 31 is summarized as follows:
1995 1994 -------- -------- REAL ESTATE: MORTGAGE $ 55,207 $ 66,102 EQUITY LINES 7,039 8,691 CONSTRUCTION 22,593 29,792 COMMERCIAL 84,271 82,600 INSTALLMENT AND OTHER 13,120 10,845 -------- -------- 182,230 198,030 LESS: ALLOWANCE FOR LOAN LOSSES (6,431) (5,572) DEFERRED LOAN ORIGINATION FEES - NET (702) (782) -------- -------- LOANS - NET 175,097 191,676 -------- -------- TOTAL MINIMUM LEASE PAYMENTS RECEIVABLE 3,253 3,778 ESTIMATED UNGUARANTEED RESIDUAL VALUE OF LEASED PROPERTY 210 381 -------- -------- 3,463 4,159 LESS: UNEARNED LEASE INCOME (399) (544) ALLOWANCE FOR LEASE LOSSES (111) (88) -------- -------- NET INVESTMENT IN LEASES 2,953 3,527 -------- -------- TOTAL $178,050 $195,203 -------- -------- -------- --------
The Bank grants loans to customers throughout its primary market area of Southern California. The Bank makes loans to borrowers from a number of different industries, the largest of which, including undisbursed amounts, are as follows at December 31 (in thousands of dollars) (see Note 11):
1995 1994 ------- ------- NONRESIDENTIAL CONSTRUCTION $34,717 $47,237 PERSONAL 30,384 26,699 REAL ESTATE AGENTS/DEVELOPERS 37,556 32,584 RESIDENTIAL CONSTRUCTION 22,506 27,242
Loans in the commercial loan portfolio are collateralized primarily by accounts receivable and inventory. 53 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) The allowance for loan and lease losses is an estimate involving both subjective and objective factors and its measurement is inherently uncertain, pending the outcome of future events. Management's determination of the adequacy of the allowance is based on an evaluation of the loan and lease portfolio, previous loan and lease loss experience, current economic conditions, volume, growth and composition of the loan and lease portfolio, the value of collateral and other relevant factors. The ongoing economic downturn in Southern California continued to have an adverse impact on the credit risk profile and performance of the Bank's loan and lease portfolio in 1995. Management believes the level of the allowance as of December 31, 1995 and 1994 is adequate to absorb losses inherent in the loan and lease portfolio; however, additional deterioration of the economy in the Bank's lending area could result in levels of loan and lease losses that could not be reasonably predicted at that date. A summary of the changes in the allowance for loan and lease losses (in thousands of dollars) for the years ended December 31 follows:
1995 1994 1993 -------- ------- ------- LOANS: BALANCE AT BEGINNING OF YEAR $ 5,572 $ 7,137 $ 6,161 RECOVERIES ON LOANS CHARGED OFF 460 1,104 731 PROVISION FOR LOAN LOSSES 6,600 3,365 4,789 LOANS CHARGED OFF (6,201) (6,034) (4,544) -------- ------- ------- BALANCE AT END OF YEAR 6,431 5,572 7,137 -------- ------- ------- LEASES: BALANCE AT BEGINNING OF YEAR 88 84 92 RECOVERIES ON LEASES CHARGED OFF 34 52 12 PROVISION FOR LEASE LOSSES 100 LEASES CHARGED OFF (11) (48) (120) -------- ------- ------- BALANCE AT END OF YEAR 111 88 84 -------- ------- ------- TOTAL $ 6,542 $ 5,660 $ 7,221 -------- ------- ------- -------- ------- -------
Loans and leases on which the accrual of interest has been discontinued amounted to $15,573,000 and $14,771,000 at December 31, 1995 and 1994, respectively. If interest on those loans and leases had continued to accrue, the additional income would have been $625,000 and $968,000 in 1995 and 1994, respectively. The Bank has pledged real estate loans amounting to $4,413,000 as collateral for a line of credit with the Federal Home Loan Bank (Note 7). At December 31, 1995, the Company had classified $1,397,000 of its loans as impaired with a specific reserve of $390,000 and $15,147,000 of its loans impaired with no related specific loss reserve determined in accordance with SFAS No. 114. The Company considers a loan impaired when it is probable that the Company will be unable to collect all contractual principal and interest under the terms of the loan agreement. In determining when a loan is impaired, management considers the following factors: Loans which have delays in payments of less than 3 months or less than $100,000 are not necessarily considered impaired unless other factors as described above also apply to the loans. The average recorded investment in impaired loans during the year ended December 31, 1995, was $13,101,000. It is generally the Company's policy to place loans on nonaccrual status when they are 90 days past due. Thereafter, interest income is no 54 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) longer recognized and the full amount of all payments received, whether principal or interest, are applied to the principal balance of the loan. As such, interest income may be recognized on impaired loans to the extent they are not past due by 90 days or more. Interest income of $236,000 was recognized on impaired loans during the year ended December 31, 1995, all of which was collected in cash. The Company will charge-off an impaired loan in accordance with its established charge off policy. 6. PROPERTY Property (in thousands of dollars) at December 31 is summarized as follows:
1995 1994 ------- ------- FURNITURE, FIXTURES AND EQUIPMENT $ 4,042 $ 3,687 LEASEHOLD IMPROVEMENTS 1,416 1,364 ------- ------- 5,458 5,051 LESS ACCUMULATED DEPRECIATION AND AMORTIZATION (4,308) (4,063) ------- ------- PROPERTY - NET $ 1,150 $ 988 ------- ------- ------- -------
7. BORROWING ARRANGEMENTS In December 1988 the Company obtained a $3,000,000 term loan from another financial institution for the purpose of providing additional capital to the bank. The credit agreement for this loan was amended pursuant to a Second Amendment to the credit agreement dated August 25, 1994. The loan as amended had interest at a fluctuating rate per annum equal to .75% in excess of the lender's reference rate (8.5% at December 31, 1995). Interest was payable monthly on the unpaid principal balance of the loan and required prepayment of 40% of the proceeds of any stock offering or placement of debt or equity. The Second Amendment was supported by a Support Agreement between a shareholder director of the Company and the Company whereby the shareholder guaranteed the payment of the loan. To compensate the shareholder for signing the Support Agreement and subsequently paying off the lending institution the Company had signed a Holding Company Support Agreement whereby the Company: (1) paid the shareholder $23,500 in 1994 and 1995 and (2) will issue to the shareholder on or prior to March 31, 1997 warrants to purchase 25,000 shares of common stock of the Company at an exercise price per share equal to 80% of the book value per share of the Company on December 31, 1996. In November 1995, the Company sold 474,000 shares of its common stock through private placement at $6.75 per share for the purpose of contributing most of the proceeds into the Bank as additional capital. Of the total proceeds of $3,200,000 the Company contributed $2,900,000 into the Bank's capital in December 1995. The shareholder paid off the outstanding balance of $2,350,000 to the lending institution in March of 1996 and the Company entered into a new note with the shareholder. The new note bears an interest rate of 3% over prime rate with interest only payable monthly for the first year and thereafter $125,000 plus quarterly interest payable monthly. Any remaining principal and interest is due on April 1, 1999. 55 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) The Bank maintains three lines of credit with outside financial institutions for the purpose of purchasing Federal funds. The lines of credit bear interest at a floating rate and provide for borrowing up to $8,000,000, $5,000,000 and $2,000,000, respectively. At December 31, 1995 and 1994, no amounts were outstanding on these lines of credit. Under an agreement with the Federal Home Loan Bank, the Bank may obtain an extension of credit of up to 50% of total assets collateralized by real estate loans. At December 31, 1995, the Bank had pledged loans amounting to $4,413,000 and had available credit of $2,207,000 based on 50% of the outstanding balance of pledged loans. No amounts were outstanding on this line of credit at December 31, 1995 and 1994. 8. EMPLOYEE BENEFIT PLANS The Company had a stock option plan that expired in 1992. Under the plan the options were granted to directors, officers and employees to purchase shares at the fair market of the common stock on the date of grant. The outstanding options become exercisable over a period of ten years. A summary of stock option transactions under this plan for each of the three years in the period ended December 31 is as follows:
1995 1995 1994 1993 OPTION PRICE --------------------------------------------- OPTIONS OUTSTANDING BEGINNING OF YEAR 229,446 229,446 367,496 $4.33 TO $13.00 OPTIONS EXERCISED (44,249) (96,050) OPTIONS CANCELED (51,250) (42,000) --------------------------------------------- OPTIONS OUTSTANDING, END OF YEAR 133,947 229,446 229,446 $4.67 TO $13.00 --------------------------------------------- ---------------------------------------------
At December 31, 1995, options for 132,447 shares were exercisable. During the year ended December 31, 1995, 44,249 options were exercised and paid for with cash of $12,000 and 19,198 shares of common stock previously outstanding. No options were exercised in 1994. During the year ended December 31, 1993, 96,050 options were exercised and paid for with cash of $189,000 and 18,050 shares of common stock previously outstanding. During 1995 the Company adopted a stock award plan that permits the granting of options to directors, officers and employees to purchase, at the fair market value of the common stock on the date of grant, up to 750,000 shares of the Company's common stock. The outstanding options become exercisable over a period of ten years. 56 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) A summary of stock option transactions for the stock award plan for the year in the period ended December 31, 1995 is as follows:
1995 OPTION 1995 PRICE ----------------------------- OPTIONS OUTSTANDING, BEGINNING OF YEAR 0 OPTIONS GRANTED 142,000 $5.25 TO $6.50 OPTIONS EXERCISED OPTIONS CANCELED ----------------------------- OPTIONS OUTSTANDING, END OF YEAR 142,000 $5.25 TO $6.50 ------- -------------- ------- --------------
During the year ended December 31, 1995 142,000 options were granted and none were exercised. The Company also has stock option plans it uses as a means of compensating directors in lieu of cash director's fees for services performed. During the year ended December 31,1995 12,249 options were exercised. During the years ended December 31, 1995, 1994 and 1993 no options were granted, or canceled. At December 31, 1995, options for 3,447 shares were outstanding and exercisable. The Company maintains a stock bonus plan that covers substantially all Company employees. The plan provides for the issuance to participating employees of share units in the plan, which entitles participants to distributions primarily of common stock of the Company. Contributions to the plan are held in trust and invested in common stock of the Company (which is purchased from third parties) or other investments under the terms of the plan agreement. Contributions are determined based on management's discretion. The Company's contributions for 1995, 1994 and 1993 were $45,000, $5,000 and $51,000 respectively. The Bank has a defined contribution plan, which meets the requirements of Section 401(k) of the Internal Revenue Code and covers substantially all employees. The Bank's contributions are determined as a percentage of each participant's contribution. The amounts contributed to the plan by the Bank were $108,000, $88,000 and $81,000 for 1995, 1994 and 1993, respectively. In 1987, the Company purchased cost recovery life insurance with aggregate death benefits in the amount of $2,473,000 on the lives of the senior management participants. The Company is the sole owner and beneficiary of such policies, which were purchased to fund the Company's obligation under separate deferred compensation arrangements. The cash surrender values and obligation under deferred compensation agreements at December 31, 1995 and 1994 of $1,231,000 and $1,167,000, respectively, and $317,000 and $189,000, respectively, have been included in other assets and in other liabilities, respectively, in the accompanying consolidated balance sheets. 9. RELATED PARTY TRANSACTIONS In the ordinary course of business, the Bank has granted loans to certain directors, executive officers and the businesses with which they are associated. All such loans and commitments to loans were made under terms that are consistent with the Bank's normal lending policies. 57 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) The following is an analysis of the activity of all such loans for the years ended December 31:
1995 1994 ----------- ----------- OUTSTANDING BALANCE, BEGINNING OF YEAR $ 2,623,000 $2,236,000 CREDIT GRANTED, INCLUDING RENEWALS 1,474,000 761,000 REPAYMENTS (2,249,000) (374,000) ----------- ----------- OUTSTANDING BALANCE, END OF YEAR $ 1,848,000 $2,623,000 ----------- ----------- ----------- -----------
10. INCOME TAXES Income tax expense (benefit) for the years ended December 31 is as follows:
FEDERAL STATE TOTAL ------------ ---------- ------------ 1995: CURRENT ($341,000) $38,000 ($303,000) DEFERRED (1,051,000) (576,000) (1,627,000) ------------ ---------- ------------ TOTAL ($1,392,000) ($538,000) ($1,930,000) ------------ ---------- ------------ ------------ ---------- ------------ 1994: CURRENT ($79,000) $ 2,000 ($77,000) DEFERRED 621,000 621,000 ------------ ---------- ------------ TOTAL $542,000 $ 2,000 $ 544,000 ------------ ---------- ------------ ------------ ---------- ------------ 1993: CURRENT ($982,000) $ 9,000 ($973,000) DEFERRED 18,000 18,000 ------------ ---------- ------------ TOTAL ($964,000) $ 9,000 ($955,000) ------------ ---------- ------------ ------------ ---------- ------------
Income tax expense (benefit) for the years ended December 31 (in thousands of dollars) varies from the amounts computed by applying the statutory Federal income tax rate as a result of the following factors:
1995 1994 1993 -------------------------------------------------- FEDERAL INCOME TAXES AT STATUTORY RATE $(1,845) (35.0%) $491 35.0% $(1,320) (35.0%) STATE FRANCHISE TAXES - NET OF FEDERAL INCOME TAX BENEFIT (355) (6.7) 95 6.8 (270) (7.1) UNBENEFITED STATE NET OPERATING LOSSES 20 1.4 276 7.3 INCREASE (DECREASE) IN DEFERRED TAX ASSET VALUATION ALLOWANCES - STATE AND FEDERAL 178 3.4 (49) (3.5) 370 9.8 OTHER 92 1.7 (13) (0.9) (11) (.3) -------------------------------------------------- INCOME TAX (BENEFIT) EXPENSE $(1,930) (36.6%) $544 38.8% $(955) (25.3%) -------------------------------------------------- --------------------------------------------------
58 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) The Company has recorded net deferred tax assets as of December 31 consisting principally of the following:
- --------------------------------------------------------------------- DEFERRED DEFERRED TAX TAX 1995 1994 - --------------------------------------------------------------------- DEFERRED TAX ASSETS: LOAN LOSS RESERVE $2,465,000 $1,373,000 UNREALIZED LOSS ON LOANS 342,000 UNREALIZED LOSS ON INVESTMENT SECURITIES 711,000 DEPRECIATION 233,000 241,000 NONACCRUAL INTEREST INCOME 171,000 252,000 SELF-INSURANCE RESERVE 106,000 71,000 REO RESERVES 601,000 104,000 CONTINGENCIES 184,000 50,000 OTHER 262,000 361,000 - --------------------------------------------------------------------- DEFERRED TAX ASSETS 4,364,000 3,163,000 VALUATION ALLOWANCE (1,202,000) (837,000) - --------------------------------------------------------------------- DEFERRED TAX ASSETS, NET OF ALLOWANCE 3,162,000 2,326,000 - --------------------------------------------------------------------- DEFERRED TAX LIABILITIES: UNREALIZED GAIN ON INVESTMENT SECURITIES 67,000 FINANCIAL ACCOUNTING LEASE DIFFERENCE 846,000 (926,000) - --------------------------------------------------------------------- NET DEFERRED TAX ASSETS $2,249,000 $1,400,000 - --------------------------------------------------------------------- - ---------------------------------------------------------------------
In the event the future consequences of difference between financial accounting bases and the tax bases of the Company's assets and liabilities result in a deferred tax asset, SFAS 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred asset is recorded when it is more likely than not that some portion or all of the deferred asset will not be recognized. At December 31, 1995, the Company has a California state net loss carry forward of $1,410,000 which expires primarily in 1996-2000 and a Federal net loss carry forward of $408,000 which expires primarily in 2010. 59 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) 11. COMMITMENTS AND OTHER MATTERS OPERATING LEASES - At December 31, 1995, the Company and the Bank were obligated under various noncancelable lease agreements, classified as operating leases, primarily for the rental of office space. Certain leases for office space contain provisions for renewal options of one or two five-year periods. Minimum future rental payments under these lease agreements are summarized as follows: 1996 $1,155,000 1997 1,139,000 1998 1,099,000 1999 1,118,000 2000 865,000 THEREAFTER 1,478,000 ---------- TOTAL $6,854,000 ---------- ---------- Total rental expense was $1,136,000, $1,072,000 and $1,173,000 in 1995, 1994 and 1993, respectively. 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 and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. At December 31, 1995 and 1994, the Bank had primarily variable rate commitments to extend credit of $55,769,000, and $47,920,000, respectively, and obligations under standby letters of credit of $2,032,000 and $1,629,000, respectively. 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. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment or real estate. 60 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) 12. LEGAL PROCEEDINGS From time to time, the Company or the Bank is a party to claims and legal proceedings arising in the ordinary course of business. Management of the Company evaluates the Company's or Bank's exposure to the cases individually and in the aggregate and provides for potential losses on such litigation if the amount of the loss is determinable and if the incurrence of the loss is probable. After taking into consideration information furnished by counsel to the Company or the Bank as to the current status of various claims and legal proceedings to which the Company or the Bank is a party, management of the Company or the Bank believes that the ultimate aggregate liability represented thereby, if any, will not have a material adverse effect on the Company's consolidated financial statements. 13. RISK-BASED CAPITAL STANDARDS AND OTHER REGULATORY MATTERS On April 8, 1992, the Bank executed a Formal Agreement (the "Agreement") with the Office of the Comptroller of the Currency (the "Comptroller") in which the Bank agreed to take specific action with respect to classified assets and the allowance for loan and lease losses, maintain specific minimum capital levels, obtain prior approval of changes in Directors and executive officers, strengthen controls over loan administration and real estate loan appraisals, improve liquidity management, submit a three-year capital program and obtain prior written approval from the Comptroller before dividends may be declared. Management believes that the Bank is in substantial compliance with all terms of the Agreement. On May 27, 1993, the Company executed a Memorandum of Understanding (the "memorandum") with the Federal Reserve Bank of San Francisco (the "Fed") under which the Company submitted a summary plan of action to improve conditions in the Bank, cannot declare cash dividends without prior notice to the Fed, and must obtain prior approval of changes in Directors or executive officers. Management of the Company believes the Company is in substantial compliance with the terms of the memorandum. Risk-based capital guidelines require that the Company and the Bank maintain a minimum total capital of 8% of risk-weighted assets. Further, at least 4% of the required capital must be "core" (Tier 1) capital. Leverage capital guidelines require, generally, that the Company and the Bank maintain a minimum ratio of (Tier 1) capital to total assets of 4%. 61 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) The Agreement requires the Bank to maintain a minimum ratio of total capital to risk-weighted assets of 9% and a minimum ratio of core capital to adjusted total assets of 6%. At December 31, 1995, the Company's total capital to risk-weighted assets and core capital to risk weighted assets were 10.70% and 9.45%, respectively. At December 31, 1995, the Bank's total capital to risk- weighted assets and core capital to risk weighted assets were 11.36% and 10.11%, respectively. At December 31, 1995, the Company's and the Bank's leverage ratios were 6.32% and 6.76%, respectively. At December 31, 1995, the Bank was in compliance with the capital requirements set forth in the Agreement. Under Federal and California laws and regulations, the Company and the Bank are subject to restrictions related to the payment of dividends and the transfer of funds from the Bank to the Company through intercompany loans and advances. 14. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY Balance sheets as of December 31:
ASSETS - ------ 1995 1994 ---- ---- CASH $ 587,000 $ 489,000 OTHER REAL ESTATE OWNED 83,000 88,000 INVESTMENTS IN SUBSIDIARIES 22,686,000 21,350,000 OTHER ASSETS 122,000 157,000 ----------- ----------- TOTAL $23,478,000 $22,084,000 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY NOTE PAYABLE $ 2,351,000 $ 2,351,000 OTHER LIABILITIES 8,000 8,000 TOTAL SHAREHOLDERS' EQUITY 21,119,000 19,728,000 ----------- ----------- TOTAL $23,478,000 $22,084,000 ----------- ----------- ----------- -----------
Statements of operations for the years ended December 31:
1995 1994 1993 ---- ---- ---- INCOME: INTEREST $ 21,000 $ 13,000 $ 18,000 ---------- ---------- ---------- TOTAL INCOME 21,000 13,000 18,000 ---------- ---------- ---------- EXPENSES: INTEREST 259,000 241,000 233,000 OTHER EXPENSES 45,000 27,000 23,000 ---------- ---------- ---------- TOTAL EXPENSES 304,000 268,000 256,000 ---------- ---------- ---------- LOSS BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY IN INCOME (LOSS) OF SUBSIDIARIES (283,000) (255,000) (238,000) INCOME TAX EXPENSE (BENEFIT) 52,000 (89,000) (81,000) ---------- ---------- ---------- LOSS BEFORE EQUITY IN INCOME (LOSS) OF SUBSIDIARIES (335,000) (166,000) (157,000) EQUITY IN INCOME (LOSS) OF SUBSIDIARIES (3,006,000) 1,025,000 (2,658,000) ---------- ---------- ---------- NET (LOSS) INCOME ($3,341,000) $ 859,000 ($2,815,000) ---------- ---------- ---------- ---------- ---------- ----------
62 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31:
1995 1994 1993 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS) ($3,341,000) $ 859,000 ($2,815,000) ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH FROM OPERATING ACTIVITIES: EQUITY IN LOSS (INCOME) OF SUBSIDIARIES FROM OPERATIONS 3,006,000 (1,025,000) 2,658,000 DECREASE IN OTHER ASSETS 35,000 99,000 167,000 INCREASE (DECREASE) IN OTHER LIABILITIES 3,000 (5,000) (9,000) ---------- ---------- ---------- NET CASH FROM OPERATING ACTIVITIES (297,000) (72,000) 1,000 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: PROCEEDS FROM SALE OF OTHER REAL ESTATE OWNED 5,000 681,000 ---------- ---------- ---------- NET CASH FROM INVESTING ACTIVITIES 5,000 681,000 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: PROCEEDS FROM SALE OF COMMON STOCK AND EXERCISE OF COMMON STOCK OPTIONS 3,290,000 189,000 PAYMENTS ON NOTE PAYABLE (649,000) INCREASE IN INVESTMENT IN SUBSIDIARIES (2,900,000) ---------- ---------- ---------- NET CASH FROM FINANCING ACTIVITIES 390,000 (460,000) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH 98,000 (72,000) 222,000 CASH AT BEGINNING OF YEAR 489,000 561,000 339,000 ---------- ---------- ---------- CASH AT END OF YEAR $ 587,000 $ 489,000 $ 561,000 ---------- ---------- ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION CASH PAID DURING THE YEAR FOR: INTEREST $ 259,000 $ 241,000 $ 233,000 ---------- ---------- ---------- ---------- ---------- ---------- SUPPLEMENTAL INFORMATION ON NONCASH INVESTMENT ACTIVITY TAX BENEFIT FOR EXERCISE OF NON-QUALIFIED STOCK OPTIONS $ 78,000 $ $ 118,000 ---------- ---------- ---------- ---------- ---------- ----------
63 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) 15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," a summary of the estimated fair value of the Company's consolidated financial instruments as of December 31, 1995 and 1994 is presented below. The estimated fair value amounts have been determined by management using available market information and appropriate valuation methodologies. However, assumptions are necessary to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
DECEMBER 31, 1995 ----------------- CARRYING ESTIMATED VALUE FAIR VALUE ASSETS: CASH AND DUE FROM BANKS $ 28,549,000 $ 28,549,000 FEDERAL FUNDS SOLD 45,000,000 45,000,000 INVESTMENT SECURITIES 62,283,000 62,283,000 LOANS AND INVESTMENT IN LEASES, NET 171,363,000 170,715,000 ACCRUED INTEREST RECEIVABLE 2,649,000 2,649,000 LIABILITIES: SAVINGS AND DEMAND DEPOSITS 241,273,000 241,273,000 TIME DEPOSITS 67,231,000 67,234,000 INTEREST PAYABLE 221,000 221,000 NOTE PAYABLE 2,351,000 2,351,000
DECEMBER 31, 1994 ----------------- CARRYING ESTIMATED VALUE FAIR VALUE ASSETS: CASH AND DUE FROM BANKS $ 21,315,000 $ 21,315,000 FEDERAL FUNDS SOLD 2,000,000 2,000,000 INVESTMENT SECURITIES 72,075,000 72,075,000 LOANS AND INVESTMENT IN LEASES, NET 156,247,000 154,814,000 ACCRUED INTEREST RECEIVABLE 2,846,000 2,846,000 LIABILITIES: SAVINGS AND DEMAND DEPOSITS 218,932,000 218,932,000 TIME DEPOSITS 58,457,000 58,352,000 INTEREST PAYABLE 149,000 149,000 NOTE PAYABLE 2,351,000 2,351,000
The carrying value of cash and due from banks, Federal funds sold, accrued interest receivable, savings and demand deposits, interest payable, note payable and commitments is a reasonable estimate of the fair value. The fair value of investment securities is based on quoted market prices. 64 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) The fair value of loans and investment in leases is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of classified loans with a carrying value of approximately $16,307,000 and $38,956,000 as of December 31, 1995 and 1994, respectively, was not estimated because it is not practical to reasonably assess the credit adjustment that would be applied in the market place for such loans. These classified loans, which are primarily real estate or construction loans, have a weighted average interest rate ranging from 8% to 12.5% and from 9.50% to 13.50% as of December 31, 1995 and 1994, respectively, and are due at various dates through the year 2025. The fair value of demand deposit accounts is the amount payable on demand. The fair value of term deposit accounts is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value of commitments is not deemed material at December 31, 1995 and 1994. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1995 and 1994. 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 consolidated financial statements since that date and, therefore, current estimates of fair value may differ significantly from amounts presented herein. 16. ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG- LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF and SFAS No. 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS, an amendment to FASB Statement No. 65. The provisions of these statements are effective for financial statements for fiscal years beginning after December 15, 1995. The Company has not completed the process of evaluating the impact that will result from adopting these statements and is therefore unable to disclose the impact of adopting such statements. However, the Company does not believe the application of SFAS Nos. 121 and 122 will have a material impact on its financial condition and results of operations when adopted. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which requires adoption of the disclosure provisions no later than fiscal years beginning after December 15, 1995 and adoption of the recognition and measurement provisions for nonemployee transactions no later than after December 15, 1995. The new standard defines a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. 65 CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED) Pursuant to the new standard, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but would be required to disclose in a note to the financial statements pro forma net income and, if presented, earnings per share as if the company had applied the new method of accounting. The accounting requirements of the new method are effective for all employee awards granted after the beginning of the fiscal year of adoption. The Company has not yet determined if it will elect to change to the fair value method, nor has it determined the effect the new standard will have on net income and earnings per share should it elect to make such a change. Adoption of the new standard will have no effect on the Company's cash flows. 17. STOCK OFFERING During 1995 the Company sold 474,000 shares of its common stock through private placement at $6.75 per share, thus increasing its capital in the amount of $3,200,000. The Company contributed $2,900,000 of the proceeds into the Bank as additional capital. One shareholder who purchased 289,000 shares (9.9% of the total shares outstanding), has an option to purchase an additional 267,000 shares at $6.75 per share (which would bring the total shares owned by the shareholder to 556,000 shares or 17.4% of the total shares which would then be outstanding). The option is subject to the approval by the Federal Reserve Board and it will expire on May 1, 1996. 66 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-39926 of California Commercial Bankshares on Form S-8 of our report dated February 9, 1996 (March 18, 1996 as to Note 7), appearing in this Annual Report on Form 10-K of California Commercial Bankshares for the year ended December 31, 1995. LOS ANGELES, CALIFORNIA MARCH 28, 1996 67 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE. Not Applicable. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following lists information regarding all directors and executive officers of the Company. PHILLIP L. BUSH, 59 years of age, has been a Director and Secretary of the Company since 1982. Mr. Bush has been a practicing attorney with the firm of Bush, Bush and Larsen, in Fountain Valley, California since 1967. Mr. Bush's practice is primarily litigation of personal injury matters. He also has practiced in the areas of real estate development and syndication, and business enterprise organization and formation. MICHAEL J. GERTNER, 56 years of age, has been a Director of the Company since 1982. Mr. Gertner is a owner in the law firm of Michael Avey Gertner, a professional corporation in Newport Beach, California. He is licensed to practice law in both California and New York. Mr. Gertner is also a Certified Public Accountant and specializes in the areas of taxation, estate planning and estate administration. JAMES W. HAMILTON, 63 years of age, has been a Director of the Company since 1982. Mr. Hamilton is Senior Counsel to the law firm of Paul, Hastings, Janofsky & Walker of which he has been a partner from 1965 until 1993. His office is in the firm's Costa Mesa facility. He specializes in securities and corporate law. FARRELL G. HINKLE, DDS, MSD, 53 years of age, has been a Director of the Company since 1982. Dr. Hinkle is an Orthodontist with offices in Newport Beach and Santa Ana. He has been practicing Orthodontics since 1973. He has a degree in Mathematics and graduated from the UCLA School of Dentistry as a Regents Scholar in 1971. He also earned a Certificate in Orthodontics and a Masters Degree from the University of Washington in 1973. WILLIAM H. JACOBY, 57 years of age, has been a Director, and the President and Chief Executive Officer of the Company since 1982 and is also Chairman of the Board and Chief Executive Officer of the Bank. Mr. Jacoby began his banking career in 1960 with First Interstate Bank of California. In 1979 Mr. Jacoby joined Westlands Bank and served in various positions until joining the Company in June 1982 during its organizational period. ROBERT L. MCKAY, 65 years of age, is a private investor in Orange County, California, where he oversees his investments in Venture Capital for business and real estate. From 1966 to 1981 Mr. McKay was President of Taco Bell, Inc. MARK H. STUENKEL, 43 years of age, is, and since November 1982 has been, Executive Vice President of the Company. He is, and since December 1988 has been President of the Bank. He was previously Executive Vice President of the Bank since 1982. Mr. Stuenkel was made a Director of the Company in 1987. He started his banking career in 1974 and prior to joining the Bank held various positions with Security Pacific National Bank. DANNIE M. HAYES, 54 years of age, is, and also has been since May 1993, Executive Vice President and Senior Credit Officer of the Bank. Mr. Hayes began his banking career in 1963 and prior to joining the Company held various senior positions with Security Pacific National Bank and City National Bank. ABDUL S. MEMON, 50 years of age, is, and since 1983 has been, Chief Financial Officer and Assistant Secretary of the Company and Senior Vice President, Cashier, Controller and Assistant Secretary of the Bank. Mr. Memon began his banking career in 1973 and prior to joining the Company held various senior positions with Westlands Bank. Effective February 1991, the director's fee paid to non-employee Directors has been $1,000 per meeting attended and the fee for attending committee meetings has been $375 per meeting attended. No fee is paid to employee directors. 68 ITEM 11. EXECUTIVE COMPENSATION. (A) SUMMARY COMPENSATION TABLE The following Summary Compensation Table sets forth information for the fiscal year ended December 31, 1995 concerning all plan and non-plan compensation awarded to, earned by, or paid to (I) the Company's Chief Executive Officer ("CEO") at the end of such fiscal year, regardless of compensation level, and (ii) the Company's four most highly compensated executive officers other than the CEO who were serving as executive officers at the end of such fiscal year and whose compensation exceeded $100,000, if any. SUMMARY COMPENSATION TABLE
Long Term Compensation ANNUAL COMPENSATION AWARDS PAYOUTS ------------------- ------ ------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Name Annual Restricted and Compen- Stock Options/ LTIP Other Principal sation Awards(s) SARs Payouts Compen- Position Year Salary($) Bonus($) ($)* ($) (#) ($) sation($) William 1995 190,000 0 5,000 0 0 0 0 H. Jacoby 1994 190,000 22,000 4,000 0 0 0 0 CEO 1993 190,000 0 3,000 0 0 0 0 Mark H. 1995 144,000 0 4,000 0 0 0 0 Stuenkel 1994 137,000 16,000 2,000 0 0 0 0 EVP 1993 137,000 0 2,000 0 0 0 0 Dannie 1995 108,000 0 3,000 0 0 0 0 M. Hayes 1994 100,000 5,000 2,000 0 0 0 0 # - Number of units $ - Dollar amount * Amounts reported represent Company's matching contribution to the 401-K Plan. None of the named officers had other annual compensation in excess of $50,000 or 10% of the total annual salary and bonus reported for any of the last three fiscal years.
The following letter footnotes contain information which relate to the corresponding lettered columns in the above table: (c) The dollar value of base salary (cash and non-cash) earned by the named executive officer. (d) The dollar value of bonus (cash and non-cash) earned by the named executive officer during the fiscal year covered, even if deferred at the election of the executive officer. (e) The dollar value of other annual compensation not properly categorized as salary or bonus; including (i) perquisites and other personal benefits, securities or property unless the aggregate amount of such compensation is the lesser of either $50,000 or 10% of the total annual salary and bonus reported for the named executive officer in columns (c) and (d); (ii) above-market or preferential earnings on restricted stock, options, stock appreciation rights ("SARs") or deferred compensation paid during the fiscal year or payable during that period but deferred at the election of the named executive officer, (iii) earnings on long-term incentive plan ("LTIP") compensation paid during the fiscal year or payable during that period but deferred at the election of the named executive officer; (iv) amounts reimbursed during the fiscal year 69 for the payment of taxes; and (v) the dollar value of the difference between the price paid by a named executive officer for any security of the Company or its subsidiaries purchased from the Company or its subsidiaries (through deferral of salary or bonus, or otherwise), and the fair market value of such security at the date of purchase, unless that discount is available generally, either to all security holders or to all salaried employees of the company. (D) STOCK OPTIONS AND STOCK APPRECIATION RIGHTS TABLES Option/SAR Grants in Last Fiscal Year The following table discloses grants of stock options and stock appreciation rights ("SARs") to the named executive officers during the year ended December 31, 1995. Multiple grants are aggregated only if they have the same terms, such as exercise price and expiration dates. The table also discloses information related to the potential realizable value of the awards at assumed annual rates of stock price appreciation (5% and 10%) compounded annually over the option/SAR term. OPTIONS/SAR GRANTS FOR THE YEAR ENDED DECEMBER 31, 1995 Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Individual Grants Term Value*(a) (b) (c) (d) (e) (f) (g) % of Total Options/ SARs Options/ Granted to SARs Employees Exercise Expir- Granted in Fiscal or Base ation Name (#) Year Price($/Sh) Date 5%($) 10%($) William Jacoby 25,000 17.6% $5.25-6.50 2005 $7,000 $14,000 CEO Mark H. Stuenkel 25,000 17.6% $5.25-6.50 2005 $7,000 14,000 EVP DannieM. Hayes 10,000 7.0% $ 6.50 2005 $3,000 $ 6,000
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End option/SAR Values 70 The following table describes the aggregate option/SAR exercised during fiscal year ended December 31, 1995 and unexercised options/SARs for each named executive officer at the end of such fiscal year: AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e) Value of Number of Unexercised Unexercised In-the-Money Options/SARs Options/SARs at FY-End(#) at FY-End($) Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise(#) Realized($) Unexercisable Unexercisable - ---- ---------------- ----------- ------------- ------------- William H. Jacoby 4,455 $31,000 30,000/25,000 0/0 Mark H. Stuenkel 2,000 $1,000 26,000/25,000 0/0 Dannie M. Hayes NONE N/A 0/10,000 0/0
During the fiscal year ended December 31, 1995, the Company did not reprice any options or SARs held by a named executive officer or otherwise reduce the terms of exercise. No options or SARs held by any executive officer over the last ten years have been repriced or modified. (C) LONG-TERM INCENTIVE PLAN ('LTIP") AWARDS TABLE The following table describes awards to the named executive officers under long- term incentive plans ("LTIP") during the fiscal year ended December 31, 1995, of items such as phantom stock, restricted stock units, dividend equivalents, and performance shares or units. The disclosures encompass plans that are "stock- based" where the benefits are a function of market price movements, as well as plans prescribing performance criteria other than or in addition to market price. For the latter type of plan, the table discloses the estimated payouts realizable in relation to the performance targets (threshold, target, and maximum). LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
(a) (b) (c) (d) (e) (f) Performance Number of or Other Shares, Units Period Until or Other Maturation Threshold Target Maximum Name Rights (#) of Payout ($ or #) ($ or #) ($ or #) - ---- -------------- ------------- ---------- -------- -------- William H. Jacoby NONE N/A N/A N/A N/A CEO Mark H.Stuenkel NONE N/A N/A N/A N/A EVP Dannie M. Hayes NONE N/A N/A N/A N/A
71 (D) DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE Although the Company has no defined benefit plan or actuarial plan, the Company has entered into certain executive salary continuation agreements with Messrs. Jacoby, Stuenkel and Memon. Please see "(F) Employment Contracts and Termination of Employment and Change-in Control Arrangements". (E) COMPENSATION OF DIRECTORS Since February 1991, the director's fee paid to non-employee directors of the Bank has been $1,000 per board meeting attended and $375 per Committee meeting attended. The total amounts of director's fees paid and accrued by the Bank during the fiscal years ended December 31, 1995, 1994 and 1993 were, $140,000, $130,000 and $147,000 respectively. No director's fees are paid by the Company. (F) EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN CONTROL ARRANGEMENTS In 1988, the Bank entered into Executive Salary Continuation Agreements with Messrs. Jacoby, Stuenkel and Memon. Pursuant to the agreements, each executive receives benefits upon his retirement or upon termination of service with the Bank prior to retirement unless such executive's employment with the Bank is terminated prior to retirement either (i) voluntarily by the executive other than for "Good Reason" (as defined in the agreements) or (ii) by the Bank for "Cause" (also defined in the agreements), in which case no benefits or payments are paid pursuant to the agreements. The agreements also provide each executive with benefits (to the extent such benefits are vested at the time) if his employment is terminated by the Bank prior to the executive's retirement for any reason other than the executives's death, disability, for Cause or is terminated by the executive for Good Reason. With the exception of Mr. Jacoby whose benefits vest at the rate of ten percent (10%) per year for each year of employment that he has been employed by the Bank, benefits vest under the agreements at the rate of ten percent (10%) per year for each year that the executive has been employed by the Bank commencing as of January 1, 1988, up to a maximum of 100%. Under the agreements, the executives shall receive the following yearly sums for a period of fifteen (15) years after either their retirement from the Bank or upon their death: Mr. Jacoby, $80,000; Mr. Stuenkel, $62,500; and Mr. Memon, $23,000. If one of the executives' employment with the Bank is terminated because of disability prior to retirement, such executive (or his/her Estate) shall be entitled to receive the above benefits upon retirement or death or in lieu thereof, to elect to receive a disability benefit in an amount equal to the present value of such executive's retirement benefits under the agreement. Each agreement also has provisions which become effective upon the occurrence of a "Change in Control" (as defined therein) of the Company or the Bank. In such event, the agreements become employment agreements with three-year terms for Mr. Jacoby and Mr. Stuenkel and employment agreements with eighteen month terms for Mr. Memon. The agreements also provide for the executives' compensation to increase annually. The executives shall also continue to receive all non-cash forms of compensation and benefits which they received prior to the Change in Control for such three year term. Under the agreements, a Change in Control is deemed to have occurred if (a) any person (other than the Company's directors as of the date of the agreements) becomes the beneficial owner of more than 40% of the Company's outstanding Common Stock (exclusive of shares held in the Company's treasury or by the Company's subsidiaries) which such stock shall have been acquired after the date of the agreements pursuant to a tender offer, exchange offer or series of purchases or other acquisitions, or any combination of such transactions; (b) there is a change in the Company's or the Bank's Board of Directors at any time within two years after any tender offer, exchange offer, merger, consolidation, sale of assets or contested election or any combination of those transactions (the "transaction") so that persons who are directors of the Company or the Bank immediately before the first 72 transaction cease to constitute a majority of the Board of Directors of the Company or the Bank any corporation which may be the successor to the Company of the Bank in any such transaction; or (C) the Company sells, transfers or otherwise disposes of substantially all of its assets and properties including the stock of the Bank or the Company shall cause the Bank to sell, transfer or otherwise dispose of substantially all of the Bank's assets and properties. If after a Change in Control one of the executives shall either terminate his/her employment for a Good Reason or be terminated by the Bank for any reason other than Cause, then the Bank shall pay such executive the cash compensation during his/her remaining term (but in the case of Messrs. Jacoby and Stuenkel such payments shall not be less than two times the executives' annual cash compensation and in the case of Mr. Memon, not less than one times the executives' annual cash compensation). Moreover, all employee benefits plans and programs in which the executives are entitled to participate shall continue for the remainder of the executives' terms and the executives shall continue to receive the retirement, death and disability benefits under the agreements. DISCOUNTED STOCK OPTION AGREEMENT In January 1988, the Company granted William H. Jacoby an option to purchase 1,980 shares of the Company's Common Stock pursuant to a Discounted Stock Option Agreement. The option was granted to Mr. Jacoby in consideration of his past performance as an officer of the Company. The option to purchase shares granted to Mr. Jacoby was intended to be the equivalent at its inception to a $24,500 bonus. As a result, the option price to be paid upon exercise for the shares is only $1.00; such price being determined by the difference between the exercise price and the fair market value of the Company's Common Stock as determined by the Board of Directors on the date of grant. Subject to the conditions set forth in the Agreement, the option may be exercised in whole or in part at any time. Mr. Jacoby exercised his option during 1995. STOCK OPTION PLAN The Company had a Stock Option Plan (the "Plan") for its directors, officers and full time employees. The Company's Board of Directors administers the Plan. The purpose of the Plan was to compensate certain of the organizers of the Company and the Bank, and to provide incentives to key employees to remain in the employ of the Company and the Bank. Options were not transferable under the Plan other than by will or by the laws of descent and distribution and during the participant's lifetime were exercisable only by the participant. The option price per share for options granted under the Plan had to be at least 100% of the fair market value of the Common Stock on the date any such options were granted, except that in the case of a shareholder owning more than 10% of the total combined voting power of all classes of the outstanding stock of the Company, the option price for incentive stock options had to be at least 110% of the fair market value on the date of grant. Upon expiration or termination of any outstanding options, shares remaining unexercised became available for grant under the Plan. The plan expired in October 1992. As of December 31, 1995, options to purchase 133,947 shares of Common Stock were outstanding at prices ranging from $4.67 to $13.00 per share. During 1995, all employees as a group exercised options for 44,249 shares of Common Stock which had a net value (market value less exercise price) of $172,000. Of such options, Mr. Jacoby and Mr. Stuenkel exercised options and received 4,455 shares and 2,000 shares, respectively, which had a net value of $31,000 and $1,000, respectively. 73 STOCK AWARD PLAN During 1995 the Company adopted a Stock Award Plan (the "Plan") for its directors, officers and full time employees. The Company's Board of Directors administers the Plan and decides to whom and upon what terms options shall be granted. Subject to adjustment by reason of stock splits or similar capital adjustments, the Plan provides for the granting of nonstatutory stock options as well as incentive stock options to purchase an aggregate of 750,000 share of the Company's Common Stock. The purpose of the Plan is to provide incentives to directors and key employees to remain in the employ of the Company and the Bank. Options are not transferable under the Plan other than by will or by the laws of descent and distribution and during the participant's lifetime were exercisable only by the participant. The option price per share for options granted under the Plan has to be at least 100% of the fair market value of the Common Stock on the date any such options are granted, except that in the case of a shareholder owning more than 10% of the total combined voting power of all classes of the outstanding stock of the Company 10% of the fair market value on the date of grant. Upon expiration or termination of any outstanding options, shares remaining unexercised become available for grant under the Plan. As of December 31, 1995, options to purchase 142,000 shares of Common Stock were outstanding at prices ranging form $5.25 to $6.50 per share. No options were exercised during 1995. STOCK BONUS PLAN Effective January 1, 1986, the Company adopted a Stock Bonus Plan (the "Stock Bonus Plan") and established a related trust. Subject to certain eligibility requirements for time of service, all of the Company's employees participate in the Stock Bonus Plan. The Stock Bonus Plan is a tax-credit employee stock ownership plan and is administered by the Board of Directors or the Chief Executive Officer. The amount of the Company's contributions of cash or securities of the Company to the Stock Bonus Plan is determined by the Board of Directors (or the Chief Executive Officer). Subject to certain limitations, such contributions are allocated to each participant's account in proportion to such participant's compensation earned during the applicable Stock Bonus Plan year. Allocations to a participant's account vest in accordance with the schedules set forth in the Stock Bonus Plan. Distributions to participants are made at participants' death, retirement, disability, or termination of employment. Participants are not permitted to make voluntary contributions to the Stock Bonus Plan and the Stock Bonus Plan may not make loans to participants. Any cash amounts contributed to the Stock Bonus Plan will be used primarily to purchase securities issued by the Company. The Company contributed $36,000 to the Stock Bonus Plan for 1995. Of such allocations Mr. Jacoby, Mr. Stuenkel and Mr. Hayes received $1,000 each. 401-K PLAN Effective February 1, 1989 the Company established a 401-K Plan which enables employees to defer a portion of their wages tax free subject to limitations established by the Internal Revenue Service. All the employees at the completion of certain eligibility requirements for time of service can elect to participate in the plan. Under the plan, the Company may make matching contributions to the plan up to stated limits. Such contributions are determined by the Board of Directors at the beginning of the year. The vesting of such contributions to the employees is based on the time of service since the effective date of the plan. (G) Additional Information with Respect to Compensation Committee Interlocks and Insider Participation in Compensation Decision. 74 Not Applicable. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The shares of the Company's Common Stock constitute the only class of voting securities of the Company. As of March 13, 1996 there were 2,944,000 shares of common stock outstanding and entitled to vote. As of March 13, 1996, there were approximately 298 shareholders of record. Set forth in the table on the following page is certain information regarding persons who according to the Company's records own more than five percent of the voting securities of the Company as of March 13, 1996, each director of the Company and all directors and officers of the Company as a group.
TITLE NAME AND ADDRESS AMOUNT AND NATURE PERCENT OF BENEFICIAL OF BENEFICIAL OF CLASS OWNER OWNERSHIP (1) CLASS Common Stock *Phillip L. Bush 102,081(2) 3.5% (no par value) 10061 Talbert Ave. Fountain Valley, CA 92708 Common Stock *Michael J. Gertner 33,643(2) 1.1% (no par value) 4340 Campus Drive Ste. 100 Newport Beach, CA 92660 Common Stock *James W. Hamilton 80,138(2) 2.7% (no par value) 695 Town Center Drive Costa Mesa, CA 92626 Common Stock *Farrell G. Hinkle 133,886(2) 4.5% (no par value) 2740 South Bristol Santa Ana, CA 92704 Common Stock *William H. Jacoby 221,140(3) 7.4% (no par value) 4100 Newport Place Newport Beach, CA 92660 Common Stock *Robert McKay 683,992(2) 23.2% (no par value) 4100 Newport Place Newport Beach, CA 92660 Common Stock *Mark H. Stuenkel 45,698(4) 1.5% (no par value) 4100 Newport Place Newport Beach, CA 92660 Common Stock All Directors and 1,403,145(5) 45.1% (no par value) Officers as a Group (29 in Number) Common Stock Financial Institutions Partners LP 289,000(6) 9.8% (no par value) 1110 Lake Cook Road #165 Buffalo Grove, IL 60089 Common Stock Randall Rose & Co. 165,000 5.6% (no par value) 635 Madison Ave. New York, NY 1022
*Director of the Company 75 (1) Except as otherwise indicated, each of the persons named in the table has sole power to vote and dispose of his shares of the Company's Common Stock, subject to community property laws where applicable. (2) Includes 3,333 shares of the Company's Common Stock which may be purchased on the exercise of stock options. (3) Includes 35,000 shares of the Company's Common Stock which may be purchased on the exercise of stock options. (4) Includes 31,250 shares of the Company's Common Stock which may be purchased on the exercise of stock options. (5) Includes an aggregate of 168,514 shares of the Company's Common Stock which may be purchased on the exercise of stock options. (6) Has an option to purchase an additional 267,000 shares at $6.75 per share (which would bring the total shares owned by the shareholder to 556,000 shares or 17.4% of the total shares which would then be outstanding). The option is subject to the approval by the Federal Reserve Board and it will expire on May 1, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Bank has had, and expects to have in the future, banking transactions in the ordinary course of its business with directors, principal shareholders and their associates on the same terms, including interest rates and collateral securing loans, as those prevailing at the time for comparable transactions with unaffiliated persons, and which do not involve more than a normal risk of collectibility, nor present other unfavorable features. Please refer to Note 7 (Borrowing Arrangements) of Item 8 (Financial Statements) regarding the Support Agreement between a director/shareholder, Robert L. McKay, and the Company, and the related compensations paid currently or which will be paid in the future by the Company. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (A) (1) FINANCIAL STATEMENTS. Financial statements and schedules of the registrant are listed in the index to Consolidated Financial Statements contained under Part II Item 8. Financial Statements and Supplementary Data of this report. (2) FINANCIAL STATEMENT SCHEDULES. All Financial statement schedules are omitted either because the conditions under which they are required are not applicable or because the information is included in the Financial Statements. 76 (3) EXHIBITS: (3) (a) Articles of Incorporation of California Commercial Bankshares as amended. (Incorporated by reference from Company's Form 10-K filed on March 31, 990). (3) (b) By-Laws of California Commercial Bankshares, as amended. (Incorporated by reference from the Company's Form 10-K filed on March 31, 1989.) (10) (A) Office Sublease between First California Associates and the Company (Incorporated by reference from the Company's Form 10-K filed on March 31, 1983). (10) (B) First Amendments to Sublease between First California Associates and the Bank (Incorporated by reference from the Company's Form 10-K filed on March 31, 1984). (10) (C) The Company's Stock Bonus Plan (Incorporated by reference from the Company's Form 10-K filed on March 31, 1986). (10) (D) Amendments to Office Sublease between First California Associates and the Company (Incorporated by reference from the Company's Form 10-K filed March 31, 1986). (10) (E) Executive Salary Continuation Agreement between National Bank of Southern California and William H. Jacoby. (Incorporated by reference from the Company's Form 10-K filed March 31, 1989). (10) (F) Executive Salary Continuation Agreements between National Bank of Southern California and Mark H. Stuenkel. (Incorporated by reference from the Company's Form 10-K filed March 31, 1987). (10) (G) Executive Salary Continuation Agreement between National Bank of Southern California and Abdul S. Memon. (Incorporated by reference from the Company's Form 10-K filed March 31, 1987). (10) (H) 401-K Plan. (Incorporated by reference from the Company's Form 10-K filed March 31, 1989). (10) (I) Lease for the premises on branch located at 22831 Lake Forest Drive, El Toro, Ca. (Incorporated by reference from the Company's Form 10-K filed March 31, 1989). (10) (J) Lease for the premises on branch located at 625 The City Drive, Orange, Ca. (Incorporated by reference from Company's Form 10-K filed on March 31, 1990). (10) (K) Lease for the property on branch located at 17252 Armstrong Ave., Irvine, Ca. (Incorporated by reference from Company's Form 10-K filed on March 31, 1990). (10) (L) 1982 Stock Option Plan, as amended. (Incorporated by reference from Company form 10-K filed on March 31, 1991). 77 (10) (M) Lease for the property located at 4100 Newport Place, Newport Beach, Ca. (Incorporated by reference from Company's Form 10-K filed on March 31, 1992). (10) (N) Credit Agreement dated 12/21/1988 with Security Pacific National Bank. (Incorporated by reference from Company's Form 10-K filed on March 31, 1994). (10) (O) First amendment to Credit Agreement dated March 1993 with Bank of America National Trust & Savings Association. (Incorporated by reference from Company's Form 10-K filed on March 31, 1994). (10) (P) Second amendment to Credit Agreement dated August 24, 1994 with Bank of America National Trust & Savings Association. (Incorporated by reference from Company's form 10-K filed on March 31, 1995). (10) (Q) Support Agreement dated September 27, 1994 with Robert L. McKay. (Incorporated by reference from Company's 10-K filed on March 31, 1995). (10) (R) Holding Company Support Agreement dated October 1, 1994 with Robert L. McKay. (Incorporated by reference Company's Form 10-K filed on March 31, 1995) (10) (S) Lease for the property located at 17330 Brookhurst Ste. 110, Fountain Valley, CA. (10) (T) The Company's Stock Option Plan. (10) (U) Form of Stock Option Agreement (10) (V) Form of Nonqualified Stock Option Agreement. (10) (W) Form of Director's Nonqualified Stock Option Agreement. (22) Subsidiaries of the Company (24) Independent Auditors' Consent. (27) Financial Data Schedule. (B) Reports on Form 8-K. No report on Form 8-K were filed by the Company during the last quarter of 1992. (C) Exhibits Filed. The following exhibits are filed with this 10-K (10) (S) Lease for the property located 17330 Brookhurst, Suite. 110, Fountain Valley, CA. (10) (T) The Company's Stock Option Plan. (10) (U) Form of Stock Option Agreement (10) (V) Form of Nonqualified Stock Option Agreement. 78 (10) (W) Form of Director's Nonqualified Stock Option Agreement. (22) Subsidiaries of the Company. (24) Independent Auditors' Consent. (27) Financial Data Schedule. (D) Financial Statement Schedules. Please see paragraph (a)(2) above in this Item 14. 79 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CALIFORNIA COMMERCIAL BANKSHARES BY: William H. Jacoby MARCH 28, 1995 ------------------------------------- WILLIAM H. JACOBY PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: Phillip L. Bush MARCH 28, 1995 - ----------------------------- PHILLIP L. BUSH DIRECTOR/SECRETARY Michael J. Gertner MARCH 28, 1995 - ----------------------------- MICHAEL J. GERTNER DIRECTOR/TREASURER James W. Hamilton MARCH 28, 1995 - ----------------------------- JAMES W. HAMILTON DIRECTOR Farrell G. Hinkle MARCH 28, 1995 - ----------------------------- FARRELL G. HINKLE DIRECTOR William H. Jacoby MARCH 28, 1995 - ----------------------------- WILLIAM H. JACOBY DIRECTOR/PRESIDENT, C.E.O. Robert L. McKay MARCH 28, 1995 - ----------------------------- ROBERT L. MCKAY DIRECTOR/CHAIRMAN OF THE BOARD Mark H. Stuenkel MARCH 28, 1995 - ----------------------------- MARK H. STUENKEL EXECUTIVE VICE PRESIDENT Abdul S. Memon MARCH 28, 1995 - ----------------------------- ABDUL S. MEMON PRINCIPAL FINANCIAL & ACCOUNTING OFFICER SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. 80 Four copies of the following will be furnished to the Securities and Exchange Commission when sent to the registrant's security holders: (1) Registrant's annual report to security holders covering the registrant's last fiscal year; and (2) the registrant's proxy statement and the form of proxy which will be sent to the registrant's security holders with respect to the next annual meeting of security holders. No such reports or proxy materials have yet been sent to the registrant's security holders. 81 CALIFORNIA COMMERCIAL BANKSHARES Exhibit Index Exhibit Number Page Number (10) (S) Lease for the property located 17330 Brookhurst, Suite 110, Fountain Valley, CA (10) (T) The Company's Stock Option Plan. (10) (U) Form of Stock Option Plan (10) (V) Form of Nonqualified Stock Option Agreement. (10) (W) Form of Director's Nonqualified Stock Option Agreement. (22) Subsidiaries of the Company. 142 (24) Independent Auditor's Consent. 144 (27) Financial Data Schedule. 146 82 EX-10.(S) 2 EXHIBIT 10(S) CITY CENTRE O F F I C E L E A S E LANDLORD: PACIFIC MUTUAL LIFE INSURANCE COMPANY California Commercial Bankshares, TENANT: A California Corporation ------------------------------------- STANDARD FORM OFFICE LEASE Table of Contents Section No. Title Page No. - ----------- ----- -------- 1. Terms and Conditions . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Lease of Premises . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3. Common Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5. Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 6. Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 3 7. Security Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 8. Use. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 9. Payments and Notices . . . . . . . . . . . . . . . . . . . . . . . . . 4 10. Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 11. Surrender; Holding Over . . . . . . . . . . . . . . . . . . . . . . . 5 12. Taxes on Tenant's Property . . . . . . . . . . . . . . . . . . . . . . 5 13. Condition Of Premises; Repairs . . . . . . . . . . . . . . . . . . . . 5 14. Alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 15. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 16. Assignment and Subletting . . . . . . . . . . . . . . . . . . . . . . 7 17. Entry by Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . 8 18. Utilities and Services . . . . . . . . . . . . . . . . . . . . . . . . 8 19. Indemnification and Exculpation . . . . . . . . . . . . . . . . . . . 9 20. Damage Or Destruction . . . . . . . . . . . . . . . . . . . . . . . . 9 21. Eminent Domain . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 22. Tenant's Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 10 23. Landlord's Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 11 24. Waivers of Subrogation . . . . . . . . . . . . . . . . . . . . . . . . 11 25. Tenant's Default and Landlord's Remedies . . . . . . . . . . . . . . . 11 26. Landlord's Default . . . . . . . . . . . . . . . . . . . . . . . . . . 12 27. Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 28. Estoppel Certificate . . . . . . . . . . . . . . . . . . . . . . . . . 12 29. Building Planning . . . . . . . . . . . . . . . . . . . . . . . . . . 12 30. Performance by Tenant; Interest and Late Charges . . . . . . . . . . . 13 31. Modification and Cure Rights of Landlord's Mortgagees and Lessors . . 13 32. Transfer of Owner's Interest . . . . . . . . . . . . . . . . . . . . . 13 33. Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 34. Parking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 35. Limitation on Landlord's Liability . . . . . . . . . . . . . . . . . . 14 36. Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . . . . 14 37. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 37.1 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 14 37.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . 14 37.3 No Merger . . . . . . . . . . . . . . . . . . . . . . . . . . 14 37.4 Professional Fees . . . . . . . . . . . . . . . . . . . . . . 14 37.5 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 37.6 Joint and Several Liability . . . . . . . . . . . . . . . . . 14 37.7 Terms and Headings . . . . . . . . . . . . . . . . . . . . . . 14 37.8 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 37.9 Prior Agreements; Amendments . . . . . . . . . . . . . . . . . 14 37.10 Separability . . . . . . . . . . . . . . . . . . . . . . . . . 15 37.11 Recording . . . . . . . . . . . . . . . . . . . . . . . . . . 15 37.12 Exhibits and Riders . . . . . . . . . . . . . . . . . . . . . 15 37.13 Signs and Auctions . . . . . . . . . . . . . . . . . . . . . . 15 37.14 Accord and Satisfaction . . . . . . . . . . . . . . . . . . . 15 37.15 Financial Statements . . . . . . . . . . . . . . . . . . . . . 15 37.16 Tenant's Authority . . . . . . . . . . . . . . . . . . . . . . 15 37.17 Landlord's Lien Waiver . . . . . . . . . . . . . . . . . . . . 15 37.18 Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Page of First Reference ----------------------- EXHIBITS - -------- A. Site Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 B. Floor Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 C. Square Footage Determination . . . . . . . . . . . . . . . . . . . . . 1 D. Work Letter Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 1 E. Sample Form of Notice of Lease Term Dates . . . . . . . . . . . . . . . 2 F. Rules and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . 4 G. Sample Form of Tenant Estoppel Certificate . . . . . . . . . . . . . . 12 H. Parking Rules and Regulations . . . . . . . . . . . . . . . . . . . . . 13 RIDERS - ------ No. 1. Fixed Rent Increase Rider No. 2. Rental Abatement Rider No. 3. Extension Option Rider No. 4 Fair Market Rental Rate Rider No. 5 Tenant Signage Rights -1- CITY CENTRE O F F I C E L E A S E This LEASE is made as of the day of September , 19 95, -------- ---------------------- ---- by and between Landlord and Tenant: W I T N E S S E T H: 1. TERMS AND CONDITIONS. For the purposes of this Lease, the following terms shall have the following definitions and meanings: 1.1 LANDLORD: Pacific Mutual Life Insurance Company, a California corporation 1.2 LANDLORD'S ADDRESS: Pacific Mutual Life Insurance Company Office of the Building, City Centre 17330 Brookhurst Street, Suite 170 Fountain Valley, California 92708 On-site Telephone Number: 714/760-4188 With a copy to: Pacific Mutual Life Insurance Company 700 Newport Center Drive Newport Beach, California 92660 Attn: REO-3590 1.3 TENANT: CALIFORNIA COMMERCIAL BANKSHARES ----------------------------------------------- a California corporation ------------------------------------------- d/b/a (if any): ------------------------------- 1.4 TENANT'S ADDRESS: 17330 Brookhurst, Suite 110 ----------------------------------------------- Fountain Valley, CA 92708 ----------------------------------------------- ----------------------------------------------- Attn: Bank Manager ---------------------------------------- With a copy to: National Bank of Southern California ----------------------------------------------- 4100 Newport Place, Suite 900 ----------------------------------------------- Newport Beach, CA 92660 ----------------------------------------------- Attn: Mr. William Jacoby ---------------------------------------- 1.5 SITE: The real property located at the Southeast corner of Brookhurst Street and La Alameda in the city of Fountain Valley, county of Orange, state of California, as shown on the site plan attached hereto as Exhibit "A". 1.6 BUILDING: A three (3) story office building located on the Site, containing approximately 98,304 Rentable Square Feet (subject to ---------- adjustment as set forth in Exhibit "C"), whose address is 17330 ---------- Brookhurst Street, Fountain Valley, California 92708. 1.7 PREMISES: These certain premises known as Suite(s) 110 as ------- generally shown on the floor plan(s) attached hereto as Exhibit "B", located on the first floor of the Building, and containing approximately --------- 5,534 Rentable Square Feet (subject to adjustment as set forth in - ---------- Exhibit "C"). 1.8 RENTABLE SQUARE FEET: See Exhibit "C". 1.9 COMMENCEMENT DATE: See Exhibit "D". 1.10 ESTIMATED COMMENCEMENT DATE: November 1 , 19 95 . ------------------ ------- 1.11 TERM: Ten ( 10 ) years and Zero ( 0 ) months; ----------- ---- ----------- ---- provided, however, that if the last day of such period is not the last day of a calendar month, the Term shall be extended to the last day of the calendar month during which the expiration of such period occurs. 1.12 ANNUAL BASIC RENT: $ 83,010.00 , calculated based upon $ 15.00 ------------- ---------- per Rentable Square Foot within the Premises per year. Annual Basic Rent is payable in monthly installments ("Monthly Basic Rent") of $ 6,917.50 . The ------------ Annual Basic Rent is subject to adjustment as provided in Exhibit "C" and increase as provided in Rider No. 1 . --- 1.13 TENANT'S PROPORTIONATE SHARE: Tenant's Proportionate Share shall consist of two (2) separate percentages: (a) 5.63 %, which is Tenant's Proportionate Share of the -------- Building, which amount is equal to a fraction, the numerator of which is the Rentable Square Feet of the Premises (as set forth in Subparagraph 1.7 above), and the denominator of which is the Rentable Square Feet of the Building (as set forth in Subparagraph 1.6 above); and (b) 1.84 %, which is Tenant's Proportionate Share of the Project, -------- which amount is equal to a fraction, the numerator of which is the Rentable Square Feet of the Premises (as set forth in Subparagraph 1.7 above), and the denominator of which is the rentable Square Feet of the Project (as set forth in Subparagraph 1.22 below. (See Exhibit "C") 1.14 LANDLORD'S CONTRIBUTION TO OPERATING EXPENSES: Tenant's Proportionate Share of Operating Expenses incurred by Landlord during the Base Year, which shall consist of two (2) separate components: (a) with respect to the Building Operating Expenses, Tenant's Proportionate Share of the Building (as set forth in Subparagraph 1.13(a) above), multiplied by the Building Operating Expenses incurred during the Base Year; and (b) with respect to the Project Operating Expenses, Tenant's Proportionate Share of the Project (as set forth in Subparagraph 1.13(b) above), multiplied by the Project Operating Expenses. As used herein, the "Base Year" shall mean the 1996 calendar year. 1.15 SECURITY DEPOSIT: $ Zero . ----------------------- 1 1.16 PERMITTED USE: Bank or general office -------------------------------------------------- - ------------------------------------------------------------------------------. 1.17 BROKERS: Voit Commercial Brokerage -------------------------------------------------------. 1.18 INTEREST RATE: The lesser of: (a) the rate announced from time to time by Bank of America (or if the preceding blank in this Subparagraph 1.18 is not filled in or if the entity named therein ceases to exist or ceases to publish such rate, by the largest (as measured by deposits) chartered bank operating in the state in which the Building is located) as its "prime rate" or "reference rate", plus five percent (5%); or (b) the maximum rate permitted by law. 1.19 LEASEHOLD IMPROVEMENTS: The tenant improvements installed or to be installed for the Premises as described in the Work Letter Agreement attached hereto as Exhibit "D". 1.20 PARKING: A total of twenty (20) parking privileges, consisting of eight (8) reserved privileges and twelve (12) unreserved privileges, subject to the parking rates and provisions set forth in Paragraph 34. Such total parking privileges shall be based on ratio of four (4) spaces per 1,000 usable square feet leased. 1.21 GUARANTOR(S): N/A ----------------------------. 1.22 PROJECT: The Site, the three 3-story buildings located thereon (including the Building), the Common Areas, the landscaping, parking facilities and all other improvements and facilities now or subsequently located on the Site from time to time, known as City Centre. The aggregate Rentable Square Feet of the three (3) office buildings in the Project (including the Building) is approximately 300,527 Rentable Square Feet. (See Exhibit "C") 2. LEASE OF PREMISES. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the Premises described in Subparagraph 1.7 above, improved or to be improved with the Leasehold Improvements. Such lease is upon, and subject to, the terms, covenants and conditions herein set forth and each party covenants, as a material part of the consideration for this Lease, to keep and perform their respective obligations under this Lease. 3. COMMON AREAS. 3.1 DEFINITIONS; TENANT'S RIGHTS. During the Term of this Lease, Tenant shall have the nonexclusive right to use, in common with Landlord and other tenants in the Project, and subject to the Rules and Regulations referred to in Paragraph 8 below, those portions of the Project (the "Project Common Areas") not leased or designated for lease to tenants that are provided for use in common by (or by the sublessees, agents, employees, customers or licensees of) Landlord, Tenant and any another tenants of the Project, whether or not those areas are open to the general public. The Project Common Areas shall include, without limitation, any fixtures, systems, decor, facilities and landscaping contained, maintained or used in connection with those areas, and shall be deemed to include any city sidewalks adjacent to the Project, any pedestrian walkway system, park or other facilities open to the general public. The common areas appurtenant to the Building shall be referred to herein as the "Building Common Areas" and shall include the following areas: (a) the common entrances, lobbies, restrooms on multi-tenant floors, elevators, stairways and access ways, loading docks, ramps, drives and platforms and any passageways and serviceways thereto, and the common pipes, conduits, wires and appurtenant equipment serving the Premises; and (b) the parking structure and parking areas (subject to Paragraph 34 below), loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas and plaza area appurtenant to the Building. The Building Common Areas and the Project Common Areas shall be referred to herein collectively as the "Common Areas." 3.2 LANDLORD'S RESERVED RIGHTS. Landlord reserves the right from time to time to use any of the Common Areas and to do any of the following, as long as such acts do not unreasonably interfere with Tenant's use of or access to the Premises: (a) expand the Building and construct or alter other buildings or improvements on the Site; (b) make any changes, additions, improvements, repairs or replacements in or to the Project, the Site, the Common Areas and/or the Building (including the Premises if required to do so by any law or regulation) and the fixtures and equipment thereof, including, without limitation: (i) maintenance, replacement and relocation of pipes, ducts, conduits, wires and meters, and (ii) changes in the location, size, shape and number of driveways, entrances, stairways, elevators, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas and walkways, and subject to Paragraph 34 below, parking spaces and parking areas; (c) close temporarily any of the Common Areas while engaged in making repairs, improvements or alterations to the Project, Site and/or Building; and (d) perform such other acts and make such other changes with respect to the Project, Site, Common Areas and Building as Landlord may, in the exercise of sound business judgment, deem to be appropriate. 4. TERM 4.1 TERM; NOTICE OF LEASE DATES. The Term of this Lease shall be for the period designated in Subparagraph 1.11 commencing on the Commencement Date (as determined pursuant to Exhibit "D"), and ending on the expiration of such period, unless the Term is sooner terminated as provided in this Lease. Within ten (10) days after Landlord's written request, Tenant shall execute a written confirmation of the Commencement Date and expiration date of the Term in the form of the Notice of Lease Term Dates attached hereto as Exhibit "E". The Notice of Lease Term Dates shall be binding upon Tenant unless Tenant objects thereto in writing within such ten (10) day period. 4.2 ESTIMATED COMMENCEMENT DATE. It is estimated by the parties that the Term of this Lease will commence on the Estimated Commencement Date set forth in Subparagraph 1.10. The Estimated Commencement Date is merely an estimate of the Commencement Date and, consequently, Tenant agrees that Landlord shall have no liability to Tenant for any loss or damage, nor shall tenant be entitled to terminate or cancel this Lease if the Term of this Lease does not commence by the Estimated Commencement Date for any reason whatsoever, including any delays in substantial completion of the Leasehold Improvements. 5. RENT. 5.1 BASIC RENT. Tenant agrees to pay Landlord, as basic rent for the Premises, the Annual basic Rent designated in Subparagraph 1.12. The Annual Basic Rent shall be paid by Tenant in twelve (12) equal monthly installments of Monthly Basic Rent designated in Subparagraph 1.12 in advance on the first day of each and every calendar month during the Term, except that the first full month's Monthly Basic Rent shall be paid upon the execution of this Lease. Annual Basic Rent for any partial month shall be prorated in the proportion that the number of days this Lease is in effect during such month bears to the actual number of days in such month. 5.2 ADDITIONAL RENT. All amounts and charges payable by Tenant under this Lease in addition to the Annual Basic Rent described in Subparagraph 5.1 above (including, without limitation, payments for insurance, repairs and parking, and Excess Expenses as provided in Paragraph 6) shall be considered additional rent for the purposes of this Lease, and the word "rent" in this Lease shall include such additional rent unless the context specifically 2 or clearly implies that only the Annual Basic Rent is referenced. The Annual Basic Rent and additional rent shall be paid to Landlord as provided in Paragraph 9, without any prior demand therefor and without any deduction or offset whatever, in lawful money of the United States of America. 6. OPERATING EXPENSES. 6.1 EXCESS EXPENSES. During the Term of this Lease, Tenant shall pay to Landlord, in the manner and at the times set forth in the following provisions of this Paragraph 6, the amount by which Tenant's Proportionate Share of Operating Expenses (which consists of two (2) separate components as set forth in Subparagraph 1.13 above) exceeds Landlord's Contribution to Operating Expenses (which consists of two (2) separate components as set forth in Subparagraph 1.14 above). Such excess amounts shall be collectively referred to in this Paragraph 6 as the "Excess Expenses". 6.2 DEFINITION OF OPERATING EXPENSES. As used in this Lease, the term "Operating Expenses" shall mean collectively, the "Project Operating Expenses" and the "Building Operating Expenses." As used herein, "Building Operating Expenses" shall include all costs and expenses for janitorial services for the Building, all costs and expenses for utilities which are separately metered to the Building, and all other costs and expenses of operation and maintenance of the Building which Landlord may, from time to time, separately allocate to the Building, all of which shall be calculated assuming the building is ninety-five percent (95%) occupied. As used herein, "Project Operating Expenses" shall include all costs and expenses of operation and maintenance of the Project, as determined by standard accounting practices, calculated assuming the buildings in the Project are ninety-five percent (95%) occupied, excluding, however, the Building Operating Expenses for the Building or the other two (2) buildings in the Project. Project Operating Expenses shall include the following costs by way of illustration but not limitation: (a) Real Property Taxes and Assessments (as defined in Subparagraph 6.4 below) and any taxes or assessments imposed in lieu thereof; (b) any and all assessments imposed with respect to the Project pursuant to any covenants, conditions and restrictions affecting the Project; (c) water and sewer charges and the costs of electricity, heating, ventilating, air conditioning and other utilities; (d) utilities surcharges and any other costs, levies or assessments resulting from statutes or regulations promulgated by any governmental authority in connection with the use or occupancy of the Project or the parking facilities serving the Project; (e) costs of insurance obtained by Landlord pursuant to Paragraph 23 of this Lease; (f) waste disposal and janitorial services; (g) security; (h) labor; (i) costs incurred in the management of the Project, including, without limitation: (1) supplies, (2) wages and salaries (and payroll taxes and similar governmental charges related thereto) of employees used in the management, operation and maintenance of the Project, (3) Project management office rental (if such management office is located on the Project) and (4) a management/administrative fee not to exceed five percent (5%) of the annual gross revenues of the Project exclusive of the proceeds of financing or a sale of the Project; (j) supplies, materials equipment and tools; (k) repair and maintenance of the elevators and the structural portions of the improvements in the Project, including the plumbing, heating, ventilating, air-conditioning and electrical systems installed or furnished by Landlord; (1) maintenance, costs and upkeep of all parking and Common Areas; (m) depreciation on a straight line basis and rental of personal property used in maintenance; (n) amortization on a straight-line basis over the useful life [together with interest at the Interest Rate (as defined in Subparagraph 1.18 of this Lease) on the unamortized balance] of all costs of a capital nature (including, without limitation, capital improvements, capital replacements, capital repairs, capital equipment and capital tools): (1) reasonably intended to produce a reduction in operating charges or energy consumption; or (2) required after the date of the Lease under any governmental law or regulation that was not applicable to the Project at the time it was originally constructed; or (3) for repair or replacement of any Project equipment needed to operate the Project at the same quality levels as prior to the replacement; (o) costs and expenses of gardening and landscaping; (p) maintenance of signs (other than signs of tenants); (q) personal property taxes levied on or attributable to personal property used in connection with the Project; (r) reasonable accounting, audit, verification, legal and other consulting fees; and (s) costs and expenses of repairs, resurfacing, repairing, maintenance, painting, lighting, cleaning, refuse removal, security and similar items, including appropriate reserves. 6.3 EXCLUSIONS FROM OPERATING EXPENSES. Notwithstanding the provisions of Subparagraph 6.2 above to the contrary, "Operating Expenses" shall not include: (a) any ground lease rental; (b) costs incurred by Landlord for the repair of damage to the Project to the extent that Landlord is reimbursed by insurance or condemnation proceeds or by tenants, warrantors or other third persons; (c) costs, including permit, license and inspection costs, incurred with respect to the installation of tenant improvements for tenants in the Project (including the original Leasehold Improvements for the Premises), or incurred in renovating or otherwise improving, decorating, painting or redecorating space for tenants or other occupants of the Project, including space planning and interior design costs and fees; (d) depreciation, amortization and interest payments, except as specifically provided herein, and except on materials, tools, supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party, where such depreciation, amortization and interest payments would otherwise have been included in the charge for such third party's services, all as determined in accordance with standard accounting practices; (e) brokerage commissions, finders' fees, attorneys' fees, space planning costs and other costs incurred by Landlord in leasing or attempting to lease space in the Project; (f) attorneys' fees and other costs and expenses incurred in connection with negotiations or disputes with present or prospective tenants or other occupants of the Project; provided, however, that Operating Expenses shall include those attorneys' fees and other costs and expenses incurred in connection with negotiations, disputes or claims relating to items of Operating Expenses, enforcement of rules and regulations of the Project, and such other matters relating to the maintenance of standards required of Landlord under the Lease; and (g) interest, principal, points and fees on debt or amortization on any mortgage, deed of trust or other debt encumbering the Project, or any portion thereof. 6.4 DEFINITION OF REAL PROPERTY TAXES AND ASSESSMENTS. All Real Property Taxes and Assessments shall be adjusted to reflect an assumption that the buildings in the Project are fully assessed for real property tax purposes as completed buildings ready for occupancy. As used in this Lease, the term "Real Property Taxes and Assessments" shall mean: any form of assessment, license fee, license tax, business license fee, commercial rental tax, levy, charge, improvement bond, tax or similar imposition imposed by any authority having the direct power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement or special assessment district thereof, as against any legal or equitable interest of Landlord in the Project, including the following by way of illustration but not limitation: (a) any tax on Landlord's "right" to rent or "right" to other income from the Premises or as against Landlord's business of leasing the Premises; (b) any assessment, tax, fee, levy or charge in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real property tax, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of the state of California in June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants. It is the intention of Tenant and Landlord that all such new and increased assessments, taxes, fees, levies and charges be included within the definition of "real property taxes" for the purpose of this Lease; (c) Any assessment, tax, fee, levy or charge allocable to or measured by the area of the Premises or other premises in the Project or the rent payable by Tenant hereunder or other tenants of the Project, including, without limitation, any gross receipts, tax or excise tax levied by state, city or federal government, or any political subdivision thereof, with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof but not on Landlord's other operations; 3 (d) any assessment, tax, fee, levy or charge upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises; and/or (e) any assessment, tax, fee, levy or charge by any governmental agency related to any transportation plan, fund or system (including assessment districts) instituted within the geographic area of which the Project is a part. Notwithstanding the foregoing provisions of this Subparagraph 6.4 above to the contrary, "Real Property Taxes and Assessments" shall not include Landlord's federal or state income, franchise, inheritance or estate taxes. 6.5 ESTIMATE STATEMENT. By the first day of April of each calendar year during the Term of this Lease, Landlord shall endeavor to deliver to Tenant a statement ("Estimated Statement") estimating the Operating Expenses for the current calendar year and the estimated amount of Excess Expenses payable by Tenant. Landlord shall have the right no more than three (3) times in any calendar year to deliver a revised Estimate Statement showing the Excess Expenses for such calendar year if Landlord determines that the Excess Expenses are greater than those set forth in the original Estimate Statement, (or previously delivered revised Estimate Statement) for such calendar year. The Excess Expenses shown on the the Estimate Statement (or revised Estimate Statement, as applicable) shall be divided into twelve (12) equal monthly installments, and Tenant shall pay to Landlord, concurrently with the regular monthly rent payment next due following the receipt of the Estimate Statement (or revised Estimate Statement, as applicable), an amount equal to one (1) monthly installment of such Excess Expenses multiplied by the number of months from January in the calendar year in which such statement is submitted to the month of such payment, both months inclusive (less any amounts previously paid by Tenant with respect to any previously delivered Estimate Statement or revised Estimate Statement for such calendar year); provided, however, that with respect to the first Estimate Statement submitted, Tenant shall also pay the Excess Expenses for those months, if any, during the Term which occurred prior to January of the calendar year in which such first Estimate Statement is submitted. Subsequent installments shall be paid concurrently with the regular monthly rent payments for the balance of the calendar year and shall continue until the next calendar year's Estimate Statement (or current calendar year's revised Estimate Statement) is received. 6.6 ACTUAL STATEMENT. By the first day of April of each succeeding calendar year during the Term of this Lease, Landlord shall endeavor to deliver to Tenant a statement ("Actual Statement") of the actual Operating Expenses and Excess Expenses for the immediately preceding calendar year. If the Actual Statement reveals that Excess Expenses were overstated or understated in any Estimate Statement (or revised Estimate Statement) previously delivered by Landlord pursuant to Subparagraph 6.5 above, then within thirty (30) days after delivery of the Actual Statement, Tenant shall pay to the Landlord the amount of any such underpayment, or, Landlord shall pay to Tenant (or credit against the next monthly rent falling due), the amount of such overpayment, as the case may be. 6.7 NO RELEASE. Any delay or failure by Landlord in delivering any Estimate or Actual Statement pursuant to this Paragraph 6 shall not constitute a waiver of its right to receive Tenant's payment of Excess Expenses, nor shall it relieve Tenant of its obligations to pay Excess Expenses pursuant to this Paragraph 6, except that Tenant shall not be obligated to make any payments based on such Estimate or Actual Statement until ten (10) business days after receipt of such statement. 6.8 TENANT'S AUDIT RIGHTS. If Tenant disputes the amount of Operating Expenses set forth in any Actual Statement delivered by Landlord, Tenant shall have the right, to be exercised, if at all, not later than six (6) months following receipt of such Actual Statement, to cause Landlord's books and records with respect to the preceding calendar year to be audited, at Tenant's expense, by a certified public accountant mutually acceptable to Landlord and Tenant. The amounts payable under Subparagraph 6.6 by Landlord to Tenant or by Tenant to Landlord as the case may be shall be appropriately adjusted on the basis of such audit. If Tenant fails to request an audit within the 6-month period, such Actual Statement shall be conclusively binding upon Landlord and Tenant. 8. USE. 8.1 GENERAL. Tenant shall use the Premises solely for the Permitted Use specified in Subparagraph 1.16, and shall not use or permit the Premises to be used for any other use or purpose whatsoever. Tenant shall observe and comply with the "Rules and Regulations" attached hereto as Exhibit "F", and all reasonable non-discriminatory modifications thereof and additions thereto from time to time put into effect and furnished to Tenant by Landlord. Landlord shall not be responsible to Tenant for the violation or non-performance by any other tenant or occupant of the Project or the Building of any such Rules and Regulations. Tenant shall also observe and comply with all requirements of any board of fire underwriters or similar body relating to the Premises, and all laws, rules and regulations of all governmental agencies having jurisdiction. Tenant shall not use or allow the Premises to be used (a) in violation of any recorded covenants, conditions and restrictions affecting the Site or of any law or governmental rule or regulation, or of any certificate of occupancy issued for the Premises or Building, or (b) for any improper, immoral, unlawful or reasonably objectionable purpose. Tenant shall not do or permit to be done anything which will obstruct or interfere with the rights of other tenants or occupants of the Project or the Building, or injure or annoy them. Tenant shall not cause, maintain or permit any nuisance in, on or about the Premises, the Building, the Project or the Site, nor commit or suffer to be committed any waste in, on or about the Premises. 8.2 EFFECT ON INSURANCE. Tenant shall not do or permit to be done anything which will (a) violate or invalidate any insurance policy maintained by Landlord or Tenant hereunder, or (b) increase the costs of any insurance policy maintained by Landlord pursuant to Paragraph 23 or otherwise with respect to the Building, Site or Project. If Tenant's occupancy or conduct of its business in or on the Premises results in any increase in premiums for any insurance carried by Landlord with respect to the Building, Site or Project, Tenant shall pay such increase as additional rent within ten (10) days after being billed therefor by Landlord. If any insurance coverage carried by Landlord pursuant to Paragraph 23 or otherwise with respect to the Building, Site or Project shall be canceled or reduced (or cancellation or reduction thereof shall be threatened) by reason of the use or occupancy of the Premises by Tenant or by anyone permitted by Tenant to be upon the Premises, and if Tenant fails to remedy such condition within five (5) days after notice thereof, Tenant shall be deemed to be in default under this Lease, without the benefit of any additional notice or cure period specified in Subparagraph 25.1 below, and Landlord shall have all remedies provided in this Lease, at law or in equity, including, without limitation, the right (but not the obligation) to enter upon the Premises and attempt to remedy such condition at Tenant' cost. 9. PAYMENTS AND NOTICES. All rent and other sums payable by Tenant to Landlord hereunder shall be paid to Landlord at the first address designated in Subparagraph 1.2, or to such other persons and/or at such other places as Landlord may hereafter designate in writing. Any notice required or permitted to be given hereunder must be in writing and may be given by personal delivery (including delivery by nationally recognized overnight courier or express mailing service), facsimile transmission, or by registered or certified mail, postage prepaid, return receipt requested, addressed to Tenant at the address(es) designated in Subparagraph 1.4, or to Landlord at the address(es) designated in Subparagraph 1.2. Either party may, by written notice to the other, specify a different address for notice purposes. 4 10. BROKERS. The parties recognize that the broker(s) who negotiated this Lease are stated in Subparagraph 1.17, and agree that Landlord shall be solely responsible for the payment of brokerage commissions to said broker(s), and that the Tenant shall have no responsibility therefor unless written provision to the contrary has been made. Each party represents and warrants to the other, that, to its knowledge, no other broker, agent or finder (a) negotiated or was instrumental in negotiating or consummating this Lease on its behalf, and (b) is or might be entitled to a commission or compensation in connection with this Lease. Any broker, agent or finder of Tenant whom Tenant has failed to disclose herein shall be paid by Tenant. Tenant shall indemnify, defend (by counsel reasonably approved in writing by Landlord) and hold Landlord harmless from and against any and all claims, judgements, suits, causes of action, damages, losses, liabilities and expenses (including attorney's fees and court costs) resulting from any breach by Tenant of the foregoing representation, including, without limitation, any claims that may be asserted against Landlord by any broker, agent or finder undisclosed by Tenant herein. Landlord shall indemnify, defend (by counsel reasonably approved in writing by Tenant) and hold Tenant harmless from and against any and all claims, judgements, suits, causes of action, damages, losses, liabilities and expenses (including attorney's fees and court costs) resulting from any breach by Landlord of the foregoing representation, including, without limitation, any claims that may be asserted against Tenant by any broker, agent or finder undisclosed by Landlord herein. The foregoing indemnities shall survive the expiration or earlier termination of this Lease. 11. SURRENDER; HOLDING OVER. 11.1 SURRENDER OF PREMISES. Upon the expiration or sooner termination of this Lease, Tenant shall surrender all keys for the Premises to Landlord, and exclusive possession of the Premises to Landlord broom clean and in first-class condition and repair, reasonable wear and tear excepted (and) casualty damage excepted if this Lease is terminated as a result thereof pursuant to Paragraph 20), with all of Tenant's personal property (and those items, if any, of Leasehold Improvements and Tenant Changes identified by Landlord pursuant to Subparagraph 14.2 below) removed therefrom and all damage caused by such removal repaired, as required pursuant to Subparagraphs 14.2 and 14.3 below. If, for any reason, Tenant fails to surrender the Premises on the expiration or earlier termination of this Lease (including upon the expiration of any subsequent month-to-month tenancy consented to by Landlord pursuant to Subparagraph 11.2 below), with such removal and repair obligations completed, then, in addition to the provisions of Subparagraph 11.3 below and Landlord's rights and remedies under Subparagraph 14.4 and the other provisions of this Lease, Tenant shall indemnify, defend (by counsel reasonably approved in writing by Landlord) and hold Landlord harmless from any and all claims, judgements, suits, causes of action, damages, losses, liabilities and expenses (including attorney's fees and court costs) resulting from such failure to surrender, including, without limitation, any claim made by any succeeding tenant based thereon. The foregoing indemnity shall survive the expiration or earlier termination of this Lease. 11.2 HOLD OVER WITH LANDLORD'S CONSENT. If, with Landlord's express written consent, Tenant remains in possession of the Premises after the expiration or earlier termination of the Lease Term, Tenant shall become a tenant from month-to-month upon the terms and conditions set forth in this Lease (including Tenant's obligation to pay all Excess Expenses and any other additional rent under this Lease), but at a Monthly Basic Rent equal to the greater of: (a) one hundred twenty-five percent (125%) of the Monthly Basic Rent applicable to the Premises immediately prior to the date of such expiration or earlier termination; or (b) one hundred twenty-five percent (125%) of the prevailing market rate excluding any rental or other concessions (as reasonably determined by Landlord) for the Premises in effect on the date of such expiration or earlier termination. Tenant shall pay an entire month's Monthly basic Rent calculated in accordance with this Subparagraph 11.2 for any portion of a month it holds over and remains in possession of the Premises pursuant to this Paragraph 11.2. 11.3 HOLD OVER WITHOUT LANDLORD'S CONSENT. If Tenant holds over after the expiration or earlier termination of the Lease Term without the express written consent of Landlord, Tenant shall become a tenant in sufferance only, upon the terms and conditions set forth in this Lease so far as applicable (including Tenant's obligation to pay all Excess Expenses and any other additional rent under this Lease), but at a Monthly Basic Rent equal to the greater of: (a) two hundred percent (200%) of the Monthly Basic Rent applicable to the Premises immediately prior to the date of such expiration or earlier termination; or (b) two hundred percent (200%) of the prevailing market rate excluding any rental or other concessions (as reasonably determined by Landlord) for the Premises in effect on the date of such expiration or earlier termination. Acceptance by Landlord of rent after such expiration or earlier termination shall not constitute a consent to a hold over hereunder or result in an extension of this Lease. Tenant shall pay an entire month's Monthly basic Rent calculated in accordance with this Subparagraph 11.3 for any portion of a month it holds over and remains in possession of the Premises pursuant to this Paragraph 11.3. 11.4 NO EFFECT ON LANDLORD'S RIGHTS. The foregoing provisions of this Paragraph 11 are in addition to, and do not affect , Landlord's right of re-entry or any other rights of Landlord hereunder or otherwise provided by law or equity. 12. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for, and shall pay before delinquency, all taxes and assessments (real and personal) levied against (a) any personal property or trade fixtures placed by Tenant in or about the Premises (including any increase in the assessed value of the Premises based upon the value of any such personal property or trade fixtures); and (b) any Leasehold Improvements or alterations in the Premises (whether installed and/or paid for by Landlord or Tenant) to the extent such items are assessed at a valuation higher than the valuation at which tenant improvements conforming to the Building's standard tenant improvements set forth in Schedule "1" to Exhibit "D" are assessed. If any such taxes or assessments are levied against Landlord or Landlord's property, Landlord may, after written notice to Tenant (and under proper protest if requested by Tenant) pay such taxes and assessments, and Tenant shall reimburse Landlord therefor within ten (10) business days after demand by Landlord; provided, however, Tenant at its sole cost and expense, shall have the right, with Landlord's cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes and assessments so paid under protest. 13. CONDITION OF PREMISES; REPAIRS. 13.1 CONDITION OF PREMISES. Tenant acknowledges that, except as otherwise expressly set forth in this Lease, neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises the Building, the Site or the Project or their condition, or with respect to the suitability thereof for the conduct of Tenant's business. The taking of possession of the Premises by Tenant shall conclusively establish that the Project, the Site, the Premises, the Leasehold Improvements therein, the Building and the Common Areas were at such time complete and in good, sanitary and satisfactory condition and repair with all work required to be performed by Landlord, if any, pursuant to Exhibit "D" completed and without any obligation on Landlord's part to make any alterations, upgrades or improvements thereto, except for the repair of any latent defects in the Building or Premises (excluding any portion of the Premises constructed by Tenant) disclosed by Tenant and specified in written notice to Landlord no later than one (1) year after the Commencement Date. Landlord shall cause all latent defects so specified in Tenant's notice to be completed and/or repaired as soon as reasonably possible after Landlord's receipt thereof. 13.2 TENANT'S REPAIR OBLIGATIONS. Except for Landlord's obligations specifically set forth in Subparagraphs 13.1, 13.3, 20.1 and 21.2 hereof, Tenant shall at all times and at Tenant's sole cost and expense, keep, maintain, repair and preserve the Premises and all Leasehold Improvements, Tenant Changes, and any alterations, additions and property therein in first-class condition and repair, reasonable wear and tear excepted. Such maintenance and repairs shall be performed with due diligence, lien-free and in a first-class workmanlike manner, by such contractor(s) selected by Tenant and approved by Landlord, which approval shall not be unreasonably withheld or delayed. Except as otherwise provided in this Lease, Landlord shall have no obligation to alter, remodel, improve, repair, renovate, redecorate or paint all or any part of the Premises. 13.3 LANDLORD'S REPAIR OBLIGATIONS. Notwithstanding the provisions of Subparagraph 13.2 above to the contrary, Landlord shall, as part of the Operating Expenses, repair and maintain (a) the Building shell and other structural portions of the Building (including the roof and foundations), (b) the basic plumbing, heating, ventilating, air conditioning, sprinkler and electrical systems within the Building core (but not any conduits or connections thereto or distribution systems thereof within the Premises or any other tenant's premises), and (c) the Common Areas; provided, however, to the extent such maintenance or repairs are required as a result of any act, neglect, fault or omission of Tenant or any of Tenant's agents, employees, contractors, licensees or invitees, Tenant shall pay to Landlord, as additional rent, the costs of such maintenance and repairs. Subject to Tenant's right to self-help and abatement of rent pursuant to Subparagraphs 13.4 and 20.3, respectively, and except as otherwise included in Landlord's Indemnity in Subparagraph 19.3, Landlord shall not be liable to Tenant for, and Tenant hereby expressly waives all rights to recover, any losses and damages (including interference with or injury to 5 Tenant's business) resulting from Landlord's performing or failure to perform any such repairs or maintenance, it being expressly understood and agreed by Tenant that Tenant shall be solely responsible for and look solely to its insurance for any such damages and losses. 13.4 TENANT'S WAIVER; SELF-HELP. Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect (including the provisions of California Civil Code Section 1942 and any successive sections or statutes of a similar nature); provided, however, subject to the termination rights set forth in Paragraph 20 and 21, if Landlord fails to perform any maintenance or repair work required pursuant to Subparagraph 13.3 within thirty (30) days after Landlord receives Tenant's written notice of the need for such repairs (or such period of time in excess of thirty (30) days as is reasonably necessary based upon the nature of such work), and if such failure to repair unreasonably interferes with Tenant's use of or access to the Premises, then Tenant shall be permitted to make such repairs, using the Building's contractors or such other contractors reasonably approved by Landlord, upon delivery of an additional two (2) business days' prior written notice to Landlord indicating that Tenant will be undertaking such repairs, and Tenant shall be entitled to recover from Landlord the reasonable costs of such repairs made by Tenant, but without any off-set rights against the rental or other amounts payable by Tenant under this Lease. 14. ALTERATIONS. 14.1 TENANT CHANGES; CONDITIONS. After installation of the initial Leasehold Improvements for the Premises pursuant to Exhibit "D", Tenant may, at its sole cost and expense, make alterations, additions, improvements and decorations to the Premises (collectively, "Tenant Changes") subject to and upon the following terms and conditions: (a) Notwithstanding any provision in this Paragraph 14 to the contrary, Tenant is absolutely prohibited from making any alterations, additions, improvements or decorations which: (i) affect any area outside the Premises; (ii) affect the Building's structure, equipment, services or systems, or the proper functioning thereof, or Landlord's access thereto; (iii) affect the outside appearance, character or use of the Project, the Building or the Common Areas; (iv) weaken or impair the structural strength of the Building; (v) in the reasonable opinion of Landlord, lessen the value of the Project or Building; or (vi) will violate or require a change in any occupancy certificate applicable to the Premises. (b) Before proceeding with any Tenant Change which is not otherwise prohibited in Subparagraph 14.1(a) above, Tenant must first obtain Landlord's written approval thereof (including approval of all plans, specifications and working drawings for such Tenant Change), which approval shall not be unreasonably withheld or delayed. However, Landlord's prior approval shall not be required for any Tenant Change which satisfies the following conditions (hereinafter a "Pre-Approved Change"): (i) the costs of such Tenant Change do not exceed Five Hundred Dollars ($500.00) individually; (ii) the costs of such Tenant Change, when aggregated with the costs of all other Tenant Changes made by Tenant during the Term of this Lease, do not exceed Fifteen Hundred Dollars ($1,500.00); (iii) Tenant delivers to Landlord final plans, specifications and working drawings for such Tenant Change at least ten (10) days prior to commencement of the work thereof; and (iv) Tenant and such Tenant Change otherwise satisfy all other conditions set forth in this Subparagraph 14.1. (c) After Landlord has approved the Tenant Changes and the plans, specifications and working drawings therefor (or is deemed to have approved the Pre-Approved Changes as set forth in Subparagraph 14.1(b) above), Tenant shall: (i) enter into an agreement for the performance of such Tenant Changes with such contractors and subcontractors selected by Tenant and approved by Landlord, which approval shall not be unreasonably withheld or delayed; (ii) before proceeding with any Tenant Change (including any Pre-Approved Change), provide Landlord with ten (10) days' prior written notice thereof; and (iii) pay to Landlord, within ten (10) days after written demand, the costs of any increased insurance premiums incurred by Landlord to include such Tenant Changes in the fire and extended coverage insurance obtained by Landlord pursuant to Paragraph 23 below. However, Landlord shall be required to include the Tenant Changes under such insurance only to the extent such insurance is actually obtained by Landlord and such Tenant Changes are insurable under such insurance; if such Tenant Changes are not or cannot be included in Landlord's insurance, Tenant shall insure the Tenant Changes under its casualty insurance pursuant to Subparagraph 22.1(a) below. In addition, before proceeding with any Tenant Change, Tenant's contractors shall obtain, on behalf of Tenant and at Tenant's sole cost and expense: (A) all necessary governmental permits and approvals for the commencement and completion of such Tenant Change; and (B) a completion and lien indemnity bond, or other surety, satisfactory to Landlord for such Tenant Change. (d) Tenant shall pay to Landlord, as additional rent, the reasonable costs of Landlord's engineers and other consultants (but not Landlord's on-site management personnel) for review of all plans, specifications and working drawings for the Tenant Changes, within ten (10) business days after Tenant's receipt of invoices either from Landlord or such consultants. In addition to such costs, Tenant shall pay to Landlord, within ten (10) business days after completion of any Tenant Change, the actual, reasonable costs incurred by Landlord for services rendered by Landlord's management personnel and engineers to coordinate and/or supervise any of the Tenant Changes to the extent such services are provided in excess of or after the normal on-site hours of such engineers and management personnel. (e) All Tenant Changes shall be performed: (i) in accordance with the approved plans, specifications and working drawings; (ii) lien-free and in a first-class and workmanlike manner; (iii) in compliance with all laws, rules, and regulations of all governmental agencies and authorities; (iv) in such a manner so as not to interfere with the occupancy of any other tenant in the Project or Building, nor impose any additional expense upon nor delay Landlord in the maintenance and operation of the Project or Building; and (v) at such times, in such manner and subject to such rules and regulations as Landlord may from time to time reasonably designate. (f) Throughout the performance of the Tenant Changes, Tenant shall obtain, or cause its contractors to obtain, workers compensation insurance and general liability insurance in compliance with the provisions of Paragraph 22 of this Lease. 14.2 REMOVAL OF TENANT CHANGES AND LEASEHOLD IMPROVEMENTS. All Tenant Changes and the initial Leasehold Improvements in the Premises (whether installed or paid for by Landlord or Tenant), shall become the property of Landlord and shall remain upon and be surrendered with the Premises at the end of the Term of this Lease; provided, however, Landlord may, by written notice delivered to Tenant at any time prior to the date which is fifteen (15) days before the expiration of the Lease Term (or immediately upon any sooner termination of this Lease) identify those items of the Leasehold Improvements and Tenant Changes which Landlord shall require Tenant to remove at the end of the Term of this Lease. If Landlord requires Tenant to remove any such items as described above, Tenant shall, at its sole cost, remove the identified items on or before the expiration or sooner termination of this Lease and repair any damage to the Premises caused by such removal (or, at Landlord's option, shall pay to Landlord all of Landlord's costs of such removal and repair). 14.3 REMOVAL OF PERSONAL PROPERTY. All articles of personal property owned by Tenant or installed by Tenant at its expense in the Premises (including business and trade fixtures, furniture and movable partitions) shall be, and remain, the property of Tenant, and shall be removed by Tenant from the Premises, at Tenant's sole cost and expense, on or before the expiration or sooner termination of this Lease. Tenant shall repair any damage caused by such removal. 14.4 TENANT'S FAILURE TO REMOVE. If Tenant fails to remove by the expiration or sooner termination of this Lease all of its personal property, or any items of Leasehold Improvements or Tenant Changes identified by Landlord for removal pursuant to Subparagraph 14.2 above, Landlord may, at its option, treat such failure as a hold over pursuant to Subparagraph 11.3 above, and/or may (without liability to Tenant for loss thereof), at Tenant's sole cost and in addition to Landlord's other rights and remedies under this Lease, at law or in equity: (a) remove and store such items; and/or (b) upon ten (10) days' prior notice to Tenant, sell all or any such items at private or public sale for such price as Landlord may obtain. Landlord shall apply the proceeds of any such sale to any amounts due to Landlord under this Lease from Tenant (including Landlord's attorneys' fees and other costs incurred in the removal, storage and/or sale of such items), with any remainder to be paid to Tenant. 15. LIENS. Tenant shall not permit any mechanic's, materialmen's or other liens to be filed against all or any part of the Project, the Site, the Building or the Premises, nor against Tenant's leasehold interest in the Premises, by reason of or in connection with any repairs, alterations, improvements or other work contracted for or undertaken by Tenant or any other act or omission of Tenant or Tenant's agents, employees, contractors, licensees or invitees. Tenant shall, at Landlord's request, provide Landlord with enforceable, conditional and final lien releases (and other evidence reasonably requested by Landlord to demonstrate protection from liens) from all persons furnishing labor and/or materials with respect to the Premises. Landlord shall have the right at all 6 reasonable times to post on the Premises and record any notices of non-responsibility which it deems necessary for protection from such liens. If any such liens are filed, Tenant shall, at its sole cost, immediately cause such lien to be released of record or bonded so that it no longer affects title to the Project, the Site, the Building or the Premises. If Tenant fails to cause such lien to be so released or bonded within ten (10) days after filing thereof, such failure shall be deemed a material breach by Tenant under this Lease without the benefit of any additional notice or cure period described in Subparagraph 25.1 below, and Landlord may, without waiving its rights and remedies based on such breach, and without releasing Tenant from any of its obligations, cause such lien to be released by any means it shall deem proper, including payment in satisfaction of the claim giving rise to such lien. Tenant shall pay to Landlord within five (5) days after receipt of invoice from Landlord, any sum paid by Landlord to remove such liens, together with interest at the Interest Rate from the date of such payment by Landlord. 16. ASSIGNMENT AND SUBLETTING. 16.1 GENERAL. No assignment or encumbrance of all or any part of this Lease, and no sublease of all or any part of the Premises, shall be permitted, except as otherwise expressly provided in this Paragraph 16. 16.2 RESTRICTION ON TRANSFER. Subject to the provisions of Subparagraphs 16.3, 16.4, 16.5 and 16.6, Tenant shall not, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, assign or encumber this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use or occupancy of the Premises by any party other than Tenant (any such assignment, encumbrance, sublease or the like shall sometimes be referred to as a "Transfer"). Any Transfer without Landlord's consent (except for a Transfer pursuant to Subparagraph 16.6 below) shall constitute a default by Tenant under this Lease, and in addition to all of Landlord's other remedies at law, in equity or under this Lease, such Transfer shall be voidable at Landlord's election. In addition, this Lease shall not, nor shall any interest of Tenant herein, be assignable by operation of law without the written consent of Landlord. For purposes of this Paragraph 16, if Tenant is a corporation, partnership or other entity, any transfer, assignment, encumbrance or hypothecation of twenty-five percent (25%) or more (individually or in the aggregate) of any stock or other ownership interest in such entity, and/or any transfer, assignment, hypothecation or encumbrance of any controlling ownership or voting interest in such entity, shall be deemed an assignment of this Lease and shall be subject to all of the restrictions and provisions contained in this Paragraph 16. Notwithstanding the foregoing, the immediately preceding sentence shall not apply to any transfers of stock of Tenant if Tenant is a publicly-held corporation and such stock is transferred publicly over a recognized security exchange or over-the-counter market. 16.3 LANDLORD'S OPTIONS. If at any time or from time to time during the Term Tenant desires to effect a Transfer, Tenant shall deliver to Landlord written notice ("Transfer Notice") setting forth the terms and provisions of the proposed Transfer and the identity of the proposed assignee, sublessee or other transferee (sometimes referred to hereinafter as a "Transferee"). Tenant shall also deliver to Landlord with the Transfer Notice, a current financial statement and financial statements for the preceding two (2) years of the Transferee which have been certified or audited by a reputable independent accounting firm acceptable to landlord, and such other information concerning the business background and financial condition of the proposed Transferee as Landlord may reasonably request. Landlord shall have the option, exercisable by written notice delivered to Tenant within twenty (20) days after Landlord's receipt of the Transfer Notice, such financial statements and other information, either to: (a) approve or disapprove such Transfer, which approval shall not be unreasonably withheld; or 16.4 ADDITIONAL CONDITIONS; EXCESS RENT. If Landlord does not exercise its sublease or termination option and instead approves of the proposed Transfer pursuant to Subparagraph 16.3(a) above, Tenant may enter into the proposed Transfer with such proposed Transferee subject to the following further conditions: (a) the Transfer shall be on the same terms set forth in the Transfer Notice delivered to Landlord (if the terms have changed, Tenant must submit a revised Transfer Notice to Landlord and Landlord shall have another twenty (20) days after receipt thereof to make the election in Subparagraphs 16.3(a) or 16.3(b) above); (b) no Transfer shall be valid and no Transferee shall take possession of the Premises until an executed counterpart of the assignment, sublease or other instrument affecting the Transfer has been delivered to Landlord pursuant to which the Transferee shall expressly assume all of Tenant's obligations under this Lease (or with respect to a sublease of a portion of the Premises or for a portion of the Term, all of Tenant's obligations applicable to such portion); (c) no Transferee shall have a further right to assign, encumber or sublet, except on the terms herein contained; and 16.5 REASONABLE DISAPPROVAL. Landlord and Tenant hereby acknowledge that Landlord's disapproval of any proposed Transfer pursuant to Subparagraph 16.3(a) shall be deemed reasonably withheld if based upon any reasonable factor, including, without limitation, any or all of the following factors: (a) the proposed Transfer would result in more than two subleases of portions of the Premises being in effect at any one time during the Term; (b) the net effective rent payable by the Transferee (adjusted on a rentable square foot basis) is less than the net effective rent then being quoted by Landlord for new leases in the Project for comparable size space for a comparable period of time; (c) the proposed Transferee is an existing tenant of the Project or is negotiating with Landlord (or has negotiated with Landlord in the last six (6) months) for space in the Project; (d) the proposed Transferee is a governmental entity; (e) the portion of the Premises to be sublet or assigned is irregular in shape with inadequate means of ingress and egress; (f) the use of the Premises by the Transferee (i) is not permitted by the use provisions in Paragraph 8 hereof, or (ii) violates any exclusive use granted by Landlord to another tenant in the Project; (g) the Transfer would likely result in significant increase in the use of the parking areas or Common Areas by the Transferee's employees or visitors, and/or significantly increase the demand upon utilities and services to be provided by Landlord to the Premises; (h) the Transferee does not have the financial capability to fulfill the obligations imposed by the Transfer; (i) the Transferee is not in Landlord's reasonable opinion of reputable or good character or consistent with Landlord's desired tenant mix; or (j) the Transferee is a real estate developer or landlord or is acting directly or indirectly on behalf of a real estate developer or landlord. 16.6 PERMITTED CONTROLLED TRANSFERS. Notwithstanding the provisions of Subparagraphs 16.1, 16.2 and 16.3 above to the contrary, Tenant may assign this Lease or sublet the Premises or any portion thereof, without Landlord's consent and without extending any sublease or termination option to Landlord, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all of the assets of Tenant's business as a going concern, provided that: (a) at least twenty (20) days prior to such assignment or sublease, Tenant delivers to Landlord the financial statements and other financial and background information 7 of the assignee or sublessee described in Subparagraph 16.3 above; (b) if an assignment, the assignee assumes, in full, the obligations above of Tenant under this Lease (or if a sublease, the sublessee of a portion of the Premises or Term assumes, in full, the obligations of Tenant with respect to such portion); (c) the financial net worth of the assignee or sublessee equals or exceeds that of Tenant as of the date of execution of this Lease; (d) Tenant remains fully liable under this Lease; (e) the use of the Premises under Article 8 remains unchanged; and (f) such transaction is not entered into as a subterfuge to avoid the restrictions and provisions of this Paragraph 16. 16.7 NO RELEASE. No Transfer shall release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant hereunder. Landlord may require that any Transferee remit directly to Landlord on a monthly basis, all monies due Tenant by said Transferee. However, the acceptance of rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent by Landlord to one Transfer shall not be deemed consent to any subsequent Transfer. In the event of default by any Transferee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such Transferee or successor. Landlord may consent to subsequent assignments of the Lease or sublettings or amendments or modifications to the Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto and any such actions shall not relieve Tenant of liability under this Lease. 16.8 ADMINISTRATIVE AND ATTORNEYS' FEES. If Tenant effects a Transfer or requests the consent of Landlord to any Transfer, then Tenant shall, upon demand, pay Landlord a non-refundable administrative fee of Two Hundred Fifty Dollars ($250.00), plus any reasonable attorneys' and paralegal fees incurred by Landlord in connection with such Transfer or request for consent (whether attributable to Landlord's in-house attorneys or paralegals or otherwise). Acceptance of the $250.00 administrative fee and/or reimbursement of Landlord's attorneys' and paralegal fees shall in no event obligate Landlord to consent to any proposed Transfer. 16.9 17. ENTRY BY LANDLORD. Landlord and its employees and agents shall at all times have the right to enter the Premises to inspect the same, to supply janitorial service and any other service required to be provided by Landlord to Tenant under this Lease, to exhibit the Premises to prospective lenders or purchasers (or during the last year of the Term, to prospective tenants), to post notices of non-responsibility,and/or to alter, improve or repair the Premises or any other portion of the Building or Project, all without being deemed guilty of or liable for any breach of Landlord's covenant of quiet enjoyment or any eviction of Tenant, and without abatement of rent. In exercising such entry rights, Landlord shall endeavor to minimize, as reasonably practicable, the interference with Tenant's business, and shall provide Tenant with reasonable advance written notice of such entry (except in emergency situations). For each of the foregoing purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant's vaults and safes, and Landlord shall have the means which Landlord may deem proper to open said doors in an emergency in order to obtain entry to the Premises. Any entry to the Premises obtained by Landlord by any of said means or otherwise shall not under 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 from the Premises or any portion thereof, or grounds for any abatement or reduction of rent. Any damages or losses on account of any such entry by Landlord shall be Tenant's sole responsibility except as otherwise expressly provided in Subparagraph 19.3. Nothing in this Paragraph 17 shall be construed as obligating Landlord to perform any repairs, alterations or decorations, except as otherwise expressly required in the Lease to be performed by Landlord. 18. UTILITIES AND SERVICES. 18.1 STANDARD UTILITIES AND SERVICES. As long as Tenant has not committed an uncured default under any of the provisions of this Lease, and subject to the terms and conditions of this Lease, and the obligations of Tenant as set forth hereinbelow, Landlord shall furnish or cause to be furnished to the Premises the following utilities and services, the costs of which shall be included in Operating Expenses, unless otherwise specified below (Landlord reserves the right to adopt non-discriminatory modifications and additions to the following provisions from time to time): (a) Landlord shall make available for Tenant's non-exclusive use, the non-attended passenger elevator facilities of the Building, seven days per week, 24 hours per day. (b) Landlord shall furnish during "Business Hours" heating, ventilation and air conditioning ("HVAC") for the Premises as required in Landlord's judgment for the comfortable and normal occupancy of the Premises. For purposes of this Subparagraph 18.1, the "Business Hours" shall mean 8:00 a.m. to 6:00 p.m. on Monday through Friday (except holidays), and 9:00 a.m. to 12:00 noon on Saturday (except holidays). The cost of maintenance and service calls to adjust and regulate HVAC system shall be charged to Tenant if the need for maintenance work results from either Tenant's adjustment of room thermostats or Tenant's failure to comply with its obligations under this Paragraph 18, including keeping window coverings closed as needed. Such work shall be charged at hourly rates equal to then-current journeyman's wages for HVAC mechanics. If Tenant desires HVAC at any time other than during Business Hours, Landlord shall provide such "after-hours" usage after advance reasonable request by Tenant, and Tenant shall pay to Landlord, as additional rent (and not as part of the Operating Expenses) the cost, as fairly determined by Landlord, of such after-hours usage (as well as the cost of any HVAC used by Tenant in excess of what Landlord considers reasonable or normal), including any minimum hour charges for after-hours requests and any special start-up costs for after-hours services which require a special start-up (such as late evenings, weekends and holidays). (c) Landlord shall furnish to the Premises 24 hours per day, reasonable quantities of electric current as required in Landlords's judgment for normal lighting and fractional horsepower office business machines. In no event shall Tenant's use of electric current ever exceed the capacity of the feeders to the Building or the risers or wiring installation of the Building. Landlord shall also furnish water to the Premises 24 hours per day for drinking and lavatory purposes, in such quantities as required in Landlord's judgment for the comfortable and normal use of the Premises. If Tenant requires or consumes water or electrical power in excess of what is considered reasonable or normal by Landlord, Landlord may require Tenant to pay to Landlord, as additional rent, the cost as fairly determined by Landlord incurred for such excess usage. (d) Landlord shall furnish janitorial services to the Premises five (5) days per week pursuant to janitorial and cleaning specifications as may be adopted by Landlord from time to time. No person(s) other than those persons approved by Landlord shall be permitted to enter the Premises for such purposes. Janitor service shall include ordinary dusting and cleaning by the janitor assigned to do such work and shall not include cleaning of carpets or rugs, except normal vacuuming, or moving of furniture, interior window cleaning, coffee or eating area cleaning and other special services. Such additional services may be rendered by Landlord pursuant to written agreement with Tenant as to the extent of such services and the payment of the cost thereof. Janitor service will not be furnished on nights when rooms are occupied after 6:00 p.m. or to rooms which are locked unless a key is furnished to the Landlord for use the janitorial contractor. Window cleaning shall be done only by Landlord, at such time and frequency as determined by Landlord at Landlord's sole discretion. Tenant shall pay to Landlord the cost of removal of any of Tenant's refuse and rubbish to the extent that the same exceeds the refuse and rubbish usually attendant upon the use of the Premises as offices. (e) Landlord may provide security service or protection in the Building, in any manner deemed reasonable by Landlord at Landlord's sole discretion, from the Commencement Date throughout the Term. (f) At Landlord's option, Landlord may install water, electricity and/or HVAC meters in the Premises to measure Tenant's consumption of such utilities, including any after-hours and extraordinary usage described above. Tenant shall pay to Landlord, within ten (10) days after demand, the cost of the installation, maintenance and repair of such meter(s). 8 18.2 TENANT'S OBLIGATIONS. Tenant shall cooperate fully at all times with Landlord, and abide by all reasonable regulations and requirements which Landlord may prescribe for the proper functioning and protection of the Building's services and systems. Tenant shall not use any apparatus or device in, upon or about the Premises which may in any way increase the amount of services or utilities usually furnished or supplied to the Premises or other premises in the Building. In addition, Tenant shall not connect any conduit, pipe, apparatus or other device to the Building's water, waste or other supply lines or systems for any purpose. Neither Tenant nor its employees, agents, contractors, licensees or invitees shall at any time enter, adjust, tamper with, touch or otherwise in any manner affect the mechanical installations or facilities of the Building. 18.3 FAILURE TO PROVIDE UTILITIES. Landlord's failure to furnish any of the utilities and services described in Subparagraph 18.1 above when such failure is caused by all or any of the following shall not result in any liability of Landlord: (a) accident, breakage or repairs; (b) strikes, lockouts or other labor disturbances or labor disputes of any such character; (c) governmental regulation, moratorium or other governmental action; (d) inability, despite the exercise of reasonable diligence, to obtain electricity, water or fuel; or (e) any other cause beyond Landlord's reasonable control. In addition, in the event of the failure of any said utilities or services, Tenant shall not be entitled to any abatement or reduction of rent (except as expressly provided in Subparagraphs 20.3 and 21.2 if such failure is a result of a damage or taking described therein), no eviction of Tenant shall result, and Tenant shall not be relieved from the performance of any covenant or agreement in this Lease. In the event of any stoppage or interruption of services or utilities, Landlord shall diligently attempt to resume such services or utilities as promptly as practicable. 19. INDEMNIFICATION AND EXCULPATION. 19.1 TENANT'S INDEMNIFICATION OF LANDLORD. Tenant shall be liable for, and shall indemnify, defend and hold Landlord and Landlord's partners, officers, directors, employees, agents, successors and assigns (collectively, "Landlord Indemnified Parties"), harmless from and against, any and all claims, damages, judgments, suits, causes of action, losses, liabilities and expenses, including attorneys' fees and court costs (collectively, "Indemnified Claims"), arising or resulting from (a) any act or omission of Tenant or of any Tenant's agents, employees, contractors, subtenants, assignees, licensees or invitees (collectively, "Tenant Parties"); (b) the use of the Premises and Common Areas and conduct of Tenant's business by Tenant or any Tenant Parties, or any other activity, work or thing done, permitted or suffered by Tenant or any Tenant Parties, in or about the Premises, the Building or elsewhere on the Site; and/or (c) any default by Tenant of any obligations on Tenant's part to be performed under the terms of this Lease. In case any action or proceeding is brought against Landlord or any Landlord Indemnified Parties by reason of any such Indemnified Claims, Tenant, upon notice from Landlord, shall defend the same at Tenant's expense by counsel approved in writing by Landlord, which approval shall not be unreasonably withheld. 19.2 TENANT'S ASSUMPTION OF RISK AND WAIVER. Except to the extent specifically included in Landlord's indemnification obligations set forth in Subparagraph 19.3 below, Tenant, as a material part of the consideration to Landlord, hereby agrees that neither Landlord nor any Landlord Indemnified Parties shall be liable to Tenant for, and Tenant expressly assumes the risk of and waives any and all claims it may have against Landlord or any Landlord Indemnified Parties with respect to, any and all damage to property or injury to persons in, upon or about the Premises, the Building, the Site or the Project resulting from any act or omission of Landlord or of any Landlord Indemnified Party (whether or not negligent) or from any other cause whatsoever, including, without limitation, (a) any damage to property entrusted to employees of the Project, (b) any loss of or damage to property by theft or otherwise, and (c) any injury or damage to persons or property resulting from any casualty, explosion, falling plaster or other masonry or glass, steam, gas, electricity, water or rain which may leak from any part of the Building or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or from any other place, or resulting from dampness, or any other cause whatsoever. Landlord or its agents shall not be liable for interference with the light or other intangible rights. 19.3 LANDLORD'S INDEMNIFICATION. Notwithstanding the provisions of Subparagraph 19.2 to the contrary, but subject to the limitation on Landlord's liability set forth in Paragraph 35 below, Landlord shall be liable for, and shall indemnify, defend and hold Tenant and Tenant's partners, officers, directors, employees, agents, successors and assigns (collectively, "Tenant Indemnified Parties") harmless from and against, any injury to persons or damage to property located on the Premises or Site (but not for injury to, or interference with, Tenant's or any Tenant Indemnified Parties' business or for consequential damages), to the extent such damage or injury arises or results from (a) the gross negligence or willful misconduct of Landlord, its agents or employees and/or (b) the default by Landlord of any obligations on Landlord's part to be performed under the terms of this Lease; provided, however, that Landlord's indemnity shall not apply or extend to any such damage or injury which is covered by any insurance maintained by Tenant or any Tenant Indemnified Parties (or would have been covered had Tenant obtained the insurance as required under this Lease). In case any action or proceeding is brought against Tenant or any Tenant Indemnified Parties by reason of any such injury or damage indemnified by Landlord as set forth hereinabove, Landlord, upon notice from Tenant, shall defend the same at Landlord's expense by counsel approved in writing by Tenant, which approval shall not be unreasonably withheld. 19.4 SURVIVAL; NO RELEASE OF INSURERS. Tenant's and Landlord's indemnification obligations under Subparagraphs 19.1 and 19.3, respectively, shall survive the expiration or earlier termination of this Lease. Tenant's covenants, agreements and indemnification in Subparagraphs 19.1 and 19.2 above, and Landlord's indemnification in Subparagraph 19.3 above, are not intended to and shall not relieve any insurance carrier of its obligations under policies required to be carried by Landlord or Tenant, respectively, pursuant to the provision of this Lease. 20. DAMAGE OR DESTRUCTION 20.1 LANDLORD'S RIGHTS AND OBLIGATIONS. In the event the Premises or any part of the Building is damaged by fire or other casualty to an extent not exceeding twenty-five percent (25%) of the full replacement cost thereof, and Landlord's contractor estimates in a writing delivered to the parties that the damage thereto is such that the Building and/or Premises may be repaired, reconstructed or restored to substantially its condition immediately prior to such damage within one hundred twenty (120) days from the date of such casualty, and Landlord will receive insurance proceeds sufficient to cover the costs of such repairs, reconstruction and restoration (including proceeds from Tenant and/or Tenant's insurance which Tenant is required to deliver to Landlord pursuant to Subparagraph 20.2 below), then Landlord shall commence and proceed diligently with the work of repair, reconstruction and restoration and this Lease shall continue in full force and effect. If, however, the Premises or any other part of the Building is damaged to an extent exceeding twenty-five percent (25%) of the full replacement cost thereof, or Landlord's contractor estimates that such work of repair, reconstruction and restoration will require longer than one hundred twenty (120) days to complete, OR Landlord will not receive insurance proceeds (and/or proceeds from Tenant, as applicable) sufficient to cover the costs of such repairs, reconstruction and restoration, then Landlord may elect to either: (a) repair, reconstruct and restore the portion of the Building and Premises damaged by such casualty (including the Leasehold Improvements and Tenant Changes), in which case this Lease shall continue in full force and effect; or (b) terminate this Lease effective as of the date which is thirty (30) days after Tenant's receipt of Landlord's election to so terminate. Under any of the conditions of this Subparagraph 20.1, Landlord shall give written notice to Tenant of its intention to repair or terminate within the later of sixty (60) days after the occurrence of such casualty, or fifteen (15) days after Landlord's receipt of the estimate from Landlord's contractor. 20.2 TENANT'S COSTS AND INSURANCE PROCEEDS. In the event of any damage or destruction of all or any part of the premises, Tenant shall immediately: (a) notify Landlord thereof; and (b) deliver to Landlord all insurance proceeds received by Tenant with respect to the Leasehold Improvements and Tenant Changes in the Premises to the extent such items are not covered by Landlord's casualty insurance obtained by Landlord pursuant to Paragraph 23 below (excluding proceeds for Tenant's furniture and other personal property), whether or not this Lease is terminated as permitted in this Paragraph 20, and Tenant hereby assigns to Landlord all rights to receive such insurance proceeds. If, for any reason (including Tenant's failure to obtain insurance for the full replacement cost of any Tenant Changes which Tenant is required to insure pursuant to Subparagraphs 14.1(c) and/or 22.1(a) hereof), Tenant fails to receive insurance proceeds covering the full replacement cost of such Tenant Changes which are damaged, Tenant shall be deemed to have self-insured the replacement cost of such Tenant Changes, and upon any damage or destruction 9 thereto, Tenant shall immediately pay to Landlord the full replacement cost of such items, less any insurance proceeds actually received by Landlord from Landlord's or Tenant's insurance with respect to such items. 20.3 ABATEMENT OF RENT. In the event that as a result of any such damage, repair, reconstruction and/or restoration of the Premises or the Building, Tenant is prevented from using, and does not use, the Premises or any portion thereof for five (5) consecutive business days (the "Eligibility Period"), then the rent shall be abated or reduced, as the case may be, during the period after the expiration of the Eligibility Period that Tenant continues to be so prevented from using and does not use the Premises or portion thereof, in the proportion that the Rentable Square Feet of the portion of the Premises that Tenant is prevented from using, and does not use, bears to the total Rentable Square Feet of the Premises. Notwithstanding the foregoing to the contrary, if the damage is due to the negligence or willful misconduct of Tenant or any Tenant Parties, there shall be no abatement of rent. Except for abatement of rent as provided hereinabove, Tenant shall not be entitled to any compensation or damages for loss of, or interference with, Tenant's business or use or access of all or any part of the Premises resulting from any such damage, repair, reconstruction or restoration. 20.4 INABILITY TO COMPLETE. Notwithstanding anything to the contrary contained in this Paragraph 20, in the event Landlord is obligated or elects to repair, reconstruct and/or restore the damaged portion of the Building or Premises pursuant to Subparagraph 20.1 above, but is delayed from completing such repair, reconstruction and/or restoration beyond the date which is six (6) months after the date estimated by Landlord's contractor for completion thereof pursuant to Subparagraph 20.1, by reason of any causes beyond the reasonable control of Landlord (including, without limitation, any acts of God, war, governmental restrictions, and delays caused by Tenant or any Tenant Parties), then Landlord may elect to terminate this Lease upon thirty (30) days' prior written notice to Tenant. 20.5 DAMAGE NEAR END OF TERM. In addition to its termination rights in Subparagraphs 20.1 and 20.4 above, Landlord shall have the right to terminate this Lease if any damage to the Building or Premises occurs during the last twelve (12) months of the Term of this Lease and Landlord's contractor estimates in a writing delivered to the parties that the repair, reconstruction or restoration of such damage cannot be completed within the earlier of (a) the scheduled expiration date of the Lease Term, or (b) sixty (60) days after the date of such casualty. 20.6 WAIVER OF TERMINATION RIGHT. The provisions of California Civil Code Section 1932, Subsection 2, and Section 1933, Subsection 4 (and any successor statutes thereof permitting Tenant to terminate this Lease as a result of any damage or destruction) are hereby expressly waived by Tenant. 21. EMINENT DOMAIN. 21.1 SUBSTANTIAL TAKING. Subject to the provisions of Subparagraph 21.4 below, in case the whole of the Premises, or such part thereof as shall substantially interfere with Tenant's use and occupancy of the Premises as reasonably determined by Landlord, shall be taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, either party shall have the right to terminate this Lease effective as of the date possession is required to be surrendered to said authority. 21.2 PARTIAL TAKING; ABATEMENT OF RENT. In the event of a taking of portion of the Premises which does not substantially interfere with the conduct of Tenant's business, then, except as otherwise provided in the immediately following sentence, neither party shall have the right to terminate this Lease and Landlord shall thereafter proceed to make a functional unit of the remaining portion of the Premises (but only to the extent Landlord receives proceeds therefor from the condemning authority), and rent shall be abated with respect to the part of the Premises which Tenant shall be so deprived on account of such taking. Notwithstanding the immediately preceding sentence to the contrary, if any part of the Building or the Site shall be taken (whether or not such taking substantially interferes with Tenant's use of the Premises), Landlord may terminate this Lease upon thirty (30) days' prior written notice to Tenant as long as Landlord also terminates leases of other tenants leasing comparably sized space within the Building for comparable lease terms. 21.3 CONDEMNATION AWARD. Subject to the provisions of Subparagraph 21.4 below, in connection with any taking of the Premises or Building, Landlord shall be entitled to receive the entire amount of any award which may be made or given in such taking or condemnation, without deduction or apportionment for any estate or interest of Tenant, it being expressly understood and agreed by Tenant that no portion of any such award shall be allowed or paid to Tenant for any so-called bonus or excess value of this Lease, and such bonus or excess value shall be the sole property of Landlord. Tenant shall not assert any claim against Landlord or the taking authority for any compensation because of such taking (including any claim for bonus or excess value of this Lease); provided, however, if any portion of the Premises is taken, Tenant shall be granted the right to recover from the condemning authority (but not from Landlord) any compensation as may be separately awarded or recoverable by Tenant for the taking of Tenant's furniture, fixtures, equipment and other personal property within the Premises, for Tenant's relocation expenses, and for any loss of goodwill or other damage to Tenant's business by reason of such taking. 21.4 TEMPORARY TAKING. In the event of a taking of the Premises or any part thereof for temporary use, (a) this Lease shall be and remain unaffected thereby and rent shall not abate, and (b) Tenant shall be entitled to receive for itself such portion or portions of any award made for such use with respect to the period of the taking which is within the Term, provided that if such taking shall remain in force at the expiration or earlier termination of this Lease, Tenant shall then pay to Landlord a sum equal to the reasonable cost of performing Tenant's obligations under Paragraph 11 with respect to surrender of the Premises and upon such payment shall be excused from such obligations. For purpose of this Subparagraph 21.4, a temporary taking shall be defined as a taking for a period of two hundred seventy (270) days or less. 22. TENANT'S INSURANCE. 22.1 TYPES OF INSURANCE. On or before the earlier of the Commencement Date or the date Tenant commences or causes to be commenced any work of any type in or on the Premises pursuant to this Lease, and continuing during the entire Term, Tenant shall obtain and keep in full force and effect, the following insurance: (a) All Risk insurance, including fire and extended coverage, sprinkler leakage (including earthquake sprinkler leakage), vandalism, malicious mischief and earthquake coverage upon property of every description and kind owned by Tenant and located in the Premises or Building, or for which Tenant is legally liable or installed by or on behalf of Tenant including, without limitation, furniture, equipment and any other personal property, and the Tenant Changes to the extent required under Subparagraph 14.1(c) above, (but excluding the initial Leasehold Improvements previously existing or installed in the Premises), in an amount not less then the full replacement cost thereof. In the event that there shall be a dispute as to the amount which comprises full replacement cost, the decision of Landlord or the mortgagees of Landlord shall be presumptive. (b) Commercial general liability insurance coverage, including personal injury, bodily injury (including wrongful death), broad form property damage, operations hazard, owner's protective coverage, contractual liability (including Tenant's indemnification obligations under this Lease, including Paragraph 19 hereof), liquor liability (if Tenant serves alcohol on the Premises), products and completed operations liability, and owned/non-owned auto liability, with initial limits as follows: general aggregate--not less than Two Million Dollars ($2,000,000.00), and per occurrence--not less than Two Million Dollars ($2,000,000.00). The limits of liability of such comprehensive general liability insurance shall be increased every five (5) years during the Term of this Lease to an amount reasonably required by Landlord. (c) Worker's compensation insurance, in statutory amounts and limits, and employer's liability insurance with limits as follows: bodily injury each accident--not less than One Million Dollars ($1,000,000.00), bodily injury/disease each employee--not less than One Million Dollars ($1,000,000.00), and a bodily injury/disease policy limit of not less than One Million Dollars ($1,000,000.00). (d) Business Income insurance in such amount as will reimburse Tenant for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent tenants or attributable to prevention of access to the Premises, Tenant's parking areas or to the Building as a result of such perils. 10 (e) Any other form or forms of insurance as Tenant or Landlord or the mortgagees of Landlord may reasonably require from time to time, in form, amounts and for insurance risks against which a prudent tenant would protect itself, but only to the extent such risks and amounts are available in the insurance market at commercially reasonable costs. 22.2 REQUIREMENTS. Each policy required to be obtained by Tenant hereunder shall: (a) be issued by insurers authorized to do business in the state in which the Building is located and rated not less than financial class X, and not less than policyholder rating A in the most recent version of Best's Key Rating Guide (provided that, in any event, the same insurance company shall provide the coverages described in Subparagraphs 22.1(a) and 22.1(d) above); (b) be in form reasonably satisfactory from time to time to Landlord; (c) name Tenant as named insured thereunder and shall name Landlord and, at Landlord's request, Landlord's mortgages and ground lessors of which Tenant has been informed in writing, as additional insureds thereunder, all as their respective interests may appear; (d) shall not have a deductible amount exceeding Five Thousand Dollars ($5,000.00); (e) specifically provide that the insurance afforded by such policy for the benefit of Landlord and Landlord's mortgagees and ground lessors shall be primary, and any insurance carried by Landlord or Landlord's mortgagees and ground lessors shall be excess and non-contributing; (f) except for worker's compensation insurance, contain an endorsement that the insurer waives its right to subrogation as described in Paragraph 24 below; and (g) contain an undertaking by the insurer to notify Landlord (and the mortgagees and ground lessors of Landlord who are named as additional insureds) in writing not less than thirty (30) days prior to any material change, reduction in coverage, cancellation or other termination thereof. Tenant agrees to deliver to Landlord, as soon as practicable after the placing of the required insurance, but in no event later than the date Tenant takes possession of all or any part of the Premises, certified copies of each such insurance policy (or certificates from the insurance company evidencing the existence of such insurance and Tenant's compliance with the foregoing provisions of this Paragraph 22). Tenant shall cause replacement policies or certificates to be delivered to Landlord on or before ten (10) days prior to the expiration of any such policy or policies. If any such initial or replacement policies or certificates are not furnished within the time(s) specified herein, Tenant shall be deemed to be in material default under this Lease without the benefit of any additional notice or cure period provided in Subparagraph 25.1 below, and Landlord shall have the right, but not the obligation, to procure such policies and certificates at Tenant's expense. 23. LANDLORD'S INSURANCE. During the Term, Landlord shall be required to insure the Building, the Premises, the Leasehold Improvements initially installed in the Premises pursuant to Exhibit "D" and certain Tenant Changes to the extent described in Subparagraph 14.1(c) above (excluding, however, Tenant's furniture, equipment and other personal property and those Tenant Changes which Tenant is obligated to insure pursuant to the provisions of Subparagraphs 14.1(c) and 22.1(a) above) against damage by fire and standard extended coverage perils and general liability insurance, in such reasonable amounts and with such reasonable deductibles as would be carried by a prudent owner of similar building in the state in which the Building is located. At Landlord's option, such insurance may be carried under any blanket or umbrella policies which Landlord has in force for other buildings and projects. In addition, at Landlord's option, Landlord may elect to self-insure all or any part of such required insurance coverage. Landlord may, but shall not be obligated to, carry any other form or forms of insurance as Landlord or the mortgagees or ground lessors of Landlord may reasonably determine is advisable. The cost of insurance obtained by Landlord pursuant to this Paragraph 23 shall be included in Operating Expenses. 24. WAIVERS OF SUBROGATION. 24.1 MUTUAL WAIVER OF PARTIES. Landlord and Tenant hereby waive their rights against each other as well as the officers, partners, directors, employees, agents and authorized representatives of Landlord and Tenant with respect to any claims or damages or losses (including any claims for bodily injury to persons and/or damage to property) which are caused by or result from (a) risks insured against under any insurance policy carried by Landlord or Tenant (as the case may be) pursuant to the provisions of this Lease and enforceable at the time of such damage, loss and/or injury, or (b) risks which would have been covered under any insurance required to be obtained and maintained by Landlord or Tenant (as the case may be) under Paragraphs 22 and 23 of this Lease (as applicable) had such insurance been obtained and maintained as required therein. The foregoing waivers shall be in addition to, and not a limitation of, any other waivers or releases contained in this Lease. 24.2 WAIVER OF INSURER. Each party shall cause each insurance policy required to be obtained by it pursuant to Paragraphs 22 and 23 (excluding Tenant's worker's compensation insurance) to provide that the insurer waives all rights of recovery by way of subrogation against either Landlord or Tenant, as the case may be, and against the officers, employees, agents, partners and authorized representatives of Landlord and Tenant in connection with any claims, losses and damages covered by such policy. If either party fails to maintain insurance required hereunder, such insurance shall be deemed to be self-insured with a deemed full waiver of subrogation as set forth in the immediately preceding sentence. 25. TENANT'S DEFAULT AND LANDLORD'S REMEDIES. 25.1 TENANT'S DEFAULT. The occurrence of any one or more of the following events shall constitute a default under this Lease by Tenant: (a) the vacation or abandonment of the Premises by Tenant. "Abandonment" is herein defined to include, but is not limited to, any absence by Tenant from the Premises for five (5) business days or longer while in default of any other provision of this Lease; (b) the failure by Tenant to make any payment of rent or additional rent or any other payment required to be made by Tenant hereunder, as and when due; (c) the failure by Tenant to timely perform any of those covenants described in Paragraphs 8.2, 15, 22.2 and 27.1 of this Lease, which Paragraphs expressly provide that such failure shall be deemed a default by Tenant under this Lease without any additional notice or cure periods; (d) the failure by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in Subparagraphs 25.1(a), (b) or (c) above, where such failure shall continue for a period of ten (10) days after written notice thereof from Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure, Section 1161 and provided further that, if the nature of Tenant's default is such that more than ten (10) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant shall commence such cure within said ten (10) day period and thereafter diligently prosecute such cure to completion, which completion shall occur not later than sixty (60) days from the date of such notice from Landlord; and (e) (i) the making by Tenant of any general assignment for the benefit of creditors, (ii) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against the Tenant, the same is dismissed within sixty (60) days), (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within sixty (60) days, or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where such seizure is not discharged within sixty (60) days. 25.2 LANDLORD'S REMEDIES; TERMINATION. In the event of any such default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder. In the event that Landlord shall elect to so terminate this Lease, then Landlord may recover from Tenant: (a) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (b) the worth at the time of the 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; plus (c) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus 11 (d) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which, in the ordinary course of things, would be likely to result therefrom including, but not limited to: "Unreimbursed Leasehold Improvement Costs" (as defined below); attorneys' fees; brokers' commissions; the costs of refurbishment, alterations, renovation and repair of the Premises; and removal (including the repair of any damage caused by such removal) and storage (or disposal) of Tenant's personal property, equipment, fixtures, Tenant Changes, Leasehold Improvements and any other items which Tenant is required under this Lease to remove but does not remove. As used herein, the term "Unreimbursed Leasehold Improvement Costs" shall mean the product when multiplying (i) the sum of any Leasehold Improvement allowance plus any other costs provided, paid or incurred by Landlord in connection with the design and construction of the initial Leasehold Improvements installed in the Premises prior to the Commencement Date pursuant to Exhibit "D", by (ii) the fraction, the numerator of which is the number of months of the Term of this Lease not yet elapsed as of the date on which this Lease is terminated (excluding any unexercised renewal options), and the denominator of which is the total number of months of the Term of this Lease (excluding any unexercised renewal options). For example, if the total costs paid or incurred by Landlord with respect to the initial Leasehold Improvements was $100,000.00, the Lease Term was sixty (60) months, and the Lease was terminated by reason of Tenant's default at the end of twelve (12) months, the Unreimbursed Leasehold Improvement Costs would be equal to $80,000.00 (i.e., $80,000.00 equals $100,000.00 x 48/60). As used in Subparagraphs 25.2(a) and 25.2(b) above, the "worth at the time of award" is computed by allowing interest at the Interest Rate set forth in Subparagraph 1.18. As used in Subparagraph 25.2(c) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 25.3 LANDLORD'S REMEDIES; RE-ENTRY RIGHTS. In the event of any such default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed, stored and/or disposed of pursuant to Subparagraph 14.4 of this Lease or any other procedures permitted by applicable law. No re-entry or taking possession of the Premises by Landlord pursuant to this Subparagraph 25.3, and no acceptance of surrender of the Premises or other action on Landlord's part, shall be construed as an election to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. 25.4 LANDLORD'S REMEDIES; CONTINUATION OF LEASE. In the event of any such default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord shall have the right to continue this Lease in full force and effect, whether or not Tenant shall have abandoned the Premises. The foregoing remedy shall also be available to Landlord pursuant to California Civil Code Section 1951.4 and any successor statute thereof in the event Tenant has abandoned the Premises. In the event Landlord elects to continue this Lease in full force and effect pursuant to this Subparagraph 25.4, then Landlord shall be entitled to enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due. Landlord's election not to terminate this Lease pursuant to this Subparagraph 25.4 or pursuant to any other provision of this Lease, at law or in equity, shall not preclude Landlord from subsequently electing to terminate this Lease or pursuing any of its other remedies. 25.5 RIGHTS AND REMEDIES CUMULATIVE. All rights, options and remedies of Landlord contained in this Paragraph 25 and elsewhere in this Lease (including Paragraph 30 below) shall be construed and held to be cumulative, and no one of them shall be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law or in equity, whether or not stated in this Lease. Nothing in this Paragraph 25 shall be deemed to limit or otherwise affect Tenant's indemnification of Landlord pursuant to any provision of this Lease. 26. LANDLORD'S DEFAULT. Landlord shall not be in default in the performance of any obligation required to be performed by Landlord under this Lease unless Landlord has failed to perform such obligation within thirty (30) days after the receipt of written notice from Tenant specifying in detail Landlord's failure to perform; provided however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed in default if its commences such performance within such thirty (30) day period and thereafter diligently pursues the same to completion. Upon any such uncured default by Landlord, Tenant may exercise any of its rights provided in law or at equity; provided, however: (a) Tenant shall have no right to offset or abate rent in the event of any default by Landlord under this Lease, except to the extent offset rights are specifically provided to Tenant in this Letter; and (b) Tenant's rights and remedies hereunder shall be limited to the extent (i) Tenant has expressly waived in this Lease any of such rights or remedies and/or (ii) this Lease otherwise expressly limits Tenant's rights or remedies, including the limitations on Landlord's liability contained in Paragraph 35 hereof. 27. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any mortgagee of a mortgage or a beneficiary of a deed of trust now or hereafter encumbering all or any portion of the Building or Site, or any lessor of any ground or master lease now or hereafter affecting all or any portion of the Building or Site, this Lease shall be subject and subordinate at all times to such ground or master leases (and such extensions and modifications thereof), and to the lien of such mortgages and deeds of trust (as well as to any advances made thereunder and to all renewals, replacements, modifications and extensions thereof). As a condition precedent to the effectiveness of any such subordination of this Lease to any future ground or master leases or the lien of any future mortgages or deeds of trust, Landlord shall provide to Tenant a commercially reasonable non-disturbance and attornment agreement in favor of Tenant executed by such future ground lessor, master lessor, mortgagee or deed of trust beneficiary, as the case may be, which shall provide that Tenant's quiet possession of the Premises shall not be disturbed on account of such subordination to such future lease or lien so long as Tenant is not in default under any provisions of this Lease. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any or all ground or master leases or the lien of any or all mortgages or deeds of trust to this Lease. In the event that any ground or master lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, at the election of Landlord's successor in interest, Tenant shall attorn to and become the tenant of such successor. Tenant hereby waives its rights under any current or future law which gives or purports to give Tenant any right to terminate or otherwise adversely affect this Lease and the obligations of Tenant hereunder in the event of any such foreclosure proceeding or sale. Tenant covenants and agrees to execute and deliver to Landlord within ten (10) days after receipt of written demand by Landlord and in the form reasonably required by Landlord, any additional documents evidencing the priority or subordination of this Lease with respect to any such ground or master lease or the lien of any such mortgage or deed of trust. Should Tenant fail to sign and return and such documents within said 10-day period, Tenant shall be in default hereunder without the benefit of any additional notice or cure periods specified in Subparagraph 25.1 above. 28. ESTOPPEL CERTIFICATE. 28.1 TENANT'S OBLIGATIONS. Within ten (10) business days following Landlord's written request, Tenant shall execute and deliver to Landlord an estoppel certificate, in a form substantially similar to the form of Exhibit "G" attached hereto, certifying: (a) the Commencement Date of this Lease; (b) that this Lease is unmodified and in full force and effect (or, if modified, that this Lease is in full force and effect as modified, and stating the date and nature of such modifications); (c) the date to which the rent and other sums payable under this Lease have been paid; (d) that there are not, to the best of Tenant's knowledge, any defaults under this Lease by either Landlord or Tenant, except as specified in such certificate; and (e) such other matters as are reasonably requested by Landlord. Any such estoppel certificate delivered pursuant to this Subparagraph 28.1 may be relied upon by any mortgage, beneficiary, purchase or prospective purchaser of any portion of the Site, as well as their assignees. 28.2 TENANT'S FAILURE TO DELIVER. Tenant's failure to deliver such estoppel certificate within such time shall be conclusive upon Tenant that: (a) this Lease is in full force and effect without modification, except as may be represented by Landlord; (b) there are no uncured defaults in Landlord's or Tenant's performance; and (c) not more than one (1) month's rental has been paid in advance. Tenant shall indemnify, defend (with counsel reasonably approved by Landlord in writing) and hold Landlord harmless from and against any and all claims, judgments, suits, causes of action, damages, losses, liabilities and expenses (including attorneys' fees and court costs) attributable to any failure by Tenant to timely deliver any such estoppel certificate to Landlord pursuant to Subparagraph 28.1 above. 29. BUILDING PLANNING. If Landlord requires the Premises for use by another tenant or for other reasons connected with the Building planning program, then Landlord shall have the right, upon sixty (60) days' prior written notice to Tenant, to relocate the Premises to other space in the Building or Project of substantially similar size as the Premises, and with tenant improvements of substantially similar age, quality and layout as then existing in the Premises. 12 In the event of any such relocation, Landlord shall pay for the cost of providing such substantially similar tenant improvements (but not any furniture or personal property), and Landlord shall reimburse Tenant, within thirty (30) days after Landlord's receipt of invoices and paid receipts, for the reasonable moving, telephone installation and stationary reprinting costs actually paid for by Tenant in connection with such relocation. If Landlord so relocates Tenant, the terms and conditions of this Lease shall remain in full force and effect and apply to the new space, except that (a) a revised Exhibit "B" shall become part of this Lease and shall reflect the location of the new space, (b) Paragraph 1 of this Lease shall be amended to include and state all correct date as to the new space, and (c) such new space shall thereafter be deemed to be the "Premises". Notwithstanding the foregoing provisions of this Paragraph 29 to the contrary, if the new space contains more Rentable Square Feet than the original Premises, Tenant shall not be obligated to pay any more Annual Basic Rent or Excess Expenses than otherwise applicable to the original Premises. Landlord and Tenant agree to cooperate fully in order to minimize the inconvenience of Tenant resulting from such relocation. 30. PERFORMANCE BY TENANT; INTEREST AND LATE CHARGES. 30.1 LANDLORD'S RIGHT TO PERFORM. Except as specifically provided otherwise in this Lease, all covenants and agreements by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement or offset of rent. If Tenant shall fail to pay any sum of money (other than Annual Basic Rent) or perform any other act on its part to be paid or performed hereunder and such failure shall continue for three (3) days with respect to monetary obligations (or ten (10) days with respect to non-monetary obligations) after Tenant's receipt of written notice thereof from Landlord, Landlord may, without waiving or releasing Tenant from any of Tenant's obligations, make such payment or perform such other act on behalf of Tenant. All sums so paid by Landlord and all necessary incidental costs incurred by Landlord in performing such other acts shall be payable by Tenant to Landlord within five (5) days after demand therefor as additional rent. The foregoing rights are in addition to any and all remedies available to Landlord upon Tenant's default as described in Paragraph 25. 30.2 INTEREST. If any monthly installment of Annual Basic Rent or Excess Expenses, or other amount payable by Tenant hereunder is not received by Landlord by the date when due, it shall bear interest at the Interest Rate set forth in Subparagraph 1.18 from the date due until paid. All interest, and any late charges imposed pursuant to Subparagraph 30.3 below, shall be considered additional rent due from Tenant to Landlord under the terms of this Lease. 30.3 LATE CHARGES. Tenant acknowledges that, in addition to interest costs, the late payments by Tenant to Landlord of any Annual Basic Rent or other sums due under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impractical to fix. Such other costs include, without limitation, processing, administrative and accounting charges and late charges that may be imposed on Landlord by the terms of any mortgage, deed of trust or related loan documents encumbering the Premises, the Building or the Site. Accordingly, if any monthly installment of Annual Basic Rent or Excess Expenses or any other amount payable by Tenant hereunder is not received by Landlord by the due date thereof, Tenant shall pay to Landlord an additional sum of ten percent (10%) of the overdue amount as a late charge, but in no event more than the maximum late charge allowed by law. The parties agree that such late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of any late payment as hereinabove referred to by Tenant, and the payment of late charges and interest are distinct and separate in that the payment of interest is to compensate Landlord for the use of Landlord's money by Tenant, while the payment of late charges is to compensate Landlord for Landlord's processing, administrative and other costs incurred by Landlord as a result of Tenant's delinquent payments. Acceptance of a late charge or interest shall not constitute a waiver of Tenant's default with respect to the overdue amount or prevent Landlord from exercising any of the other rights and remedies available to Landlord under this Lease or at law or in equity now or hereafter in effect. 31. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS. 31.1 MODIFICATIONS. If, in connection with Landlord's obtaining or entering into any financing or ground lease for any portion of the Building or Site, the lender or ground lessor shall request modifications to this Lease, Tenant shall, within ten (10) days after request therefor, execute an amendment to this Lease including such modifications, provided such modifications are reasonable, do not increase the obligations of Tenant hereunder, or adversely affect the leasehold estate created hereby or Tenant's rights hereunder. 31.2 CURE RIGHTS. In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee covering the Premises or ground lessor of Landlord whose address shall have been furnished to Tenant, and shall offer such beneficiary, mortgagee or ground lessor a reasonable opportunity to cure the default (including with respect to any such beneficiary or mortgagee, time to obtain possession of the Premises, subject to this Lease and Tenant's rights hereunder, by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure). 32. TRANSFER OF OWNER'S INTEREST. The Term "Landlord" as used in this Lease, so far as covenants or obligations on the part of the Landlord are concerned, shall be limited to mean and include only the owner or owners, at the time in question, of the fee title to, or a lessee's interest in a ground lease of, the Site. In the event of any transfer or conveyance of any such title or interest (other than a transfer for security purposes only), the transferor shall be automatically relieved of all covenants and obligations on the part of Landlord contained in this Lease accruing after the date of such transfer or conveyance. Landlord and Landlord's transferees and assignees shall have the absolute right to transfer all or any portion of their respective title and interest in the Site, the Building, the Premises and/or this Lease without the consent of Tenant, and such transfer or subsequent transfer shall not be deemed a violation on Landlord's part of any of the terms and conditions of this Lease. 33. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that, upon Tenant performing all of the covenants and provisions on Tenant's part to be observed and performed under this Lease (including payment of rent hereunder), Tenant shall and may peaceably and quietly have, hold and enjoy the Premises in accordance with and subject to the terms and conditions of this Lease. 34. PARKING. 34.1 TENANT'S PARKING PRIVILEGES. During the Term of this Lease, Landlord shall lease to Tenant, and Tenant shall lease from Landlord, the number of parking privileges specified in Subparagraph 1.20 hereof for use by Tenant's employees in the common parking areas for the Building within the Project, as designated by Landlord from time to time. Landlord shall at all times have the right to establish and modify the nature and extent of the parking areas for the Building and Project (including whether such areas shall be surface, underground and/or other structures) as long as Tenant is provided the number of parking privileges designated in Subparagraph 1.20. In addition, Landlord may, in its sole discretion, assign any unreserved and unassigned parking privileges, and/or make all or a portion of such privileges reserved. 34.2 PARKING CHARGES; LOSS OF PRIVILEGE. Except for during the Initial Term of the Lease, each of Tenant's parking privileges set forth in Subparagraph 1.20 hereof shall be subject to a monthly parking fee as may be established and adjusted by Landlord from time to time. In addition to such parking privileges for use by Tenant's employees, Landlord shall permit access to the parking areas for Tenant's visitors, subject to availability of spaces and payment (by validation charges or otherwise) of daily visitor parking charges therefor as may be established and adjusted by Landlord from time to time. If, at any time during the Term hereof, Tenant fails or elects not to pay any parking fee so established by Landlord for the full number of parking privileges set forth in Subparagraph 1.20, Landlord may, at any time thereafter, upon ten (10) days' written notice to Tenant, terminate Tenant's right to use any or all privileges for which Tenant has failed or chosen not to pay. Eight (8) of the total parking privileges per Subparagraph 1.20 shall be reserved and designated in front of Premises for visitor parking, free for the Initial Term of the Lease (see Exhibit "A"). 34.3 PARKING RIGHTS. The use of the parking areas shall be subject to the Parking Rules and Regulations attached hereto as Exhibit "H" and any other reasonable, non-discriminatory rules and regulations adopted by Landlord and/or Landlord's parking operators from time to time, including any system for controlled ingress and egress and charging visitors and invitees, with appropriate provision for validation of such charges. Tenant shall not use more parking privileges than its allotment and shall not use any parking spaces specifically assigned by Landlord to other tenants of the Building or Project or for such other uses as visitor parking. Tenant's parking privileges shall be used only for parking by vehicles no larger than normally sized passenger automobiles or pick-up trucks. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, 13 customers or invitees to be loaded, unloaded, or parked in areas other than those designated by Landlord for such activities. If Tenant permits or allows any of the prohibited activities described herein, then Landlord shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost thereof to Tenant, which cost shall be immediately payable by Tenant upon demand by Landlord. 35. LIMITATION ON LANDLORD'S LIABILITY. Notwithstanding anything contained in this Lease to the contrary, the obligations of Landlord under this Lease (including any actual or alleged breach or default by Landlord) do not constitute personal obligations of the individual partners, directors, officers or shareholders of Landlord or Landlord's partners, and Tenant shall not seek recourse against the individual partners, directors, officers or shareholders of Landlord or Landlord's partners, or any of their personal assets for satisfaction of any liability with respect to this Lease. In addition, in consideration of the benefits accruing hereunder to Tenant and notwithstanding anything contained in this Lease to the contrary, Tenant hereby covenants and agrees for itself and all of its successors and assigns that the liability of Landlord for its obligations under this Lease (including any liability as a result of any actual or alleged failure, breach or default hereunder by Landlord), shall be limited solely to, and Tenant's and its successors' and assigns' sole and exclusive remedy shall be against, Landlord's interest in the Site and proceeds therefrom, and no other assets of Landlord. 36. HAZARDOUS MATERIALS. 36.1 TENANT'S COVENANTS. In addition to its other obligations under this Lease (including Paragraph 8 hereof), Tenant covenants to comply with all laws relating to Hazardous Materials with respect to the Premises, the Building and the Site. Except for general office supplies typically used in an office area in the ordinary course of business (such as copier toner, liquid paper, glue, ink, and cleaning solvents), for use in the manner for which they were designed and only in accordance with all Hazardous Materials laws and the highest standards prevailing in the industry for such use, and then only in such amounts as may be normal for the office business operations conducted by Tenant on the Premises, neither Tenant nor any Tenant Parties (as defined in Subparagraph 19.1) shall use, handle, store or dispose of any Hazardous Materials in, on, under or about the Premises, the Building or the Site. Tenant shall promptly take all actions, at its sole cost and expense, as are necessary to return the Premises, Building, Site and Project to the condition existing prior to the introduction of any such Hazardous Materials by Tenant or any Tenant Parties, provided Landlord's approval of such actions shall first be obtained. Furthermore, Tenant shall immediately notify Landlord of any inquiry, test, investigation or enforcement proceeding by or against Tenant or the Premises concerning the presence of any Hazardous Material. 36.2 TENANT'S INDEMNITY. Tenant shall be solely responsible for and shall indemnify, defend (with counsel reasonably approved by Landlord) and hold Landlord harmless from and against any and all claims, judgments, suits, causes of action, damages, penalties, fines, liabilities, losses and expenses (including, without limitation, investigation and clean-up costs, attorneys' fees, consultant fees and court costs) which arise during or after the Term of this Lease as a result of the breach of any of the obligations and covenants set forth in Subparagraph 36.1 above, and/or any contamination of the Premises, Building, Site or Project directly or indirectly arising from the activities of Tenant or any Tenant Parties. 36.3 DEFINITION OF HAZARDOUS MATERIALS. For purposes of this Lease, the term "Hazardous Materials" shall mean, collectively, asbestos, any petroleum fuel, and any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the state of California or the United States Government, including, but not limited to, any material or substance defined as a "hazardous waste," "extremely hazardous waste," "restricted hazardous waste," "hazardous substance," "hazardous material" or "toxic pollutant" under the California Health and Safety Code and/or under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601, et seq. 36.4 SURVIVAL. The foregoing covenants and indemnities of Tenant shall survive the expiration or earlier termination of the Lease. 37. MISCELLANEOUS. 37.1 GOVERNING LAW. This Lease shall be governed by, and construed pursuant to, the laws of the state in which the Building is located. 37.2 SUCCESSORS AND ASSIGNS. Subject to the provisions of Paragraph 32 above, and except as otherwise provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective heirs, personal representatives and permitted successors and assigns; provided, however, no rights shall inure to the benefit of any Transferee of Tenant unless the Transfer to such Transferee is made in compliance with the provisions of Paragraph 16, and no options or other rights which are expressly made personal to the original Tenant hereunder or in any rider attached hereto shall be assignable to or exercisable by anyone other than the original Tenant under this Lease. 37.3 NO MERGER. The voluntary or other surrender of this Lease by Tenant or a mutual termination thereof shall not work as a merger and shall, at the option of Landlord, either (a) terminate all or any existing subleases, or (b) operate as an assignment to Landlord of Tenant's interest under any or all such subleases. 37.4 PROFESSIONAL FEES. If either Landlord or Tenant should bring suit against the other with respect to this Lease, including for unlawful detainer or any other relief against the other hereunder, then all costs and expenses incurred by the prevailing party therein (including, without limitation, its actual appraisers', accountants', attorneys' and other professional fees and court costs), shall be paid by the other party. 37.5 WAIVER. The waiver by either party of any breach by the other party of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant and condition herein contained, nor shall any custom or practice which may become established between the parties in the administration of the terms hereof be deemed a waiver of, or in any way affect, the right of any party to insist upon the performance by the other in strict accordance with said terms. No waiver of any default of either party hereunder shall be implied from any acceptance by Landlord or delivery by Tenant (as the case may be) of any rent or other payments due hereunder or any omission by the non-defaulting party to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect defaults other than as specified in said waiver. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. 37.6 JOINT AND SEVERAL LIABILITY. If more than one person or entity executes this Lease as Tenant: (a) each of them is and shall be jointly and severally liable for the covenants, conditions, provisions and agreements of this Lease to be kept, observed and performed by Tenant; and (b) the act or signature of, or notice from or to, any one or more of them with respect to this Lease shall be binding upon each and all of the persons and entities executing this Lease as Tenant with the same force and effect as if each and all of them had so acted or signed, or given or received such notice. 37.7 TERMS AND HEADINGS. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. Words used in any gender include other genders. The paragraph headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. 37.8 TIME. Time is of the essence with respect to performance of every provision of this Lease in which time or performance is a factor. All references in this Lease to "days" shall mean calendar days unless specifically modified herein to be "business" days. 37.9 PRIOR AGREEMENTS; AMENDMENTS. This Lease (and the Exhibits and Riders attached hereto) contain all of the covenants, provisions, agreements, conditions and understandings between Landlord and Tenant concerning the Premises and any other matter covered or mentioned in this Lease, and no prior agreement or understanding, oral or written, express or implied, pertaining to the Premises or any such other matter shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. The parties acknowledge that all prior agreements, representations and negotiations are deemed superseded by the execution of this Lease to the extent they are not expressly incorporated herein. 14 37.10 SEPARABILITY. The invalidity or unenforceability of any provision of this Lease (except for Tenant's obligation to pay Annual Basic Rent and Excess Expenses under Paragraphs 5 and 6 hereof) shall in no way affect, impair or invalidate any other provision hereof, and such other provisions shall remain and in full force and effect to the fullest extent permitted by law. 37.11 RECORDING. Neither Landlord nor Tenant shall record this Lease. In addition, neither party shall record a short form memorandum of this Lease without the prior written consent (and signature on the memorandum) of the other, and provided that prior to recordation Tenant executes and delivers to Landlord, in recordable form, a properly acknowledged quitclaim deed or other instrument extinguishing all of the Tenant's rights and interest in and to the Site, Building and Premises, and designating Landlord as the transferee, which deed or other instrument shall be held by Landlord and may be recorded by Landlord once the Lease terminates or expires (but not prior thereto). If such short form memorandum is recorded in accordance with the foregoing, the party requesting the recording shall pay for all costs of or related to such recording, including, but not limited to, recording charges and documentary transfer taxes. 37.12 EXHIBITS AND RIDERS. All Exhibits and Riders attached to this Lease are hereby incorporated in this Lease as though set forth at length herein. 37.13 SIGNS AND AUCTIONS. Except for Tenant's identity sign on the entry doors of the Premises and Tenant's elevator lobby identity sign on any full floor of the Building leased by Tenant (which signs shall be consistent with the Building's signage program and otherwise subject to Landlord's prior written approval), Tenant shall have no right to place any sign upon the Premises, the Building, Site or Project or which can be seen from outside the Premises. In addition, Tenant shall have no right to conduct any auction in, on or about the Premises, the Building or Site. 37.14 ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of a lesser amount than the rent payment herein stipulated shall be deemed to be other than on account of the 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 provided in this Lease. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by any statute or at common law. 37.15 FINANCIAL STATEMENTS. Upon ten (10) days prior written request from Landlord (which Landlord may make at any time during the Term but no more often that two (2) times in any calendar year), Tenant shall deliver to Landlord (a) a current financial statement of Tenant and any guarantor of this Lease, and (b) financial statements of Tenant and such guarantor for the two (2) years prior to the current financial statement year. Such statements shall be prepared in accordance with generally acceptable accounting principles and certified as true in all material respects by Tenant (if Tenant is an individual) or by an authorized officer or general partner of Tenant (if Tenant is a corporation or partnership, respectively). 37.16 TENANT'S AUTHORITY. If Tenant executes this Lease as a partnership or corporation, then Tenant and the persons and/or entities executing this Lease on behalf of Tenant represent and warrant that: (a) Tenant is a duly authorized and existing partnership or corporation, as the case may be, and is qualified to do business in the state in which the Building is located; (b) such persons and/or entities executing this Lease are duly authorized to execute and deliver this Lease on Tenant's behalf in accordance with the Tenant's partnership agreement (if Tenant is a partnership), or a duly adopted resolution of Tenant's board of directors and the Tenant's by-laws (if Tenant is a corporation); and (c) this Lease is binding upon Tenant in accordance with its terms. 37.17 LANDLORD'S LIEN WAIVER. If Tenant desires to purchase subject to a security interest, lease or obtain a loan secured by Tenant's personal property in the Premises and requests that Landlord execute a lien waiver in connection therewith waiving Landlord's lien rights to such personal property, Landlord agrees to execute such lien waiver on Landlord's standard form, provided that Tenant delivers such request in writing to Landlord together with a non-refundable processing fee in the amount of $300.00. Notwithstanding the foregoing, however, if Landlord incurs processing costs (including attorneys' fees) in connection with such request which exceed $300.00, then Tenant shall reimburse such excess costs to Landlord within three (3) business days following Tenant's receipt of invoice(s) therefor. Nothing in this Subparagraph 37.17 shall permit Tenant to encumber its leasehold interest in the Premises. 37.18 GUARANTY. This Lease is subject to and conditional upon Tenant's delivery to Landlord, concurrently with Tenant's execution and delivery of this Lease, of a Guaranty in the form of and upon the terms contained in Exhibit "I" attached hereto and incorporated herein by this reference, which shall be fully executed by the Guarantor(s) specified in Subparagraph 1.21. IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year first above written. "TENANT" California Commercial Bankshares, a California Corporation ------------------------------------------------ By: /s/ W. H. Jacoby --------------------------------------------- Its: President ------------------------------------------- By: --------------------------------------------- Its: ------------------------------------------- "LANDLORD" PACIFIC MUTUAL LIFE INSURANCE COMPANY, a California corporation By: --------------------------------------------- Its: ------------------------------------------- By: --------------------------------------------- Its: ------------------------------------------- 15 EXHIBIT "A" SITE PLAN [GRAPHIC] CITY CENTRE Fountain Valley California A-1 EXHIBIT "B" FLOOR PLAN [GRAPHIC] CITY CENTER Fountain Valley California Ground Floor Building 17330 B-1 EXHIBIT "C" RENTABLE SQUARE FEET AND USABLE SQUARE FEET 1. The term "Rentable Square Feet" as used in the Lease shall be deemed to include with respect to the Premises: (a) the total rentable area of the Premises determined in accordance with the Method for Measuring Floor Area in Office Buildings, ANSI Z65.1-1980 (the "BOMA Standard"), including (i) for single tenancy floors, all the area covered by the elevator lobbies, corridors, restrooms, elevator rooms, mechanical rooms, electrical rooms, telephone closets and janitorial closets on such floors, or (ii) for multiple tenancy floors, a pro-rata portion of all the area covered by the elevator lobbies, corridors, restrooms, elevator rooms, mechanical rooms, electrical rooms, telephone closets and janitorial closets on such floor; plus (b) a pro rata portion of (i) the lobby area on the ground floor of the Building and the conference room on the first floor of the Building and (ii) the area of the emergency equipment, fire pump equipment, electrical switching gear, elevator rooms, mechanical rooms, electrical rooms, janitorial closets, telephone equipment and mail delivery facilities serving the Building which are not located on any tenant floor. The term "Rentable Square Feet" with respect to the Building shall mean the total rentable area for all floors in the Building computed in accordance with the provisions of Subparagraph 1(a) above, including the entire lobby and other areas described in Subparagraph 1(b) above. The term "Rentable Square Feet" with respect to the Project shall mean the total rentable area for all floors in the Building and the other buildings in the Project, computed in accordance with the provisions of Subparagraph 1(a) above, including the entire lobby and other areas within such buildings as described in Subparagraph 1(b) above. 2. The term "Usable Square Feet" as used in Exhibit "D" with respect to the Premises shall be deemed to include the total usable area of the Premises as determined in accordance with the BOMA Standard. 3. For purposes of establishing the initial Tenant's Proportionate Share, Landlord's Contribution to Operating Expenses, Annual Basic Rent and Monthly Basic Rent as shown in Paragraph 1 of the Lease, the number of Rentable Square Feet of the Premises is deemed to be as set forth in Subparagraph 1.7 of the Lease, the number of Rentable Square Feet of the Building is deemed to be as set forth in Subparagraph 1.6 of the Lease, and the number of Rentable Square Feet of the Project is deemed to be as set forth in Subparagraph 1.22 of the Lease. For purposes of establishing the amount of the Allowance in Exhibit "D" (if any), the number of Usable Square Feet of the Premises is deemed to be 4,919 square feet. C-1 EXHIBIT "D" WORK LETTER AGREEMENT This Work Letter Agreement supplements the Office Lease (the "Lease"), dated and executed concurrently herewith, by and between Landlord and Tenant, covering certain premises described in the Lease (the "Premises"). All terms not defined herein shall have the same meaning as set forth in the Lease. 1. CONSTRUCTION OF BUILDING SHELL. 1.1 BUILDING SHELL. Landlord has constructed, through its contractor, a parking facility and building shell, including the following as part of the Building shell: (a) rough concrete floor; (b) finished ceilings on tenant space; (c) finished core area, including elevators and elevator lobbies, toilet rooms, electrical rooms, telephone rooms, janitorial closets, exit stairs and mechanical shaft; (d) primary heating, ventilating and air conditioning service to the edge of the building core (not including main loops and branch distribution, controls, and mixing boxes); (e) primary sprinkler service to the edge of the building core (not including main loops and branch distribution); (f) mail electrical panels on each floor (but not including distribution); and (g) life safety systems as required by code for a building shell. Landlord shall furnish and install within the Premises those items of general construction (including any distribution to the Premises of any of the foregoing services) shown on the plans and specifications finally approved by Landlord and Tenant pursuant to Paragraph 2 below (the "Leasehold Improvements") in compliance with all applicable codes and regulations. All Building shell work and Leasehold Improvements shall be constructed pursuant to this Work Letter Agreement and shall be performed only by Landlord's contractor. 1.2 CONSTRUCTION REPRESENTATIVES. Landlord hereby appoints the following person(s) as Landlord's representative ("Landlord's Representative") to act for Landlord in all matters covered by this Exhibit "D": Sandra Baker-PM Realty Advisors. Tenant hereby appoints the following person as Tenant's representative ("Tenant's Representative") to act for Tenant in all matters covered by this Exhibit "D" William Jacoby. All communications with respect to the matters covered by this Exhibit "D" shall be made to Landlord's Representative or Tenant's Representative, as the case may be. Either party may change its representative under this Exhibit "D" at any time by written notice to the other party. 2. CONSTRUCTION PLANS FOR PREMISES. All plans and drawings required by this Paragraph 2 shall be prepared in accordance with the schedule provided in Paragraph 7 below. 2.1 PREPARATION OF SPACE PLANS. Tenant shall select an architect, reasonably approved by Landlord, or shall select Landlord's architect, to prepare preliminary space plans for the Premises. The architect so selected by Tenant shall be referred to herein as the "Architect". The Architect, in consultation with Landlord's engineers, shall prepare detailed space plans sufficient to convey the architectural design of the Premises and layout of the Leasehold Improvements therein ("Space Plans"). The Space Plans shall be submitted to Landlord for Landlord's reasonable approval. If Landlord shall disapprove of any portion of the Space Plans, Landlord shall advise Tenant in writing of such disapproval and the reasons therefor. Tenant shall then submit to Landlord for Landlord's reasonable approval, a redesign of the Space Plans, incorporating those revisions required by Landlord. 2.2 PREPARATION OF FINAL PLANS. Based on the approved Space Plans, Tenant shall cause the Architect, in consultation with Landlord's engineers, to prepare complete architectural plans, drawings and specifications and complete engineering, mechanical, structural and electrical working drawings for all of the Leasehold Improvements for the Premises (collectively, the "Final Plans"), showing: (a) the subdivision (including partitions and walls), layout, lighting, finish and decoration work (including carpeting and other floor coverings) desired by Tenant for the Premises; (b) all internal and external communications and utility facilities which will require conduiting or other improvements from the Building shell and/or within common areas; and (c) all other specifications for the Leasehold Improvements. The Final Plans shall be approved in the same manner as provided in Paragraph 2.1 above for approval of Space Plans. 2.3 REQUIREMENTS OF TENANT'S FINAL PLANS. Tenant's Final Plan shall include locations and complete dimensions, and shall: (a) be compatible with the Building shell and with the design, construction and equipment of the Building; (b) be compatible with and at least equal quality as the standards set forth in Schedule 1 to this Exhibit "D" (the "Standards"); and (c) comply with all applicable laws and ordinances, and the rules and regulations of all governmental authorities having jurisdiction, and all applicable insurance regulations. 2.4 CHANGES TO SHELL OF BUILDING. If the Final Plans or any amendment thereof or supplement thereto shall require changes in the Building shell, the increased cost of the Building shell work caused by such changes shall be charged against the Allowance. 3. ALLOWANCE FOR LEASEHOLD IMPROVEMENTS. 3.1 ALLOWANCE. Tenant shall receive from Landlord an allowance (the "Allowance") of up to, but not exceeding, $33,204.00 (i.e., $6.00 per rentable square foot within the Premises, subject to adjustment as set forth in Exhibit "C"), which Allowance shall be used solely to contribute toward payment of the Work Cost (as defined below) of the Leasehold Improvements.* All items of Leasehold Improvements, whether or not the cost thereof is covered by the Allowance, shall become the property of Landlord upon expiration or earlier termination of the Lease and shall remain on the Premises at all times during the Term of this Lease, except as otherwise provided in Subparagraph 14.2 of the Lease. If the Work Cost exceeds the Allowance, Tenant shall pay to Landlord such excess within five (5) business days after invoice therefor (less any sums previously paid by Tenant for such excess pursuant to the Work Cost estimate, as described in Paragraph 3.2 below). If the Allowance exceeds the Work Cost, Tenant shall not be entitled to any payment, rent reduction or credit therefor. *Tenant may at Tenant's sole discretion allocate all or a portion of said "Allowance" to the cost of building-Top signage installation (See Rider No. 5). 3.2 WORK COST ESTIMATE AND STATEMENT. Prior to the commencement of any of the Leasehold Improvements shown on the Final Plans, Landlord shall submit to Tenant a written estimate of Work Cost of the Leasehold Improvements, which written estimate shall be based on the Final Plans. Tenant shall either approve the estimate or disapprove specific items and submit to Landlord revisions of Final Plans to reflect the deletion of and/or substitution for such disapproved items. Submission and approval of the Work Cost estimate shall proceed in accordance with the schedule provided in Paragraph 7 below. Upon Tenant's approval of said estimate, such approved estimate to be hereinafter known as the "Work Cost Statement", Landlord shall have the right to purchase materials and to commence the construction of the items included in said Work Cost Statement pursuant to Paragraph 4 hereof. In the event the total costs reflected in the Work Cost Statement exceed the Allowance, Tenant shall pay such excess, as additional rent, within five (5) business days after Tenant's approval of the estimate. Any differences between the estimated Work Cost in the Work Cost Statement and the actual Work Cost shall be determined by Landlord and appropriate adjustments and payments by Landlord or Tenant, as the case may be, shall be made within five (5) business days thereafter. 3.3 NO OBLIGATION OF LANDLORD. Until Tenant approves the estimate, Landlord shall be under no obligation to perform the installation of any of the Leasehold Improvements. 4. CONSTRUCTION OF LEASEHOLD IMPROVEMENTS. Following Tenant's approval of the estimate described in Subparagraph 3.2 above and upon Tenant's payment of the total amount by which such estimate exceeds the Allowance, if any, Landlord's contractor shall commence and diligently proceed with the construction of the Leasehold Improvements, subject to Tenant Delays (as described in Paragraph 9) and any other delays beyond the reasonable control of Landlord or its contractor (including, without limitation, any fire, earthquake, inclement weather or other acts of God, shortages in material or labor, D-1 strikes and delays in obtaining governmental permits and approvals). Promptly upon the commencement of the Leasehold Improvements work, Landlord shall furnish Tenant with a construction schedule setting forth the projected completion dates therefor and showing the deadlines for any actions required to be taken by Tenant during such construction, and Landlord may from time to time during construction of the Leasehold Improvements modify or amend such schedule. Landlord shall make a reasonable effort to meet such schedule, as the same may be modified or amended; provided, however, Landlord shall have no liability to Tenant for damages or losses, and Tenant shall have no right to terminate or cancel this Lease, as a result of any failure or delay in meeting such schedule or substantially completing the Leasehold Improvements. Any approved changes to the Final Plans shall initiate a new written estimate of Work Cost which shall be approved by Tenant pursuant to the provisions of Paragraph 3.2 above. 5. WORK COST. "Work Cost" means: (a) all design and engineering fees incurred in connection with the preparation of the Space Plans and Final Plans (including the cost of Landlord's consulting engineers and other consultants); (b) costs of permits, fees and taxes; (c) testing and inspecting costs; (d) the actual costs and charges for material and labor, contractor's profit and contractor's general overhead incurred by Landlord in having the Leasehold Improvements done; (e) all other costs expended or to be expended by Landlord in the construction of the Leasehold Improvements, including those costs incurred by Landlord for construction of elements of the Leasehold Improvements in the Premises, which construction was performed by Landlord prior to the execution of the Lease (i.e., during or after the construction of the Building shell) and which construction is for the benefit of tenants and is customarily performed by Landlord prior to the execution of leases for such space in the Building for reasons of economics (examples of such construction would include the extension of mechanical (including heating, ventilating and air conditioning systems) and electrical distribution systems outside of the core of the Building, well construction, column enclosures and painting outside of the core of the Building, ceiling hanger wires and window treatment); and (f) a construction management fee to Landlord in the amount of None percent (0%) of all other Work Costs specified in Subparagraphs 5(a) through 5(e) above. 6. FREIGHT ELEVATOR. Landlord shall, consistent with its obligation to other tenants then in occupancy in the Building, make the freight elevator (if any) reasonably available to Tenant in connection with initial decorating, furnishing and moving into the Premises. Tenant shall pay for any after-hours staffing of the freight elevator. 7. SCHEDULE. Preparation and approval of Space Plans, Final Plans and the Work Cost Statement shall proceed in accordance with the following responsibility and timing schedule:
Action Responsibility ------ -------------- (a) Delivery to Landlord of initial Tenant Space Plans (b) Delivery to Tenant of written Landlord notice approving or disapproving initial Space Plans (c) Delivery to Landlord, if necessary, Tenant of redesign of Space Plans (d) Delivery to Tenant of written Landlord notice of final approval of Space Plans (e) Delivery to Landlord of Final Plans Tenant (f) Delivery to Tenant of written Landlord notice approving or disapproving the Final Plans (g) Delivery to Landlord, if necessary, Tenant of redesign of Final Plans (h) Delivery to Tenant of written Landlord notice of final approval of the Final Plans (i) Delivery to Tenant of Work Landlord Cost estimate (j) Delivery to Landlord of written Tenant notice of final approval of Work Cost Statement and payment of costs in excess of Allowance
8. COMMENCEMENT DATE AND SUBSTANTIAL COMPLETION. 8.1 COMMENCEMENT DATE. The Term of the Lease shall commences on the date (the "Commencement Date") which is the earlier of: (a) the date Tenant commences operation of its business in all or any portion of the Premises; or (b) the date the Leasehold Improvements have been "substantially completed" (as defined below); provided, however, that if substantial completion of the Leasehold Improvements is delayed as a result of any Tenant Delays described in Paragraph 9 below, then the Commencement Date as would otherwise have been established pursuant to this Subparagraph 8.1(b) shall be accelerated by the number of days of such Tenant Delays. 8.2 SUBSTANTIAL COMPLETION; PUNCH-LIST. For purposes of Subparagraph 8.1(b) above, the Leasehold Improvements shall be deemed to be "substantially completed" when Landlord's contractor certifies in writing to Landlord and Tenant that Landlord has: (a) provided to Tenant reasonable access to the Premises; (b) substantially performed all of the Building shell work and Leasehold Improvements work required to be performed by Landlord under this Work Letter Agreement, other than decoration and minor "punch-list" type items and adjustments which do not materially interfere with Tenant's access to or use of the Premises; and (c) obtained a temporary certificate of occupancy or other required, equivalent approval from the local governmental authority permitting occupancy of the Premises. Within ten (10) days after receipt of such certificate from Landlord's contractor, Tenant shall conduct a walk-through inspection of the Premises with Landlord and provide to Landlord a written punch-list specifying those decoration and other punch-list items which require completion, which items Landlord shall thereafter diligently complete. D-2 9. TENANT DELAYS. For purposes of this Work Letter Agreement, "Tenant Delays" shall mean any delay in substantial completion of the Leasehold Improvements resulting from any or all of the following: (a) Tenant's failure to timely perform any of its obligations pursuant to this Work Letter Agreement, including any failure to complete on or before the due date therefor any action item which is Tenant's responsibility pursuant to Paragraph 7 or any schedule delivered by Landlord to Tenant pursuant to this Work Letter Agreement; (b) Tenant's changes to Space Plans or Final Plans after Landlord's approval thereof; (c) Tenant's request for materials, finishes, or installations other than the Standards set forth on Schedule "1"; (d) any delay of Tenant in making payment to Landlord for Tenant's share of Work Cost; or (e) any other act or failure to act by Tenant, Tenant's employees, agents, architects, independent contractors, consultants and/or any other person performing or required to perform services on behalf of Tenant. TENANT: California Commercial Bankshares -------------------------------------------------------------, a California Corporation ------------------------------------------------------------ By: W H Jacoby --------------------------------------------------------- Its: President ---------------------------------------------------- By: --------------------------------------------------------- Its: ---------------------------------------------------- LANDLORD: PACIFIC MUTUAL LIFE INSURANCE COMPANY, a California corporation By: --------------------------------------------------------- Its: ---------------------------------------------------- By: --------------------------------------------------------- Its: ---------------------------------------------------- D-3 SCHEDULE "1" TO EXHIBIT "D" BUILDING STANDARD IMPROVEMENTS CITY CENTRE FOUNTAIN VALLEY, CALIFORNIA "BUILDING STANDARDS" - ------------------------------------------------------------------------------- The following is a description of the building standard tenant finishes: PARTITIONS/WALL FINISH - 5/8 inch, one hour-rated drywall/paint CEILING - Armstrong, "Second Look", 2' X 4' ceiling tiles CEILING HEIGHT - Nine feet (9') LIGHTING - 2' X 4' fluorescent, reflectorized fixtures. Reduced from four (4) tubes to two (2) tubes to save energy costs. LIGHT SWITCHES - Hubble single pole. DOORS - Typically 3' X 8'10", solid core door with red oak skin and Watco oil finish. DOOR HARDWARE - Schlage passage set with brushed aluminum finish in common corridors. Hardware varies in tenant suites. ELECTRICAL SYSTEM - Fluorescent lighting requirements at 277 Volts and one watt per square foot for receptacles at 120 Volts mounted vertically, at 12" AFF to center outlet. ELEVATORS - Each building has two Montgomery hydraulic passenger elevators. FLOORING - CARPET: Design Waeve Tempest II, 30-ounce carpet over 5/16" Nova padding. BASE: Burke rubber base HVAC SYSTEM - Variable air volume with fan units on each floor. The central plan for making chilled water is located on the ground floor of the parking structure with two (2) cooling towers above. Three chillers service the entire project: two (2) "Carrier" centrifugal chillers, each of 400-ton capacity and one (1) of 250-ton capacity. The 250-ton chiller is capable of serving the entire project during a large percentage of the year; therefor, the three (3) chillers represent a triple back-up system. WINDOW COVERINGS - Bali mini-blinds in brushed aluminum is the building standard. WINDOW MULLION DISTANCE - Five Feet D-4 EXHIBIT "E" SAMPLE FORM OF NOTICE OF LEASE TERM DATES To:_________________________________ Date:_______________________________ Re: Office Lease dated ___________, 19__ between PACIFIC MUTUAL LIFE INSURANCE COMPANY, Landlord, and _________________ Tenant, concerning Suite ____________ ("Premises") located at _________________ Brookhurst Street, Fountain Valley, California. Gentlemen: In accordance with the above-referenced Lease, we wish to advise and/or confirm as follows: 1. That the Premises have been accepted by Tenant as being substantially complete in accordance with the Lease, and that there is no deficiency in construction. 2. That Tenant has accepted and is in possession of the Premises, and acknowledges that under the provisions of the Lease, the Term of the Lease is for _______ years, with __ options to renew for __ years each, and commenced upon the Commencement Date of ________________, 19__ and is currently scheduled to expire on _____________, subject to earlier termination as provided in the Lease. 3. That in accordance with the Lease, rental payment has commenced (or shall commence) on _______________________. 4. If the Commencement Date of the Lease is other than the first day of the month, the first billing will contain a pro rata adjustment. Each billing thereafter, with the exception of the final billing, shall be for the full amount of the monthly installment as provided for in the Lease. 5. Rent is due and payable in advance on the first day of each and every month during the Term of the Lease. Your rent checks should be made payable to ___________________________ at ______________________________. 6. The exact number of Rentable Square Feet within the Premises is _____ square feet. The exact number of Usable Square Feet within the Premises is _____ square feet. 7. Tenant's Proportionate Share as adjusted based upon the exact number of Rentable Square Feet within the Premises, consists of two (2) separate percenages: (a) _____%, which is Tenant's Proportionate Share of the Building; and (b) _____%, which is Tenant's Proportionate Share of the Project. ACCEPTED AND AGREED TENANT: LANDLORD: ____________________________________ PACIFIC MUTUAL LIFE INSURANCE COMPANY, a California corporation By: ________________________________ By: ___________________________________ Print Name: ________________________ Print Name: ___________________________ Its: ____________________________ Its: _______________________________ By: ________________________________ By: ___________________________________ Print Name: ________________________ Print Name: ___________________________ Its: ____________________________ Its: _______________________________ SAMPLE ONLY (NOT FOR EXECUTION) E-1 EXHIBIT "F" RULES AND REGULATIONS 1. No sign, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved by Landlord, using materials and in a style and format approved by Landlord. 2. Tenant shall not place anything or allow anything to be placed near the glass of any window, door, partition or wall which may appear unsightly from outside the Premises. No awnings or other projection shall be attached to the outside walls of the Building without the prior written consent of Landlord. No curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises, other than Building standard materials, without the prior written consent of Landlord. 3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances, elevators, escalators or stairways of the Building. The halls, passages, exits, entrances, elevators, escalators and stairways are not for the general public, and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interests of the Building and its tenants; provided, that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. Tenant and no employee, invitee, agent, licensee or contractor of Tenant shall go upon or be entitled to use any portion of the roof of the Building. 4. The directory of the Building and the directory located in the courtyard area of the Project will be provided exclusively for the display of the name and location of tenants only, and Landlord reserves the right to exclude any other names therefrom. Tenant shall be entitled to one (1) line on the Building lobby directory and one (1) line on the courtyard directory to identify Tenant. 5. All cleaning and janitorial services for the Building and the Premises shall be provided exclusively through Landlord or Landlord's janitorial contractors in accordance with the provisions of Subparagraph 18.1(d) of the Lease. No person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning the same. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises. Except as expressly provided in Subparagraph 19.3 of the Lease, Landlord shall not in any way be responsible to Tenant for loss of property on the Premises, however occurring, or for any damage to Tenant's property by the janitors or any other employee or any other person. 6. Landlord will furnish Tenant, free of charge, with two keys to each door lock in the Premises. Landlord may impose a reasonable charge for any additional keys. Tenant may not make or have made additional keys, and Tenant shall not alter any lock or install a new additional lock or bolt on any door or window of its Premises. Tenant, upon termination of its tenancy, shall deliver to Landlord the keys of all doors which have been furnished to, or otherwise procured by Tenant, and, in the event of loss of any keys, shall pay Landlord the cost of replacing the same or of changing the lock or locks opened by such lost key of Landlord shall deem it necessary to make such change. 7. Electric wires, telephones, telegraphs, burglar alarms or other similar apparatus shall not be installed in the Premises except with the approval and under the direction of Landlord. The location of telephones, call boxes and any other equipment affixed to the Premises shall be subject to the approval of Landlord. Any installation of telephones, telegraphs, electric wires or other electric apparatus made without permission shall be removed by Tenant at Tenant's own expense. No machines other than standard office machines, such as typewriters and calculators, photocopiers, personal computers and word processors, and vending machines permitted by the Lease, shall be used in the Premises without the approval of Landlord. 8. No furniture, freight, or equipment of any kind shall be brought into the Building without prior notice to Landlord and all moving of the same into or out of the Building shall be done at such time and in such manner as Landlord shall designate. No furniture, equipment or merchandise shall be received in the Building or carried up or down in the elevators, except between such hours and in such elevators as shall be designated by Landlord. 9. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects, if such objects are considered necessary by Tenant, as determined by Landlord, shall stand on such platforms as determined by Landlord to be necessary to properly distribute the weight. Business machines and mechanical equipment which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. Except as expressly provided in Subparagraph 19.3 of the Lease, Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant. 10. Tenant shall not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Project by reason of noise, odors or vibrations, nor shall Tenant bring into or keep in or about the Premises any birds or animals. 11. Tenant shall not use any method of heating or air-conditioning other than that supplied by Landlord. 12. Tenant shall not waste electricity, water or air-conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air-conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice, and shall not adjust controls other than room thermostats installed for Tenant's use. Tenant shall keep corridor doors closed and shall close window coverings at the end of each business day. 13. Landlord reserves the right from time to time, in Landlord's sole and absolute discretion, exercisable without prior notice and without liability to Tenant, to: (a) name or change the name of the Building, Site or Project; (b) change the address of the Building or Project, and/or (c) install, replace or change any signs in, on or about the Common Areas, the Building or Site (except for Tenant's signs, if any, which are expressly permitted by the Lease). 14. Landlord reserves the right to exclude from the Building between the hours of 6:00 p.m. and 7:00 a.m., or such other hours as may be established from time to time by Landlord, and on legal holidays, any person unless that person is known to the person or employee in charge of the Building and has a pass or is properly identified. Landlord shall not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Tenant shall be responsible for all persons for whom it requests passes and shall be liable to Landlord for all acts of such persons. Landlord reserves the right to prevent access to the Building in case of invasion, mob riot, public excitement or other commotion by closing the doors or by other appropriate action. F-1 15. Tenant shall close and lock all doors of its Premises and entirely shut off all water faucets or other water apparatus, and, except with regard to Tenant's computers and other equipment which reasonably require electricity on a 24-hour basis, all electricity, gas or air outlets before Tenant and its employees leave the Premises. Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule. 16. Tenant shall not obtain for use on the Premises, food, beverage, towel or other similar services or accept barbering or bootblacking services upon the Premises, except at such hours and under such regulations as may be reasonably fixed by Landlord. 17. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substances of any kind whatsoever shall be thrown therein. 18. Tenant shall not sell, or permit the sale at retail, of newspapers, magazines, periodicals, theater tickets, or any other goods or merchandise to the general public in or on the Premises. Tenant shall not make any room-to-room solicitation of business from other tenants in the Project. Tenant shall not use the Premises for any business or activity other than that specifically provided for in the Lease. 19. Tenant shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 20. Except as expressly permitted in the Lease, Tenant shall not mark, drive nails, screw or drill into the partitions, window mullions, woodwork or plaster, or in any way deface the Premises or any part thereof, except to install normal wall hangings. Tenant shall repair any damage resulting from noncompliance under this rule. 21. Tenant shall not install, maintain or operate upon the Premises any vending machines without the prior written consent of Landlord, which shall not be unreasonably withheld. 22. Canvassing, soliciting and distribution of handbills or any other written material, and peddling in and around the Project or the Building are expressly prohibited, and each tenant shall cooperate to prevent same. 23. Landlord reserves the right to exclude or expel from the Project and/or the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Project or Building. 24. Tenant shall store all its trash and garbage within its Premises. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions reasonably issued from time to time by Landlord. 25. The Premises shall not be used for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind. No cooking shall be done or permitted by Tenant on the Premises, except that use by Tenant of Underwriters' Laboratory-approved equipment for brewing coffee, tea, hot chocolate and similar beverages shall be permitted and the use of a microwave shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 26. Tenant shall not use in any space, or in the public halls of the Building, any hand trucks except those equipped with rubber tires and side guards, or such other material-handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Building. 27. Tenant shall not use the name of the Project or Building in connection with, or in promoting or advertising, the business of Tenant, except for Tenant's address. 28. Tenant agrees that it shall comply with all fire and security regulations that may be issued from time to time by Landlord, and Tenant also shall provide Landlord with the name of a designated responsible employee to represent Tenant in all matters pertaining to such fire or security regulations. Tenant shall cooperate fully with Landlord in all matters concerning fire and other emergency procedures. 29. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage. Such responsibility shall include keeping doors locked and other means of entry to the Premises closed. 30. The requirements of Tenant will be attended to only upon the appropriate application to the office of the Building by an authorized individual. Employee of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any locked office without specific instructions from Landlord. 31. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of Tenant or any other such tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any and all of the tenants in the Building. 32. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of premises in the Project or Building. 33. Landlord reserves the right to make such other and reasonable Rules and Regulations as, in its judgment, may from time to time be needed for safety, security, care and cleanliness of the Project and/or Building and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional rules and regulations which are adopted. 34. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees or guests. 35. Tenant shall not lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except by a paste, or other material which may easily be removed with water, the use of cement or other similar adhesive materials being expressly prohibited. The method of affixing any such linoleum, tile, carpet or other similar floor covering shall be subject to the approval of Landlord. the expense of repairing any damage resulting from a violation of this rule shall be borne by Tenant. F-2 EXHIBIT "G" SAMPLE FORM OF TENANT ESTOPPEL CERTIFICATE The undersigned ("Tenant") hereby certifies to __________ ("Landlord"), and __________________________________, as follows: 1. Attached hereto is a true, correct and complete copy of that certain Office Lease dated ____________, 19____ between Landlord and Tenant (the "Lease"), which demises Premises which are located at ___________________. The Lease is now in full force and effect and has not been amended, modified or supplemented, except as set forth in Paragraph 6 below. 2. The Term of the Lease commenced on ________________, 19____. 3. The Term of the Lease is currently scheduled to expire on _______________, 19____. 4. Tenant has no option to renew or extend the Term of the Lease except: __________________________. 5. Tenant has no preferential right to purchase the Premises or any portion of the Building or Site upon which the Premises are located, and Tenant has no rights or options to expand into other space in the Building except: ___________________________. 6. The Lease has: (Initial One) ( ) not been amended, modified, supplemented, extended, renewed or assigned. ( ) been amended, modified, supplemented, extended, renewed or assigned by the following described agreements, copies of which are attached hereto: ______________________. 7. Tenant has accepted and is now in possession of the Premises and has not sublet, assigned or encumbered the Lease, the Premises or any portion thereof except as follows: ________________________. 8. The current Monthly Basic Rent is $______________; and currently monthly parking charges are $__________________. 9. Tenant's Proportionate Share consists of two (2) separate percentages: (a) ______%, which is Tenant's Proportionate Share of the Building; and (b) ______%, which is Tenant's Proportionate Share of the Project. Tenant's Proportionate Share of Operating Expenses currently payable by Tenant is $______________________ per month, which amount is Landlord's current estimate of Tenant's Percentage of Operating Expenses in excess of: (Completed One) (1) $___________ per year for Building Operating Expenses, and $___________ per year for Project Operating Expenses (expense stop) or (2) ____________ the Operating Expenses incurred in the Base Year. 10. The amount of security deposit (if any) is $______________. No other security deposits have been made. 11. All rental payments by Tenant have been paid in full as of the date hereof. No rent under the Lease has been paid for more than thirty (30) days in advance of its due date. 12. All work required to be performed by Landlord under the Lease has been completed and has been accepted by Tenant, and all tenant improvement allowances have been paid in full. 13. To the best of Tenant's knowledge, as of the date hereof, there are no defaults on the part of Landlord or Tenant under the Lease. 14. Tenant has no defense as to its obligations under the Lease and claims no set-off or counterclaim against Landlord. 15. Tenant has no right to any concession (rental or otherwise) or similar compensation in connection with renting the space it occupies, except as expressly provided in the Lease. 16. All insurance required of Tenant under the Lease has been provided by Tenant and all premiums have been paid. 17. There has not been filed by or against Tenant a petition in bankruptcy, voluntary or otherwise, any assignment for the benefit of creditors, any petition seeking reorganization or arrangement under the bankruptcy laws of the United States or any state thereof, or any other action brought pursuant to such bankruptcy laws with respect to Tenant. 18. Tenant pays rent due Landlord under the Lease to Landlord and does not have any knowledge of any other person who has any right to such rents by collateral assignment or otherwise. The foregoing certification is made with the knowledge that ____________ ______________________ is about to [fund a loan to Landlord or Purchase the Building from Landlord], and that _____________ is relying upon the representation herein made in [funding such loan or purchasing the Building]. Dated: ____________________, 19_____. "TENANT" ___________________________________ By: _______________________________ Print Name: _______________________ Its: _______________________ G-1 EXHIBIT "H" PARKING RULES AND REGULATIONS In addition to the parking provisions contained in the Lease to which this Exhibit "H" is attached, the following rules and regulations shall apply with respect to the use of the Building's parking facilities. 1. Every parker is required to park and lock his/her own vehicle. Subject to Landlord's indemnity in Subparagraph 19.3 of the Lease, all responsibility for damage to or loss of vehicles is assumed by the parker and Landlord shall not be responsible for any such damage or loss by water, fire, defective brakes, the act or omissions of others, theft, or for any other cause. 2. Tenant shall not park or permit its employees to park in any parking areas designated by Landlord as areas for parking by visitors to the Project. Tenant shall not leave vehicles in the parking areas overnight nor park any vehicles in the parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles or four wheeled trucks. 3. Parking stickers or any other device or form of identification supplied by Landlord as a condition of use of the parking facilities shall remain the property of Landlord. Such parking identification device must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable and any device in the possession of an unauthorized holder will be void. 4. No overnight or extended term storage of vehicles shall be permitted. 5. Vehicles must be parked entirely within painted stall lines of a single parking stall. 6. All directional signs and arrows must be observed. 7. The speed limit within all parking areas shall be five (5) miles per hour. 8. Parking is prohibited: (a) in areas not striped for parking; (b) in aisles; (c) where "no parking" signs are posted; (d) on ramps; (e) in cross-hatched areas; and (f) in reserved spaces and in such other areas as may be designated by Landlord or Landlord's parking operator. 9. Loss or theft of parking identification devices must be reported to the Management Office immediately, and a lost or stolen report must be filed by the Tenant or user of such parking identification device at the time. Landlord has the right to exclude any vehicle from the parking facilities that does not have an identification device. 10. Any parking identification devices reported lost or stolen found on any unauthorized car will be confiscated and the illegal holder will be subject to prosecution. 11. Washing, waxing, cleaning or servicing of any vehicle in any area not specifically reserved for such purpose is prohibited. 12. The parking operators, managers or attendants are not authorized to make or allow any exceptions to these rules and regulations. 13. Tenant's continued right to park in the parking facilities is conditioned upon Tenant abiding by these rules and regulations and those contained in this Lease. Further, if the Lease terminates for any reason whatsoever, Tenant's right to park in the parking facilities shall terminate concurrently therewith. 14. Tenant agrees to sign a parking agreement with Landlord or Landlord's parking operator within five (5) days of request, which agreement shall provide the manner of payment of monthly parking fees and otherwise be consistent with the Lease and these rules and regulations. 15. Landlord reserves the right to refuse the sale or use of monthly stickers or other parking identification devices to any tenant or person who willfully refuses to comply with these rules and regulations and all city, state or federal ordinances, laws or agreements. 16. Landlord reserves the right to establish and change parking fees, except Tenant's parking privileges are free of charge during the initial term of this Lease per Subparagraph 34.2 of the Lease, and to modify and/or adopt such other reasonable and non-discriminatory rules and regulations for the parking facilities as it deems necessary for the operation of the parking facilities. Landlord may refuse to permit any person who violates these rules to park in the parking facilities, and any violation of the rules shall subject the vehicle to removal, at such vehicle owner's expense. H-1 FIXED RENT INCREASE RIDER RIDER NO. 1 TO OFFICE LEASE This Rider No. 1 is made and entered into by and between PACIFIC MUTUAL LIFE INSURANCE COMPANY, a California corporation ("Landlord"), and California Commercial Bankshares, a California Corporation ("Tenant"), as of the day and year of the Lease between Landlord and Tenant to which this Rider is attached. Landlord and Tenant hereby agree that, notwithstanding anything contained in the Lease to the contrary, the provisions set forth below shall be deemed to be part of the Lease and shall supersede any inconsistent provisions of the Lease. All references in the Lease and in this Rider to the "Lease" shall be construed to mean the Lease (and all exhibits attached thereto), as amended and supplemented by this Rider. All capitalized terms not defined in this Rider shall have the same meaning as set forth in the Lease. Subject to any adjustment of the Rentable Square Feet of the Premises pursuant to Exhibit "C", the Annual Basic Rent and Monthly Basic Rent set forth in Paragraph 1 of the Lease shall be increased in accordance with the following schedule:
Months During Term in Which Increase Shall be Effective Annual Base Rent Monthly Basic Rent ------------------------------------------------------- ---------------- ------------------ 13 through months 24 $ 86,330.40 $ 7,194.20 ------ ------ --------------- ---------------- (i.e., $ 15.60 Per Rentable (i.e., $ 1.30 Per ------- ------ Square Foot within the Premises per Rentable Square Foot within the year) Premises per month) 25 through months 36 $ 89,650.80 $ 7,470.90 ------ ------ --------------- ---------------- (i.e., $ 16.20 Per Rentable (i.e., $ 1.35 Per ------- ------ Square Foot within the Premises per Rentable Square Foot within the year) Premises per month) 37 through months 48 $ 92,971.20 $ 7,747.60 ------ ------ --------------- ---------------- (i.e., $ 16.80 Per Rentable (i.e., $ 1.40 Per ------- ------ Square Foot within the Premises per Rentable Square Foot within the year) Premises per month) 49 through months 60 $ 96,291.60 $ 8,024.30 ------ ------ --------------- ---------------- (i.e., $ 17.40 Per Rentable (i.e., $ 1.45 Per ------- ------ Square Food within the Premises per Rentable Square Foot within the year) Premises per month) 61 through months 96 $ 98,947.92 $ 8,245.66 ------ ------ --------------- ---------------- (i.e., $ 17.88 Per Rentable (i.e., $ 1.49 Per ------- ------ Square Foot within the Premises Rentable Square Foot within the per year) Premises per month) 97 through months 120 $ 102,932.40 $ 8,577.70 ------ ------ --------------- ---------------- (i.e., $ 18.60 Per Rentable (i.e., $ 1.55 Per ------- ------ Square Foot within the Premises Rentable Square Foot within the per year) Premises per month)
1 RENTAL ABATEMENT RIDER RIDER NO. 2 TO OFFICE LEASE This Rider No. 2 is made and entered into by and between PACIFIC MUTUAL LIFE INSURANCE COMPANY, a California corporation ("Landlord") and California Commercial Bankshares, a California Corporation ("Tenant"), as of the day and year of the Lease between Landlord and Tenant to which this Rider is attached. Landlord and Tenant hereby agree that, notwithstanding anything contained in the Lease to the contrary, the provisions set forth below shall be deemed to be part of the Lease and shall supersede any inconsistent provisions of the Lease. All references in the Lease and in this Rider to the "Lease" shall be construed to mean the Lease (and all exhibits attached thereto), as amended and supplemented by this Rider. All capitalized terms not defined in this Rider shall have the same meaning as set forth in the Lease. 1. Provided Tenant is not in default under any provisions of the Lease, Landlord hereby agrees to abate Tenant's obligation to pay Monthly Basic Rent for the period commencing with the second (2nd) month of the initial Term of the Lease and continuing through and including the sixth (6th) month of the initial Term of the Lease. During such abatement period, Tenant shall still be responsible for all of Tenant's other monetary obligations under the Lease, including, without limitation, all Excess Expenses and any expenses relative to Tenant's use and occupancy of the Premises (including "after hours" HVAC and excess electrical and water consumption costs pursuant to Paragraph 18 of the Lease). 2. In the event of a default by Tenant under the terms of this Lease which results in early termination pursuant to the provisions of Subparagraph 25.2 of the Lease, then as a part of the recovery permitted by Subparagraph 25.2(a) of this Lease, Landlord shall be entitled to recover the entire amount of Monthly Basic Rent which was abated under the provisions of this Rider. Any such amount which Landlord is entitled to recover hereinabove shall become immediately due and payable as unpaid rent which had been earned at the date of termination. EXTENSION OPTION RIDER RIDER NO. 3 TO OFFICE LEASE This Rider No. 3 is made and entered into by and between PACIFIC MUTUAL LIFE INSURANCE COMPANY, a California corporation ("Landlord") and California Commercial Bankshares, a California Corporation ("Tenant"), as of the day and year of the Lease between Landlord and Tenant to which this Rider is attached. Landlord and Tenant hereby agree that, notwithstanding anything contained in the Lease to the contrary, the provisions set forth below shall be deemed to be part of the Lease and shall supersede any inconsistent provisions of the Lease. All references in the Lease and in this Rider to the "Lease" shall be construed to mean the Lease (and all exhibits attached thereto), as amended and supplemented by this Rider. All capitalized terms not defined in this Rider shall have the same meaning as set forth in the Lease. 1. Landlord hereby grants to Tenant Two (2) consecutive options (collectively, "Extension Options" and individually, "Extension Option") to extend the Term of the Lease for additional periods of Five (5) years each (collectively, the "Option Terms" and individually, the "Option Term"), on the same terms, covenants and conditions as provided for in the Lease during the initial Ten (10) year Term, except for the Annual Basic Rent, which shall be the "fair market rental rate" as defined and determined in accordance with the provisions of Paragraph 3 below. 2. Each Extension Option must be exercised, if at all, by written notice ("Extension Notice") delivered by Tenant to Landlord no later than the date which is Six (6) months and no more than nine (9) months prior to the expiration of the then current term of the Lease. Each Extension Option shall, at Landlord's sole option, not be deemed to be properly exercised if, at the time such Extension Option is exercised or on the scheduled commencement date for the Option Term, Tenant has (a) committed an uncured event of default whose cure period has expired pursuant to Paragraph 25 of the Lease, (b) assigned all or any portion of the Lease or its interest therein, or (c) sublet all or any portion of the Premises. Provided Tenant has properly and timely exercised an Extension Option, the then current term of the Lease shall be extended by the Option term, and all terms, covenants and conditions of the Lease shall remain unmodified and in full force and effect, except that the Annual Basic Rent shall be as set forth above. 3. The Annual Basic Rent for the applicable Option Term shall be 100 percent (100%) of the fair market rental rate in accordance with the Fair Market Rental Rider attached to the Lease as Rider No. 4. 4. Tenant's Extension Option is personal to the original Tenant executing this Lease and may not be exercised or assigned, voluntarily or involuntarily, by or to any person or entity other than the original Tenant. FAIR MARKET RENTAL RATE RIDER RIDER NO. 4 TO OFFICE LEASE This Rider No. 4 is made and entered into by and between PACIFIC MUTUAL LIFE INSURANCE COMPANY, a California corporation ("Landlord"), and California Commercial Bankshares, a California Corporation ("Tenant"), as of the day and year of the Lease between Landlord and Tenant to which this Rider is attached. Landlord and Tenant hereby agree that, notwithstanding anything contained in the Lease to the contrary, the provisions set forth below shall be deemed to be part of the Lease and shall supersede any inconsistent provisions of the Lease. All references in the Lease and in this Rider to the "Lease" shall be construed to mean the Lease (and all exhibits attached thereto), as amended and supplemented by this Rider. All capitalized terms not defined in this Rider shall have the same meaning as set forth in the Lease. 1. The term "fair market rental rate" as used in the Lease and any Rider attached thereto shall mean the annual amount per square foot, projected during the relevant period, that a willing, comparable, non-equity tenant (excluding sublease and assignment transactions) would pay, and a willing, comparable Landlord of a comparable office building in age, size and quality would accept, at arm's length (including what Landlord is accepting in current transactions for the Project), for space of comparable size, quality, and floor height as the Premises, taking into account the age, quality and layout of the existing improvements in the Premises, and taking into account items that professional real estate appraisers customarily consider, including, but not limited to, rental rates, office space availability, tenant size, tenant improvement allowances, free rent and any other lease concessions, if any, then being charged or granted by Landlord or the lessors of such similar office buildings. 2. In the event where a determination of fair market rental rate is required under the Lease, Landlord shall provide written notice of Landlord's determination of the fair market rental rate within fifteen (15) days after receipt of Tenant's notice. Tenant shall have ten (10) days ("Tenant's Review Period") after receipt of Landlord's notice of the fair market rental rate within which to accept such fair market rental rate or to reasonably object thereto in writing. Failure of Tenant to so object to the fair market rental rate submitted by Landlord in writing within Tenant's Review Period shall conclusively be deemed Tenant's approval and acceptance thereof. In the event Tenant reasonably objects to the fair market rental rate submitted by Landlord within Tenant's Review Period, Landlord and Tenant shall attempt in good faith to agree upon such fair market rental rate using their best good faith efforts. If Landlord and Tenant fail to reach agreement on such fair market rental rate within fifteen (15) days following Tenant's Review Period (the "Outside Agreement Date"), then each party's determination shall be submitted to appraisal in accordance with the provisions of Paragraph 3 below. 3. (a) Landlord and Tenant shall each appoint one (1) independent appraiser who shall by profession be an M.A.I. certified real estate appraiser who shall have been active over the five (5) year period ending on the date of such appointment in the leasing of commercial (including suburban office) properties in the Orange County area. The determination of the appraisers shall be limited solely to the issue of whether Landlord or Tenant's submitted fair market rental rate for the Premises, is the closest to the actual fair market rental rate for Premises, as determined by the appraisers, taking into account the requirements specified in Paragraph 1 above. Each such appraiser shall be appointed within fifteen (15) days after the Outside Agreement Date. (b) The two (2) appraisers shall within fifteen (15) days of the date of appointment of the last appointed appraiser agree upon and appoint a third appraiser who shall be qualified under the same criteria set forth hereinabove for qualification of the initial two (2) appraisers. (c) The three (3) appraisers shall within thirty (30) days of the appointment of the third appraiser reach a decision as to whether the parties shall use Landlord's or Tenant's submitted fair market rental rate, and shall notify Landlord and Tenant thereof. (d) The decision of the majority of the three (3) appraisers shall be binding upon Landlord and Tenant. If either Landlord or Tenant fails to appoint an appraiser within the time period specified in Subparagraph 3(a) hereinabove, the appraiser appointed by one of them shall reach a decision based upon the same procedures as set forth above (i.e., by selecting either Landlord's or Tenant's submitted fair market rental rate), and shall notify Landlord and Tenant thereof, and such appraiser's decision shall be binding upon Landlord and Tenant. (e) If the two (2) appraisers fail to agree upon and appoint a third appraiser, both appraisers shall be dismissed and the matter to be decided shall be forthwith submitted to arbitration under the provisions of the American Arbitration Association based upon the same procedures as set forth above (i.e., by selecting either Landlord's or Tenant's submitted fair market rental rate). (f) The cost of appraisal (and, if necessary, arbitration) shall be paid by Landlord and Tenant equally. TENANT'S SIGNAGE RIGHTS RIDER NO. 5 TO OFFICE LEASE This Rider No. 5 is made and entered into by and between PACIFIC MUTUAL LIFE INSURANCE COMPANY, a California corporation ("Landlord"), and California Commercial Bankshares, a California Corporation ("Tenant"), as of day and year of the Lease between Landlord and Tenant to which this Rider is attached. Landlord and Tenant hereby agree that, notwithstanding anything contained in the Lease to the contrary, the provisions set forth below shall be deemed to be part of the Lease and shall supersede any inconsistent provisions of the Lease. All references in the Lease and in this Rider to the "Lease" shall be construed to mean the Lease (and all exhibits attached thereto), as amended and supplemented by this Rider. All capitalized terms not defined in this Rider shall have the same meaning as set forth in the Lease. 1. BUILDING IDENTITY SIGN. Landlord hereby agrees that Tenant, at Tenant's sole cost and expense, shall have the right during the Term to install one (1) exterior top identity sign on the Building ("Building Identity Sign") above the third floor of the Building on the precise panel and within five (5) feet of the northwest corner on the west side of the Building with the exterior facing Brookhurst Street as depicted on Rider No. 5-1 attached hereto and incorporated herein by this reference. Tenant shall be entitled to place on the Building Identity Sign "National Bank of Southern California" and its accompanying logo. No other markings or identification shall be permitted or placed on such sign except for any replacement of such name and logo thereon with the name and/or logo identifying a Transferee (signage rights shall be for another banking institution only) to which this entire Lease and such signage rights are assigned in accordance with Subparagraph 16.6 of the Lease; provided, however, any such replacement shall be: (i) made at Tenant's sole cost and expense; (ii) subject to Landlord's prior written approval as to lettering and graphics, and all other specifications; (iii) subordinate to and shall not violate any signage restrictions or exclusive in any then existing leases of tenants in the Project; and (iv) consistent and compatible with (A) the restrictions contained in this Rider No. 5, (B) all governmental regulations and requirements, and (C) Landlord's design, signage and graphics program. All letters on such signs shall be individual letters and may be illuminated from the back to the extent provided in the specifications described in Paragraph 2 below and as long as such illumination is consistent and compatible with Landlord's design, signage and graphics program or is otherwise approved by Landlord, which approval shall not be unreasonably withheld. 2. SPECIFICATIONS. The specifications for the sign described in Paragraph 1 above (including the graphics, materials, color, design, lettering, lighting, height, size, quality and exact location thereof) shall be subject to any applicable governmental agencies and authorities and shall be subject to Landlord's prior written approval which approval shall not be unreasonably withheld, and shall be consistent and compatible with Landlord's design, signage and graphics program. The size of the sign shall be no more than 30 inches in height. 3. INSTALLATION AND MAINTENANCE. The sign described hereinabove shall be installed and maintained, at Tenant's sole cost and expense, pursuant to an installation and maintenance program approved and supervised by Landlord. Tenant shall be solely responsible for any additional costs of utilities for illumination of the sign which shall be separately metered. 4. REMOVAL. At the expiration or sooner termination of this Lease, Tenant shall, at Tenant's sole cost and expense, but subject to Landlord's supervision, cause (a) the Building Identity Sign, described above to be removed and (b) the Building to be restored to the condition existing prior to the placement of such sign. If Tenant fails to remove such sign and restore the Building as provided in this Paragraph 4 within thirty (30) days, then Landlord may perform such work, and all costs and expenses incurred by Landlord in so performing shall be reimbursed by Tenant to Landlord within ten (10) days after Tenant's receipt of invoice therefor. 5. RIGHTS PERSONAL TO TENANT. The signage rights hereinabove provided are personal to the original Tenant executing this Lease and may not be assigned or transferred to, or utilized by, any other person or entity, except that Tenant shall be permitted to assign such rights to a Transferee to which this entire Lease is assigned in accordance with the provisions of Subparagraph 16.6 of the Lese provided that (a) any replacement in the name, logo or lettering of Tenant's sign to identify such Transferee shall (1) be subject to the provisions of clauses (i), (ii), (iii) and (iv) of Paragraph 1 above; and (b) such replacement and the nature of the tenancy of such Transferee do not conflict with any express exclusivity or signage provision contained within any then existing leases of tenants in the Project. RIDER NO. 5-1 SIGNAGE LOCATION [MAP] 5-1 EX-10.(T) 3 EXHIBIT 10(T) CALIFORNIA COMMERCIAL BANKSHARES 1995 STOCK AWARD PLAN TABLE OF CONTENTS
Page I. THE PLAN............................................................ 1 1.1 PURPOSE........................................................ 1 1.2 ADMINISTRATION................................................. 1 1.3 PARTICIPATION.................................................. 2 1.4 STOCK SUBJECT TO THE PLAN...................................... 2 1.5 GRANT OF AWARDS................................................ 2 1.6 EXERCISE OF AWARDS............................................. 3 II. OPTIONS............................................................. 3 2.1 GRANTS......................................................... 3 2.2 OPTION PRICE................................................... 3 2.3 OPTION PERIOD.................................................. 4 2.4 EXERCISE OF OPTIONS............................................ 4 2.5 LIMITATIONS ON GRANT OF INCENTIVE STOCK OPTIONS........................................................ 5 2.6 NON-EMPLOYEE DIRECTOR AWARDS................................... 5 III. STOCK APPRECIATION RIGHTS........................................... 7 3.1 GRANTS......................................................... 7 3.2 EXERCISE OF STOCK APPRECIATION RIGHTS ......................... 7 3.3 PAYMENT........................................................ 8 IV. RESTRICTED STOCK AWARDS............................................. 9 4.1 GRANTS......................................................... 9 4.2 RESTRICTIONS................................................... 9 V. PERFORMANCE SHARE AWARDS............................................ 10 5.1 GRANTS......................................................... 10 VI. OTHER PROVISIONS.................................................... 10 6.1 RIGHTS OF ELIGIBLE EMPLOYEES, PARTICIPANTS AND BENEFICIARIES.............................................. 10 6.2 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION .................... 11 6.3 TERMINATION OF EMPLOYMENT...................................... 12 6.4 GOVERNMENT REGULATIONS......................................... 14 6.5 TAX WITHHOLDING................................................ 14 6.6 AMENDMENT, TERMINATION AND SUSPENSION.......................... 15 6.7 PRIVILEGES OF STOCK OWNERSHIP; NONDISTRIBUTIVE INTENT......................................... 16 6.8 EFFECTIVE DATE OF THE PLAN..................................... 16 6.9 TERM OF THE PLAN............................................... 16 6.10 GOVERNING LAW.................................................. 17 6.11 TRANSFER AND OTHER RESTRICTIONS UNDER RULE 16b-3..................................................... 17 6.12 FINANCIAL STATEMENTS........................................... 17 VII. DEFINITIONS......................................................... 18 7.1 DEFINITIONS.................................................... 18
i CALIFORNIA COMMERCIAL BANKSHARES 1995 STOCK AWARD PLAN I. THE PLAN. 1.1 PURPOSE. The purpose of this Plan is to promote the success of the Company and its Subsidiaries by providing an additional means to attract, motivate and retain key personnel of the Company and its Subsidiaries through the grant of Options and other Awards(1) that provide added long term incentives for high levels of performance and for significant efforts to improve the financial performance of the Company and its subsidiaries. 1.2 ADMINISTRATION. (a) This Plan shall be administered by the Committee. Action of the Committee with respect to the administration of this Plan shall be taken pursuant to a majority vote or the unanimous written consent of its members. In the event action by the Committee is taken by written consent, the action shall be deemed to have been taken at the time specified in the consent or, if none is specified, at the time of the last signature. The Committee may delegate administrative functions to individuals who are officers or employees of the Company. (b) Subject to the express provisions of this Plan, the Committee shall have the authority to construe and interpret this Plan and any agreements defining the rights and obligations of the Company and Participants under this Plan, to further define the terms used in this Plan, to prescribe, amend and rescind rules and regulations relating to the administration of this Plan, to determine the duration and purposes of leaves of absence which may be granted to Participants without constituting a termination of their employment for purposes of this Plan and to make all other determinations necessary or advisable for the administration of this Plan. The determination of the Committee on any of the foregoing matters shall be conclusive. - ---------------------- (1) For definitions of these and other capitalized terms, see Section 7.1, Definitions. 1 (c) Any action taken by, or inaction of, the Company, any Subsidiary, the Board or the Committee relating to this Plan shall be within the absolute discretion of that entity or body. No member of the Board or Committee, or officer of the company or any Subsidiary, shall be liable for any such action or inaction. (d) Subject to the requirements of Section 7.1(i), the Board, at any time it so desires, may increase or decrease the number of members of the Committee, may remove from membership on the Committee all or any portion of its members, and may appoint such person or persons as it desires to fill any vacancy existing on the Committee, whether caused by removal, resignation or otherwise. 1.3 PARTICIPATION. Awards may be granted only to Eligible Employees. An Eligible Employee who has been granted an Award may, if otherwise eligible, be granted additional Awards if the Committee shall so determine. Except as provided in Section 2.6 below, members of the Board who are not officers or employees of the Company shall not be eligible to receive Awards. 1.4 STOCK SUBJECT TO THE PLAN. The stock to be offered under this Plan shall be shares of the Company's authorized but unissued Common Stock. The aggregate amount of Common Stock that may be issued or transferred pursuant to Awards granted under this Plan shall not exceed the sum of 750,000 shares, subject to adjustment as set forth in Section 6.2. If any option and any related Stock Appreciation Right shall lapse or terminate without having been exercised in full, or any Common Stock subject to a Restricted Stock Award shall not vest or any Common Stock subject to a Performance Share Award shall not have been transferred, the unpurchased, unvested or nontransferred shares subject thereto shall again be available for purposes of this Plan. 1.5 GRANT OF AWARDS. Subject to the express provisions of this Plan, the Committee shall determine from the class of Eligible Employees those individuals to whom Awards under this Plan shall be granted, the terms of Awards (which need not be identical) and the number of shares of Common Stock subject to each Award; provided, however, that the aggregate number of shares of Common Stock subject to Awards that may be granted to any employee in any twelve month period may not exceed 30,000. Each Award shall be subject to the terms and conditions set forth in this Plan and such other terms and 2 conditions established by the Committee as are not inconsistent with the purpose and provisions of this Plan and shall contain such terms and conditions as may be required by the California Department of Corporations. The grant of an Award is made on the Award Date. 1.6 EXERCISE OF AWARDS. An Option or Stock Appreciation Right shall be deemed to be exercised when the Secretary of the Company receives written notice of such exercise from the Participant, together with payment of the purchase price made in accordance with Section 2.2(a), except to the extent payment may be permitted to be made following delivery of written notice of exercise in accordance with Section 2.2(b). Notwithstanding any other provision of this Plan, the Committee may impose, by rule and in Award Agreements, such conditions upon the exercise of Awards (including, without limitation, conditions limiting the time of exercise to specified periods) as may be required to satisfy applicable regulatory requirements, including without limitation Rule 16b-3 (or any successor rule) promulgated by the Commission. II. OPTIONS. 2.1 GRANTS. One or more Options may be granted to any Eligible Employee. Each Option so granted shall be designated by the Committee as either a Nonqualified Stock Option or an Incentive Stock Option. 2.2 OPTION PRICE. (a) The purchase price per share of Common Stock covered by each Option shall be determined by the Committee, but shall not be less than 100% of the Fair Market Value of the Common Stock on the date the Option is granted, other than in the case of a Participant who owns more than 10% of the total combined voting power of all classes of stock of the Company, in which event the option price shall be 110% of the Fair Market Value of the Common Stock of the Company on the date the option is granted. The purchase price of any shares purchased shall be paid in full at the time of each purchase in one or a combination of the following methods: (i) in cash or by check payable to the order of the Company, (ii) if authorized by the Committee or specified in the Option being exercised, by a promissory note made by the Participant in favor of the Company, upon the terms and conditions determined by the Committee, and secured by the Common Stock issuable upon exercise in 3 compliance with applicable law (including, without limitation, state corporate law and federal margin requirements) or (iii) if authorized by the Committee or specified in the Option being exercised, by shares of Common Stock of the Company already owned by the Participant; provided, however, that any shares delivered which were initially acquired upon exercise of a stock option must have been owned by the Participant at least six months as of the date of delivery. Shares of Common Stock used to satisfy the exercise price of an Option shall be valued at their Fair Market Value on the date of exercise. (b) In addition to the payment methods described in subsection (a), the Option may provide that the Option can be exercised and payment made by delivering a properly executed exercise notice together with irrevocable instructions to a bank or broker to promptly deliver to the Company the amount of sale or loan proceeds necessary to pay the exercise price and, unless otherwise allowed by the Committee, any applicable tax withholding under Section 6.6. The Company shall not be obligated to deliver certificates for the shares unless and until it receives full payment of the exercise price therefor. 2.3 OPTION PERIOD. Each Option and all rights or obligations thereunder shall expire on such date as shall be determined by the Committee, but not later than 10 years after the Award Date, and shall be subject to earlier termination as hereinafter provided. 2.4 EXERCISE OF OPTIONS. Except as otherwise provided in Sections 6.3 and 6.4, an Option may become exercisable, in whole or in part, on the date or dates specified in the Award Agreement and thereafter shall remain exercisable until the expiration or earlier termination of the Option; PROVIDED that the Option shall become exercisable at the rate of at least 20% per year over five years from the date that the Option is granted. No Option shall be exercisable for at least six months after the Award Date, except in the case of death or Total Disability. The Committee may, at any time after grant of the Option and from time to time, increase the number of shares exercisable at any time so long as the total number of shares subject to the option is not increased. No Option shall be exercisable except in respect of whole shares, and fractional share interests shall be disregarded. Not less than 10 shares of Common Stock may be purchased at one time unless the number purchased is the total number at the time available for purchase under the terms of the option. 4 2.5 LIMITATIONS ON GRANT OF INCENTIVE STOCK OPTIONS. (a) To the extent that the aggregate fair market value of stock with respect to which incentive stock options first become exercisable by a Participant in any calendar year exceeds $100,000, taking into account both Common Stock subject to Incentive Stock Options under this Plan and stock subject to incentive stock options under all other plans of the Company and its Subsidiaries, such options shall be treated as nonqualified stock options. For purposes of determining whether the $100,000 limit is exceeded, the fair market value of stock subject to options shall be determined as of the date the options are awarded. In reducing the number of options treated as incentive stock options to meet the $100,000 limit, the most recently granted options shall be reduced first. To the extent a reduction of simultaneously granted options is necessary to meet the $100,000 limit, the Company may, in the manner and to the extent permitted by law, designate which shares of Common Stock are to be treated as shares acquired pursuant to the exercise of an Incentive Stock Option. (b) There shall be imposed in any Award Agreement relating to Incentive Stock Options such terms and conditions as are required in order that the option be an "incentive stock option" as that term is defined in Section 422A of the Code. (c) No Incentive Stock Option may be granted to any person who, at the time the Incentive Stock Option is granted, owns shares of outstanding Common Stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, unless the exercise price of such Option is at least 110% of the Fair Market Value of the stock subject to the Option and such option by its terms is not exercisable after the expiration of five years from the date such Option is granted. 2.6 NON-EMPLOYEE DIRECTOR AWARDS. (a) PARTICIPATION. Awards under this Section 2.6 shall be made only to Non-Employee Directors. (b) OPTION GRANTS. Each person who is a Non-Employee Director in office at the time that the provisions of Section 2.6 of this Plan are first approved by shareholders shall be granted without further action a Nonqualified Stock Option to purchase 10,000 shares of Common Stock (the grant date or award date of which shall be the date of the meeting at which the Board of Directors of the Company approved the Award. 5 (c) OPTION PRICE. The purchase price per share of the Common Stock covered by each Option granted pursuant to this Section 2.6 shall be one hundred percent of the Fair Market Value of the Common Stock on the Award Date. The purchase price of any shares purchased shall be paid in full at the time of each purchase in cash or by check or in shares of Common Stock valued at their Fair Market Value on the business day next preceding the date of exercise of the Option, or partly in such shares and partly in cash. (d) OPTION PERIOD. Each Option granted under this Section 2.6 and all rights or obligations thereunder shall expire on the tenth anniversary of the Award Date and shall be subject to earlier termination as provided below. (e) EXERCISE OF OPTIONS. Except as otherwise provided in Sections 2.6(f), each option granted under this Section 2.6 shall become exercisable as to one-third of the covered shares twelve months after the Award Date, as to an additional one-third of the covered shares twenty-four months after the Award Date and as to all covered shares thirty-six months after the Award Date. (f) TERMINATION OF DIRECTORSHIP. If a Non-Employee Director Participant's services as a member of the Board terminate, each Option granted pursuant to Section 2.6(b) hereof held by such Non-Employee Director Participant which is not then exercisable shall terminate as provided in this Section 2.6(f). If a Non-Employee Director Participant's services as a member of the Board terminate by reason of death or Total Disability, any portion of any such Option which is then exercisable may be exercised for one year after the date of such termination or the balance of such Option's term, whichever period is shorter. If a Non-Employee Director Participant's services as a member of the Board terminate for any other reason, any portion of any such Option which is then exercisable may be exercised for three months after the date of such termination or the balance of such option's term, whichever period is shorter. Notwithstanding the preceding sentence, in the event the Non-Employee Director Participant's services as a member of the Board of Directors is terminated for cause, all Options shall lapse immediately upon such termination of services if required under applicable federal banking laws, regulations or orders. (g) LIMITATION ON AMENDMENTS AND AUTHORITY. Notwithstanding any other provision of this Plan, the provisions of this Section 2.6 shall not be amended more than once every six months, other than as may be necessary to conform with any applicable changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the applicable rules thereunder. Any discretionary 6 authority granted to the Board or the Committee pursuant to this Plan shall not be applicable to options granted pursuant to this Section 2.6. (h) TRANSFER AND OTHER RESTRICTIONS UNDER RULE 16b-3. The provisions of Section 6.12 are incorporated herein by this reference, except that each time the words "Participant" and "Participants" appear in such section they shall be replaced with the words "Non-Employee Director Participant" and "Non-Employee Director Participants," respectively. (i) ADJUSTMENTS. The specific numbers of shares stated in the foregoing provisions of Section 2.6(b) hereof and the consideration payable for such shares shall be subject to adjustment in certain events as provided in Section 6.2 of this Plan. (j) EFFECTIVE DATE OF SECTION 2.6. This Section 2.6 shall be effective as of the date of Board approval (January 25, 1995), subject to shareholder approval within twelve months after such date. III. STOCK APPRECIATION RIGHTS. 3.1 GRANTS. In its discretion, the Committee may grant Stock Appreciation Rights concurrently with the grant of Options. A Stock Appreciation Right shall extend to all or a portion of the shares covered by the related Option. A Stock Appreciation Right shall entitle the Participant who holds the related option, upon exercise of the Stock Appreciation Right and surrender of the related option, or portion thereof, to the extent the Stock Appreciation Right and related option each were previously unexercised, to receive payment of an amount determined pursuant to Section 3.3. Any Stock Appreciation Right granted in connection with an Incentive Stock Option shall contain such terms as may be required to comply with the provisions of Section 422A of the Code and the regulations promulgated thereunder. In its discretion, the Committee may also grant Stock Appreciation Rights independently of any Option subject to such conditions as the Committee may in its absolute discretion provide. 3.2 EXERCISE OF STOCK APPRECIATION RIGHTS. (a) A Stock Appreciation Right granted concurrently with an option shall be exercisable only at such time or times, and to the extent, that the related Option shall be exercisable and only when the Fair Market 7 Value of the stock subject to the related Option exceeds the exercise price of the related Option. (b) In the event that a Stock Appreciation Right granted concurrently with an option is exercised, the number of shares of Common Stock subject to the related Option shall be charged against the maximum amount of Common Stock that may be issued or transferred pursuant to Awards under this Plan. The number of shares subject to the Stock Appreciation Right and the related Option of the Participant shall also be reduced by such number of shares. (c) If a Stock Appreciation Right granted concurrently with an option extends to less than all the shares covered by the related option and if a portion of the related option is thereafter exercised, the number of shares subject to the unexercised Stock Appreciation Right shall be reduced only if and to the extent that the remaining number of shares covered by such related Option is less than the remaining number of shares subject to such Stock Appreciation Right. (d) A Stock Appreciation Right granted independently of any option shall be exercisable pursuant to the terms of the Award Agreement but in no event earlier than six months after the Award Date, except in the case of death or Total Disability. 3.3 PAYMENT. (a) Upon exercise of a Stock Appreciation Right and surrender of an exercisable portion of the related option, the Participant shall be entitled to receive payment of an amount determined by multiplying (i) the difference obtained by subtracting the exercise price per share of Common Stock under the related option from the Fair Market Value of a share of Common Stock on the date of exercise of the Stock Appreciation Right, by (ii) the number of shares with respect to which the Stock Appreciation Right shall have been exercised. (b) The Committee, in its sole discretion, may settle the amount determined under paragraph (a) above solely in cash, solely in shares of Common stock (valued at Fair Market Value on the date of exercise of the Stock Appreciation Right), or partly in such shares and partly in cash, provided that the Committee shall have determined that such exercise and payment are consistent with applicable law. In any event, cash shall be paid in lieu of 8 fractional shares. Absent a determination to the contrary, all Stock Appreciation Rights shall be settled in cash as soon as practicable after exercise. The exercise price for the Stock Appreciation Right shall be the exercise price of the related Option. Notwithstanding the foregoing, the Committee may, in the Award Agreement, determine the maximum amount of cash or stock or a combination thereof which may be delivered upon exercise of a Stock Appreciation Right. (c) Upon exercise of a Stock Appreciation Right granted independently of any Option, the Participant shall be entitled to receive payment of an amount based on a percentage, specified in the Award Agreement, of the difference obtained by subtracting the Fair Market Value per share of Common Stock on the Award Date from the Fair Market Value per share of Common Stock on the date of exercise of the Stock Appreciation Right. Such amount shall be paid as described in paragraph (b) above. IV. RESTRICTED STOCK AWARDS. 4.1 GRANTS. Subject to Section 1.4, the Committee may, in its discretion, grant one or more Restricted Stock Awards to any Eligible Employee. Each Restricted Stock Award agreement shall specify the number of shares of Common Stock to be issued to the Participant, the date of such issuance, the price, if any, to be paid for such shares by the Participant and the restrictions imposed on such shares, which restrictions shall not terminate earlier than six months after the Award Date. 4.2 RESTRICTIONS. (a) Shares of Common Stock included in Restricted Stock Awards may not be sold, assigned, transferred, pledged or otherwise disposed of or encumbered, either voluntarily or involuntarily, until such shares have vested. (b) Participants receiving Restricted Stock shall be entitled to dividend and voting rights for the shares issued even though they are not vested, provided that such rights shall terminate immediately as to any forfeited Restricted Stock. (c) In the event that the Participant shall have paid cash in connection with the Restricted Stock Award, the Award Agreement shall specify whether and to what extent such cash shall be returned upon a forfeiture (with or without an earnings factor). 9 V. PERFORMANCE SHARE AWARDS. 5.1 GRANTS. The Committee may, in its discretion, grant Performance Share Awards to Eligible Employees based upon such factors as the Committee shall determine. A Performance Share Award agreement shall specify the number of shares of Common Stock subject to the Performance Share Award, the price, if any, to be paid for such shares by the Participant and the conditions upon which issuance to the Participant shall be based, which issuance shall not be earlier than six months after the Award Date. VI. OTHER PROVISIONS. 6.1 RIGHTS OF ELIGIBLE EMPLOYEES, PARTICIPANTS AND BENEFICIARIES. (a) Status as an Eligible Employee shall not be construed as a commitment that any Award will be made under this Plan to any Eligible Employee generally. (b) Nothing contained in this Plan (or in Award Agreements or in any other documents related to this Plan or to Awards) shall confer upon any Eligible Employee or Participant any right to continue in the service or employ of the Company or any Subsidiary or constitute any contract or agreement of service or employment, or interfere in any way with the right of the Company or any Subsidiary to reduce such person's compensation or other benefits or to terminate the services or employment of such Eligible Employee or Participant, with or without cause, but nothing contained in this Plan or any document related thereto shall affect any other contractual right of any Eligible Employee or Participant. (c) Amounts payable pursuant to an Award shall be paid only to the Participant or, in the event of the Participant's death, to the Participant's Beneficiary or, in the event of the Participant's Total Disability, to the Participant's Personal Representative or, if there is none, to the Participant. Other than by will or the laws of descent and distribution, no benefit payable under, or interest in, this Plan or in any Award shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge and any such attempted action shall be void and no such benefit or interest shall be, in any manner, liable for, or subject to, debts, contracts, liabilities, engagements or torts of any Eligible Employee, Participant or Beneficiary. The Committee shall disregard any attempted transfer, assignment or other alienation prohibited by the preceding sentence and 10 shall pay or deliver such cash or shares of Common Stock in accordance with the provisions of this Plan. (d) No Participant, Beneficiary or other person shall have any right, title or interest in any fund or in any specific asset (including shares of Common Stock) of the Company or any of its Subsidiaries by reason of any Award granted hereunder. Neither the provisions of this Plan (or of any documents related hereto), nor the creation or adoption of this Plan, nor any action taken pursuant to the provisions of this Plan shall create, or be construed to create, a trust of any kind or a fiduciary relationship between the Company and any Participant, Beneficiary or other person. To the extent that a Participant, Beneficiary or other person acquires a right to receive an Award hereunder, such right shall be no greater than the right of any unsecured general creditor of the Company. 6.2 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. (a) If the outstanding shares of Common Stock are changed into or exchanged for cash or a different number or kind of shares or securities of the Company or of another issuer, or if additional shares or new or different securities are distributed with respect to the outstanding shares of the Common Stock, through a reorganization or merger to which the Company is a party, or through a combination, consolidation, recapitalization, reclassification, stock split, stock dividend, reverse stock split, stock consolidation or other capital change or adjustment, an appropriate adjustment shall be made in the number and kind of shares or other consideration that is subject to or may be delivered under this Plan and pursuant to outstanding Awards. A corresponding adjustment to the consideration payable with respect to Awards granted prior to any such change and to the price, if any, paid in connection with Restricted Stock Awards or Performance Share Awards shall also be made. Any such adjustment, however, shall be made without change in the total payment, if any, applicable to the portion of the Award not exercised but with a corresponding adjustment in the price for each share. Corresponding adjustments shall be made with respect to Stock Appreciation Rights based upon the adjustments made to the Options to which they are related or, in the case of Stock Appreciation Rights granted independently of any Option, based upon the adjustments made to Common Stock. (b) Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, the Plan shall terminate. Notwithstanding the foregoing, the Committee may provide in writing in connection with, or in 11 contemplation of, any such transaction for any or all of the following alternatives (separately or in combinations): (i) for the assumption by the successor corporation of the Awards theretofore granted or the substitution by such corporation for such Awards of awards covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; (ii) for the continuance of this Plan by such successor corporation in which event this Plan and the Awards shall continue in the manner and under the terms so provided; or (iii) for the payment in cash or shares of Common Stock in lieu of and in complete satisfaction of such Awards. (c) In adjusting Awards to reflect the changes described in this Section 6.2, or in determining that no such adjustment is necessary, the Committee may rely upon the advice of independent counsel and accountants of the Company, and the determination of the Committee shall be conclusive. No fractional shares of stock shall be issued under this Plan on account of any such adjustment. 6.3 TERMINATION OF EMPLOYMENT. (a) If the Participant's service to or employment by the Company or any Subsidiary terminates for any reason other than Retirement, death or Total Disability, the Participant shall have, subject to earlier termination pursuant to or as contemplated by Section 2.3, three months or such shorter period as is provided in the Award Agreement from the date of termination of services or employment to exercise any Option to the extent it shall have become exercisable on the date of termination of employment, and any Option not exercisable on that date shall terminate; PROVIDED that in no event shall such period be less than 30 days. Notwithstanding the preceding sentence, in the event the Participant is discharged for cause, all Options shall lapse immediately upon such termination of services or employment if required by applicable federal banking laws, regulations or orders. (b) If the Participant's service to or employment by the Company or any Subsidiary terminates as a result of Retirement or Total Disability, the Participant or Participant's Personal Representative, as the case may be, shall have, subject to earlier termination pursuant to or as contemplated by Section 2.3, 12 months or such shorter period as is provided in the Award Agreement from the date of termination of services or employment to exercise any option to the extent it shall have become exercisable by the date of termination of services or employment and any Option not exercisable on that date shall terminate; PROVIDED that in no event shall such period be less than six months. 12 (c) If the Participant's service to or employment by the Company or any Subsidiary terminates as a result of death while the Participant is rendering services to the Company or any Subsidiary or is employed by the Company or any Subsidiary or during the 12 month period referred to in subsection (b) above, the Participant's Option shall be exercisable by the Participant's Beneficiary, subject to earlier termination pursuant to or as contemplated by Section 2.3, during the 12 month period or such shorter period as is provided in the Award Agreement following the Participant's death, as to all or any part of the shares of Common Stock covered thereby to the extent exercisable on the date of death (or earlier termination); PROVIDED that in on event shall such period be less than six months. (d) Each Stock Appreciation Right granted concurrently with an Option shall have the same termination provisions and exercisability periods as the Option to which it relates. The termination provisions and exercisability periods of any Stock Appreciation Right granted independently of an option shall be established in accordance with Section 3.2(d). The exercisability period of a Stock Appreciation Right shall not exceed that provided in Section 2.3 or in the related Award Agreement and the Stock Appreciation Right shall expire at the end of such exercisability period. (e) In the event of termination of services to or employment with the Company or any Subsidiary for any reason, (i) shares of Common Stock subject to the Participant's Restricted Stock Award shall be forfeited in accordance with the provisions of the related Award Agreement to the extent such shares have not become vested on that date; and (ii) shares of Common Stock subject to the Participant's Performance Share Award shall be forfeited in accordance with the provisions of the related Award Agreement to the extent such shares have not been issued or become issuable on that date. (f) In the event of termination of services to or employment with the Company or any Subsidiary for any reason, other than discharge for cause, the Committee may, in its discretion, increase the portion of the Participant's Award available to the Participant, or Participant's Beneficiary or Personal Representative, as the case may be, upon such terms as the Committee shall determine. (g) If an entity ceases to be a Subsidiary, such action shall be deemed for purposes of this Section 6.3 to be a termination of services or employment of each employee of that entity who does not continue as an employee of another entity within the Company. 13 (h) Upon forfeiture of a Restricted Stock Award pursuant to this Section 6.3, the Participant, or his or her Beneficiary or Personal Representative, as the case may be, shall transfer to the Company the portion of the Restricted Stock Award not vested at the date of termination of services or employment, without payment of any consideration by the Company for such transfer unless the Participant paid a purchase price in which case repayment, if any, of that price shall be governed by the Award Agreement. Notwithstanding any such transfer to the Company, or failure, refusal or neglect to transfer, by the Participant, or his or her Beneficiary or Personal Representative, as the case may be, such nonvested portion of any Restricted Stock Award shall be deemed transferred automatically to the Company on the date of termination of services or employment. The Participant's original acceptance of the Restricted Stock Award shall constitute his or her appointment of the Company and each of its authorized representatives as attorney(s)-in-fact to effect such transfer and to execute such documents as the Company or such representatives deem necessary or advisable in connection with such transfer. 6.4 GOVERNMENT REGULATIONS. This Plan, the granting of Awards under this Plan and the issuance or transfer of shares of Common Stock (and/or the payment of money) pursuant thereto are subject to all applicable federal and state laws, rules and regulations and to such approvals by any regulatory or governmental agency (including without limitation "no action" positions of the Commission) which may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Without limiting the generality of the foregoing, no Awards may be granted under this Plan, and no shares shall be issued by the Company, nor cash payments made by the Company, pursuant to or in connection with any such Award, unless and until, in each such case, all legal requirements applicable to the issuance or payment have, in the opinion of counsel to the Company, been complied with. In connection with any stock issuance or transfer, the person acquiring the shares shall, if requested by the Company, give assurances satisfactory to counsel to the Company in respect of such matters as the Company may deem desirable to assure compliance with all applicable legal requirements. 6.5 TAX WITHHOLDING. (a) Upon the disposition by a Participant or other person of shares of Common Stock acquired pursuant to the exercise of an Incentive Stock Option prior to satisfaction of the holding period requirements of Section 14 422A of the Code, or upon the exercise of a Nonqualified Stock Option, the exercise of a Stock Appreciation Right, the vesting of a Restricted Stock Award or the payment of a Performance Share Award the Company shall have the right to (i) require such Participant or such other person to pay by cash or check payable to the Company, the amount of any taxes which the Company may be required to withhold with respect to such transactions or (ii) deduct from amounts paid in cash the amount of any taxes which the Company may be required to withhold with respect to such cash amounts. The above notwithstanding, in any case where a tax is required to be withheld in connection with the issuance or transfer of shares of Common Stock under this Plan, the Participant may elect, pursuant to such rules as the Committee may establish, to have the Company reduce the number of such shares issued or transferred by the appropriate number of shares to accomplish such withholding; provided, the committee may impose such conditions on the payment of any withholding obligation as may be required to satisfy applicable regulatory requirements, including, without limitation, Rule 16b-3 promulgated by the Commission pursuant to the Exchange Act. (b) The Committee may, in its discretion, permit a loan from the Company to a Participant in the amount of any taxes which the Company may be required to withhold with respect to shares of Common Stock received pursuant to a transaction described in subsection (a) above. Such a loan will be for a term, at a rate of interest and pursuant to such other terms and rules as the Committee may establish. 6.6 AMENDMENT, TERMINATION AND SUSPENSION. (a) The Board may, at any time, terminate or, from time to time, amend, modify or suspend this Plan (or any part hereof). In addition, the Committee may, from time to time, amend or modify any provision of this Plan and, with the consent of the Participant, make such modifications of the terms and conditions of such Participant's Award as it shall deem advisable. The Committee, with the consent of the Participant, may also amend the terms of any Option to provide that the Option price of the shares remaining subject to the original Award shall be reestablished at a price not less than 100% of the Fair Market Value of the Common Stock on the effective date of the amendment. No modification of any other term or provision of any option which is amended in accordance with the foregoing shall be required, although the Committee may, in its discretion, make such further modifications of any such Option as are not inconsistent with or prohibited by this Plan. No Awards may be granted during any suspension of this Plan or after its termination. 15 (b) If an amendment would materially (i) increase the benefits accruing to Participants, (ii) increase the aggregate number of shares which may be issued under this Plan, or (iii) modify the requirements of eligibility for participation in this Plan, the amendment shall be approved by the Board and, to the extent then required by Rule 16b-3 under the Exchange Act, Section 425 of the Code or any successor provisions, rules or statutes thereto, by a majority of the shareholders; provided that the Board of Directors of the Company may make such amendments to the Plan as may be required by the California Department of corporations. (c) In the case of Awards issued before the effective date of any amendment, suspension or termination of this Plan, such amendment, suspension or termination of the Plan shall not, without specific action of the Board or the Committee and the consent of the Participant, in any way modify, amend, alter or impair any rights or obligations under any Award previously granted under the Plan. 6.7 PRIVILEGES OF STOCK OWNERSHIP; NONDISTRIBUTIVE INTENT. A Participant shall not be entitled to the privilege of stock ownership as to any shares of Common Stock not actually issued to him or her. Upon the issuance and transfer of shares to the Participant, unless a registration statement is in effect under the Securities Act and applicable state securities law, relating to such issued and transferred Common Stock and there is available for delivery a prospectus meeting the requirements of Section 10 of the Securities Act, the Common Stock may be issued and transferred to the Participant only if he or she represents and warrants in writing to the Company that the shares are being acquired for investment and not with a view to the resale or distribution thereof. No shares shall be issued and transferred unless and until there shall have been full compliance with any then applicable regulatory requirements (including those of exchanges upon which any Common Stock of the Company may be listed). 6.8 EFFECTIVE DATE OF THE PLAN. This Plan shall be effective upon its approval by the Board, subject to approval by the shareholders of the Company within twelve months from the date of such Board approval. 6.9 TERM OF THE PLAN. Unless previously terminated by the Board, this Plan shall terminate at the close of business on January 24, 16 2005, and no Awards shall be granted under it thereafter, but such termination shall not affect any Award theretofore granted. 6.10 GOVERNING LAW. This Plan and the documents evidencing Awards and all other related documents shall be governed by, and construed in accordance with, the laws of the State of California. If any provision shall be held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions of this Plan shall continue to be fully effective. 6.11 TRANSFER AND OTHER RESTRICTIONS UNDER RULE 16b-3. Any Option, similar right (including stock appreciation rights) or other Award that would constitute a derivative security (as such phrase is defined in Rule 16a-1 under the Exchange Act and used in Rule 16b-3 thereunder) and that is issued under this Plan shall not be transferable by the Participant other than by will, the laws of descent and distribution or pursuant to a QDRO. The designation of beneficiary by an officer or director of the Company shall not be deemed to constitute a transfer under this Plan. It is the intent of the Company that the Plan satisfy and be interpreted in a manner that in the case of Participants who are or may be subject to Section 16 of the Exchange Act satisfies the applicable requirements of the applicable Rule 16b-3 so that such persons will be entitled to the benefits of such rule or other exemptive rules under Section 16 of the Exchange Act and will not be subjected to avoidable liability thereunder in respect of benefits intended by the Plan. In furtherance of such intent and the Company's intent to satisfy any applicable state securities laws, the Awards granted under all of the provisions of the Plan, in the discretion of the Committee, may be deemed granted-under a separate plan if so required, notwithstanding the designation of this document as a single plan for convenience of reference and to establish certain provisions and limitations applicable to all authorized Awards. If any provision of the Plan or of any Award would frustrate or otherwise conflict with the intent expressed above, that provision to the extent possible shall be interpreted and deemed amended so as to avoid such conflict, but to the extent of any remaining irreconcilable conflict with such intent as to such persons in the circumstances, such provision shall be deemed void. 6.12 FINANCIAL STATEMENTS. The Company shall deliver to each Participant in the Plan a copy of the Company's Consolidated Annual Report (or such other report 17 as may be prepared by the Company on an annual basis containing financial statements of the Company for the prior fiscal year) within ninety (90) days after the end of the Company's fiscal year. VII. DEFINITIONS. 7.1 DEFINITIONS. (a) "AWARD" means an Option, which may be designated as a Nonqualified Stock Option or an Incentive Stock Option, a Stock Appreciation Right, a Restricted Stock Award or Performance Share Award, in each case granted under this Plan. (b) "AWARD AGREEMENT" means a written agreement setting forth the terms of an Award. (c) "AWARD DATE" means the date upon which the Committee took the action granting an Award or such later date as is prescribed by the Committee or, in the case of Options granted under Section 2.6, the date specified in such Section 2.6. (d) "BANK" means National Bank of Southern California, a national banking association, so long as it is a Subsidiary. (e) "BENEFICIARY" means the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive the benefits specified under this Plan in the event of a Participant's death. (f) "BOARD" means the Board of Directors of the Company. (g) "CODE" means the Internal Revenue Code of 1986, as amended from time to time. (h) "COMMISSION" means the Securities and Exchange Commission. (i) "COMMITTEE" means the Compensation Committee appointed by the Board and consisting of three or more Board members or such greater number as may be required under applicable law, each of whom, during such time as one or more Participants may be subject to Section 16 of the Exchange Act, shall be a Disinterested Director; provided however, that the minimum number of members of the Committee may be reduced by the Board to the minimum number required by Rule 16b-3 promulgated by the Commission pursuant to the Exchange Act, as then in effect. 18 (j) "COMMON STOCK" means the Common Stock Of the Company. (K) "COMPANY" means California Commercial Bankshares, a California corporation, and its successors. (1) "DISINTERESTED DIRECTOR" shall mean a member of the Board who was not, during the year prior to being appointed to the Committee, or during the period of service as an administrator hereunder, granted or awarded equity securities pursuant to the Plan or pursuant to any other plan of the Company or its affiliates, except to the extent consistent with the disinterested plan administration requirements under Rule 16b-3. (m) "ELIGIBLE EMPLOYEE" means an officer or employee of the Company or a subsidiary who has not served on the Committee within the preceding twelve months. (n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (o) "FAIR MARKET VALUE" means (i) if the stock is listed or admitted to trade on a national securities exchange, the closing price of the stock on the Composite Tape, as published in the Western Edition OF THE WALL STREET JOURNAL, of the principal national securities exchange on which the stock is so listed or admitted to trade, on such date, or, if there is no trading of the stock on such date, then the closing price of the stock as quoted on such Composite Tape on the next preceding date on which there was trading in such shares; (ii) if the stock is not listed or admitted to trade on a national securities exchange, the last price for the stock on such date, as furnished by the National Association of Securities Dealers, Inc. ("NASD") through the NASDAQ National Market Reporting System or a similar organization if the NASD is no longer reporting such information; (iii) if the stock is not listed or admitted to trade on a national securities exchange and is not reported on the National Market Reporting System, the mean between the bid and asked price for the stock on such date, as furnished by the NASD; or (iv) if the stock is not listed or admitted to trade on a national securities exchange, is not reported on the National Market Reporting System and if bid and asked prices for the stock are not furnished by the NASD or a similar organization, the values established by the Committee for purposes of the Plan. (p) "INCENTIVE STOCK OPTION" means an option which is designated as an incentive stock option within the meaning of Section 422A of the Code, the award of which contains such provisions as are necessary to comply with that section. 19 (q) "NON-EMPLOYEE DIRECTOR" means a member of the Board who is not an officer or employee of the Company or any of its Subsidiaries. (r) "NON-EMPLOYEE DIRECTOR PARTICIPANT" means a Non-Employee Director who has been granted an Option under Section 2.6. (s) "NONQUALIFIED STOCK OPTION" means an option which is designated as a Nonqualified Stock Option. (t) "OPTION" means an option to purchase Common Stock under this Plan. An Option shall be designated by the Committee as a Nonqualified Stock Option or an Incentive Stock Option. (u) "PARTICIPANT" means an Eligible Employee who has been granted an Award. (v) "PERFORMANCE SHARE AWARD" means an award of shares of cash or Common Stock, the issuance of which is contingent upon attainment of performance objectives specified by the Committee. (w) "PERSONAL REPRESENTATIVE" means the person or persons who, upon the disability or incompetence of a participant, shall have acquired on behalf of the participant by legal proceeding or otherwise the power to exercise the rights and receive the benefits specified in this Plan. (X) "PLAN" means the California Commercial Bankshares 1995 Stock Award Plan. (Y) "QDRO" shall mean an order requiring the transfer of an Award or portion thereof pursuant to a state domestic relations law to the spouse, former spouse, child or other dependent of a Participant. Such order must be in a form substantially identical to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended. (z) "RESTRICTED STOCK" means those shares of Common Stock issued pursuant to a Restricted Stock Award which are subject to the restrictions set forth in the related Award Agreement. (aa) "RESTRICTED STOCK AWARD" means an award of a fixed number of shares of Common Stock to the Participant subject, however, to payment of such consideration, if any, and such forfeiture provisions, as are set forth in the Award Agreement. 20 (bb) "RETIREMENT" means retirement from employment by or providing services to the Company or any Subsidiary after age 65 and, in the case of employees, in accordance with the retirement policies of the Company then in effect. (cc) "SECURITIES ACT" means the Securities Act of 1933, as amended. (dd) "STOCK APPRECIATION RIGHT" means a right to receive a number of shares of Common Stock or an amount of cash, or a combination of shares and cash, determined as provided in Section 3.3(a). (ee) "SUBSIDIARY" means any corporation or other entity a majority or more of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. (ff) "TOTAL DISABILITY" means a "permanent and total disability" within the meaning of Section 22(e)(3) of the Code. 21 EX-10.(U) 4 EXHIBIT 10(U) CALIFORNIA COMMERCIAL BANKSHARES INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT dated as of the ___ day of ____, ________, between California Commercial Bankshares, a California corporation (the "Corporation"), and ____________ (the "Employee"). W I T N E S S E T H WHEREAS, pursuant to the Corporation's 1995 Stock Award Plan (the "Plan"), the Corporation has granted to the Employee effective as of the ___ day of __________, 19___ (the "Award Date") an option to purchase all or any part of _______ authorized but unissued shares of Common Stock, no par value, of the Corporation upon the terms and conditions set forth herein and in the Plan. NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties agree as follows: 1. DEFINED TERMS. Capitalized terms used herein and not otherwise defined herein shall have the meaning assigned to such terms in the Plan. 2. GRANT OF OPTION. This Agreement evidences the Corporation's grant to the Employee of the right and option to purchase, on the terms and conditions set forth herein and in the Plan, all or any part of an aggregate of ______ shares of the Common Stock at the price of ______ per share (the "Option"), exercisable from time to time, subject to the provisions of this Agreement and the Plan, prior to the close of business on the day before the tenth anniversary of the Award Date (the "Expiration Date"). Such price equals or exceeds the Fair Market Value of the Corporation's Common Stock as of the Award Date. It is the intent of the Corporation that this Option constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("Code"). 3. EXERCISABILITY OF OPTION. Subject to the conditions set forth in this Agreement, the option shall be exercisable in accordance with Schedule 1 attached hereto. To the extent the Employee does not in any year purchase all or any part of the shares to which the Employee is entitled, the Employee has the right cumulatively thereafter to purchase any shares not so purchased and such right shall continue until the option terminates or expires. Fractional 1 share interests shall be disregarded, but may be cumulated. No fewer than ten shares may be purchased at any one time, unless the number purchased is the total number at the time available for purchase under the option. 4. LIMITATION ON EXERCISE OF OPTION. In the event the Employee is granted incentive stock options (whether under this Agreement or any other incentive stock option agreement) and the aggregate fair market value (determined as of the respective dates of grant of such options) of the Common Stock with respect to which such options are first exercisable in any calendar year exceeds $100,000, the most recently granted options shall be treated as nonqualified stock options to the extent of the excess. In addition, in the case of simultaneously granted options, the Corporation may, in the manner and to the extent permitted by law, designate which shares are to be treated as stock acquired pursuant to the exercise of an incentive stock option. 5. METHOD OF EXERCISE OF OPTION. The Option shall be exercisable by the delivery to the Corporation of a written notice stating the number of shares to be purchased pursuant to the Option and accompanied by payment made in accordance with and in a form permitted in Section 2.2 of the Plan for the full purchase price of the shares to be purchased, subject to such further limitations and rules or procedures as the Committee may from time to time establish as to any non-cash payment and as to the tax withholding requirements of Section 6.5 of the Plan. The purchase price may be paid in full or in part by shares of Common Stock of the Corporation already owned by the Employee; provided, however, that any shares delivered which were initially acquired upon exercise of a stock option must have been owned by the Participant at least six months as of the date of delivery. Shares of Common Stock used to satisfy the exercise price of an option shall be valued at their Fair Market Value on the date of exercise. In addition, the Employee (or the Employee's Beneficiary or Personal Representative) shall furnish any written statements required pursuant to Section 6.7 of the Plan. 6. EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH; CHANGE IN SUBSIDIARY STATUS. The Option and all other rights hereunder, to the extent not exercised, shall terminate and become null and void at such time as the Employee ceases to be employed by either the Corporation or any Subsidiary, except that: (a) if the Employee terminates for any reason other than Retirement, death, Total Disability or discharge for cause, the Employee may at any time within a period of three months after such termination exercise the Option to the extent the option was exercisable at the date of such termination; 2 (b) if the Employee is discharged for cause, which shall include (i) conviction of a felony, (ii) misappropriation of assets of the Corporation, (iii) continued or repeated insobriety, (iv) continued or repeated absence from service during periods the Employee is expected to render services as an employee, other than due to disability or illness and (v) refusal to carry out the reasonable directions of the executive officers or Board of Directors of the Corporation, the Employee may at any time within a period of thirty days after such termination exercise the Option to the extent the option was exercisable at the date of such termination, provided that the Option shall lapse immediately upon such termination of services or employment to the extent required by applicable federal banking laws, regulations or orders; (c) if the Employee terminates as a result of Retirement or Total Disability, the Participant or Participant's Personal Representative, as the case may be, shall have twelve months from the date of termination to exercise the Option to the extent the option was exercisable at the date of such termination; (d) if the Employee dies while in the employ of the Corporation or any Subsidiary, or within twelve months after a termination described in subsection (c) of this Section 5, then the Option may be exercised within a period of three months after the Employee's date of death by the Employee's Beneficiary to the extent the Option was exercisable on the date of the Employee's death (or such earlier termination); provided, however, that in no event may the Option be exercised by anyone under this Section or otherwise after the Expiration Date. If the Employee is employed by an entity which ceases to be a Subsidiary, such event shall be deemed for purposes of this Section 6 to be a termination described in subsection (a) in respect of the Employee. Absence from work caused by military service or authorized sick leave shall not be considered a termination for purposes of this Section. 7. ADJUSTMENTS UPON SPECIFIED CHANGES. (a) If the outstanding shares of Common Stock are changed into or exchanged for cash or a different number or kind of shares or securities of the Corporation or of another issuer, or if additional shares or new or different securities are distributed with respect to the outstanding shares of the Common Stock, through a reorganization or merger to which the corporation is a party, or through a combination, consolidation, recapitalization, reclassification, 3 stock split, stock dividend, reverse stock split, stock consolidation or other capital change or adjustment, an appropriate adjustment shall be made in the number and kind of shares that are subject to or may be delivered pursuant to this Award Agreement. A corresponding adjustment to the consideration payable by the Participant to exercise the option shall also be made. Any such adjustment, however, shall be made by making an appropriate adjustment in the price for each share subject to the Option without changing the total payment applicable to the portion of the Option not theretofore exercised. (b) Upon the dissolution or liquidation of the Corporation, or upon a reorganization, merger or consolidation of the Corporation with one or more corporations as a result of which the Corporation is not the surviving corporation, the Plan and the option shall terminate. Notwithstanding the foregoing, the Committee may provide in writing in connection with, or in contemplation of, any such transaction for any or all of the following alternatives (separately or in combinations): (i) for the assumption by the successor corporation of the option or the substitution by such corporation for the Option of options covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; (ii) for the continuance of the Plan and the Option by such successor corporation in which event the Plan and the Option shall continue in the manner and under the terms so provided; or (iii) for the payment in cash or shares of Common Stock in lieu of, and in complete satisfaction of, the Option. 8. NON-TRANSFERABILITY OF OPTION. Subject to limited exceptions set forth in Section 6.1 of the Plan, the option and any other rights of the Employee under this Agreement or the Plan are nontransferable. 9. NOTICES. Any notice to be given under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal office to the attention of Principal Accounting and Financial Officer, and to the Employee at the address given beneath the Employee's signature hereto, or at such other address as either party may hereafter designate in writing to the other. Any such notice shall be deemed to have been duly given when enclosed in a properly sealed envelope addressed as aforesaid, registered or certified, and deposited (postage and registry or certification fee prepaid) in a post office or branch post office regularly maintained by the United States Government. 4 10. PLAN. The Option and all rights of the Employee thereunder are subject to, and the Employee agrees to be bound by, all of the terms and conditions of the provisions of the Plan, incorporated herein by this reference, to the extent such provisions are applicable to options granted to Eligible Employees. In the event of a conflict or inconsistency between the terms and conditions of this Agreement and of the Plan, the terms and conditions of the Plan shall govern. The Employee acknowledges receipt of a copy of the Plan, which is made a part hereof by this reference, and agrees to be bound by the terms thereof. Unless otherwise expressly provided in other Sections of this Agreement, provisions of the Plan that confer discretionary authority on the Committee do not (and shall not be deemed to) create any rights in the Employee unless such rights are expressly set forth herein or are otherwise in the sole discretion of the Committee so conferred by appropriate action of the Committee under the Plan after the date hereof. 11. NOTICE OF DISPOSITION. The Employee agrees to notify the Corporation of any sale or other disposition of any shares of Common Stock received upon exercise of the Option, if such sale or disposition occurs within two years after the Award Date or within one year after the date of such exercise. 5 IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed on its behalf by a duly authorized officer and the Employee has hereunto set his or her hand. CALIFORNIA COMMERCIAL BANKSHARES, a California corporation By: -------------------------------- Title: ----------------------------- EMPLOYEE ----------------------------------- (Signature) ----------------------------------- (Print Name) ----------------------------------- (Address) ----------------------------------- (City, State, Zip Code) 6 SCHEDULE 1 RIGHT TO EXERCISE The Option may be exercised as to ______ shares of Common Stock on and after the first anniversary of the Award Date and as to an additional ______ shares of Common Stock on and after the last day of each succeeding calendar month commencing on ___________, _____ and continuing through and including _________, and as to the final _______ shares of Common Stock on and after ________, ____. 7 CONSENT OF SPOUSE In consideration of the execution of the foregoing Incentive Stock Option Agreement by California Commercial Bankshares, I, __________________________, the spouse of the Employee herein named, do hereby join with my spouse in executing the foregoing Incentive Stock Option Agreement and do hereby agree to be bound by all of the terms and provisions thereof and of the Plan. DATED:__________, ____. ----------------------------------- Signature of Spouse 8 EX-10.(V) 5 EXHIBIT 10(V) CALIFORNIA COMMERCIAL BANKSHARES NONQUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT dated as of the _____ day of ____________, ______ between California Commercial Bankshares, a California corporation (the "Corporation"), and ___________________ (the "Employee"). W I T N E S S E T H WHEREAS, pursuant to the Corporation's 1995 Stock Award Plan (the "Plan"), the Corporation has granted to the Employee effective as of the _____ day of __________, 19__ the "Award Date") a nonqualified stock option to purchase all or any part of _________________ authorized but unissued shares of Common Stock, no value, of the Corporation upon the terms and conditions set forth herein and in the Plan. NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties agree as follows: 1. DEFINED TERMS. Capitalized terms used herein and not otherwise defined herein shall have the meaning assigned to such terms in the Plan. 2. GRANT OF OPTION. This Agreement evidences the Corporation's grant to the Employee of the right and option to purchase, on the terms and conditions set forth herein and in the Plan, all or any part of an aggregate of ______ shares of the Common Stock at the price of ___________ per share (the "Option"), exercisable from time to time, subject to the provisions of this Agreement and the Plan, prior to the close of business on the day before the tenth anniversary of the Award Date (the "Expiration Date"). 3. EXERCISABILITY OF OPTION. Subject to the conditions set forth in this Agreement, the Option shall be exercisable in accordance with Schedule 1 attached hereto. To the extent the Employee does not in any year purchase all or any part of the shares to which the Employee is entitled, the Employee has the right cumulatively thereafter to purchase any shares not so purchased and such right shall continue until the Option terminates or expires. Fractional share interests shall be disregarded, but may be cumulated. No fewer than ten (10) shares may be purchased at any one time, unless the number purchased is the total number at the time available for purchase under the Option. 4. METHOD OF EXERCISE OF OPTION. The Option shall be exercisable by the delivery to the Corporation of a written notice stating the number of shares to be purchased pursuant to the Option and accompanied by payment made in accordance with and in a form permitted by Section 2.2 of the Plan for the full purchase price of the shares to be purchased, subject to such further limitations and rules or procedures as the Committee may from time to time establish as to any non-cash payment and as to the tax withholding requirements of Section 6.5 of the Plan. The purchase price may be paid in full or in part by shares of Common Stock of the Corporation already owned by the Employee; provided, however, that any shares delivered which were initially acquired upon exercise of a stock option must have been owned by the Participant at least six months as of the date of delivery. Shares of Common Stock used to satisfy the exercise price of an option shall be valued at their Fair Market Value on the date of exercise. In addition, the Employee (or the Employee's Beneficiary or Personal Representative) shall furnish any written statements required pursuant to Section 6.7 of the Plan. 5. EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH; CHANGE IN SUBSIDIARY STATUS. The Option and all other rights hereunder, to the extent not exercised, shall terminate and become null and void at such time as the Employee ceases to be employed by either the Corporation or any Subsidiary, except that: (a) if the Employee terminates for any reason other than Retirement, death, Total Disability or discharge for cause, the Employee may at any time within a period of three months after such termination exercise the option to the extent the option was exercisable at the date of such termination; (b) if the Employee is discharged for cause, which shall include (i) conviction of a felony, (ii) misappropriation of assets of the Corporation, (iii) continued or repeated insobriety, (iv) continued or repeated absence from service during periods the Employee is expected to render services as an employee, other than due to disability or illness and (v) refusal to carry out the reasonable directions of the executive officers or Board of Directors of the Corporation, the Employee may at any time within a period of thirty days after such termination exercise the option to the extent the Option was exercisable at the date of such termination, provided that the Option shall lapse immediately upon such termination of services or employment to the extent required by applicable federal banking laws, regulations or orders; (c) if the Employee terminates as a result of Retirement or Total Disability, the Participant or 2 Participant's Personal Representative, as the case may be, shall have twelve months from the date of termination to exercise the Option to the extent the option was exercisable at the date of such termination; (d) if the Employee dies while in the employ of the Corporation or any Subsidiary, or within twelve months after a termination described in subsection (c) of this Section 5, then the Option may be exercised within a period of three months after the Employee's date of death by the Employee's Beneficiary to the extent the Option was exercisable on the date of the Employee's death (or such earlier termination); provided, however, that in no event may the option be exercised by anyone under this Section or otherwise after the Expiration Date. If the Employee is employed by an entity which ceases to be a Subsidiary, such event shall be deemed for purposes of this Section 5 to be a termination described in subsection (a) in respect of the Employee. Absence from work caused by military service or authorized sick leave shall not be considered a termination for purposes of this Section. 6. ADJUSTMENTS UPON SPECIFIED CHANGES. (a) If the outstanding shares of Common Stock are changed into or exchanged for cash or a different number or kind of shares or securities of the Corporation or of another issuer, or if additional shares or new or different securities are distributed with respect to the outstanding shares of the Common Stock, through a reorganization or merger to which the Corporation is a party, or through a combination, consolidation, recapitalization, reclassification, stock split, stock dividend, reverse stock split, stock consolidation or other capital change or adjustment, an appropriate adjustment shall be made in the number and kind of shares that are subject to or may be delivered pursuant to this Award Agreement. A corresponding adjustment to the consideration payable by the Participant to exercise the option shall also be made. Any such adjustment, however, shall be made by making an appropriate adjustment in the price for each share subject to the Option without changing the total payment applicable to the portion of the Option not theretofore exercised. (b) Upon the dissolution or liquidation of the Corporation, or upon a reorganization, merger or consolidation of the Corporation with one or more corporations as a result of which the Corporation is not the surviving corporation, the Plan and the Option shall terminate. Notwithstanding the foregoing, the Committee may provide in writing in connection with, or 3 in contemplation of, any such transaction for any or all of the following alternatives (separately or in combination): (i) for the assumption by the successor corporation of the option or the substitution by such corporation for the Option of options covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; (ii) for the continuance of the Plan and the Option by such successor corporation in which event the Plan and the Option shall continue in the manner and under the terms so provided; or (iii) for the payment in cash or shares of Common Stock in lieu of, and in complete satisfaction of, the Option. 7. NON-TRANSFERABILITY OF OPTION. Subject to limited exceptions set forth in Section 6.1 of the Plan, the Option and any other rights of the Employee under this Agreement or the Plan are nontransferable. 8. NOTICES. Any notice to be given under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal office to the attention of the Principal Accounting and Financial Officer, and to the Employee at the address given beneath the Employee's signature hereto, or at such other address as either party may hereafter designate in writing to the other. Any such notice shall be deemed to have been duly given when enclosed in a properly sealed envelope addressed as aforesaid, registered or certified, and deposited (postage and registry or certification fee prepaid) in a post office or branch post office regularly maintained by the United States Government. 9. PLAN. The Option and all rights of the Employee thereunder are subject to, and the Employee agrees to be bound by, all of the terms and conditions of the provisions of the Plan, incorporated herein by this reference, to the extent such provisions are applicable to options granted to Eligible Employees. In the event of a conflict or inconsistency between the terms and conditions of this Agreement and of the Plan, the terms and conditions of the Plan shall govern. The Employee acknowledges receipt of a copy of the Plan, which is made a part hereof by this reference, and agrees to be bound by the terms thereof. Unless otherwise expressly provided in other Sections of this Agreement, provisions of the Plan that confer discretionary authority on the Committee do not (and shall not be deemed to) create any rights in the Employee unless such rights are expressly set forth herein or are otherwise in the sole discretion of the Committee so conferred by appropriate action of the Committee under the Plan after the date hereof. 4 IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed on its behalf by a duly authorized officer and the Employee has hereunto set his or her hand. CALIFORNIA COMMERCIAL BANKSHARES, a California corporation By: ----------------------------- Title: ---------------------------- EMPLOYEE ---------------------------------- (Signature) ---------------------------------- (Print Name) ---------------------------------- (Address) ---------------------------------- (City, State, Zip Code) 5 SCHEDULE 1 RIGHT TO EXERCISE The Option may be exercised as to ______ shares of Common Stock on and after the first anniversary of the Award Date and as to an additional _______ shares of Common Stock on and after the last day of each succeeding calendar month commencing on ______________, _____ and continuing through and including ______________, _____________, and as to the final _______ shares of Common Stock on and after ______________, ______. 6 CONSENT OF SPOUSE In consideration of the execution of the foregoing Nonqualified Stock Option Agreement by California Commercial Bankshares, I, _____________________________, the spouse of the Employee herein named, do hereby join with my spouse in executing the foregoing Nonqualified Stock Option Agreement and do hereby agree to be bound by all of the terms and provisions thereof and of the Plan. DATED:______________, _____. ------------------------------ Signature of Spouse 7 EX-10.(W) 6 EXHIBIT 10(W) CALIFORNIA COMMERCIAL BANKSHARES DIRECTOR NONQUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT dated as of the _____ day of 1995, between California Commercial Bankshares, a California corporation (the "Corporation"), and __________________________ (the "Director"). W I T N E S S E T H WHEREAS, pursuant to the Corporation's 1995 Stock Award Plan (the "Plan") , the Corporation has granted to the Director effective as of the 25th day of January, 1995 (the "Award Date") a nonqualified stock option to purchase all or any part of _______________ authorized but unissued shares of Common Stock, no value, of the Corporation upon the terms and conditions set forth herein and in the Plan. NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties agree as follows: 1. DEFINED TERMS. Capitalized terms used herein and not otherwise defined herein shall have the meaning assigned to such terms in the Plan. 2. GRANT OF OPTION. This Agreement evidences the Corporation's grant to the Director of the right and option to purchase, on the terms and conditions set forth herein and in the Plan, all or any part of an aggregate of shares of the Common Stock at the price of $5.25 per share (the "Option") , exercisable from time to time, subject to the provisions of this Agreement and the Plan, prior to the close of business on the day before the tenth anniversary of the Award Date (the "Expiration Date"). 3. EXERCISABILITY OF OPTION. Subject to the conditions set forth in this Agreement, the Option shall be exercisable in accordance with Schedule 1 attached hereto. To the extent the Director does not in any year purchase all or any part of the shares to which the Director is entitled, the Director has the right cumulatively thereafter to purchase any shares not so purchased and such right shall continue until the Option terminates or expires. Fractional share interests shall be disregarded, but may be cumulated. No fewer than ten (10) shares may be purchased at any one time, unless the number purchased is the total number at the time available for purchase under the Option. 4. METHOD OF EXERCISE OF OPTION. The Option shall be exercisable by the delivery to the Corporation of a written notice stating the number of shares to be purchased pursuant to the option and accompanied by payment made in accordance with and in a form permitted by Section 2.2 of the Plan for the full purchase price of the shares to be purchased, subject to such further limitations and rules or procedures as the Committee may from time to time establish as to any non-cash payment and as to the tax withholding requirements of Section 6.5 of the Plan. The purchase price may be paid in full or in part by shares of Common Stock of the Corporation already owned by the Director; provided, however, that any shares delivered which were initially acquired upon exercise of a stock option must have been owned by the Participant at least six months as of the date of delivery. Shares of Common Stock used to satisfy the exercise price of an Option shall be valued at their Fair Market Value on the date of exercise. In addition, the Director (or the Director's Beneficiary or Personal Representative) shall furnish any written statements required pursuant to Section 6.7 of the Plan. 5. EFFECT OF TERMINATION AS DIRECTOR OR DEATH; CHANGE IN SUBSIDIARY STATUS. The Option and all other rights hereunder, to the extent not exercised, shall terminate and become null and void at such time as the Director ceases to serve as a director of either the corporation or any Subsidiary, except that: (a) if the Director ceases to serve as a director of either the Corporation or a Subsidiary for any reason other than death or Total Disability, the Director may at any time within a period of three months after such termination exercise the Option to the extent the option was exercisable at the date of such termination, provided that the Option shall terminate immediately if the Director is terminated for cause to the extent required under applicable federal banking laws, regulations or orders; (b) if the Director ceases to serve as a director of the Corporation or a Subsidiary as a result of Total Disability, the Participant or Participant's Personal Representative, as the case may be, shall have twelve months from the date of termination to exercise the Option to the extent the Option was exercisable at the date of such termination; (c) if the Director dies while in serving as a director of the Corporation or any Subsidiary, or within twelve months after a termination described in subsection (b) of this Section 5, then the Option may be exercised within a period of three months after the Director's date of death by the Director's Beneficiary 2 to the extent the Option was exercisable on the date of the Director's death (or such earlier termination); provided, however, that in no event may the option be exercised by anyone under this Section or otherwise after the Expiration Date. If the Director serves as a director of an entity which ceases to be a Subsidiary, such event shall be deemed for purposes of this Section 5 to be a termination described in subsection (a) in respect of the Director. 6. ADJUSTMENTS UPON SPECIFIED CHANGES. (a) If the outstanding shares of Common Stock are changed into or exchanged for cash or a different number or kind of shares or securities of the Corporation or of another issuer, or if additional shares or new or different securities are distributed with respect to the outstanding shares of the Common Stock, through a reorganization or merger to which the Corporation is a party, or through a combination, consolidation, recapitalization, reclassification, stock split, stock dividend, reverse stock split, stock consolidation or other capital change or adjustment, an appropriate adjustment shall be made in the number and kind of shares that are subject to or may be delivered pursuant to this Award Agreement. A corresponding adjustment to the consideration payable by the Participant to exercise the Option shall also be made. Any such adjustment, however, shall be made by making an appropriate adjustment in the price for each share subject to the Option without changing the total payment applicable to the portion of the Option not theretofore exercised. (b) Upon the dissolution or liquidation of the Corporation, or upon a reorganization, merger or consolidation of the Corporation with one or more corporations as a result of which the Corporation is not the surviving corporation, the Plan and the Option shall terminate. Notwithstanding the foregoing, the Committee may provide in writing in connection with, or in contemplation of, any such transaction for any or all of the following alternatives (separately or in combination): (i) for the assumption by the successor corporation of the option or the substitution by such corporation for the Option of options covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; (ii) for the continuance of the Plan and the Option by such successor corporation in which event the Plan and the Option shall continue in the manner and under the terms so provided; or (iii) for the payment in cash or shares 3 of Common Stock in lieu of, and in complete satisfaction of, the Option. 7. NON-TRANSFERABILITY OF OPTION. Subject to limited exceptions set forth in Section 6.1 of the Plan, the Option and any other rights of the Director under this Agreement or the Plan are nontransferable. 8. NOTICES. Any notice to be given under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal office to the attention of the Principal Accounting and Financial Officer, and to the Director at the address given beneath the Director's signature hereto, or at such other address as either party may hereafter designate in writing to the other. Any such notice shall be deemed to have been duly given when enclosed in a properly sealed envelope addressed as aforesaid, registered or certified, and deposited (postage and registry or certification fee prepaid) in a post office or branch post office regularly maintained by the United States Government. 9. PLAN. The Option and all rights of the Director thereunder are subject to, and the Director agrees to be bound by, all of the terms and conditions of the provisions of the Plan, incorporated herein by this reference, to the extent such provisions are applicable to options granted to Non-Employee Directors. In the event of a conflict or inconsistency between the terms and conditions of this Agreement and of the Plan, the terms and conditions of the Plan shall govern. The Director acknowledges receipt of a copy of the Plan, which is made a part hereof by this reference, and agrees to be bound by the terms thereof. Unless otherwise expressly provided in other Sections of this Agreement, provisions of the Plan that confer discretionary authority on the Committee do not (and shall not be deemed to) create any rights in the Director unless such rights are expressly set forth herein or are otherwise in the sole discretion of the Committee so conferred by appropriate action of the Committee under the Plan after the date hereof. 4 IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed on its behalf by a duly authorized officer and the Director has hereunto set his or her hand. CALIFORNIA COMMERCIAL BANKSHARES, a California corporation By: ------------------------------------ Title: --------------------------------- DIRECTOR --------------------------------------- (Signature) --------------------------------------- (Print Name) --------------------------------------- (Address) --------------------------------------- (City, State, Zip Code) 5 SCHEDULE I RIGHT TO EXERCISE The Option may be exercised as to _____ shares of Common Stock on and after the first anniversary of the Award Date and as to an additional _____ shares of Common Stock on and after the second anniversary of the Award Date, and as to the final _____ shares of Common Stock on and after the third anniversary of the Award Date. 6 CONSENT OF SPOUSE In consideration of the execution of the foregoing Nonqualified Stock Option Agreement by California Commercial Bankshares, I, ____________________________, the spouse of the Director herein named, do hereby join with my spouse in executing the foregoing Nonqualified Stock Option Agreement and do hereby agree to be bound by all of the terms and provisions thereof and of the Plan. DATED: _________________, 19__ -------------------------------- Signature of Spouse 7 EX-22 7 EXHIBIT 22 SUBSIDIARIES OF THE COMPANY The Company owns all of the issued and outstanding shares of National Bank of Southern California which was licensed to do business as a National Bank by the Comptroller of the Currency on January 10, 1983. The Company owns all of the issued and outstanding shares of Venture Partners, Inc., a California Corporation. EX-24 8 EXHIBIT 24 EXHIBIT 24 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statement No. 33- 39926 of California Commercial Bankshares on Form S-8 of our report dated February 9, 1995, appearing in this Annual Report on Form 10-K of California Commercial Bankshares for the year ended December 31, 1995. LOS ANGELES, CALIFORNIA MARCH 28, 1995 EX-27 9 EXHIBIT 27
9 1,000,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 28549 0 45000 0 62283 0 0 194212 6542 334043 308504 0 2069 2351 0 0 14077 70421 334043 20000 3409 1333 24742 7022 7289 17453 6600 (72) 18479 (5271) (5271) 0 0 (3341) (1.30) (1.30) 0 15573 0 0 16516 5660 6212 494 6542 5359 0 1183
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