-----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, QUr8T3IbwlxgJVW1MJhdBXsrT2NX9QB7JR+5Gzl6bKubBA3gxHvGENMDop/F/2Rc MZDdesPqtQ+PR9v9AMPBHQ== 0000921085-02-000006.txt : 20020415 0000921085-02-000006.hdr.sgml : 20020415 ACCESSION NUMBER: 0000921085-02-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL COAST BANCORP CENTRAL INDEX KEY: 0000921085 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770367061 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25418 FILM NUMBER: 02585971 BUSINESS ADDRESS: STREET 1: 301 MAIN ST CITY: SALINAS STATE: CA ZIP: 93901 BUSINESS PHONE: 4084226642 MAIL ADDRESS: STREET 1: 301 MAIN STREET CITY: SALINAS STATE: CA ZIP: 93901 FORMER COMPANY: FORMER CONFORMED NAME: SALINAS VALLEY BANCORP DATE OF NAME CHANGE: 19940330 10-K 1 tenk.txt 12/31/01 10-K UNITED STATES 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 Year ended December 31, 2001 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------- Commission file number 0-25418 ------- CENTRAL COAST BANCORP --------------------- (Exact name of registrant as specified in its charter) STATE OF CALIFORNIA 77-0367061 ------------------- ---------- (State or other jurisdiction of (I.R.S.Employer Identification No.) incorporation or organization) 301 Main Street, Salinas, California 93901 - ------------------------------------ ----- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (831) 422-6642 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class ------------------- Common Stock (no par value) 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 the 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 [ ]. The aggregate market value of the voting stock held by non-affiliates of the registrant at March 7, 2002 was $167,025,775.70. As of March 7, 2002, the registrant had 8,970,235 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference into this Form 10-K: Part III, Items 10 through 13 from registrant's definitive proxy statement for the 2002 annual meeting of shareholders. The Index to Exhibits is located at page 72 Page 1 of 200 Pages 1 CENTRAL COAST BANCORP INDEX TO ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED DECEMBER 31, 2001 Part I. Page Item 1. Business 3 Item 2. Properties 14 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Part II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 16 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 7a. Quantitative and Qualitative Disclosures About Market Risks 45 Item 8. Financial Statements and Supplementary Data 45 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 67 Part III. Item 10. Directors and Executive Officers of the Registrant 67 Item 11. Executive Compensation 67 Item 12. Security Ownership of Certain Beneficial Owners and Management 67 Item 13. Certain Relationships and Related Transactions 67 Part IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 68 Signatures 71 2 PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS. - -------------------------------- Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to, matters described in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Changes to such risks and uncertainties, which could impact future financial performance, include, among others, (1) competitive pressures in the banking industry; (2) changes in the interest rate environment; (3) general economic conditions, nationally, regionally and in operating market areas, including a decline in real estate values in the Company's market areas; (4) the effects of terrorism, including the events of September 11, 2001 and thereafter; (5) changes in the regulatory environment; (6) changes in business conditions and inflation; (7) changes in securities markets; (8) data processing compliance problems; (9) the California power crisis; (10) variances in the actual versus projected growth in assets; (11) return on assets; (12) loan losses; (13) expenses; (14) rates charged on loans and earned on securities investments; (15) rates paid on deposits; and (16) fee and other noninterest income earned, as well as other factors. This entire Annual Report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Company's business. Therefore, the information set forth therein should be carefully considered when evaluating the business prospects of the Company and the Bank. Central Coast Bancorp (the "Company") is a California corporation, located in Salinas, California and was organized in 1994 to act as a bank holding company for Bank of Salinas. In 1996, the Company acquired Cypress Bank, which was headquartered in Seaside, California. Both banks were state-charted institutions. In July of 1999, the Company merged Cypress Bank into the Bank of Salinas and then renamed Bank of Salinas as Community Bank of Central California (the "Bank"). The Bank is headquartered in Salinas and serves individuals, merchants, small and medium-sized businesses, professionals, agribusiness enterprises and wage earners located in the California Central Coast area. On February 21, 1997, the former Bank of Salinas purchased certain assets and assumed certain liabilities of the Gonzales and Castroville branch offices of Wells Fargo Bank. As a result of the transaction the Bank assumed deposit liabilities, received cash, and acquired tangible assets. This transaction resulted in intangible assets, representing the excess of the liabilities assumed over the fair value of the tangible assets acquired. In January 1997, the former Cypress Bank opened a new branch office in Monterey, California, so that it might better serve business and individual customers on the Monterey Peninsula. In December 1998, the former Bank of Salinas opened an additional new branch office in Salinas, California, to better provide services to the growing Salinas community. In June of 2000, the Bank opened a new branch office in Watsonville, which is in Santa Cruz County. In October of 2000, another new branch office was opened in Hollister, which is in San Benito County. The opening of these two branch offices was a first step in expanding the Bank's service area to include 3 communities in contiguous counties outside of Monterey County. In February 2002, the Bank received regulatory approval to open a new branch in Gilroy, California. The estimated opening date for the branch is April 15, 2002. Gilroy is located at the southern end of the Santa Clara Valley in Santa Clara County. These three communities are of similar economic make-up to the agricultural based communities the Bank serves in Monterey County. Until August 16, 2001, the Company conducted no significant activities other than holding the shares of the subsidiary Bank. On August 16, 2001 the Company notified the Board of Governors of the Federal Reserve System (the "Board of Governors"), the Company's principal regulator, that the Company was engaged in certain lending activities. The Company purchased a loan from the Bank that the Bank had originated for a local agency that was categorized as a large issuer for taxation purposes. The Company is able to use the tax benefits of such loans. The Company may purchase similar loans in the future. Upon prior notification to the Board of Governors, the Company is authorized to engage in a variety of activities, which are deemed closely related to the business of banking. The Bank operates through its main office in Salinas and through nine branch offices located in Castroville, Hollister, Gonzales, King City, Marina, Monterey, Salinas, Seaside and Watsonville, California. The Bank offers a full range of commercial banking services, including the acceptance of demand, savings and time deposits, and the making of commercial, real estate (including residential mortgage), Small Business Administration, personal, home improvement, automobile and other installment and term loans. The Bank also currently offers personal and business Visa credit cards. It also offers ATM and Visa debit cards, travelers' checks, safe deposit boxes, notary public, customer courier and other customary bank services. Most of the Bank's offices are open from 9:00 a.m. to 5:00 p.m., Monday through Thursday and 9:00 a.m. to 6:00 p.m. on Friday. The Westridge and Marina branch offices are also open from 9:00 a.m. to 1:00 p.m. on Saturdays. Additionally, on a 24-hour basis, customers can bank by telephone or online at the Bank's Internet site, www.community-bnk.com. The Bank also operates a limited service facility in a retirement home located in Salinas, California. The facility is open from 10:00 a.m. to 12:00 p.m. on Wednesday of each week. The Bank has automated teller machines (ATMs) located at the Castroville, Hollister, Gonzales, King City, Marina, Monterey, Salinas, Seaside and Watsonville offices, the Monterey County Fairgrounds, the Soledad Correctional Training Facility Credit Union, Salinas Valley Memorial Hospital and Fort Hunter Liggett which is located in Jolon, California. The Bank is insured under the Federal Deposit Insurance Act and each depositor's account is insured up to the legal limits thereon. The Bank is chartered (licensed) by the California Commissioner of Financial Institutions ("Commissioner") and has chosen not to become a member of the Federal Reserve System. The Bank has no subsidiaries. The Company operates an on-site computer system, which provides independent processing of its deposits, loans and financial accounting. The Bank concentrates its lending activities in four principal areas: commercial loans (including agricultural loans); consumer loans; real estate construction loans (both commercial and personal) and real estate-other loans. At December 31, 2001, these four categories accounted for approximately 33%, 3%, 14% and 50% of the Bank's loan portfolio, respectively. The Bank's deposits are attracted primarily from individuals, merchants, small and medium-sized businesses, professionals and agribusiness enterprises. The Bank's deposits are not received from a single depositor or group of affiliated depositors the loss of any one of which would have a materially adverse effect on the business of the Bank. A material portion of the Bank's deposits is not concentrated within a single industry or group of related industries. 4 As of December 31, 2001, the Bank served a total of 27 state, municipality and governmental agency depositors totaling $82,559,000 in deposits. Of this amount $30,000,000 is attributable to certificates of deposit for the State of California. In connection with the deposits of municipalities or other governmental agencies or entities, the Bank is generally required to pledge securities to secure such deposits, except for the first $100,000 of such deposits, which are insured by the Federal Deposit Insurance Corporation ("FDIC"). As of December 31, 2001, the Bank had total deposits of $724,862,000. Of this total, $231,501,000 represented noninterest-bearing demand deposits, $105,949,000 represented interest-bearing demand deposits, and $387,412,000 represented interest-bearing savings and time deposits. The principal sources of the Bank's revenues are: (i) interest and fees on loans; (ii) interest on investments (principally government securities); and (iii) interest on Federal Funds sold (funds loaned on a short-term basis to other banks). For the fiscal year ended December 31, 2001, these sources comprised 83.3 percent, 15.9 percent, and 0.8 percent, respectively, of the Bank's total interest income. SUPERVISION AND REGULATION - -------------------------- The common stock of the Company is subject to the registration requirements of the Securities Act of 1933, as amended, and the qualification requirements of the California Corporate Securities Law of 1968, as amended. The Bank's common stock, however, is exempt from such requirements. The Company is also subject to the periodic reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended, which include, but are not limited to, annual, quarterly and other current reports with the Securities and Exchange Commission. The Bank is licensed by the California Commissioner of Financial Institutions. Its deposits are insured by the FDIC, and it has chosen not to become a member of the Federal Reserve System. Consequently, the Bank is subject to the supervision of, and is regularly examined by, the Commissioner and the FDIC. Such supervision and regulation include comprehensive reviews of all major aspects of the Bank's business and condition, including its capital ratios, allowance for probable loan losses and other factors. However, no inference should be drawn that such authorities have approved any such factors. The Company and the Bank are required to file reports with the Commissioner, the FDIC and the Board of Governors and provide such additional information as the Commissioner, FDIC and the Board of Governors may require. The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is registered as such with, and subject to the supervision of, the Board of Governors. The Company is required to obtain the approval of the Board of Governors before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, the Company would own or control more than 5% of the voting shares of such bank. The Bank Holding Company Act prohibits the Company from acquiring any voting shares of, or interest in, all or substantially all of the assets of, a bank located outside the State of California unless such an acquisition is specifically authorized by the laws of the state in which such bank is located. Any such interstate acquisition is also subject to the provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. 5 The Company, and any subsidiaries, which it may acquire or organize, are deemed to be "affiliates" of the Bank within the meaning of that term as defined in the Federal Reserve Act. This means, for example, that there are limitations (a) on loans by the Bank to affiliates, and (b) on investments by the Bank in affiliates' stock as collateral for loans to any borrower. The Company and its subsidiaries are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities. In addition, regulations of the Board of Governors promulgated under the Federal Reserve Act require that reserves be maintained by the Bank in conjunction with any liability of the Company under any obligation (demand deposits, promissory note, acknowledgement of advance, banker's acceptance or similar obligation) with a weighted average maturity of less than seven (7) years to the extent that the proceeds of such obligations are used for the purpose of supplying funds to the Bank for use in its banking business, or to maintain the availability of such funds. The Board of Governors and the FDIC have adopted risk-based capital guidelines for evaluating the capital adequacy of bank holding companies and banks. The guidelines are designed to make capital requirements sensitive to differences in risk profiles among banking organizations, to take into account off-balance sheet exposures and to aid in making the definition of bank capital uniform internationally. Under the guidelines, the Company and the Bank are required to maintain capital equal to at least 8.0% of its assets and commitments to extend credit, weighted by risk, of which at least 4.0% must consist primarily of common equity (including retained earnings) and the remainder may consist of subordinated debt, cumulative preferred stock, or a limited amount of loan loss reserves. Assets, commitments to extend credit, and off-balance sheet items are categorized according to risk and certain assets considered to present less risk than others permit maintenance of capital at less than the 8% ratio. For example, most home mortgage loans are placed in a 50% risk category and therefore require maintenance of capital equal to 4% of such loans, while commercial loans are placed in a 100% risk category and therefore require maintenance of capital equal to 8% of such loans. The Company and the Bank are subject to regulations issued by the Board of Governors and the FDIC, which require maintenance of a certain level of capital. These regulations impose two capital standards: a risk-based capital standard and a leverage capital standard. Under the Board of Governors' risk-based capital guidelines, assets reported on an institution's balance sheet and certain off-balance sheet items are assigned to risk categories, each of which has an assigned risk weight. Capital ratios are calculated by dividing the institution's qualifying capital by its period-end risk- weighted assets. The guidelines establish two categories of qualifying capital: Tier 1 capital (defined to include common shareholders' equity and noncumulative perpetual preferred stock) and Tier 2 capital which includes, among other items, limited life (and in case of banks, cumulative) preferred stock, mandatory convertible securities, subordinated debt and a limited amount of reserve for loan losses. Tier 2 capital may also include up to 45% of the pretax net unrealized gains on certain available-for-sale 6 equity securities having readily determinable fair values (i.e. the excess, if any, of fair market value over the book value or historical cost of the investment security). The federal regulatory agencies reserve the right to exclude all or a portion of the unrealized gains upon a determination that the equity securities are not prudently valued. Unrealized gains and losses on other types of assets, such as bank premises and available-for-sale debt securities, are not included in Tier 2 capital, but may be taken into account in the evaluation of overall capital adequacy and net unrealized losses on available-for-sale equity securities will continue to be deducted from Tier 1 capital as a cushion against risk. Each institution is required to maintain a risk-based capital ratio (including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier 1 capital. Under the Board of Governors' leverage capital standard an institution is required to maintain a minimum ratio of Tier 1 capital to the sum of its quarterly average total assets and quarterly average reserve for loan losses, less intangibles not included in Tier 1 capital. Period-end assets may be used in place of quarterly average total assets on a case-by-case basis. The Board of Governors and the FDIC have also adopted a minimum leverage ratio for bank holding companies as a supplement to the risk-weighted capital guidelines. The leverage ratio establishes a minimum Tier 1 ratio of 3% (Tier 1 capital to total assets) for the highest rated bank holding companies or those that have implemented the risk-based capital market risk measure. All other bank holding companies must maintain a minimum Tier 1 leverage ratio of 4% with higher leverage capital ratios required for bank holding companies that have significant financial and/or operational weakness, a high risk profile, or are undergoing or anticipating rapid growth. At December 31, 2001, the Bank and the Company are in compliance with the risk-based capital and leverage ratios described above. See Footnote 14 to the Consolidated Financial Statements in Item 8 "Financial Statements and Supplementary Data" below for a listing of the Company's and the Bank's risk-based capital ratios at December 31, 2001 and 2000. The Board of Governors and FDIC adopted regulations implementing a system of prompt corrective action pursuant to Section 38 of the Federal Deposit Insurance Act and Section 131 of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The regulations establish five capital categories with the following characteristics: (1) "Well capitalized" - consisting of institutions with a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive; (2) "Adequately capitalized" - consisting of institutions with a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater, and the institution does not meet the definition of a "well capitalized" institution; (3) "Undercapitalized" - consisting of institutions with a total risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less than 4%; (4) "Significantly undercapitalized" - consisting of institutions with a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%; (5) "Critically undercapitalized" - consisting of an institution with a ratio of tangible equity to total assets that is equal to or less than 2%. The regulations established procedures for classification of financial institutions within the capital categories, filing and reviewing capital restoration plans required under the regulations and procedures for issuance of directives by the appropriate regulatory agency, among other matters. The regulations impose restrictions upon all institutions to refrain from certain actions which would cause an institution to be classified within any one of the three "undercapitalized" categories, such as declaration of dividends or other capital distributions or payment of management fees, if following the distribution or payment the institution would be classified within one of the "undercapitalized" categories. In addition, institutions which are classified in one of the three "undercapitalized" categories are subject to certain mandatory and discretionary supervisory actions. Mandatory supervisory 7 actions include (1) increased monitoring and review by the appropriate federal banking agency; (2) implementation of a capital restoration plan; (3) total asset growth restrictions; and (4) limitation upon acquisitions, branch office expansion, and new business activities without prior approval of the appropriate federal banking agency. Discretionary supervisory actions may include (1) requirements to augment capital; (2) restrictions upon affiliate transactions; (3) restrictions upon deposit gathering activities and interest rates paid; (4) replacement of senior executive officers and directors; (5) restrictions upon activities of the institution and its affiliates; (6) requiring divestiture or sale of the institution; and (7) any other supervisory action that the appropriate federal banking agency determines is necessary to further the purposes of the regulations. Further, the federal banking agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company under the guaranty is limited to the lesser of (i) an amount equal to 5 percent of the depository institution's total assets at the time it became undercapitalized, and (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it were "significantly undercapitalized." FDICIA also restricts the solicitation and acceptance of and interest rates payable on brokered deposits by insured depository institutions that are not "well capitalized." An "undercapitalized" institution is not allowed to solicit deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on insured deposits in the particular institution's normal market areas or in the market areas in which such deposits would otherwise be accepted. Any financial institution which is classified as "critically undercapitalized" must be placed in conservatorship or receivership within 90 days of such determination unless it is also determined that some other course of action would better serve the purposes of the regulations. Critically undercapitalized institutions are also prohibited from making (but not accruing) any payment of principal or interest on subordinated debt without the prior approval of the FDIC and the FDIC must prohibit a critically undercapitalized institution from taking certain other actions without its prior approval, including (1) entering into any material transaction other than in the usual course of business, including investment expansion, acquisition, sale of assets or other similar actions; (2) extending credit for any highly leveraged transaction; (3) amending articles or bylaws unless required to do so to comply with any law, regulation or order; (4) making any material change in accounting methods; (5) engaging in certain affiliate transactions; (6) paying excessive compensation or bonuses; and (7) paying interest on new or renewed liabilities at rates which would increase the weighted average costs of funds beyond prevailing rates in the institution's normal market areas. Under the FDICIA, the federal financial institution agencies have adopted regulations which require institutions to establish and maintain comprehensive written real estate policies which address certain lending considerations, including loan-to-value limits, loan administrative policies, portfolio diversification standards, and documentation, approval and reporting requirements. The FDICIA further generally prohibits an insured state bank from engaging as a principal in any activity that is impermissible for a national bank, absent FDIC determination that the activity would not pose a significant risk to the Bank Insurance Fund, and that the bank is, and will continue to be, within applicable capital standards. Similar restrictions apply to subsidiaries of insured state banks. The Company does not 8 currently intend to engage in any activities which would be restricted or prohibited under the FDICIA. The Federal Financial Institution Examination Counsel ("FFIEC") on December 13, 1996, approved an updated Uniform Financial Institutions Rating System ("UFIRS"). In addition to the five components traditionally included in the so-called "CAMEL" rating system which has been used by bank examiners for a number of years to classify and evaluate the soundness of financial institutions (including capital adequacy, asset quality, management, earnings and liquidity), UFIRS includes for all bank regulatory examinations conducted on or after January 1, 1997, a new rating for a sixth category identified as sensitivity to market risk. Ratings in this category are intended to reflect the degree to which changes in interest rates, foreign exchange rates, commodity prices or equity prices may adversely affect an institution's earnings and capital. The revised rating system is identified as the "CAMELS" system. The federal financial institution agencies have established bases for analysis and standards for assessing a financial institution's capital adequacy in conjunction with the risk-based capital guidelines including analysis of interest rate risk, concentrations of credit risk, risk posed by non-traditional activities, and factors affecting overall safety and soundness. The safety and soundness standards for insured financial institutions include analysis of (1) internal controls, information systems and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; (6) compensation, fees and benefits; and (7) excessive compensation for executive officers, directors or principal shareholders which could lead to material financial loss. If an agency determines that an institution fails to meet any standard, the agency may require the financial institution to submit to the agency an acceptable plan to achieve compliance with the standard. If the agency requires submission of a compliance plan and the institution fails to timely submit an acceptable plan or to implement an accepted plan, the agency must require the institution to correct the deficiency. The agencies may elect to initiate enforcement action in certain cases rather than rely on an existing plan particularly where failure to meet one or more of the standards could threaten the safe and sound operation of the institution. Community Reinvestment Act ("CRA") regulations evaluate banks' lending to low and moderate income individuals and businesses across a four-point scale from "outstanding" to "substantial noncompliance," and are a factor in regulatory review of applications to merge, establish new branch offices or form bank holding companies. In addition, any bank rated in "substantial noncompliance" with the CRA regulations may be subject to enforcement proceedings. The Bank has a current rating of "outstanding" for CRA compliance. The Company's ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law. Funds for payment of any cash dividends by the Company would be obtained from its investments as well as dividends and/or management fees from the Bank. The payment of cash dividends and/or management fees by the Bank is subject to restrictions set forth in the California Financial Code, as well as restrictions established by the FDIC. See Item 5 below for further information regarding the payment of cash dividends by the Company and the Bank. 9 COMPETITION - ----------- At June 30, 2001, the competing commercial and savings banks had 67 branch offices in the cities of Castroville, Hollister, Gonzales, King City, Marina, Monterey, Salinas, Seaside and Watsonville where the Bank has its ten branch offices. Additionally, the Bank competes with thrifts and, to a lesser extent, credit unions, finance companies and other financial service providers for deposit and loan customers. Larger banks may have a competitive advantage because of higher lending limits and major advertising and marketing campaigns. They also perform services, such as trust services, international banking, discount brokerage and insurance services, which the Bank is not authorized nor prepared to offer currently. The Bank has made arrangements with its correspondent banks and with others to provide some of these services for its customers. For borrowers requiring loans in excess of the Bank's legal lending limits, the Bank has offered, and intends to offer in the future, such loans on a participating basis with its correspondent banks and with other independent banks, retaining the portion of such loans which is within its lending limits. As of December 31, 2001, the Bank's aggregate legal lending limits to a single borrower and such borrower's related parties were $10,351,000 on an unsecured basis and $17,252,000 on a fully secured basis based on regulatory capital of $69,007,000 The Bank's business is concentrated in its service area, which primarily encompasses Monterey County, including the Salinas Valley area. In 2000 the Bank expanded its service area to include Hollister and Watsonville in San Benito and Santa Cruz Counties, respectively. As previously mentioned, the Bank has received FDIC and State approval to open a branch in Gilroy, which is in Santa Clara County. The Gilroy branch is expected to open in April 2002. The economy of the Bank's service area is dependent upon agriculture, tourism, retail sales, population growth and smaller service oriented businesses. Based upon data as of the most recent practicable date (June 30, 20011), there were 71 operating commercial and savings bank branch offices in Monterey County with total deposits of $4,474,913,000. This was an increase of $409,794,000 over the June 30, 2000 balances. The Bank held a total of $643,094,000 in deposits, representing approximately 14.4% of total commercial and savings banks deposits in Monterey County as of June 30, 2001. In the two new expansion areas of Hollister and Watsonville, at June 30, 2001, there were 8 and 12 branch offices with total deposits of $516,569,000 and $716,450,000, respectively. At that date, the Bank had deposits of $23,022,000 and $8,612,000 in those two communities. In order to compete with the major financial institutions in their primary service areas, the Bank uses to the fullest extent possible, the flexibility which is accorded by its independent status. This includes an emphasis on specialized services, local promotional activity, and personal contacts by the Bank's officers, directors and employees. The Bank also seeks to provide special services and programs for individuals in its primary service area who are employed in the agricultural, professional and business fields, such as loans for equipment, furniture, tools of the trade or expansion of practices or businesses. In the event there are customers whose loan demands exceed the Bank's lending limits, the Bank seeks to arrange for such loans on a participation basis with other financial institutions. The Bank also assists those customers requiring services not offered by the Bank to obtain such services from correspondent banks. - -------- 1. "FDIC Institution Office Deposits:, June 30, 2001 10 Banking is a business that depends on interest rate differentials. In general, the difference between the interest rate paid by the Bank to obtain their deposits and other borrowings and the interest rate received by the Bank on loans extended to customers and on securities held in the Bank's portfolio comprise the major portion of the Bank's earnings. Commercial banks compete with savings and loan associations, credit unions, other financial institutions and other entities for funds. For instance, yields on corporate and government debt securities and other commercial paper affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for loans with savings and loan associations, credit unions, consumer finance companies, mortgage companies and other lending institutions. The interest rate differentials of the Bank, and therefore its earnings, are affected not only by general economic conditions, both domestic and foreign, but also by the monetary and fiscal policies of the United States as set by statutes and as implemented by federal agencies, particularly the Federal Reserve Board. This Agency can and does implement national monetary policy, such as seeking to curb inflation and combat recession, by its open market operations in United States government securities, adjustments in the amount of interest-free reserves that banks and other financial institutions are required to maintain, and adjustments to the discount rates applicable to borrowing by banks from the Federal Reserve Board. These activities influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and timing of any future changes in monetary policies and their impact on the Bank are not predictable. In 2001 the Federal Reserve Board lowered rates eleven times for a total of 475 basis points. The Federal Funds rate went from 6.50% at the beginning of the year to 1.75% at the end of the year. Such rate changes were not anticipated and they adversely impacted the Bank's net interest income for 2001 and will continue to do so in 2002. In 1996, pursuant to Congressional mandate, the FDIC reduced bank deposit insurance assessment rates to a range from $0 to $0.27 per $100 of deposits, dependent upon a bank's risk. Based upon the above risk-based assessment rate schedule, the Bank's current capital ratios and the Bank's current levels of deposits, the Bank anticipates no change in the assessment rate applicable to the Bank during 2002 from that in 2001. Since 1996, California law implementing certain provisions of prior federal law has (1) permitted interstate merger transactions; (2) prohibited interstate branching through the acquisition of a branch office business unit located in California without acquisition of the whole business unit of the California bank; and (3) prohibited interstate branching through de novo establishment of California branch offices. Initial entry into California by an out-of-state institution must be accomplished by acquisition of or merger with an existing whole bank which has been in existence for at least five years. The federal financial institution agencies, especially the Office of the Comptroller of the Currency ("OCC") and the Board of Governors, have taken steps to increase the types of activities in which national banks and bank holding companies can engage, and to make it easier to engage in such activities. The OCC has issued regulations permitting national banks to engage in a wider range of activities through subsidiaries. "Eligible institutions" (those national banks that are well capitalized, have a high overall rating and a satisfactory CRA rating, and are not subject to an enforcement order) may engage in activities related to banking through operating subsidiaries subject to an expedited application process. In addition, a national bank may apply to the OCC to engage in an activity through a subsidiary in which the bank itself may not engage. 11 On November 12, 1999, President Clinton signed into law The Financial Services Modernization Act of 1999 (the "FSMA"), which is potentially the most significant banking legislation in many years. The FSMA eliminates most of the remaining depression-era "firewalls" between banks, securities firms and insurance companies which was established by The Banking Act of 1933, also known as the Glass-Steagall Act ("Glass-Steagall"). Glass-Steagall sought to insulate banks as depository institutions from the perceived risks of securities dealing and underwriting, and related activities. The FSMA repeals Section 20 of Glass-Steagall which prohibited banks from affiliating with securities firms. Bank holding companies that can qualify as "financial holding companies" can now acquire securities firms or create them as subsidiaries, and securities firms can now acquire banks or start banking activities through a financial holding company. The FSMA includes provisions which permit national banks to conduct financial activities through a subsidiary that are permissible for a national bank to engage in directly, as well as certain activities authorized by statute, or that are financial in nature or incidental to financial activities to the same extent as permitted to a "financial holding company" or its affiliates. This liberalization of United States banking and financial services regulation applies both to domestic institutions and foreign institutions conducting business in the United States. Consequently, the common ownership of banks, securities firms and insurance firms is now possible, as is the conduct of commercial banking, merchant banking, investment management, securities underwriting and insurance within a single financial institution using a "financial holding company" structure authorized by the FSMA. Prior to the FSMA, significant restrictions existed on the affiliation of banks with securities firms and on the direct conduct by banks of securities dealing and underwriting and related securities activities. Banks were also (with minor exceptions) prohibited from engaging in insurance activities or affiliating with insurers. The FSMA removes these restrictions and substantially eliminates the prohibitions under the Bank Holding Company Act on affiliations between banks and insurance companies. Bank holding companies which qualify as financial holding companies can now insure, guarantee, or indemnify against loss, harm, damage, illness, disability, or death; issue annuities; and act as a principal, agent, or broker regarding such insurance services. In order for a commercial bank to affiliate with a securities firm or an insurance company pursuant to the FSMA, its bank holding company must qualify as a financial holding company. A bank holding company will qualify if (i) its banking subsidiaries are "well capitalized" and "well managed" and (ii) it files with the Board of Governors a certification to such effect and a declaration that it elects to become a financial holding company. The amendment of the Bank Holding Company Act now permits financial holding companies to engage in activities, and acquire companies engaged in activities, that are financial in nature or incidental to such financial activities. Financial holding companies are also permitted to engage in activities that are complementary to financial activities if the Board of Governors determines that the activity does not pose a substantial risk to the safety or soundness of depository institutions or the financial system in general. These standards expand upon the list of activities "closely related to banking" which have to date defined the permissible activities of bank holding companies under the Bank Holding Company Act. One further effect of the Act is to require that financial institutions must respect the privacy of their customers and protect the security and confidentiality of customers' non-public personal information. These regulations require, in general, that financial institutions (1) may not disclose non-public personal information of customers to non-affiliated third parties without 12 notice to their customers, who must have an opportunity to direct that such information not be disclosed; (2) may not disclose customer account numbers except to consumer reporting agencies; and (3) must give prior disclosure of their privacy policies before establishing new customer relationships. The Company and the Bank have not determined whether or when either of them may seek to acquire and exercise new powers or activities under the FSMA, and the extent to which competition will change among financial institutions affected by the FSMA has not yet become clear. On October 26, 2001, President Bush signed the USA Patriot Act (the "Patriot Act"), which includes provisions pertaining to domestic security, surveillance procedures, border protection, and terrorism laws to be administered by the Secretary of the Treasury. Title III of the Patriot Act entitled, "International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001" includes amendments to the Bank Secrecy Act which expand the responsibilities of financial institutions in regard to anti-money laundering activities with particular emphasis upon international money laundering and terrorism financing activities through designated correspondent and private banking accounts. Effective December 25, 2001, Section 313(a) of the Patriot Act prohibits any insured financial institution such as the Bank, from providing correspondent accounts to foreign banks which do not have a physical presence in any country (designated as "shell banks"), subject to certain exceptions for regulated affiliates of foreign banks. Section 313(a) also requires financial institutions to take reasonable steps to ensure that foreign bank correspondent accounts are not being used to indirectly provide banking services to foreign shell banks, and Section 319(b) requires financial institutions to maintain records of the owners and agent for service of process of any such foreign banks with whom correspondent accounts have been established. Effective July 23, 2002, Section 312 of the Patriot Act creates a requirement for special due diligence for correspondent accounts and private banking accounts. Under Section 312, each financial institution that establishes, maintains, administers, or manages a private banking account or a correspondent account in the United States for a non-United States person, including a foreign individual visiting the United States, or a representative of a non-United States person shall establish appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and record instances of money laundering through those accounts. The Company and the Bank are not currently aware of any account relationships between the Bank and any foreign bank or other person or entity as described above under Sections 313(a) or 312 of the Patriot Act. The terrorist attacks on September 11, 2001 have realigned national security priorities of the United States and it is reasonable to anticipate that the United States Congress may enact additional legislation in the future to combat terrorism including modifications to existing laws such as the Patriot Act to expand powers as deemed necessary. The effects which the Patriot Act and any additional legislation enacted by Congress may have upon financial institutions is uncertain; however, such legislation would likely increase compliance costs and thereby potentially have an adverse effect upon the Company's results of operations. Certain legislative and regulatory proposals that could affect the Bank and the banking business in general are periodically 13 introduced before the United States Congress, the California State Legislature and Federal and state government agencies. It is not known to what extent, if any, legislative proposals will be enacted and what effect such legislation would have on the structure, regulation and competitive relationships of financial institutions. It is likely, however, that such legislation could subject the Company and the Bank to increases in regulation, disclosure and reporting requirements, competition and the Bank's cost of doing business. In addition to legislative changes, the various federal and state financial institution regulatory agencies frequently propose rules and regulations to implement and enforce already existing legislation. It cannot be predicted whether or in what form any such rules or regulations will be enacted or the effect that such and regulations may have on the Company and the Bank. As of December 31, 2001, the Company employed 221 persons primarily on a full time basis. None of the Company's employees are represented by a labor union and the Company considers its employee relations to be good ITEM 2. PROPERTIES The headquarters office and centralized operations of the Company are located at 301 Main Street, Salinas, California. The Company owns and leases properties that house administrative and data processing functions and ten banking offices. Owned and leased facilities are listed below. 301 Main Street 1658 Fremont Boulevard Salinas, California Seaside, California 32,500 square feet 2,800 square feet Leased (term expires 2007, Leased (term expires 2009 With two 7 1/2 year renewal with one 10 year renewal options) options) Current monthly rent of Current monthly rent of $21,397.08 $5,273.04 10601 Merritt Street 228 Reservation Road Castroville, California Marina, California 2,500 square feet 3,000 square feet Owned Leased (term expires 2004 with three 5 year renewal options) Current monthly rent of $3,090.00 400 Alta Street 599 Lighthouse Avenue Gonzales, California Monterey, California. 5,175 square feet 2,160 square feet Leased (term expires 2003 Leased (term expires 2004 with three 5 year renewal with two 10 year renewal options) options) Current monthly rent of Current monthly rent of $4,132.00 $6,271.92 14 532 Broadway 155 Westridge Drive King City, California Watsonville, California 4,000 square feet 971 square feet Leased (term expires 2009 Leased (term expires 2003 with two 5 year renewal with two 3 year renewal options) options) Current monthly rent of Current monthly rent of $5,160.00 $1,602.15 1285 North Davis Road 491 Tres Pinos Road Salinas, California. Hollister, California 3,200 square feet 2,800 square feet Leased (term expires 2008 Leased (term expires 2006 with two 5 year renewal with one 3 year renewal options) option) Current monthly rent of Current monthly rent of $7,728.00 $3,920.00 761 First Street Gilroy, California 2,670 square feet Leased (dated February 2002) term expires 2007 with one five year renewal option) Current monthly rent of $5,206 The above leases contain options to extend for three to fifteen years. Included in the above are two facilities leased from shareholders at terms and conditions which management believes are consistent with the commercial lease market. Rental rates are adjusted annually for changes in certain economic indices. The annual minimum lease commitments are set forth in Footnote 5 of Item 8 Financial Statements and Supplementary Data included in this report and incorporated here by reference. The foregoing summary descriptions of leased premises are qualified in their entirety by reference to the lease agreements listed as exhibits hereto at page 72. ITEM 3. LEGAL PROCEEDINGS There are no material proceedings adverse to the Company or the Bank to which any director, officer, affiliate of the Company or 5% shareholder of the Company or the Bank, or any associate of any such director, officer, affiliate or 5% shareholder of the Company or Bank are a party, and none of the above persons has a material interest adverse to the Company or the Bank. Neither the Company nor the Bank are a party to any pending legal or administrative proceedings (other than ordinary routine litigation incidental to the Company's or the Bank's business) and no such proceedings are known to be contemplated. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2001. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information The Company's common stock is listed on the Nasdaq National Market exchange (trading symbol: CCBN). The table below presents the range of high and low prices for the common stock for the two most recent fiscal years based on information provided to the Company from Nasdaq. The prices have been restated to reflect the 10% stock dividends paid in February 2000 and 2001 and the 5 for 4 stock split in February 2002.
Calendar Year Low High - ------------- --- ---- 2001 First Quarter $13.00 $ 15.80 Second Quarter 14.80 21.00 Third Quarter 15.40 20.08 Fourth Quarter 15.72 18.34 2000 First Quarter $10.42 $ 12.18 Second Quarter 10.64 11.64 Third Quarter 11.00 12.36 Fourth Quarter 12.18 13.41
The closing price for the Company's common stock was $18.62 as of March 7, 2002. (b) Holders ------- As of March 7, 2002, there were approximately 2,300 holders of the common stock of the Company. There are no other classes of common equity outstanding. (c) Dividends --------- The Company's shareholders are entitled to receive dividends when and as declared by its Board of Directors, out of funds legally available therefor, subject to the restrictions set forth in the California General Corporation Law (the "Corporation Law"). The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The Corporation Law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets two conditions, which generally stated are as follows: (1) the corporation's assets equal at least 1-1/4 times its liabilities; and (2) the corporation's current assets equal at least its current liabilities or, if the average of the corporation's earnings before taxes on income and before interest expenses for the two preceding fiscal years was less than the average of the corporation's interest expenses for such fiscal years, then the corporation's current assets must equal at least 16 1-1/4 times its current liabilities. Funds for payment of any cash dividends by the Company would be obtained from its investments as well as dividends and/or management fees from the Bank. The payment of cash dividends by the subsidiary Bank is subject to restrictions set forth in the California Financial Code (the "Financial Code"). The Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of (a) the bank's retained earnings; or (b) the bank's net income for its last three fiscal years, less the amount of any distributions made by the bank or by any majority-owned subsidiary of the bank to the shareholders of the bank during such period. However, a bank may, with the approval of the Commissioner, make a distribution to its shareholders in an amount not exceeding the greater of (a) its retained earnings; (b) its net income for its last fiscal year; or (c) its net income for its current fiscal year. In the event that the Commissioner determines that the shareholders' equity of a bank is inadequate or that the making of a distribution by the bank would be unsafe or unsound, the Commissioner may order the bank to refrain from making a proposed distribution. The FDIC may also restrict the payment of dividends if such payment would be deemed unsafe or unsound or if after the payment of such dividends, the bank would be included in one of the "undercapitalized" categories for capital adequacy purposes pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991. Additionally, while the Board of Governors has no general restriction with respect to the payment of cash dividends by an adequately capitalized bank to its parent holding company, the Board of Governors might, under certain circumstances, place restrictions on the ability of a particular bank to pay dividends based upon peer group averages and the performance and maturity of the particular bank, or object to management fees on the basis that such fees cannot be supported by the value of the services rendered or are not the result of an arm's length transaction. Under these provisions and considering minimum regulatory capital requirements, the amount available for distribution from the Bank to the Company was approximately $9,003,000 as of December 31, 2001. To date, the Company has not paid a cash dividend and presently does not intend to pay cash dividends in the foreseeable future. The Company distributed a five-for-four stock split in February 2002, a ten percent stock dividend in February 2001 and a ten percent stock dividend in 2000. The Board of Directors will determine payment of dividends in the future after consideration of various factors including the profitability and capital adequacy of the Company and the Bank. 17 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected consolidated financial data concerning the business of the Company and its subsidiary Bank. This information should be read in conjunction with the Consolidated Financial Statements, the notes thereto, and Management's Discussion and Analysis included in this report. Earnings per share information has been adjusted retroactively for all stock dividends and stock splits.
As of and for the Year Ended December 31 ------------------------------------------------------------------------ In thousands (except per share data) 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Operating Results - ----------------- Total Interest Income $ 51,747 $ 51,415 $ 41,517 $ 37,354 $ 33,916 Total Interest Expense 18,360 18,290 13,648 13,319 12,041 ------------------------------------------------------------------------ Net Interest Income 33,387 33,125 27,869 24,035 21,875 Provision for Loan Losses 2,635 3,983 1,484 159 64 ------------------------------------------------------------------------ Net Interest Income After Provision for Credit Losses 30,752 29,142 26,385 23,876 21,811 Noninterest Income 3,129 2,433 2,231 2,084 1,765 Noninterest Expenses 19,223 17,408 16,043 13,859 12,573 ------------------------------------------------------------------------ Income before Income Taxes 14,658 14,167 12,573 12,101 11,003 Income Taxes 5,149 5,241 4,522 4,948 4,500 ------------------------------------------------------------------------ Net Income $ 9,509 $ 8,926 $ 8,051 $ 7,153 $ 6,503 - ---------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share $ 1.05 $ 0.94 $ 0.82 $ 0.78 $ 0.72 Diluted Earnings Per Share 1.01 0.91 0.80 0.72 0.66 - ---------------------------------------------------------------------------------------------------------------- Financial Condition and Capital - Year-End Balances Total Loans $ 606,300 $ 473,395 $ 395,597 $ 312,170 $ 255,494 Total Assets 802,266 706,693 593,445 543,933 497,674 Total Deposits 724,862 633,209 518,189 489,192 450,301 Shareholders' Equity 65,336 59,854 53,305 51,199 43,724 - ---------------------------------------------------------------------------------------------------------------- Financial Condition and Capital - Average Balances Total Loans $ 522,884 $ 424,172 $ 352,936 $ 275,850 $ 243,022 Total Assets 727,198 632,953 562,073 499,354 441,013 Total Deposits 648,664 565,487 494,266 447,598 396,457 Shareholders' Equity 62,918 55,762 52,069 47,587 39,969 - ---------------------------------------------------------------------------------------------------------------- Selected Financial Ratios Rate of Return on: Average Total Assets 1.31% 1.41% 1.43% 1.43% 1.47% Average Shareholders' Equity 15.11% 16.01% 15.46% 15.03% 16.27% Rate of Average Shareholders' Equity to Total Average Assets 8.65% 8.81% 9.26% 9.53% 9.06% - ----------------------------------------------------------------------------------------------------------------
18 (a) Average Balance Sheet and Net Interest Margin --------------------------------------------- (1) Distribution of Assets, Liabilities and Equity; Interest Rates and Interest Differential - Table One in Item 7. - "Management's Discussion and Analysis" included in this report sets forth the Company's average balance sheets (based on daily averages) and an analysis of interest rates and the interest rate differential for each of the three years in the period ended December 31, 2001 and is incorporated here by reference. (2) Volume/Rate Analysis - Information as to the impact of changes in average rates and average balances on interest earning assets and interest bearing liabilities is set forth in Table Two in Item 7. - "Management's Discussion and Analysis" and is incorporated here by reference. (b) Investment Portfolio -------------------- (1) The book value of investment securities at December 31, 2001 and 2000 is set forth in Note 4 to the Consolidated Financial Statements included in Item 8 - "Financial Statements and Supplementary Data" included in this report and is incorporated here by reference. (2) The book value, maturities and weighted average yields of investment securities as of December 31, 2001 are set forth in Table Thirteen of Item 7. - "Management's Discussion and Analysis" included in this report and is incorporated here by reference. (3) There were no issuers of securities for which the book value was greater than 10% of shareholders' equity other than U.S. Government and U.S. Government Agencies and Corporations. (c) Loan Portfolio -------------- (1) The composition of the loan portfolio is summarized in Table Three of Item 7. - "Management's Discussion and Analysis" included in this report and is incorporated here by reference. (2) The maturity distribution of the loan portfolio at December 31, 2001 is summarized in Table Twelve of Item 7. - "Management's Discussion and Analysis" included in this report and is incorporated here by reference. (3) Nonperforming Loans ------------------- The Company's current policy is to cease accruing interest when a loan becomes 90 days past due as to principal or interest, when the full timely collection of interest or principal becomes uncertain or when a portion of the principal balance has been charged off, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, the accrued and uncollected interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement or when the loan is both well secured and in process of collection. 19 A loan is considered to be impaired when it is probable that the borrower will be unable to pay all of the amounts due according to the contractual terms of the loan agreement For further discussion of nonperforming loans, refer to Table Four and the "Risk Elements" section of Item 7. - "Management's Discussion and Analysis" in this report. (d) Summary of Loan Loss Experience ------------------------------- (1) An analysis of the allowance for loan losses showing charged off and recovery activity as of December 31, 2001 is summarized in Table Five of Item 7- "Management's Discussion and Analysis" included in this report and is incorporated here by reference. Factors used in determination of the allowance for loan losses are discussed in greater detail in the "Risk Elements" section of Management's Discussion and Analysis included in this report and are incorporated here by reference. (2) Management believes that any allocation of the allowance for probable loan losses into loan categories lends an appearance of exactness, which does not exist in that the allowance is utilized in total and is available for all loans. Further, management believes that the breakdown of historical losses as shown in Table Five of Item 7 - "Management's Discussion and Analysis" included in this report is a reasonable representation of management's expectation of potential losses inherent in the portfolio. However, the allowance for loan losses should not be interpreted as an indication of when charge-offs will occur or as an indication of future charge-off trends. For further discussion, refer to Table Six of Item 7. - "Management's Discussion and Analysis" in this report. (e) Deposits -------- (1) Table One in Item 7. - "Management's Discussion and Analysis" included in this report sets forth the distribution of average deposits for the years ended December 31, 2001, 2000 and 1999 and is incorporated here by reference. (2) Table Eleven in Item 7. - "Management's Discussion and Analysis" included in this report sets forth the maturities of time certificates of deposit of $100,000 or more at December 31, 2001 and is incorporated here by reference. (f) Return on Equity and Assets --------------------------- (1) The Selected Financial Data table at page 16 of this section sets forth the ratios of net income to average assets and average shareholders' equity, and average hareholders' equity to average assets. As the Company has never paid a cash dividend, the dividend payout ratio is not indicated. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to, matters described in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Changes to such risks and uncertainties, which could impact future financial performance, include, among others, (1) competitive pressures in the banking industry; (2) changes in the interest rate environment; (3) general economic conditions, nationally, regionally and in operating market areas, including a decline in real estate values in the Company's market areas; (4) the effects of terrorism, including the events of September 11, 2001 and thereafter; (5) changes in the regulatory environment; (6) changes in business conditions and inflation; (7) changes in securities markets; (8) data processing compliance problems; (9) the California power crisis; (10) variances in the actual versus projected growth in assets; (11) return on assets; (12) loan losses; (13) expenses; (14) rates charged on loans and earned on securities investments; (15) rates paid on deposits; and (16) fee and other noninterest income earned, as well as other factors. This entire Annual Report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Company's business. Therefore, the information set forth therein should be carefully considered when evaluating the business prospects of the Company and the Bank. Critical Accounting Policies - ---------------------------- General Central Coast Bancorp's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. Other estimates that we use are related to the expected useful lives of our depreciable assets. In addition GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. Allowance for Loan Losses The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting. (1) Statement of Financial Accountings Standards (SFAS) No. 5 "Accounting for Contingencies", which requires that losses be accrued when they are probable of occurring and estimable and (2) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Our allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon 21 estimates that can and do change when the actual events occur. The formula allowance uses an historical loss view as an indicator of future losses and as a result could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might otherwise occur are mitigated. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, and fair market value of collateral are used to estimate those losses. The use of these values is inherently subjective and our actual losses could be greater or less than the estimates. The unallocated allowance captures losses that are attributable to various economic events, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowances. For further information regarding our allowance for credit losses, see page 33. Business Organization Central Coast Bancorp (the "Company") is a California corporation, located in Salinas, California and was organized in 1994 to act as a bank holding company for Bank of Salinas. In 1996, the Company acquired Cypress Bank, which was headquartered in Seaside, California. Both banks were state-charted institutions. In July of 1999, the Company merged Cypress Bank into the Bank of Salinas and then renamed Bank of Salinas as Community Bank of Central California (the "Bank"). As of December 31, 2001, the Bank operated ten full-service branch offices and one limited-service branch office. The Bank is headquartered in Salinas and serves individuals, merchants, small and medium-sized businesses, professionals, agribusiness enterprises and wage earners located in the tri-county area of Monterey, San Benito and Santa Cruz. In June of 2000, the Bank opened a new branch office in Watsonville, which is in Santa Cruz County. In October of 2000, another new branch office was opened in Hollister, which is in San Benito County. The opening of these two branch offices was a first step in expanding the Bank's service area to include communities in contiguous counties outside of Monterey County. In February 2002, the Bank received regulatory approval to open a new branch in Gilroy, California. The estimated opening date for the branch is April 15, 2002. Gilroy is located at the southern end of the Santa Clara Valley in Santa Clara County. These three communities are of similar economic make-up to the agricultural based communities the Bank serves in Monterey County. Until August 16, 2001, the Company conducted no significant activities other than holding the shares of the subsidiary Bank. On August 16, 2001 the Company notified the Board of Governors of the Federal Reserve System (the "Board of Governors"), the Company's principal regulator, that the Company was engaged in certain lending activities. The Company purchased a loan from the Bank that the Bank had originated for a local agency that was categorized as a large issuer for taxation purposes. The Company is able to use the tax benefits of such loans. The Company may purchase similar loans in the future. Upon prior notification to the Board of Governors, the Company is authorized to engage in a variety of activities, which are deemed closely related to the business of banking. The following analysis is designed to enhance the reader's understanding of the Company's financial condition and the results of its operations as reported in the Consolidated Financial Statements included in this Annual Report. Reference should be made to those statements and the "Selected Financial Data" presented elsewhere in this report for additional detailed information. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Except within the "overview" section below, interest income and net interest income are presented on a tax equivalent basis. 22 Overview For the 18th consecutive year, Central Coast Bancorp earned record net income on a year-over-year basis. Net income in 2001 increased 6.5% to $9,509,000 versus $8,926,000 in 2000. Diluted earnings per share for 2001, after giving effect to the 5 for 4 stock split distributed on February 28, 2002, was $1.01, up 11.0% from the $0.91 reported for 2000. For 2001, the Company realized a return on average equity of 15.1% and a return on average assets of 1.31%, as compared to 16.0% and 1.41% for 2000. During 2001, total assets of the Company increased $95,573,000 (13.5%) to a total of $802,266,000 at year-end. At December 31, 2001, loans totaled $606,300,000, up $132,905,000 (28.1%) from the ending balances on December 31, 2000. Deposit growth in 2001, which includes $30,000,000 of State of California certificates of deposit, was $91,652,000 (14.5%). Deposits totaled $724,862,000 at year-end 2001. These past two years have presented very different economic conditions for the banking business. In 2000, interest rates were increasing with the prime rate ending the year at 9.50%. Competition for deposits was strong and by December 31, 2000 typical rates on one-year certificates of deposit exceeded 6%. On January 4, 2001, the Federal Reserve Bank made the first of eleven rate cuts during the year, which totaled 475 basis points resulting in a in a prime rate of 4.75% at December 31, 2001. At each rate cut variable rate loans repriced immediately or by the quarter end. Rates paid on deposit products were lowered as market conditions allowed and generally lagged the reduction in loan rates. The market rate for a one-year certificate at December 31, 2001was approximately 2.25%. However, certificates of deposit with longer average maturities will not reflect the decline in rates until they reprice at maturity. Thus, throughout 2001 as earning assets repriced more quickly than interest-bearing liabilities, the net interest margin declined with a resulting downward pressure on earnings. The increase in earning assets helped to offset the decline in yields. While the economic conditions for the past two years were very different, our community based banking model has provided the Company with continued growth in customer base, assets and earnings. We are proud of our record of 18 consecutive years of increased earnings, particularly in the face of the current economic and interest rate environment. In June and October of 2000, the Bank opened new branch offices in Hollister and Watsonville. Both of these branches exceeded their budgeted loan and deposit targets. The San Benito Chamber of Commerce designated the Hollister branch as the "Professional Service Business of the Year." The award is an extraordinary accomplishment for a business in its first year of operation. We are very proud of the way in which both of these new branches have become an integral part of their respective community in such a short time. The success of these branches reinforces our strategy of expanding the Bank's footprint by opening traditional branches in communities with a similar economic base and structure to our existing markets. As announced, the Bank will open a new branch in Gilroy early in 2002. We anticipate opening one additional branch later this year. Looking forward into 2002, it appears the year will provide another challenging economic environment. If the short-term interest rates do not decrease further, we would expect the Bank's net interest margin to be slightly lower than the fourth quarter 2001 rate of about 4.81%. Current economic data suggests that the country will have a slow recovery. With these factors in mind, the key for earnings growth is to continue to develop solid banking relationships, emphasize loan quality and control costs. In this, the Bank's twentieth year of operations, we expect to continue our record of continued earnings growth based on our current evaluation of economic data available to us. 23 (A) Results of Operations Net Interest Income/Net Interest Margin (fully taxable equivalent) Net interest income represents the excess of interest and fees earned on interest-earning assets (loans, securities and federal funds sold) over the interest paid on deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets. Net interest income for 2001 was $34,489,000, a $562,000 (1.7%) increase over 2000. The rapidly changing interest rates in 2001 had a significant impact on the Bank's interest income and interest expense during the year. Interest income increased $632,000 (1.2%) to total $52,849,000 in 2001. The average balance of loans outstanding in 2001 was $96,002,000 (23.0%) higher than it was in 2000. This higher volume of loans contributed $9,559,000 to interest income from the prior year results. The average rate received on loans decreased from 9.93% in 2000 to 8.41% in 2001. This decrease of 152 basis points reduced interest income $7,829,000. In December of 2000 and during the first quarter of 2001, the Bank increased its holdings of tax exempt securities. This resulted in an increase of $899,000 in interest earned on tax-exempt securities in 2001, of which, $798,000 was due do higher volume and $101,000 was due to higher rates. Both the average rate and balance decreased on taxable investment securities resulting in a decrease of $1,340,000 in interest income. Interest earned on Fed funds sold was down $657,000 due both to the volume and rates. Overall, the average rate received on earning assets in 2001 decreased 116 basis points to 7.89% from the 9.05% received in 2000. Interest expense was $70,000 higher in 2001 over 2000, as the lower rates paid approximately offset the increase in the volume of interest bearing liabilities. Average balances of interest-bearing liabilities were higher in 2001 by $56,905,000, which added $2,694,000 to interest expense. Average rates paid on interest-bearing liabilities were down 49 basis points for the year. The lower rates reduced interest expense in 2001 by $2,624,000. Interest paid on interest bearing liabilities generally adjusts more slowly in response to market rate changes as time deposits and borrowings adjust at maturity. As rates continued to come down in the fourth quarter of 2001, the average rates received on earning assets and the rates paid on interest-bearing liabilities decreased accordingly. In the fourth quarter, the average rate received on earning assets was 6.98% down from 9.16% in the year-ago period. The average rate paid on interest-bearing liabilities was 3.07% versus 4.49% in the fourth quarter of 2000. The net interest margin for the two periods was 4.81% and 5.93%, respectively. With no further rate cuts in the first quarter of 2002, management expects the net interest margin will be slightly lower than the 4.81% achieved in the fourth quarter. Net interest income for 2000 was $33,927,000, a $5,293,000 (18.5%) increase over 1999. The interest income component was up $9,935,000 to $52,217,000 (23.5%). About 65% of the increase was attributable to growth in the earning assets with the balance due to rates. Average outstanding loan balances of $417,075,000 for 2000 reflected a 19.8% increase over 1999 balances. This increase contributed an additional $6,388,000 to interest income. From July 1, 1999 through May 15, 2000, the Federal 24 Reserve Board raised interest rates six times for a total of 175 basis points. The higher interest rates increased the average yield on loans 67 basis points, which added $2,783,000 to interest income. The securities portfolio average balances decreased $12,066,000 (7.8%), which offset the increases in interest income by $757,000. The average yield received on securities was up 44 basis points and added $613,000 to interest income. Federal Funds sold interest income increased $908,000 due to both higher average balances and higher rates. Interest expense increased $4,642,000 (34.0%) in 2000 over 1999. The average balances of interest bearing liabilities increased $49,628,000 (13.2%). The higher average balances resulted from a $58,677,000 (36.8%) increase in time deposits offset in part by an $8,768,000 decrease in interest bearing checking accounts. At times during 2000, the Bank had up to $40,000,000 in time deposits from the State of California. This compares to a maximum of $20,000,000 in 1999. Interest paid on time certificates in 2000 increased $4,569,000, which accounted for most of the overall increase in interest expense. Interest expense attributable to the higher volume in time deposits was $2,934,000 and the higher rates added $1,635,000. Average rates paid on time certificates were 75 basis points higher in 2000. Rates paid on all interest bearing liabilities were 66 basis points higher in 2000 than in 1999. Net interest margin for 2000 was 5.88% versus 5.65% in 1999. Table One, Analysis of Net Interest Margin on Earning Assets, and Table Two, Analysis of Volume and Rate Changes on Net Interest Income and Expenses, are provided to enable the reader to understand the components and past trends of the Banks' interest income and expenses. Table One provides an analysis of net interest margin on earning assets setting forth average assets, liabilities and shareholders' equity; interest income earned and interest expense paid and average rates earned and paid; and the net interest margin on earning assets. Table Two presents an analysis of volume and rate change on net interest income and expense. 25
Table One: Analysis of Net Interest Margin on Earning Assets - ----------------------------------------------------------------------------------------------------------------- (Taxable Equivalent Basis) 2001 2000 1999 Avg. Avg. Avg. Avg. Avg. Avg. In thousands (except Balance Interest Yield Balance Interest Yield Balance Interest Yield percentages) ------- -------- ----- ------- -------- ------ ------- -------- ----- Assets: Earning Assets Loans (1) (2) $513,077 $ 43,135 8.41% $417,075 $ 41,405 9.93% $ 348,086 $ 32,234 9.26% Taxable investment securities 99,488 6,000 6.03% 106,754 7,340 6.88% 120,422 7,596 6.31% Tax-exempt investment securities (3) 48,691 3,307 6.79% 36,601 2,408 6.58% 34,999 2,296 6.56% Federal funds sold 8,745 407 4.65% 16,857 1,064 6.31% 3,153 156 4.95% --------------------- -------------------- -------------------- Total Earning Assets 670,001 $ 52,849 7.89% 577,287 $ 52,217 9.05% 506,660 $ 42,282 8.35% ---------- --------- ---------- Cash & due from banks 42,551 39,432 42,595 Other assets 14,646 16,234 12,818 ----------- ----------- ---------- $727,198 $632,953 $ 562,073 =========== =========== ========== Liabilities & Shareholders' Equity: Interest bearing liabilities: Demand deposits $ 97,785 $ 1,254 1.28% $ 94,948 $ 1,551 1.63% $ 103,716 $ 1,792 1.73% Savings 129,358 3,940 3.05% 107,075 3,820 3.57% 105,000 3,447 3.28% Time deposits 247,388 12,732 5.15% 218,330 12,549 5.75% 159,653 7,980 5.00% Other borrowings 8,496 434 5.11% 5,769 370 6.41% 8,125 429 5.28% --------------------- -------------------- -------------------- Total interest bearing liabilities 483,027 18,360 3.80% 426,122 18,290 4.29% 376,494 13,648 3.63% ---------- --------- ---------- Demand deposits 174,133 145,134 125,897 Other Liabilities 7,120 5,935 7,613 ----------- ----------- ---------- Total Liabilities 664,280 577,191 510,004 Shareholders' Equity 62,918 55,762 52,069 ----------- ----------- ---------- $727,198 $632,953 $ 562,073 =========== =========== ========== Net interest income & Margin (4) $ 34,489 5.15% $ 33,927 5.88% $ 28,634 5.65% ================= =============== =================== - ----------------------------------------------------------------------------------------------------------------- 1. Loans interest includes loan fees of $1,387,000, $997,000 and $1,096,000 in 2001, 2000 and 1999. 2. Average balances of loans include average allowance for loan losses of $9,807,000, $7,097,000 and $4,850,000 and average deferred loan fees of $978,000, $719,000 and $796,000 for the years ended December 31, 2001, 2000 and 1999, respectively. 3. Includes taxable-equivalent adjustments for income on securities that is exempt from federal income taxes. The federal statutory tax rate was 35% for 2001, 2000 and 1999. 4. Net interest margin is computed by dividing net interest income by total average earning assets.
26
Table Two: Volume/Rate Analysis - -------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2001 over 2000 (In thousands) Increase (decrease) due to change in: Net Interest-earning assets: Volume Rate (4) Change ------ -------- ------ Net Loans (1)(2) $ 9,559 $ (7,829) $ 1,730 Taxable investment securities (501) (839) (1,340) Tax-exempt investment securities (3) 798 101 899 Federal funds sold (513) (144) (657) ----------- ----------- ----------- Total 9,343 (8,711) 632 ----------- ----------- ----------- Interest-bearing liabilities: Demand deposits 46 (343) (297) Savings deposits 798 (678) 120 Time deposits 1,675 (1,492) 183 Other borrowings 175 (111) 64 ----------- ----------- ----------- Total 2,694 (2,624) 70 ----------- ----------- ----------- Interest differential $ 6,649 $ (6,087) $ 562 =========== =========== =========== - --------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2000 over 1999 (In thousands) Increase (decrease) due to change in: Net Interest-earning assets: Volume Rate (4) Change ------ -------- ------ Net Loans (1)(2) $ 6,388 $ 2,783 $ 9,171 Taxable investment securities (862) 606 (256) Tax-exempt investment securities(3) 105 7 112 Federal funds sold 678 230 908 ----------- ----------- ----------- Total 6,309 3,626 9,935 ----------- ----------- ----------- Interest-bearing liabilities: Demand deposits (152) (89) (241) Savings deposits 68 305 373 Time deposits 2,934 1,635 4,569 Other borrowings (124) 65 (59) ----------- ----------- ----------- Total 2,726 1,916 4,642 ----------- ----------- ----------- Interest differential $ 3,583 $ 1,710 $ 5,293 =========== =========== =========== - -------------------------------------------------------------------------------------------------------------- 1. The average balance of non-accruing loans is immaterial as a percentage of total loans and, as such, has been included in net loans. 2. Loan fees of $1,387,000, $997,000 and $1,096,000 for the years ended December 31, 2001, 2000 and 1999, respectively, have been included in the interest income computation. 3. Includes taxable-equivalent adjustments for income on securities that is exempt from federal income taxes. The federal statutory tax rate was 35% for 2001, 2000 and 1999. 4. The rate / volume variance has been included in the rate variance.
27 Provision for Loan Losses The Bank provided $2,635,000 for loan losses in 2001 as compared to $3,983,000 in 2000. The 2000 provision included $1,185,000 as a reserve for certain classified loans to a single borrower. During 2001, reductions in outstanding balances on those loans allowed for a reallocation of $370,000 of that allowance. The remaining decrease in the amount of the provision for loan losses is due to the change of loans inside the loan portfolio and the individual analysis of loan loss allowance required for each. Net loan charge-offs were $253,000 in 2001 compared to $208,000 in 2000. The ratio of net charge-offs to average loans outstanding was 0.05% in each of the two years. The ratios of the allowance for loan losses to total loans - net of deferred fees were 1.94% at December 31, 2001 and 1.98% at December 31, 2000. In 2000, the Bank provided $3,983,000 for loan losses as compared to $1,484,000 in 1999. In providing for the allowance for loan losses the Company considered the significant growth in the loan portfolio of $77,798,000 (19.7%), geographic and industry concentrations, expansion into new geographic markets, and volatility and weaknesses in the local economy, including potential effects of power shortages, water supply, and volatile market prices for agricultural products. In addition, as mentioned in the preceding paragraph, $1,185,000 was provided for classified loans to a single borrower. Net loans charged-off in 1999 totaled $240,000 or 0.07% of average loans outstanding. The allowance for loan losses to total loans - net of deferred fees at December 31, 1999 was 1.41%. Service Charges and Fees and Other Income Noninterest income in 2001 increased $696,000 (28.6%) over 2000 to a total of $3,129,000. Service charges and fees related to deposit accounts increased $175,000 (10.0%) due to increased business activity. The low interest rates generated increased business for the Bank's mortgage origination activities. Fees related to this activity doubled to $334,000 in 2001 from $167,000 in 2000. The activity in mortgage refinancing is expected to decline somewhat in 2002. Of the total increase, $362,000 is related to securities transactions. In 2001, the Bank realized gains of $168,000 on the sale of investment securities versus a loss of $194,000 in 2000. Noninterest income was up $202,000 (9.1%) in 2000 over the same period in 1999. Service charges and fees related to deposit accounts increased $401,000 (29.8%) due to higher volumes, the full year effect of new fees implemented in late 1999 and new products. Noninterest income was negatively impacted in the fourth quarter of 2000 as the Bank realized a loss of $194,000 on the sale and repositioning of investment securities. In all of 1999, the Bank had a realized gain of $45,000 on the sale of investment securities. Salaries and Benefits Salary and benefit expenses increased $1,538,000 (15.3%) in 2001 over 2000. The two new branches opened in mid to late 2000 accounted for $567,000 of the increase on a year-over-year basis. Salaries and benefits from all other operations were up $971,000 (9.9%). Due to normal merit reviews and staffing additions during the year, base salaries increased $653,000 (9.0%) Benefit costs increased commensurate with the salaries. At the end of 2001, the full time equivalent (FTE) staff was 221 versus 211 at the end of 2000. For 2000, increases in salaries and benefits totaled $965,000 (10.6%). Salary expenses related to the staffing of the two new branch offices opened in the second half of the 2000 accounted 28 for $287,000 of the increase. Salaries and benefits from continuing operations were up $678,000 (7.4%). Base salaries increased $421,000 (6.2%) due to normal merit reviews, competitive salary adjustments and staffing additions during the year. Benefit costs increased commensurate with the salaries. At the end of 2000, the full time equivalent (FTE) staff was 211 versus 204 at the end of 1999. Occupancy and Furniture and Equipment Occupancy and furniture and equipment expense increased $294,000 (9.2%) to total $3,475,000 in 2001. The two branches opened in mid to late 2000 accounted for $121,000 of the increase on a year-over-year basis. Higher energy costs added $45,000, an increase of 29.2% exclusive of the new branches. Equipment related expenses and depreciation increased $108,000 (6.5%) after adjustment for the new branches. Occupancy and fixed assets expense increased $542,000 (20.5%) in 2000 over 1999. The new Hollister and Watsonville branch offices accounted for $81,000 of the increase. For the rest of the Company, occupancy and fixed assets expense increased $461,000 (17.4%). Much of the increase is attributable to the full year effect of the relocation of two branch offices and remodeling of one branch office and operations office space during 1999. Other Expenses For the second consecutive year, other expenses declined slightly from the prior year level. In 2001, other expenses totaled $4,129,000 down $17,000 from 2000. Adjusted for the two new branches added in 2000, other expenses were down $29,000. With the declining interest rate environment and the weak economic conditions in 2001, management made a concerted effort to control these costs. Cost control will be a continuing theme in 2002. The efficiency ratio (fully taxable equivalent), calculated by dividing noninterest expense by the sum of net interest income and noninterest income, for 2001 was 51.1% as compared to 47.9% in 2000. Other expenses were down $142,000 (3.3%) in 2000 from 1999. The two new branch offices incurred other expenses totaling $45,000. Thus, other expenses for other operations decreased $187,000 (4.4%). In 1999, the Bank incurred one-time costs of approximately $263,000 associated with the merger of the Bank of Salinas and Cypress Bank to form Community Bank of Central California. Normal price increases and growth in the Bank's operations accounted for the remaining higher expenses. The efficiency ratio (fully taxable equivalent) for 1999 was 52.0%. Provision for Taxes The effective tax rate on income was 35.1%, 37.0% and 36.0% in 2001, 2000 and 1999, respectively. In November and December of 2000 and in the first quarter of 2001, the Bank purchased approximately $12,600,000 of fixed rate municipal bonds. As a result, in 2001 tax-exempt interest income on a tax equivalent basis increased to be 6.26% of total interest income from 4.61% in 2000. Accordingly, the effective tax rate fell 1.9% in 2001. The effective tax rate of the Company was higher in 2000 over 1999 as tax-exempt instruments were a smaller percentage of earning assets. The effective tax rate was greater than the federal statutory tax rate due to state tax expense of $1,858,000, $1,513,000 and $1,326,000 in these years. Tax-exempt income of $2,754,000 $2,082,000 and $1,998,000 from investment securities and loans in these years helped to reduce the effective tax rate. 29 (B) Balance Sheet Analysis Central Coast Bancorp's total assets at December 31, 2001 were $802,266,000 compared to $706,693,000 at December 31, 2000, representing an increase of 13.5%. The average balance of total assets was $727,198,000 in 2001, which represents an increase of 14.9% totaling $94,245,000 over the average total asset balance of $632,953,000 in 2000. Loans The Bank concentrates its lending activities in four principal areas: commercial loans (including agricultural loans); real estate construction loans (both commercial and personal); real estate-other loans and consumer loans. At December 31, 2001, these four categories accounted for approximately 33%, 14%, 50% and 3% of the Bank's loan portfolio, respectively, as compared to 36%, 12%, 50% and 2% at December 31, 2000. The Bank has developed a very successful loan calling officer program. On a year-over-year basis beginning in 1997, the annual percentage of loan growth has been 6%, 22%, 27%, 20% and 28%. The Bank has attracted many new loan customers as well as better serving existing customers. All categories of loans reflect increased growth in 2001. The largest growth took place in the real estate-other category. However, the largest percentage gain of 59.1% was in the consumer category. A concerted effort was made in 2001 to offer a broader and more competitive package of consumer loans. Table Three summarizes the composition of the loan portfolio for the past five years as of December 31:
Table Three: Loan Portfolio Composite - ------------------------------------------------------------------------------------------------------------- In thousands 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Commercial $ 199,761 $ 171,631 $ 159,385 $ 136,685 $ 124,714 Real Estate: Construction 85,314 57,780 35,330 19,929 14,645 Other 306,622 234,890 188,600 144,685 107,354 Consumer 15,653 9,840 13,003 11,545 9,349 Deferred Loans Fees (1,050) (746) (721) (674) (568) - ------------------------------------------------------------------------------------------------------------- Total Loans 606,300 473,395 395,597 312,170 255,494 Allowance for Loan Losses (11,753) (9,371) (5,596) (4,352) (4,223) - ------------------------------------------------------------------------------------------------------------- Total $ 594,547 $ 464,024 $ 390,001 $ 307,818 $ 251,271 =============================================================================================================
The majority of the Bank's loans are direct loans made to individuals, local businesses and agri-businesses. The Bank relies substantially on local promotional activity, personal contacts by Bank officers, directors and employees to compete with other financial institutions. The Bank makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment. Commercial loans consist of credit lines for operating needs, loans for equipment purchases, working capital, and various other business loan products. Consumer loans include a range of traditional consumer loan products offered by the Bank such as personal lines of credit and loans to finance purchases of autos, boats, recreational vehicles, mobile homes and various other consumer items. The construction loans are generally composed of commitments to customers within the Bank's service area for 30 construction of both commercial properties and custom and semi-custom single family residences. Other real estate loans consist primarily of loans to the Bank's depositors secured by first trust deeds on commercial and residential properties typically with short-term maturities and original loan to value ratios not exceeding 75%. In general, except in the case of loans with SBA guarantees, the Bank does not make long-term mortgage loans; however, the Bank has informal arrangements in place with mortgage lenders to assist customers in securing single-family mortgage financing. Average net loans in 2001 were $513,077,000 representing an increase of $96,002,000 or 23.0% over 2000. Average net loans in 2000 were $417,075,000 representing an increase of $68,989,000 or 19.8% over 1999. Risk Elements - The Bank assesses and manages credit risk on an ongoing basis through stringent credit review and approval policies, extensive internal monitoring and established formal lending policies. Additionally, the Bank contracts with an outside loan review consultant to periodically grade new loans and to review the existing loan portfolio. Management believes its ability to identify and assess risk and return characteristics of the Company's loan portfolio is critical for profitability and growth. Management strives to continue the historically low level of loan losses by continuing its emphasis on credit quality in the loan approval process, active credit administration and regular monitoring. With this in mind, management has designed and implemented a comprehensive loan review and grading system that functions to continually assess the credit risk inherent in the loan portfolio. Ultimately, the credit quality of the Bank's loans may be influenced by underlying trends in the national and local economic and business cycles. The Bank's business is mostly concentrated in Monterey County. The County's economy is highly dependent on the agricultural and tourism industries. The agricultural industry is also a major driver of the economies of San Benito County and the southern portions of Santa Cruz and Santa Clara Counties, which represent the areas of the Bank's branch expansion plan. As a result, the Bank lends money to individuals and companies dependent upon the agricultural and tourism industries. The Company has significant extensions of credit and commitments to extend credit which are secured by real estate, totaling approximately $453 million at December 31, 2001. Although management believes this real estate concentration has no more that the normal risk of collectibility, a substantial decline in the economy in general, or a decline in real estate values in the Bank's primary market areas in particular, could have an adverse impact on the collectibility of these loans. The ultimate recovery of these loans is generally dependent on the successful operation, sale or refinancing of the real estate. The Bank monitors the effects of current and expected market conditions and other factors on the collectibility of real estate loans. When, in management's judgment, these loans are impaired, an appropriate provision for losses is recorded. The more significant assumptions management considers involve estimates of the following: lease, absorption and sale rates; real estate values and rates of return; operating expenses; inflation; and sufficiency of collateral independent of the real estate including, in limited instances, personal guarantees. Not withstanding the foregoing, abnormally high rates of impairment due to general/local economic conditions could adversely affect the Company's future prospects and results of operations. In extending credit and commitments to borrowers, the Bank generally requires collateral and/or guarantees as security. The repayment of such loans is expected to come from cash flow or from proceeds from the sale of selected assets of the borrowers. The Bank's requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with management's evaluation of the credit-worthiness of the borrower. 31 Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing properties, residences and other real property. The Bank secures its collateral by perfecting its interest in business assets, obtaining deeds of trust, or outright possession among other means. Loan losses from lending transactions related to real estate and agriculture compare favorably with the Bank's loan losses on its loan portfolio as a whole. Management believes that its lending policies and underwriting standards will tend to mitigate losses in an economic downturn, however, there is no assurance that losses will not occur under such circumstances. The Bank's loan policies and underwriting standards include, but are not limited to, the following: 1) maintaining a thorough understanding of the Bank's service area and limiting investments outside of this area, 2) maintaining a thorough understanding of borrowers' knowledge and capacity in their field of expertise, 3) basing real estate construction loan approval not only on salability of the project, but also on the borrowers' capacity to support the project financially in the event it does not sell within the original projected time period, and 4) maintaining conforming and prudent loan to value and loan to cost ratios based on independent outside appraisals and ongoing inspection and analysis by the Bank's construction lending officers. In addition, the Bank strives to diversify the risk inherent in the construction portfolio by avoiding concentrations to individual borrowers and on any one project. Nonaccrual, Past Due and Restructured Loans Management generally places loans on nonaccrual status when they become 90 days past due, unless the loan is well secured and in the process of collection. Loans are charged off when, in the opinion of management, collection appears unlikely. Table Four sets forth nonaccrual loans, loans past due 90 days or more, and restructured loans performing in compliance with modified terms, for December 31:
Table Four: Non-Performing Loans - ------------------------------------------------------------------------------------------------------- In thousands 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- Past due 90 days or more and still accruing Commercial $ 68 $ 215 $ 51 $ 73 $ 73 Real estate - 10 303 1,174 6 Consumer and other 12 5 - - - - ------------------------------------------------------------------------------------------------------- 80 230 354 1,247 79 - ------------------------------------------------------------------------------------------------------- Nonaccrual: Commercial 702 329 11 333 188 Real estate 592 - 1,565 543 628 Consumer and other - - - - - - ------------------------------------------------------------------------------------------------------- 1,294 329 1,576 876 816 - ------------------------------------------------------------------------------------------------------- Restructured (in compliance with modified terms)- Commercial 955 1,010 - - - - ------------------------------------------------------------------------------------------------------- Total $ 2,329 $ 1,569 $ 1,930 $ 2,123 $ 895 =======================================================================================================
Interest due but excluded from interest income on nonaccrual loans was approximately $45,000 in 2001, $64,000 in 2000 and $82,000 in 1999. In 2001 and 1999, interest income recognized from payments received on nonaccrual loans was $69,000 and $21,000, respectively (none was recognized in 2000). A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all 32 amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of 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. At December 31, 2001, the recorded investment in loans that are considered impaired was $2,418,000 of which $1,294,000 is included in nonaccrual loans, and $955,000 is included in restructured loans above. Impaired loans had a valuation allowance of $536,000. The average recorded investment in impaired loans during 2001 was $2,638,000. The Company recognized interest income on impaired loans of $191,000, $161,000 and $92,000 in 2001, 2000 and 1999, respectively (including interest income of $98,000 on restructured loans in 2001 and in 2000). There were no troubled debt restructurings or loan concentrations in excess of 10% of total loans not otherwise disclosed as a category of loans as of December 31, 2001. Management is not aware of any potential problem loans, which were accruing and current at December 31, 2001, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms. The Company held no real estate acquired by foreclosure at December 31, 2001 or 2000. Allowance for Loan Losses The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on our regular assessments of the probable estimated losses inherent in the loan portfolio and to a lesser extent, unused commitments to provide financing. Determining the adequacy of the allowance is a matter of careful judgment, which reflects consideration of all significant factors that affect the collectibility of the portfolio as of the evaluation date. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include the formula allowance, specific allowances for identified problem loans and the unallocated reserve. The unallocated allowance contains amounts that are based on management's evaluation of conditions that are not directly measured in the determination of the formula and specific allowances. The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments, in each case based on the internal risk grade of such loans and commitments. Changes in risk grades of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based on our historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. At December 31, 2001 the formula allowance was $9,043,000 compared to $7,336,000 at December 31, 2000. The increase in the formula allowance was primarily a result of the growth in loan balances in this category of $134,904,000 in 2001. In addition to the formula allowance calculated by the application of the loss factors to the standard loan categories, certain specific allowances may also be calculated. Quarterly, all criticized loans are analyzed individually based on the source and adequacy of repayment and specific type of collateral, and an assessment is made of the adequacy of the formula reserve relative to the individual loan. A specific allocation higher than the formula reserve will be calculated based on the higher-than-normal probability of loss and/or a collateral shortfall. At December 31, 2001 the specific allowance was $1,678,000 on loan base of $18,922,000 compared to a specific 33 allowance of $1,111,000 on a loan base of $8,076,000 at December 31, 2000. The increase in the specific allowance in 2001 was primarily attributable to one credit, which was performing at year-end. The unallocated allowance contains amounts that are based on management's evaluation of conditions that are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem loans or portfolio segments. At December 31, 2001 the unallocated allowance was $1,032,000 compared to $925,000 at December 31, 2000. The conditions evaluated in connection with the unallocated allowance include the following at the balance sheet date: o The current national and local economic and business conditions, trends and developments, including the condition of various market segments within our lending area; o Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices; o Changes in the nature, mix, concentrations and volume of the loan portfolio; o The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Bank's current portfolio. There can be no assurance that the adverse impact of any of these conditions on the Bank will not be in excess of the unallocated allowance as determined by Management at December 31 2001 and set forth in the preceding paragraph. The allowance for loan losses totaled $11,753,000 or 1.94% of total loans at December 31, 2001 compared to $9,371,000 or 1.98% at December 31, 2000. At those two dates, the allowance represented 505 and 597 percent of nonperforming loans. In 2000, the allowance for loan losses was increased in consideration of the significant growth in the loan portfolio of $77,798,000 (19.7%), geographic and industry concentrations, expansion into new geographic markets, and volatility and weaknesses in the local economy, including potential effects of power shortages, water supply, and volatile market prices for agricultural products. In addition, approximately $1.2 million was provided as a result of the downward classification to substandard of several loans to a single borrower. It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio. Based on information currently available to analyze loan loss potential, including economic factors, overall credit quality, historical delinquency and a history of actual charge-offs, management believes that the loan loss provision and allowance are adequate. However, no prediction of the ultimate level of loans charged off in future years can be made with any certainty. 34 Table Five summarizes, for the years indicated, the activity in the allowance for loan losses.
Table Five: Allowance for Loan Losses - -------------------------------------------------------------------------------------------------------- Year Ended Year Ended Year Ended Year Ended Year Ended In thousands (except percentages) 12/31/01 12/31/00 12/31/99 12/31/98 12/31/97 - -------------------------------------------------------------------------------------------------------- Average loans outstanding $523,862 $424,891 $ 353,732 $ 276,437 $ 243,593 - -------------------------------------------------------------------------------------------------------- Allowance for possible loan losses at beginning of period $ 9,371 $ 5,596 $ 4,352 $ 4,223 $ 4,372 Loans charged off: Commercial (349) (273) (333) (130) (279) Real estate (2) - (41) (16) (100) Consumer (79) (119) (26) (31) (61) - -------------------------------------------------------------------------------------------------------- (430) (392) (400) (177) (440) - -------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged off: Commercial 162 170 143 116 162 Real estate - - 7 20 28 Consumer 15 14 10 11 37 - -------------------------------------------------------------------------------------------------------- 177 184 160 147 227 - -------------------------------------------------------------------------------------------------------- Net loans charged off (253) (208) (240) (30) (213) Additions to allowance charged to operating expenses 2,635 3,983 1,484 159 64 - -------------------------------------------------------------------------------------------------------- Allowance for possible loan losses at end of period $ 11,753 $ 9,371 $ 5,596 $ 4,352 $ 4,223 - -------------------------------------------------------------------------------------------------------- Ratio of net charge-offs to average loans outstanding 0.05% 0.05% 0.07% 0.01% 0.09% Provision of allowance for possible loan losses to average loans outstanding 0.50% 0.94% 0.42% 0.06% 0.03% Allowance for possible loan losses to loans net of deferred fees at year end 1.94% 1.98% 1.41% 1.39% 1.65% - --------------------------------------------------------------------------------------------------------
35 As part of its loan review process, management has allocated the overall allowance based on specific identified problem loans and historical loss data. Table Six summarizes the allocation of the allowance for loan losses at December 31, 2001 and 2000.
Table Six: Allowance for Loan Losses by Loan Category - ---------------------------------------------------------------------------------------- December 31, 2001 December 31, 2000 ----------------- ----------------- Percent of Percent of loans in each loans in each category to category to In thousands (except percentages) Amount total loans Amount total loans - ---------------------------------------------------------------------------------------- Commercial $ 7,397 33% $ 5,602 36% Real estate 3,019 64% 2,589 62% Consumer 305 3% 255 2% - ---------------------------------------------------------------------------------------- Total allocated 10,721 100% 8,446 100% Total unallocated 1,032 925 - ---------------------------------------------------------------------------------------- Total $ 11,753 $ 9,371 - ----------------------------------------------------------------------------------------
Other Real Estate Owned The Company held no real estate acquired by foreclosure at December 31, 2001 or 2000. Deposits At December 31, 2001, deposits totaled $724,862,000 up from $633,210,000 at the end of 2000. The 2001 year-end balances included $30,000,000 in certificates from the State of California. These deposits are placed in the Bank at its request and are secured by pledged investment securities. The deposit growth in 2001, exclusive of the State certificates, was $61,652,000 (9.7%). Capital Resources The current and projected capital position of the Company and the impact of capital plans and long-term strategies is reviewed regularly by management. The Company's capital position represents the level of capital available to support continued operations and expansion. Since October of 1998 and through December 31, 2001, the Board of Directors of the Company has authorized three separate plans to repurchase up to 5% (in each plan) of the outstanding shares of the Company's common stock. Purchases are made from time to time, in the open market and negotiated transactions and are subject to appropriate regulatory and other accounting requirements. The following common share amounts and average prices paid have been adjusted to give effect to all applicable stock dividends and splits. The Company acquired 313,419 shares of its common stock in the open market during 2001, 513,618 in 2000 and 250,835 in 1999 at average prices of approximately $15.31, $11.88 and $10.66 per share, respectively. The Company completed repurchases under the first and second plans in May 2000 and April 2001, respectively. At December 31, 2001, there were 279,904 shares remaining to repurchase under the third plan. These repurchases are made with the intention to lessen the dilutive impact of issuing new shares to meet stock option plans as well as for capital management objectives. The Company's primary capital resource is shareholders' equity, which increased $5.5 million or 9.2% from the previous year-end. 36 The ratio of total risk-based capital to risk-adjusted assets was 11.1% at December 31, 2001, compared to 12.3% at December 31, 2000. Tier 1 risk-based capital to risk-adjusted assets was 9.9% at December 31, 2001, compared to 11.1% at December 31, 2000. The capital ratios are lower in 2001 as compared to 2000 as risked-based assets grew at a higher rate than did capital.
Table Seven: Capital Ratios As of December 31, ----------------- 2001 2000 ---- ---- Tier 1 Capital 9.9% 11.1% Total Capital 11.1% 12.3% Leverage 8.4% 9.1%
See the discussion of capital requirements in "Supervision and Regulation" and in Footnote 13 - Regulatory Matters in the Consolidated Financial Statements. Inflation The impact of inflation on a financial institution differs significantly from that exerted on manufacturing, or other commercial concerns, primarily because its assets and liabilities are largely monetary. In general, inflation primarily affects the Company indirectly through its effect on market rates of interest, and thus the ability of the Bank to attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand, and potentially adversely affects the Company's capital adequacy because loan growth in inflationary periods can increase faster than the corresponding rate that capital grows through retention of earnings the Company generates in the future. In addition to its effects on interest rates, inflation directly affects the Company by increasing the Company's operating expenses. Inflation did not have a material effect upon the Company's results of operations during the year 2001. Market Risk Management Overview. The goal for managing the assets and liabilities of the Bank is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Bank to undue interest rate risk. The Board of Directors has overall responsibility for the Company's interest rate risk management policies. The Bank has an Asset and Liability Management Committee (ALCO), which establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates. Asset/Liability Management. Activities involved in asset/liability management include but are not limited to lending, accepting and placing deposits, investing in securities and issuing debt. Interest rate risk is the primary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of volatile interest rates. The asset/liability management policy sets limits on the acceptable amount of variance in net interest margin and market value of equity under changing interest environments. The Bank uses simulation models to forecast earnings, net interest margin and market value of equity. 37 Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes. Using computer modeling techniques, the Company is able to estimate the potential impact of changing interest rates on earnings. A balance sheet forecast is prepared quarterly using inputs of actual loan, securities and interest bearing liabilities (i.e. deposits/borrowings) positions as the beginning base. The forecast balance sheet is processed against three interest rate scenarios. The scenarios include a 200 basis point rising rate forecast, a flat rate forecast and a 200 basis point falling rate forecast which take place within a one year time frame. The net interest income is measured during the first year of the rate changes and in the year following the rate changes. The Company's 2002 net interest income, as forecast below, was modeled utilizing a forecast balance sheet projected from year-end 2001 balances. The following assumptions were used in the modeling activity: Earning asset growth of 5.6% based on ending balances Loan growth of 4.0% based on ending balances Investment and funds sold growth of 8.2% based on ending balances Deposit growth of 4.0% based on ending balances Balance sheet target balances were the same for all rate scenarios The following table summarizes the effect on net interest income of a (+/- 200) basis point change in interest rates as measured against a flat rate (no change) scenario. Table Eight: Interest Rate Risk Simulation of Net Interest Income as of December 31, 2001
Estimated Impact on 2001 Net Interest Income ------ (in thousands) Variation from flat rate scenario +200 $3,149 -200 ($3,569)
The simulations of earnings do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as conservative estimates of interest rate risk. The Company also uses a second simulation scenario that rate shocks the balance sheet with an immediate parallel shift in interest rates of +/-200 basis points. This scenario provides estimates of the future market value of equity (MVE) and net interest income (NII). MVE measures the impact on equity due to the changes in the market values of assets and liabilities as a result of a change in interest rates. The Bank measures the volatility of these benchmarks using a twelve month time horizon. Using the December 31, 2001 balance sheet as the base for the simulation, the following table summarizes the effect on net interest income of a +/-200 basis point change in interest rates: 38 Table Nine: Interest Rate Risk Simulation of NII as of December 31, 2001
% Change Change in NII in NII from Current from Current 12 Mo. Horizon 12 Month Horizon -------------- ---------------- (in thousands) + 200bp 16% $5,413 - 200bp (20%) ($6,981)
These results indicate that the balance sheet is asset sensitive since earnings increase when interest rates rise. The magnitude of the NII change is within the Company's policy guidelines. The asset liability management policy limits aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs. Gap analysis provides another measure of interest rate risk. The Company does not actively use gap analysis in managing interest rate risk. It is presented here for comparative purposes. Interest rate sensitivity is a function of the repricing characteristics of the Bank's portfolio of assets and liabilities. These repricing characteristics are the time frames within which the interest-bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity. Interest rate sensitivity management focuses on the maturity of assets and liabilities and their repricing during periods of changes in market interest rates. Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities in the Bank's current portfolio that are subject to repricing at various time horizons. The differences are known as interest sensitivity gaps. As reflected in Table Ten, at December 31, 2001, the cumulative gap through the one-year time horizon indicates a slightly liability sensitive position. Somewhere between one and five years the Bank moves into an asset sensitive position. This interest rate sensitivity table categorizes interest-bearing transaction deposits and savings deposits as repricing immediately. However, as has been observed through interest rate cycles, the deposit liabilities do not reprice immediately. Consequently, the Bank's net interest income varies as though the Bank is asset sensitive, i.e. as interest rates rise net interest income increases and vice versa. The asset sensitivity is validated by the modeling as presented in Tables Eight and Nine and the actual operating results in 2001 as the net interest margin decreased during a rapidly falling interest rate environment. 39
Table Ten: Interest Rate Sensitivity December 31, 2001 - --------------------------------------------------------------------------------------------------------------- Assets and Liabilities Over three which Mature or Reprice: Next day months and Over one and within within and within Over (In thousands) Immediately three months one year five years five years Total - --------------------------------------------------------------------------------------------------------------- Interest earning assets: Investments $ 1,236 $ 10,590 $ 103 $ 51,061 $ 74,163 $ 137,153 Loans, excluding nonaccrual loans and overdrafts 13,874 373,040 60,292 108,898 47,594 603,698 - --------------------------------------------------------------------------------------------------------------- Total $ 15,110 $ 383,630 $ 60,395 $ 159,959 $ 121,757 $ 740,851 =============================================================================================================== Interest bearing liabilities: Interest bearing demand $ 105,949 $ - $ - $ - $ - $ 105,949 Savings 122,861 - - - - 122,861 Time certificates - 96,153 145,990 22,240 168 264,551 Other Borrowings - 78 243 2,710 3,110 6,141 - --------------------------------------------------------------------------------------------------------------- Total $ 228,810 $ 96,231 $ 146,233 $ 24,950 $ 3,278 $ 499,502 =============================================================================================================== Interest rate sensitivity gap $ (213,700) $ 287,399 $ (85,838) $ 135,009 $ 118,479 Cumulative interest rate sensitivity gap $ (213,700) $ 73,699 $ (12,139) $ 122,870 $ 241,349 - --------------------------------------------------------------------------------------------------------------- December 31, 2000 Interest rate sensitivity gap $ (183,847) $ 241,129 $(103,528) $ 83,474 $ 156,490 Cumulative interest rate sensitivity gap $ (183,847) $ 57,282 $ (46,246) $ 37,228 $ 193,718 - ---------------------------------------------------------------------------------------------------------------
Liquidity Liquidity management refers to the Company's ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Company's liquidity position. Federal funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals decrease liquidity. The Bank assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. Commitments to fund loans and outstanding standby letters of credit at December 31, 2001, were approximately $166,386,000 and $3,690,000, respectively. Such loans relate primarily to revolving lines of credit and other commercial loans, and to real estate construction loans. The Company's sources of liquidity consist of overnight funds sold to correspondent banks, unpledged marketable investments, loans pledged to the Federal Home Loan Bank of San Francisco ("FHLB-SF") and sellable SBA loans. On December 31, 2001, consolidated liquid assets totaled $110.0 million or 13.7% of total assets as compared to $132.0 million or 18.7% of total consolidated assets on December 31, 2000. In addition to liquid assets, the Bank maintains short term lines of credit with correspondent banks. At December 31, 2001, the Bank had $80,000,000 available under these credit lines. Informal 40 agreements are also in place with various other banks to purchase participations in loans, if necessary. The Company serves primarily a business and professional customer base and, as such, its deposit base is susceptible to economic fluctuations. Accordingly, management strives to maintain a balanced position of liquid assets to volatile and cyclical deposits. Liquidity is affected by portfolio maturities as well as the affect interest rate fluctuations have on the market values of both assets and liabilities. The Bank holds all of its investment securities in the available-for-sale category. This enables the Bank to sell any of its unpledged securities to meet liquidity needs. In periods of rising interest rates, such as experienced throughout most of 1999 and the first half of 2000, bond prices decreased, which resulted in large unrealized losses within the Bank's investment portfolio. Unrealized losses limit the Bank's ability to sell these securities to provide liquidity without realizing those losses. As a means for providing liquidity from the investment portfolio when there are unrealized losses, the Bank has a master repurchase agreement with a correspondent bank. Such a repurchase agreement allows the Bank to pledge securities as collateral for borrowings to obtain liquidity without having to sell a security at a loss. In a declining interest rate environment such as experienced in 2001, as bond prices increase, liquidity is more easily obtained through security sales. The maturity distribution of certificates of deposit in denominations of $100,000 or more is set forth in Table Eleven. These deposits are generally more rate sensitive than other deposits and, therefore, are more likely to be withdrawn to obtain higher yields elsewhere if available. Table Eleven: Certificates of Deposit in Denominations of $100,000 or More
- --------------------------------------------------------------- In thousands December 31, 2001 - --------------------------------------------------------------- Three months or less $ 75,503 Over three months through six months 42,833 Over six months through twelve months 65,889 Over twelve months 17,405 - ----------------------------------------------------------- Total $ 201,630 ===========================================================
41 Loan demand also affects the Bank's liquidity position. Table Twelve presents the maturities of loans for the period indicated.
Table Twelve: Loan Maturities - December 31, 2001 - ------------------------------------------------------------------------------------------ One year One year through Over In thousands or less five years five years Total - ------------------------------------------------------------------------------------------ Commercial $ 100,100 $ 77,547 $ 22,114 $ 199,761 Real estate - construction 72,141 916 12,257 85,314 Real estate - other 40,602 95,263 170,757 306,622 Consumer 10,081 4,951 621 15,653 - ------------------------------------------------------------------------------------------ Total $ 222,924 $ 178,677 $ 205,749 $ 607,350 - ------------------------------------------------------------------------------------------ Loans shown above with maturities greater than one year include $290,459,000 of floating interest rate loans and $93,967,000 of fixed rate loans.
The maturity distribution and yields of the investment portfolios (on a taxable equivalent basis) are presented in Table Thirteen:
Table Thirteen: Securities Maturities and Weighted Average Yields - ----------------------------------------------------------------------------------------------------------- December 31, 2001 December 31, 2000 Weighted Weighted Market Average Market Average In thousands (except percentages) Value Yield Value Yield - ----------------------------------------------------------------------------------------------------------- Available for sale securities: U.S. Treasury and agency securities Maturing within 1 year $ 103 2.27% $ 300 5.79% Maturing after 1 year but within 5 years 47,223 6.21% 12,902 6.28% Maturing after 5 years but within 10 years 17,898 4.62% 61,559 6.45% Maturing after 10 years 10,262 6.87% 10,366 6.42% State & Political Subdivision Maturing within 1 year - - 238 3.80% Maturing after 1 year but within 5 years 3,823 7.05% 1,366 7.92% Maturing after 5 year but within 10 Years 23,151 6.58% 16,562 6.61% Maturing after 10 years 22,867 6.95% 26,671 6.88% Corporate Debt Securities Maturing within 1 year - - 9,957 8.24% Maturing after 10 years 10,590 3.01% 11,192 7.75% Other 1,236 - 1,163 - - ----------------------------------------------------------------------------------------------------------- Total investment securities $ 137,153 5.96% $ 152,276 6.70% ===========================================================================================================
42 The principal cash requirements of the Company are for expenses incurred in the support of administration and operations of the Bank. These cash requirements are funded through direct reimbursement billings to the Bank. For non-banking functions, the Company is dependent upon the payment of cash dividends by the Bank to service its commitments. The Company expects that the cash dividends paid by the Bank to the Company will be sufficient to meet this payment schedule. Off-Balance Sheet Items The Bank has certain ongoing commitments under operating leases. (See Note 5 of the financial statements for the terms.) These commitments do not significantly impact operating results. As of December 31, 2001, commitments to extend credit were the only financial instruments with off-balance sheet risk. The Bank has not entered into any contracts for freestanding financial derivative instruments such as futures, swaps, options etc and did not identify any embedded derivatives. Loan and letter of credit commitments increased to $170,076,000 from $150,473,000 at December 31, 2000. The commitments represent 28.1% of total loans at year-end 2001 versus 31.8% a year ago. The majority of the commitments have a maturity of one year or less. Commitments for home equity lines of credit totaling $14,700,000, which have a ten-year maturity, are the single largest category of commitments exceeding a one-year maturity. Disclosure of Fair Value The Financial Accounting Standards Board ("FASB"), adopted Statement of Financial Accounting Standards Number 107, "Disclosures About Fair Value of Financial Statements," requiring the disclosure of fair value of most financial instruments, whether recognized or not recognized in the financial statements. The intent of presenting the fair values of financial instruments is to depict the market's assessment of the present value of net future cash flows discounted to reflect both current interest rates and the market's assessment of the risk that the cash flows will not occur. In determining fair values, the Company used the carrying amount for cash, short-term investments, accrued interest receivable, short-term borrowings and accrued interest payable as all of these instruments are short term in nature. Securities are reflected at quoted market values. Loans and deposits have a long term time horizon, which required more complex calculations for fair value determination. Loans are grouped into homogeneous categories and broken down between fixed and variable rate instruments. Loans with a variable rate, which reprice quickly, are valued at carrying value. The fair value of fixed rate instruments is estimated by discounting the future cash flows using current rates. Credit risk and repricing risk factors are included in the current rates. Fair value for nonaccrual loans is reported at carrying value and is included in the net loan total. Since the allowance for loan losses exceeds any potential adjustment for nonaccrual valuation, no further valuation adjustment has been made. Demand deposits, savings and certain money market accounts are short term in nature so the carrying value equals the fair value. For deposits that extend over a period in excess of four months, the fair value is estimated by discounting the future cash payments using the rates currently offered for deposits of similar remaining maturities. At year-end 2001 the fair values calculated on the Bank's assets were 0.5% above the carrying values versus 0.4% under the carrying values at year-end 2000. 43 Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" covering elimination of pooling accounting treatment in business combinations and financial accounting and reporting for acquired goodwill and other intangible assets at acquisition. SFAS No. 141 supersedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises" and is effective for transactions initiated after June 30, 2001. Under SFAS No. 141, all mergers and business combinations initiated after the effective date must be accounted for as "purchase" transactions. A merger or business combination was considered initiated if the major terms of the transaction, including the exchange or conversion ratio, were publicly announced or otherwise disclosed to shareholders of the combining companies prior to the effective date. Goodwill in any merger or business combination which was not initiated prior to the effective date will be recognized as an asset in the financial statements, measured as the excess of the cost of an acquired entity over the net of the amounts assigned to identifiable assets acquired and liabilities assumed, and then tested for impairment to assess losses and expensed against earnings only in the periods in which the recorded value of goodwill exceeded its implied fair value. The FASB concurrently issued SFAS No. 142, "Goodwill and Other Intangible Assets" to address financial accounting and reporting for acquired goodwill and other intangible assets at acquisition in transactions other than business combinations covered by SFAS No. 141, and the accounting treatment of goodwill and other intangible assets after acquisition and initial recognition in the financial statements. SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets" and is required to be applied at the beginning of an entity's fiscal year to all goodwill and other intangible assets recognized in its financial statements at that date, for fiscal years beginning after December 15, 2001. It is not certain what effect SFAS No. 141 and SFAS No. 142 may have upon the pace of business combinations in the banking industry in general or upon prospects of any merger or business combination opportunities involving the Company in the future. The Company was required to adopt SFAS No. 142 beginning January 1, 2002. The Company does not expect the adoption of SFAS No. 142 to have a material effect on its financial position, results of operations, or cash flows as the Company had no goodwill as of December 31, 2001 and all of the Company's intangible assets at 2001 have finite lives and will continue to be amortized. Other Matters The terrorist actions on September 11, 2001 and thereafter have had significant adverse effects upon the United States economy. Whether the terrorist activities in the future and the actions of the United States and its allies in combating terrorism on a worldwide basis will adversely impact the Company and the extent of such impact is uncertain. However, such events have had and may continue to have an adverse effect on the economy in the Company's market areas. Such continued economic deterioration could adversely affect the Company's future results of operations by, among other matters, reducing the demand for loans and other products and services offered by the Company, increasing nonperforming loans and the amounts reserved for loan losses, and causing a decline in the Company's stock price. 44 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by Item 7A of Form 10-K is contained in the Market Risk Management section of Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 37. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Independent Auditors' Report 46 Consolidated Balance Sheets, December 31, 2001 and 2000 47 Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 48 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 49 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 50 Notes to Consolidated Financial Statements 51-66 All schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the Consolidated Financial Statements or notes thereto. 45 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders of Central Coast Bancorp: We have audited the accompanying consolidated balance sheets of Central Coast Bancorp and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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 Central Coast Bancorp and subsidiary at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. San Francisco, California January 24, 2002 (February 28, 2002 as to the stock split information in Note 1) 46 Consolidated Balance Sheets Central Coast Bancorp and Subsidiary
- ----------------------------------------------------------------------------------------------------------------- December 31, 2001 2000 - ----------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 55,245,000 $ 51,411,000 Federal funds sold - 23,081,000 - ----------------------------------------------------------------------------------------------------------------- Total cash and equivalents 55,245,000 74,492,000 Available-for-sale securities at fair value 137,153,000 152,276,000 Loans: Commercial 199,761,000 171,631,000 Real estate-construction 85,314,000 57,780,000 Real estate-other 306,622,000 234,890,000 Consumer 15,653,000 9,840,000 Deferred loan fees, net (1,050,000) (746,000) - ----------------------------------------------------------------------------------------------------------------- Total loans 606,300,000 473,395,000 Allowance for loan losses (11,753,000) (9,371,000) - ----------------------------------------------------------------------------------------------------------------- Net Loans 594,547,000 464,024,000 - ----------------------------------------------------------------------------------------------------------------- Premises and equipment, net 2,962,000 3,735,000 Accrued interest receivable and other assets 12,359,000 12,166,000 - ----------------------------------------------------------------------------------------------------------------- Total assets $ 802,266,000 $ 706,693,000 ================================================================================================================= Liabilities and Shareholders' Equity Deposits: Demand, noninterest bearing $ 231,501,000 $ 207,002,000 Demand, interest bearing 105,949,000 88,285,000 Savings 122,861,000 110,204,000 Time 264,551,000 227,719,000 - ----------------------------------------------------------------------------------------------------------------- Total deposits 724,862,000 633,210,000 Accrued interest payable and other liabilities 12,068,000 13,629,000 - ----------------------------------------------------------------------------------------------------------------- Total liabilities 736,930,000 646,839,000 - ----------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Notes 5 and 11) Shareholders' Equity: Preferred stock-no par value; authorized 1,000,000 shares; none outstanding Common stock - no par value; authorized 25,000,000 shares; outstanding: 8,963,780 and 8,402,498 shares at December 31, 2001 and 2000 50,898,000 44,472,000 Shares held in deferred compensation trust (299,048 shares in 2001 and 271,862 shares in 2000), net of deferred obligation - - Retained earnings 14,855,000 16,444,000 Accumulated other comprehensive (loss), net of taxes of $297,000 in 2001 and $738,000 in 2000 (417,000) (1,062,000) - ----------------------------------------------------------------------------------------------------------------- Total shareholders' equity 65,336,000 59,854,000 - ----------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 802,266,000 $ 706,693,000 ================================================================================================================= See notes to Consolidated Financial Statements
47 Consolidated Statements of Income Central Coast Bancorp and Subsidiary
- ------------------------------------------------------------------------------------------------------------- Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------- Interest Income Loans (including fees) $ 43,135,000 $ 41,405,000 $ 32,234,000 Investment securities 8,205,000 8,945,000 9,127,000 Fed funds sold 407,000 1,065,000 156,000 - ------------------------------------------------------------------------------------------------------------- Total interest income 51,747,000 51,415,000 41,517,000 - ------------------------------------------------------------------------------------------------------------- Interest Expense Interest on deposits 17,926,000 17,921,000 13,218,000 Other 434,000 369,000 430,000 - ------------------------------------------------------------------------------------------------------------- Total interest expense 18,360,000 18,290,000 13,648,000 - ------------------------------------------------------------------------------------------------------------- Net Interest Income 33,387,000 33,125,000 27,869,000 Provision for Loan Losses (2,635,000) (3,983,000) (1,484,000) - ------------------------------------------------------------------------------------------------------------- Net Interest Income after Provision for Loan Losses 30,752,000 29,142,000 26,385,000 - ------------------------------------------------------------------------------------------------------------- Noninterest Income Service charges on deposits 1,924,000 1,749,000 1,348,000 Other income 1,205,000 684,000 883,000 - ------------------------------------------------------------------------------------------------------------- Total noninterest income 3,129,000 2,433,000 2,231,000 - ------------------------------------------------------------------------------------------------------------- Noninterest Expenses Salaries and benefits 11,619,000 10,081,000 9,116,000 Occupancy 1,642,000 1,479,000 1,301,000 Furniture and equipment 1,833,000 1,702,000 1,338,000 Other 4,129,000 4,146,000 4,288,000 - ------------------------------------------------------------------------------------------------------------- Total noninterest expenses 19,223,000 17,408,000 16,043,000 - ------------------------------------------------------------------------------------------------------------- Income Before Provision for Income Taxes 14,658,000 14,167,000 12,573,000 Provision for Income Taxes 5,149,000 5,241,000 4,522,000 - ------------------------------------------------------------------------------------------------------------- Net Income $ 9,509,000 $ 8,926,000 $ 8,051,000 ============================================================================================================= Basic Earnings per Share $ 1.05 $ 0.94 $ 0.82 Diluted Earnings per Share $ 1.01 $ 0.91 $ 0.80 ============================================================================================================= See Notes to Consolidated Financial Statements
48 Consolidated Statements of Cash Flow Central Coast Bancorp and Subsidiary
- ---------------------------------------------------------------------------------------------------------------------------- Years ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operations: Net income $ 9,509,000 $ 8,926,000 $ 8,051,000 Reconciliation of net income to net cash provided by operating activities: Provision for loan losses 2,635,000 3,983,000 1,484,000 Depreciation 1,361,000 1,266,000 936,000 Amortization and accretion 665,000 8,000 136,000 Provision for deferred income taxes (1,260,000) (1,852,000) (871,000) Loss (gain) on sale of securities (168,000) 194,000 (45,000) Net loss on sale of equipment 23,000 19,000 126,000 Gain on other real estate owned (4,000) (67,000) - Decrease (increase) in accrued interest receivable and other assets 164,000 1,077,000 (2,241,000) Increase (decrease) in accrued interest payable and other liabilities (2,420,000) 3,492,000 2,110,000 Increase in deferred loan fees 304,000 25,000 47,000 - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operations 10,809,000 17,071,000 9,733,000 - ---------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Proceeds from maturities of available-for-sale securities 46,672,000 70,751,000 100,042,000 Proceeds from sale of available-for-sale securities 77,962,000 19,806,000 5,988,000 Purchase of available-for-sale securities (108,665,000) (91,174,000) (89,498,000) Net change in loans held for sale - - 6,168,000 Net increase in loans (133,462,000) (78,031,000) (84,049,000) Proceeds from sale of other real estate owned 199,000 - 387,000 Proceeds from sale of equipment - - 26,000 Purchases of equipment (611,000) (1,132,000) (2,087,000) - ---------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (117,905,000) (79,780,000) (63,023,000) - ---------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net increase in deposit accounts 91,652,000 115,021,000 28,997,000 Net increase (decrease) in other borrowings 935,000 (11,744,000) 16,950,000 Cash received for stock options exercised 119,000 76,000 1,098,000 Cahs paid for shares repurchased (4,857,000) (6,111,000) (2,682,000) - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 87,849,000 97,242,000 44,363,000 - ---------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and equivalents (19,247,000) 34,533,000 (8,927,000) Cash and equivalents, beginning of year 74,492,000 39,959,000 48,886,000 - ---------------------------------------------------------------------------------------------------------------------------- Cash and equivalents, end of year $ 55,245,000 $ 74,492,000 $ 39,959,000 ============================================================================================================================ Noncash Investing and Financing Activities: The Company obtained $335,000 of real estate (OREO) in 1999 in connection with forclosures of delinquent loans (none in 2001 or 2000). In 2001, 2000 and 1999 stock option exercises and stock repurchases totaling $84,000, $20,000 and $666,000, respectively were performed through a "stock for stock" exercise under the Company's stock option and deferred compensation plans (see Note 9). - ---------------------------------------------------------------------------------------------------------------------------- Other Cash Flow Information: Interest paid $ 18,695,000 $ 17,121,000 $ 13,733,000 Income taxes paid 8,203,000 5,970,000 3,569,000 ============================================================================================================================ See Notes to Consolidated Financial Statements
49 Consolidated Statements of Shareholders' Equity Central Coast Bancorp and Subsidiary
- --------------------------------------------------------------------------------------------------------------------- Accumulated Other Years Ended December 31, Common Stock Retained Comprehensive 2001, 2000 and 1999 Shares Amount Earnings Income (Loss) Total - --------------------------------------------------------------------------------------------------------------------- Balances, January 1, 1999 7,640,056 $ 41,103,000 $ 9,733,000 $ 363,000 $ 51,199,000 Net income - - 8,051,000 - 8,051,000 Changes in unrealized losses on securities available for sale, net of taxes of $3,502,000 - - - (5,039,000) (5,039,000) Reclassification adjustment for gains included in income, net of taxes of $19,000 - - - (26,000) (26,000) ---------------- Total comprehensive income 2,986,000 ---------------- Stock options and warrants exercised 667,790 1,764,000 - - 1,764,000 Shares repurchased (257,525) (3,348,000) - - (3,348,000) Tax benefit of stock options exercised - 704,000 - - 704,000 - --------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1999 8,050,321 40,223,000 17,784,000 (4,702,000) 53,305,000 Net income - - 8,926,000 - 8,926,000 Changes in unrealized gains on securities available for sale, net of taxes of $2,449,000 - - - 3,526,000 3,526,000 Reclassification adjustment for losses included in income, net of taxes of $80,000 - - - 114,000 114,000 ---------------- Total comprehensive income 12,566,000 ---------------- 10% stock dividend 805,033 10,266,000 (10,266,000) - - Stock options exercised 16,248 96,000 - - 96,000 Shares repurchased (469,104) (6,131,000) - - (6,131,000) Tax benefit of stock options exercised - 18,000 - - 18,000 - --------------------------------------------------------------------------------------------------------------------- Balances, December 31, 2000 8,402,498 44,472,000 16,444,000 (1,062,000) 59,854,000 Net income - - 9,509,000 - 9,509,000 Changes in unrealized losses on securities available for sale, net of taxes of $511,000 - - - 744,000 744,000 Reclassification adjustment for gains included in income, net of taxes of $69,000 - - - (99,000) (99,000) ---------------- Total comprehensive income 10,154,000 ---------------- 10% stock dividend 836,410 11,098,000 (11,098,000) - - Stock options exercised 38,291 203,000 - - 203,000 Shares repurchased (313,419) (4,940,000) - - (4,940,000) Tax benefit of stock options exercised - 65,000 - - 65,000 - --------------------------------------------------------------------------------------------------------------------- Balances, December 31, 2001 8,963,780 $ 50,898,000 $ 14,855,000 $ (417,000) $ 65,336,000 - --------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Central Coast Bancorp and Subsidiary Years ended December 31, 2001, 2000 and 1999 Note 1. Significant Accounting Policies and Operations. The consolidated financial statements include Central Coast Bancorp (the "Company") and its wholly-owned subsidiary, Community Bank of Central California (the "Bank"). All material intercompany accounts and transactions are eliminated in consolidation. The accounting and reporting policies of the Company and the Bank conform to accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. The material estimate that is particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses. Community Bank of Central California operates ten full service branch offices in Monterey, Santa Cruz and San Benito Counties, serving small and medium sized business customers, as well as individuals. The Bank focuses on business loans and deposit services to customers throughout its service area. Investment securities are classified at the time of purchase into one of three categories: held-to-maturity, trading or available-for-sale. Investment securities classified as "held-to-maturity" are measured at amortized cost based on the Company's positive intent and ability to hold such securities to maturity. "Trading securities" are bought and held principally for the purpose of selling them in the near term and are carried at market value with a corresponding recognition of unrecognized holding gain or loss in the results of operations. The remaining investment securities are classified as "available-for-sale" and are measured at market value with a corresponding recognition of the unrealized holding gain or loss (net of tax effect) as a separate component of shareholders' equity until realized. Accretion of discounts and amortization of premiums arising at acquisition are included in income using methods approximating the effective interest method. Gains and losses on sales of investments, if any, are determined on a specific identification basis. At December 31, 2001 and 2000 all of the Company's investments were classified as available-for-sale. Loans are stated at the principal amount outstanding, reduced by any charge-offs. Loan origination fees and certain direct loan origination costs are deferred and the net amount is recognized using the effective yield method, generally over the contractual life of the loan. Interest income is accrued as earned. The accrual of interest on loans is discontinued and any accrued and unpaid interest is reversed when principal or interest is ninety days past due, when payment in full of principal or interest is not expected or when a portion of the principal balance has been charged off. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Senior management may grant a waiver from nonaccrual status if a loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, the 51 accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the original terms of the loan agreement or when the loan is both well secured and in process of collection. The allowance for loan losses is an amount that management believes will be adequate to absorb losses inherent in existing loans and commitments to extend credit, based on evaluations of collectibility, prior loss experience and other factors. The allowance is established through a provision charged to expense. Loans are charged against the allowance when management believes that the collectibility of the principal is unlikely. In evaluating the adequacy of the allowance, management considers numerous factors such as changes in the composition of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current and anticipated local economic conditions that may affect the borrowers' ability to pay. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of 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. Real estate and other assets acquired in satisfaction of indebtedness are recorded at the lower of estimated fair market value net of anticipated selling costs or the recorded loan amount, and any difference between this and the loan amount is charged to the allowance. Costs of maintaining other real estate owned, subsequent write downs and gains or losses on the subsequent sale are reflected in current earnings. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the lesser of the lease terms or estimated useful lives of the assets, which are generally 3 to 30 years. Intangible assets representing the excess of the purchase price over the fair value of tangible net assets acquired, are being amortized on a straight-line basis over seven years and are included in other assets. Other borrowed funds consist of $6,141,000 borrowed from the Federal Home Loan Bank collaterallized by certain real estate loans and investment securities. Stock compensation. The Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. No compensation expense has been recognized in the financial statements for employee stock arrangements. Note 9 to the Consolidated Financial Statements contains a summary of the pro forma effects to reported net income and earnings per share as if the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." 52 Income taxes are provided using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities arise principally from differences in reporting provisions for loan losses, interest on nonaccrual loans, depreciation, state franchise taxes and accruals related to the salary continuation plan. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Stock split. On January 28, 2002 the Board of Directors declared a 5 for 4 stock split which was distributed on February 28, 2002, to shareholders of record as of February 14, 2002. All share and per share data including stock option and warrant information have been retroactively adjusted to reflect the stock split. Comprehensive income includes net income and other comprehensive income, which represents the changes in its net assets during the period from non-owner sources. The Company's only source of other comprehensive income is derived from unrealized gain and loss on securities available-for-sale and is presented net of tax in the accompanying statements of shareholders' equity. Segment reporting. The Company operates a single line of business with no customer accounting for more than 10% of its revenue. Management evaluates the Company's performance as a whole and does not allocate resources based on the performance of different lending or transaction activities. Accordingly, the Company and its subsidiary operate as one business segment. Recently issued accounting pronouncements. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" covering elimination of pooling accounting treatment in business combinations and financial accounting and reporting for acquired goodwill and other intangible assets at acquisition. SFAS No. 141 is effective for transactions initiated after June 30, 2001. Under SFAS No. 141, all mergers and business combinations initiated after the effective date must be accounted for as "purchase" transactions. Goodwill in any merger or business combination which was not initiated prior to the effective date will be recognized as an asset in the financial statements, measured as the excess of the cost of an acquired entity over the net of the amounts assigned to identifiable assets acquired and liabilities assumed, and then tested for impairment to assess losses and expensed against earnings only in the periods in which the recorded value of goodwill exceeded its implied fair value. The FASB concurrently issued SFAS No. 142, "Goodwill and Other Intangible Assets" to address financial accounting and reporting for acquired goodwill and other intangible assets at acquisition in transactions other than business combinations covered by SFAS No. 141, and the accounting treatment of goodwill and other intangible assets after acquisition and initial recognition in the financial statements. The Company is required to adopt SFAS No. 142 beginning January 1, 2002. Early adoption is not permitted. The Company does not expect the adoption of SFAS No. 142 to have a material effect on its financial position, results of operations, or cash flows as the Company had no goodwill as of December 31, 2001 and all of the Company's intangible assets at December 31, 2001 have finite lives and will continue to be amortized. 53 Note 2. Cash and Due from Banks. The Company, through its bank subsidiary, is required to maintain reserves with the Federal Reserve Bank. Reserve requirements are based on a percentage of deposits. At December 31, 2002 the Company maintained reserves of approximately $975,000 in the form of vault cash and balances at the Federal Reserve to satisfy regulatory requirements. Note 3. Securities. The Company's investment securities portfolio as of December 31, 2001 and 2000 consisted of the following:
- --------------------------------------------------------------------------------------------- Amortized Unrealized Unrealized Market In thousands Cost Gain Loss Value - --------------------------------------------------------------------------------------------- December 31, 2001 Available for sale securities: U.S. Treasury and Agency Securities $ 74,578 $ 961 $ 53 $ 75,486 State & Political Subdivision 50,523 186 868 49,841 Corporate Debt Securities 11,530 - 940 10,590 Other 1,236 - - 1,236 - --------------------------------------------------------------------------------------------- Total investment securities $ 137,867 $ 1,147 $ 1,861 $ 137,153 ============================================================================================= December 31, 2000 Available for sale securities: U.S. Treasury and Agency Securities $ 85,589 $ 169 $ 631 $ 85,127 State & Political Subdivision 45,851 93 1,107 44,837 Corporate Debt Securities 21,473 - 324 21,149 Other 1,163 - - 1,163 - --------------------------------------------------------------------------------------------- Total investment securities $ 154,076 $ 262 $ 2,062 $ 152,276 =============================================================================================
The amortized cost and estimated fair value of debt securities at December 31, 2001, based on projected average life, are shown in the next table. Projected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
- ------------------------------------------------------------------------------------------ Amortized Market In thousands Cost Value - ------------------------------------------------------------------------------------------ Available for sale securities: Maturing within 1 year $ 103 $ 103 Maturing after 1 year but within 5 years 50,545 51,046 Maturing after 5 years but within 10 years 41,093 41,049 Maturing after 10 years 44,890 43,719 Other 1,236 1,236 - ------------------------------------------------------------------------------------------ Total investment securities $ 137,867 $ 137,153 ==========================================================================================
At December 31, 2001 and 2000, securities with a market value of $120,472,000 and $94,178,000 were pledged as collateral for deposits of public funds and other purposes as required by law or contract. In 2001, security sales resulted in gross realized losses of $26,000 and gross realized gains of $194,000. In 2000, such sales resulted in gross realized losses of $194,000 and no gross unrealized gains. In 1999, such sales resulted in gross realized gains of $45,000 and no gross unrealized losses. 54 Note 4. Loans and allowance for loan losses. The Company's business is concentrated in Monterey County, California whose economy is highly dependent on the agricultural industry. As a result, the Company lends money to individuals and companies dependent upon the agricultural industry. In addition, the Company has significant extensions of credit and commitments to extend credit which are secured by real estate, the ultimate recovery of which is generally dependent on the successful operation, sale or refinancing of real estate, totaling approximately $453,000,000. The Company monitors the effects of current and expected market conditions and other factors on the collectibility of real estate loans. When, in management's judgment, these loans are impaired, appropriate provisions for losses are recorded. The more significant assumptions management considers involve estimates of the following: lease, absorption and sale rates; real estate values and rates of return; operating expenses; inflation; and sufficiency of collateral independent of the real estate including, in limited instances, personal guarantees. In extending credit and commitments to borrowers, the Company generally requires collateral and/or guarantees as security. The repayment of such loans is expected to come from cash flow or from proceeds from the sale of selected assets of the borrowers. The Company's requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with management's evaluation of the credit worthiness of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing properties, residences and other real property. The Company secures its collateral by perfecting its interest in business assets, obtaining deeds of trust, or outright possession among other means. Loan losses from lending transactions related to real estate and agriculture compare favorably with the Company's loan losses on its loan portfolio as a whole. The activity in the allowance for loan losses is summarized as follows:
- ------------------------------------------------------------------------------------------------------------- In thousands 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------- Balance, beginning of year $ 9,371 $ 5,596 $ 4,352 Provision charged to expense 2,635 3,983 1,484 Loans charged off (430) (392) (400) Recoveries 177 184 160 - ------------------------------------------------------------------------------------------------------------- Balance, end of year $ 11,753 $ 9,371 $ 5,596 =============================================================================================================
In determining the provision for estimated losses related to specific major loans, management evaluates its allowance on an individual loan basis, including an analysis of the credit worthiness, cash flows and financial status of the borrower, and the condition and the estimated value of the collateral. Specific valuation allowances for secured loans are determined by the excess of recorded investment in the loan over the fair market value or net realizable value where appropriate, of the collateral. In determining overall level of allowances to be maintained and the loan loss allowance ratio, management uses a formula allowance calculated by applying loss factors to outstanding loans and certain unused commitments and an unallocated allowance for amounts that are based on management's evaluation of conditions that are not directly measured in the determination of the specific and formula allowances. In determining these allowances, management evaluates many factors including prevailing and forecasted economic conditions, regular reviews of the quality of loans, industry experience, historical loss experience, composition and geographic concentrations of the loan portfolio, the borrowers' ability to repay and repayment performance and estimated collateral values. 55 Management believes that the allowance for loan losses at December 31, 2001 is adequate, based on information currently available. However, no prediction of the ultimate level of loans charged off in future years can be made with any certainty. Non-performing loans at December 31 are summarized below:
- ----------------------------------------------------------------------------------------------------------- In thousands 2001 2000 - ----------------------------------------------------------------------------------------------------------- Past due 90 days or more and still accruing: Real estate $ 68 $ 10 Commercial - 215 Consumer and other 12 5 - ----------------------------------------------------------------------------------------------------------- 80 230 - ----------------------------------------------------------------------------------------------------------- Nonaccrual: Real estate 592 - Commercial 702 329 Consumer and other - - - ----------------------------------------------------------------------------------------------------------- 1,294 329 - ----------------------------------------------------------------------------------------------------------- Restructured (in compliance with modified terms) - Commercial 955 1,010 - ----------------------------------------------------------------------------------------------------------- Total nonperforming loans $ 2,329 $ 1,569 ===========================================================================================================
Interest due but excluded from interest income on nonaccrual loans was approximately $45,000, $64,000 and $82,000 in 2001, 2000 and 1999 respectively. In 2001 and 1999, interest income recognized from payments received on nonaccrual loans was $69,000 and $21,000, respectively (none was recognized in 2000). At December 31, 2001, the recorded investment in loans that are considered impaired under SFAS No. 114 was $2,418,000 of which $1,294,000 are included as nonaccrual loans above, and $955,000 are included as restructured loans above. At December 31, 2000, the recorded investment in loans that are considered impaired was $1,691,000 of which $215,000 are included as nonaccrual loans above, and $1,010,000 are included as restructured loans above. Such impaired loans had valuation allowances totalling $536,000 and $809,000, in 2001 and 2000, respectively, based on the estimated fair values of the collateral. The average recorded investment in impaired loans during 2001 and 2000 was $2,638,000 and $2,129,000, respectively. The Company recognized interest income on impaired loans of $191,000, $161,000 and $92,000 in 2001, 2000 and 1999, respectively (including interest income of $98,000 on restructured loans in 2001 and in 2000). At December 31, 2001, there were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual. The Company held no real estate acquired by foreclosure at December 31, 2001 or 2000. Note 5. Premises and equipment. Premises and equipment owned by the Company at December 31 are summarized as follows:
- ----------------------------------------------------------------------------------------------- In thousands 2001 2000 - ----------------------------------------------------------------------------------------------- Land $ 121 $ 121 Building 265 260 Furniture and equipment 6,606 6,390 Leasehold improvement 2,460 2,223 - ----------------------------------------------------------------------------------------------- 9,452 8,994 Accumulated depreciation and amortization (6,490) (5,259) - ----------------------------------------------------------------------------------------------- Premises and equipment, net $ 2,962 $ 3,735 ===============================================================================================
56 The Company also leases facilities under agreements that expire in March 2003 through October 2009 with options to extend for five to fifteen years. These include two facilities leased from shareholders at terms and conditions which management believes are consistent with the market. Rental rates are adjusted annually for changes in certain economic indices. Rental expense was approximately $675,000, $634,000 and $565,000, including lease expense to shareholders of $133,000, $122,000 and $121,000 in 2001, 2000 and 1999 respectively. The minimum annual rental commitments under these leases, including the remaining rental commitment under the leases to shareholders are as follows:
- --------------------------------------------------------------------------------------------- Operating In thousands Leases - --------------------------------------------------------------------------------------------- 2002 $ 708 2003 642 2004 593 2005 480 2006 480 Thereafter 691 - --------------------------------------------------------------------------------------------- Total $ 3,594 =============================================================================================
Note 6. Income Taxes. The provision for income taxes is as follows:
- ----------------------------------------------------------------------------------- In thousands 2001 2000 1999 - ----------------------------------------------------------------------------------- Current: Federal $ 4,577 $ 5,160 $ 3,863 State 1,832 1,933 1,530 - ----------------------------------------------------------------------------------- Total 6,409 7,093 5,393 - ----------------------------------------------------------------------------------- Deferred: Federal (950) (1,432) (667) State (310) (420) (204) - ----------------------------------------------------------------------------------- Total (1,260) (1,852) (871) - ----------------------------------------------------------------------------------- Total $ 5,149 $ 5,241 $ 4,522 - -----------------------------------------------------------------------------------
A reconciliation of the Federal income tax rate to the effective tax rate is as follows:
- --------------------------------------------------------------------------------------- 2001 2000 1999 - --------------------------------------------------------------------------------------- Statutory Federal income tax rate 35.0% 35.0% 35.0% State income taxes (net of Federal income tax benefit) 6.9% 7.1% 7.0% Tax exempt interest income (6.4%) (5.0%) (5.4%) Other (0.4%) (0.1%) (0.6%) - --------------------------------------------------------------------------------------- Effective tax rate 35.1% 37.0% 36.0% - ---------------------------------------------------------------------------------------
57 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000, are presented below:
- --------------------------------------------------------------------------------------- In thousands 2001 2000 - --------------------------------------------------------------------------------------- Deferred tax assets: Provision for loan losses $ 5,206 $ 4,053 Unrealized loss on available for sale securities 297 738 Salary continuation plan 755 618 Depreciation and amortization 209 258 State income taxes 127 251 Excess serving rights 12 15 Interest on nonaccrual loans 20 51 Accrual to cash adjustments - - Other 202 26 - --------------------------------------------------------------------------------------- Net deferred tax asset $ 6,828 $ 6,010 - ---------------------------------------------------------------------------------------
The Company believes that it is more likely than not that it will realize the above deferred tax assets in future periods; therefore, no valuation allowance has been provided against its deferred tax assets. Note 7. Other Noninterest Expense. Other expense for the years ended December 31, 2001, 2000 and 1999 consists of the following:
- --------------------------------------------------------------------------------------------- In thousands 2001 2000 1999 - --------------------------------------------------------------------------------------------- Customer expenses $ 525 $ 413 $ 398 Marketing 473 644 475 Professional fees 457 430 452 Stationary and supplies 372 377 444 Data processing 272 314 306 Amortization of intangibles 257 257 257 Shareholder and director 229 253 250 Insurance 216 216 180 Dues and assessments 177 179 139 Other 1,151 1,063 1,387 - --------------------------------------------------------------------------------------------- Total $ 4,129 $ 4,146 $ 4,288 - ---------------------------------------------------------------------------------------------
Note 8. Earnings Per Share. Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised and converted into common stock. 58 There was no difference in the numerator used in the calculation of basic earnings per share and diluted earnings per share. The denominator used in the calculation of basic earnings per share and diluted earnings per share for each of the years ended December 31 is reconciled as follows:
- ------------------------------------------------------------------------------------------- In thousands (expect per share data) 2001 2000 1999 - ------------------------------------------------------------------------------------------- Basic Earnings Per Share Net income $ 9,509 $ 8,926 $ 8,051 Weighted average common shares outstanding 9,046 9,515 9,724 ------------------------------ Basic earnings per share $ 1.05 $ 0.94 $ 0.82 =========================================================================================== Diluted Earnings Per Share Net Income $ 9,509 $ 8,926 $ 8,051 Weighted average common shares outstanding 9,046 9,515 9,724 Dilutive effect of outstanding options 394 281 338 ------------------------------ Weighted average common shares outstanding - Diluted 9,440 9,796 10,062 ------------------------------ Diluted earnings per share $ 1.01 $ 0.91 $ 0.80 ===========================================================================================
Note 9. Employee Benefit Plans. The Company has two stock option plans under which incentive stock options or nonqualified stock options may be granted to certain key employees or directors to purchase shares of common stock. Options are granted at a price not less than the fair market value of the common stock on the date of grant. Options vest over various periods not in excess of ten years from date of grant and expire not more than ten years from date of grant. The weighted average value of options granted in 2001, 2000 and 1999 was $4.95, $4.22 and $3.68 per share, respectively. As of December 31, 2001, 1,433,399 shares are available for future grants under the plans. Activity under the stock option plans is as follows:
- ------------------------------------------------------------------------------------------------------- Weighted Average Exercise Shares Price - ------------------------------------------------------------------------------------------------------- Balances, January 1, 1999 1,443,341 $ 4.54 1,125,990 exercisable at a weighted average exercise price of $3.70 Granted 28,642 10.98 Expired (15,908) 6.50 Exercised (608,217) 1.99 - ------------------------------------------------------------------------------------------------------- Balances, December 31, 1999 847,858 6.54 743,713 exercisable at a weighted average exercise price of $6.05 Granted 240,968 11.70 Expired (8,250) 11.64 Exercised (17,871) 5.33 - ------------------------------------------------------------------------------------------------------- Balances, December 31, 2000 1,062,705 7.70 784,113 exercisable at a weighted average exercise price of $6.34 Granted 5,000 15.89 Exercised (43,786) 4.65 - ------------------------------------------------------------------------------------------------------- Balances, December 31, 2001 1,023,919 $ 5.80 852,027 exercisable at a weighted average exercise price of $7.09 - -------------------------------------------------------------------------------------------------------
59 Additional information regarding options outstanding as of December 31, 2001 is as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Remaining Weighted Weighted Range of Number Contractual Average Number Average Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price - ---------------------------------------------------------------------------------------------------------------------------------- $ 3.12 - 5.32 227,240 3.5 $ 4.34 227,240 $4.34 6.49 - 6.90 422,061 4.9 6.52 422,061 6.52 10.18 - 15.89 374,618 7.6 11.33 202,726 11.35 - ---------------------------------------------------------------------------------------------------------------------------------- $ 3.12 - 15.89 1,023,919 5.6 $ 7.79 852,027 $7.09 - ----------------------------------------------------------------------------------------------------------------------------------
Additional Stock Plan Information As discussed in Note 1, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. No compensation expense has been recognized in the financial statements for employee stock arrangements. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS 123) requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions for 2001: expected life, four years following vesting; average stock volatility of 15.6%; risk free interest rates ranging from 4.14% to 6.57%; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the 2001, 2000 and 1999 awards had been amortized to expense over the vesting period of the awards, pro forma net income would have been $9,334,000 ($1.03 basic and $0.99 diluted earnings per share), $8,548,000 000 ($0.90 basic and $0.87 diluted earnings per share) and $7,939,000 ($0.82 basic and $0.79 diluted earnings per share) in 2001, 2000 and 1999, respectively. The impact of outstanding non-vested stock options granted prior to 1995 has been excluded from the pro forma calculation; accordingly, the 2001, 2000 and 1999 pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock options. 401(k) Savings Plan The Company has a 401(k) Savings Plan under which eligible employees may elect to make tax deferred contributions from their annual salary, to a maximum established annually by the IRS. The Company matches 25% of the employees' contributions. The Company may make additional contributions to the plan at the discretion of the Board of Directors. All employees meeting age and service requirements are eligible to participate in the Plan. Company contributions vest after 3 years of service. Company contributions during 2001, 2000 and 1999 which are funded currently, totaled $129,000, $114,000 and $94,000, respectively. 60 Salary Continuation Plan The Company has a salary continuation plan for three officers which provides for retirement benefits upon reaching age 63. The Company accrues such post-retirement benefits over the vesting periods (of five or ten years) based on a discount rate of 7.5%. In the event of a change in control of the Company, the officers' benefits will fully vest. The Company recorded compensation expense of $94,000, $292,000 and $256,000 in 2001, 2000 and 1999 respectively. Accrued compensation payable under the salary continuation plan totaled $1,233,000 and $1,140,000 at December 31, 2001 and 2000, respectively. Deferred Compensation Plan The Company has a deferred compensation plan for the benefit of the Board of Directors and certain officers. In addition to the deferral of compensation, the plan allows participants the opportunity to defer taxable income derived from the exercise of stock options. The participant's may, after making an election to defer receipt of the option shares for a specified period of time, use a "stock-for-stock" exercise to tender to the Company mature shares with a fair value equal to the exercise price of the stock options exercised. The Company simultaneously delivers new shares to the participant equal to the value of shares surrendered and the remaining shares under option are placed in a trust administered by a third- party trust company, to be distributed in accordance with the terms of each participant's election to defer. During 2001 and 2000 no shares were tendered under the plan. In 1999, 60,126 shares with a fair value of approximately $666,000 were tendered to the Company using a "stock-for-stock" exercise. At December 31, 2001, 299,048 shares (with a fair value of approximately $6,579,000) were held in the Deferred Compensation Trust. Note 10. Disclosures About Fair Value of Financial Instruments. The estimated fair value amounts have been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation techniques may have a material effect on the estimated fair value amounts.
- ---------------------------------------------------------------------------------------------------------------------- December 31, 2001 December 31, 2000 Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value - ---------------------------------------------------------------------------------------------------------------------- Financial Assets Cash and equivalents $ 55,245 $ 55,245 $ 74,492 $ 74,492 Securities 137,153 137,153 152,276 152,276 Loans, net 594,547 598,475 464,024 461,060 Financial Liabilities Demand deposits 337,450 337,450 295,287 295,287 Time Deposits 264,551 267,362 227,719 228,724 Savings 122,861 122,861 110,204 110,204 Other borrowings 6,141 6,141 5,206 5,206 - ----------------------------------------------------------------------------------------------------------------------
The following estimates and assumptions were used to estimate the fair value of the financial instruments. 61 Cash and equivalents - The carrying amount is a reasonable estimate of fair value. Securities - Fair values of securities are based on quoted market prices or dealer quotes. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities. Loans, net - Fair values for certain commercial, construction, revolving customer credit and other loans were estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and similar maturities, adjusted for the allowance for loan losses. Certain adjustable rate loans have been valued at their carrying values, if no significant changes in credit standing have occurred since origination and the interest rate adjustment characteristics of the loan effectively adjust the interest rate to maintain a market rate of return. For adjustable rate loans which have had changes in credit quality, appropriate adjustments to the fair value of the loans are made. Demand, time and savings deposits - The fair value of noninterest-bearing and adjustable rate deposits and savings is the amount payable upon demand at the reporting date. The fair value of fixed-rate interest-bearing deposits with fixed maturity dates was estimated by discounting the cash flows using rates currently offered for deposits of similar remaining maturities. Other Borrowings - The carrying amount is a reasonable estimate of fair value. Off-balance sheet instruments - The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit-worthiness of the counterparties. The fair values of standby and commercial letters of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The fair values of such off-balance sheet instruments were not significant at December 31, 2001 and 2000, therefore, have not been included in the table above. Note 11. Commitments and Contingencies. The Company is involved in a number of legal actions arising from normal business activities. Management, based upon the advise of legal counsel, believes the ultimate resolution of all pending legal actions will not have a material effect on the financial statements. In the normal course of business there are various commitments outstanding to extend credit which are not reflected in the financial statements, including loan commitments of approximately $166,386,000 and $149,839,000 at December 31, 2001 and 2000 and standby letters of credit and financial guarantees of $3,690,000 and $4,634,000 at December 31, 2001 and 2000. The Bank does not anticipate any losses as a result of these commitments. Approximately $43,059,000 of loan commitments outstanding at December 31, 2001 relate to construction loans and are expected to fund within the next twelve months. The remainder relate primarily to revolving lines of credit or other commercial loans. Many of these loan commitments are expected to expire without being drawn upon. Therefore the total commitments do not necessarily represent future cash requirements. 62 Stand-by letters of credit are commitments written by the Bank to guarantee the performance of a customer to a third party. These guarantees are issued primarily relating to purchases of inventory by the Bank's commercial customers, are typically short-term in nature and virtually all such commitments are collaterallized. Most of the outstanding commitments to extend credit are at variable rates tied to the Bank's reference rate of interest. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit issued is the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Company controls the credit risk of the off-balance sheet financial instruments through the normal credit approval and monitoring process. Note 12. Related Party Loans. The Company makes loans to officers and directors and their associates subject to loan committee approval and ratification by the Board of Directors. These transactions are on substantially the same terms as those prevailing at the time for comparable transactions with unaffiliated parties and do not involve more than normal risk of collectibility. An analysis of changes in related party loans for the year ended December 31, 2001 is as follows:
- ------------------------------------------------------------------------------------------ Beginning Balance Additions Repayments Ending Balance - ------------------------------------------------------------------------------------------ $ 4,882,000 $ 14,101,000 $ 14,968,000 $ 4,015,000 - ------------------------------------------------------------------------------------------
Committed lines of credit, undisbursed loans and standby letters of credit to directors and officers were approximately $6,021,000 and $2,461,000 at December 31, 2001 and 2000. Note 13. Regulatory Matters. The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Capital adequacy guidelines and the regulatory framework for prompt corrective action require that the Company meet specific capital adequacy guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and a minimum leverage ratio of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 2001 that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 2001 and 2000, the most recent notifications from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. 63 The following table shows the Company's and the Bank's actual capital amounts and ratios at December 31, as well as the minimum capital ratios to be categorized as "well capitalized" under the regulatory framework:
- ---------------------------------------------------------------------------------------------------------------- To Be Categorized Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: ------ ------------------ ------------------ Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------------- As of December 31, 2001: Total Capital (to Risk Weighted Assets): Company $ 73,518,000 11.1% $ 52,971,000 8.0% N/A Community Bank 65,318,000 10.0% 52,202,000 8.0% $ 65,252,000 10.0% Tier 1 Capital (to Risk Weighted Assets) Company 65,198,000 9.9% 26,486,000 4.0% N/A Community Bank 57,117,000 8.8% 26,101,000 4.0% 39,151,000 6.0% Tier 1 Capital (to Risk Average Assets) Company 65,198,000 8.4% 30,896,000 4.0% N/A Community Bank 57,117,000 7.5% 30,470,000 4.0% 38,088,000 5.0% ----------------------------------------------------------------------- As of December 31, 2000: Total Capital (to Risk Weighted Assets): Company $ 66,892,000 12.3% $ 43,490,000 8.0% N/A Community Bank 63,866,000 11.8% 43,273,000 8.0% $ 54,092,000 10.0% Tier 1 Capital (to Risk Weighted Assets) Company 60,098,000 11.1% 21,745,000 4.0% N/A Community Bank 57,073,000 10.6% 21,637,000 4.0% 32,455,000 6.0% Tier 1 Capital (to Risk Average Assets) Company 60,098,000 9.1% 26,344,000 4.0% N/A Community Bank 57,073,000 8.7% 26,251,000 4.0% 32,814,000 5.0% ================================================================================================================
The ability of the Company to pay cash dividends in the future will largely depend upon the cash dividends paid to it by its subsidiary Bank. Under State and Federal law regulating banks, cash dividends declared by a Bank in any calendar year generally may not exceed its net income for the preceding three fiscal years, less distributions to the Company, or its retained earnings. Under these provisions, and considering minimum regulatory capital requirements, the amount available for distribution from the Bank to the Company was approximately $9,003,000 as of December 31, 2001. The Bank is subject to certain restrictions under the Federal Reserve Act, including restrictions on the extension of credit to affiliates. In particular, the Bank is prohibited from lending to the Company unless the loans are secured by specified types of collateral. Such secured loans and other advances from the Bank is limited to 10% of Bank shareholders' equity, or a maximum of $5,716,000 at December 31, 2001. No such advances were made during 2001 or 2000. 64 Note 14. Central Coast Bancorp (Parent Company Only) The condensed financial statements of Central Coast Bancorp follow (in thousands):
Condensed Balance Sheets - --------------------------------------------------------------------------------------------------- December 31, 2001 2000 - --------------------------------------------------------------------------------------------------- Assets: Cash - interest bearing account with Bank $ 997 $ 1,944 Loans 7,063 - Investment in Bank 57,672 56,823 Premises and equipment, net 1,174 1,730 Other Assets 1,149 1,142 - --------------------------------------------------------------------------------------------------- Total assets $ 68,055 $ 61,639 =================================================================================================== Liabilities and Shareholders' Equity Liabilities $ 2,719 $ 1,785 Shareholders' Equity 65,336 59,854 - --------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 68,055 $ 61,639 ===================================================================================================
Condensed Income Statements - ------------------------------------------------------------------------------------------------------ Years ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------ Management fees $ 9,888 $ 8,700 $ 7,704 Interest income 109 - - Other income 3 - 14 Cash dividends received from the Bank 10,500 7,000 500 - ------------------------------------------------------------------------------------------------------ Total income 20,500 15,700 8,218 Operating expenses 9,812 9,257 8,212 - ------------------------------------------------------------------------------------------------------ Income before income taxes and equity in undistributed net income of Bank 10,688 6,443 6 Provision (credit) for income taxes 66 (206) (206) Equity in undistributed net income of Bank (1,113) 2,277 7,839 - ------------------------------------------------------------------------------------------------------ Net income 9,509 8,926 8,051 Other comprehensive income (loss) 645 3,640 (5,065) - ------------------------------------------------------------------------------------------------------ Total comprehensive income $ 10,154 $ 12,566 $ 2,986 ======================================================================================================
65
Condensed Statements of Cash Flows - --------------------------------------------------------------------------------------------------- Years ended December 31, 2001 2000 1999 - --------------------------------------------------------------------------------------------------- Increase (decrease) in cash: Operations: Net income $ 9,509 $ 8,926 $ 8,051 Adjustments to reconcile net income to net cash provided by operations: Equity in undistributed net income of Bank 1,113 (2,277) (7,839) Depreciation 841 778 546 Gain on sale of equipment 17 - (10) (Increase) decrease in other assets (8,387) (127) 31 Increase in liabilities 1,000 380 285 - --------------------------------------------------------------------------------------------------- Net cash provided by operations 4,093 7,680 1,064 - --------------------------------------------------------------------------------------------------- Investing Activities: Proceeds from sale of equipment - - 18 Purchases of equipment (302) (612) (944) - --------------------------------------------------------------------------------------------------- Net cash used by investing activities (302) (612) (926) - --------------------------------------------------------------------------------------------------- Financing Activities: Stock repurchases (4,857) (6,111) (2,682) Stock options and warrants exercised 119 94 1,098 - --------------------------------------------------------------------------------------------------- Net cash used by financing activities (4,738) (6,017) (1,584) - --------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (947) 1,051 (1,446) Cash balance, beginning of year 1,944 893 2,339 - --------------------------------------------------------------------------------------------------- Cash balance, end of year $ 997 $ 1,944 $ 893 ===================================================================================================
Note 15. Selected Quarterly Information (unaudited) - ---------------------------------------------------------------------------------------------------------- In thousands (except per share data) 2001 2000 Three months ended Dec.31 Sep.30 June 30 Mar.31 Dec.31 Sep.30 June 30 Mar.31 - ---------------------------------------------------------------------------------------------------------- Interest revenue $ 12,331 $ 13,052 $ 12,944 $ 13,420 $ 13,656 $ 13,576 $ 12,618 $ 11,565 Interest expense 3,930 4,681 4,823 4,926 4,890 4,901 4,437 4,062 --------------------------------------------------------------------------- Net interest revenue 8,401 8,371 8,121 8,494 8,766 8,675 8,181 7,503 Provision for loan losses 1,680 760 75 120 1,127 1,530 800 526 --------------------------------------------------------------------------- Net interest revenue after provision for loan losses 6,721 7,611 8,046 8,374 7,639 7,145 7,381 6,977 Total noninterest revenues 777 927 775 650 584 672 631 546 Total noninterest expenses 4,759 4,749 4,776 4,939 4,654 4,298 4,336 4,120 --------------------------------------------------------------------------- Income before taxes 2,739 3,789 4,045 4,085 3,569 3,519 3,676 3,403 Income taxes 680 1,421 1,522 1,526 1,215 1,266 1,433 1,327 --------------------------------------------------------------------------- Net income $ 2,059 $ 2,368 $ 2,523 $ 2,559 $ 2,354 $ 2,253 $ 2,243 $ 2,076 =========================================================================== Per common share: Basic earnings per share $ 0.23 $ 0.26 $ 0.28 $ 0.28 $ 0.26 $ 0.24 $ 0.23 $ 0.21 Dilutive earnings per share 0.23 0.26 0.26 0.26 0.25 0.23 0.22 0.21 - ---------------------------------------------------------------------------------------------------------- The principal market on which the company's common stock is traded is Nasdaq.
66 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by Item 10 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A. 67 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. Listed and included in Part II, Item 8. (2) Financial Statement Schedules. Not applicable. (3) Exhibits. (2.1) Agreement and Plan of Reorganization and Merger by and between Central Coast Bancorp, CCB Merger Company and Cypress Coast Bank dated as of December 5, 1995, incorporated by reference from Exhibit 99.1 to Form 8-K, filed with the Commission on December 7, 1995. (3.1) Articles of Incorporation, as amended. (3.2) Bylaws, as amended, incorporated by reference from Exhibit 3.2 to Form 10-Q, filed with the Commission on August 13, 2001. (4.1) Specimen form of Central Coast Bancorp stock certificate, incorporated by reference from the Registrant's 1994 Annual Report on Form 10-K filed with the Commission on March 31, 1995. (10.1) Lease agreement dated December 12, 1994, related to 301 Main Street, Salinas, California incorporated by reference from the Registrant's 1994 Annual Report on Form 10-K filed with the Commission on March 31, 1995. (10.2) King City Branch Lease incorporated by reference from Exhibit 10.3 to Registration Statement on Form S-4, No. 33-76972, filed with the Commission on March 28, 1994. (10.3) Amendment to King City Branch Lease, incorporated by reference from Exhibit 10.4 to Registration Statement on Form S-4, No. 33-76972, filed with the Commission on March 28, 1994. *(10.4) 1982 Stock Option Plan, as amended, incorporated by reference from Exhibit 4.2 to Registration Statement on Form S-8, No. 33-89948, filed with the Commission on March 3, 1995. *(10.5) Form of Nonstatutory Stock Option Agreement under the 1982 Stock Option Plan incorporated by reference from Exhibit 4.6 to Registration Statement on Form S-8, No. 33-89948, filed with the Commission on March 3, 1995. 68 *(10.6) Form of Incentive Stock Option Agreement under the 1982 Stock Option Plan incorporated by reference from Exhibit 4.7 to Registration Statement on Form S-8, No. 33-89948, filed with the Commission on March 3, 1995. *(10.7) 1994 Stock Option Plan, as amended and restated, incorporated by reference from Exhibit 9.9 to Registration Statement on Form S-8, No. 33-89948, filed with the Commission on November 15, 1996. *(10.8) Form of Nonstatutory Stock Option Agreement under the 1994 Stock Option Plan incorporated by reference from Exhibit 4.3 to Registration Statement on Form S-8, No. 33-89948, filed with Commission on March 3, 1995. *(10.9) Form of Incentive Stock Option Agreement under the 1994 Stock Option Plan incorporated by reference from Exhibit 4.4 to Registration Statement on Form S-8, No. 33-89948, filed with the Commission on March 3, 1995. *(10.10) Form of Director Nonstatutory Stock Option Agreement under the 1994 Stock Option Plan incorporated by reference from Exhibit 4.5 to Registration Statement on Form S-8, No. 33-89948, filed with the Commission on March 3, 1995. *(10.11) Form of Bank of Salinas Indemnification Agreement for directors and executive officers incorporated by reference from Exhibit 10.9 to Amendment No. 1 to Registration Statement on Form S-4, No. 33-76972, filed with the Commission on April 15, 1994. *(10.12) 401(k) Pension and Profit Sharing Plan Summary Plan Description incorporated by reference from Exhibit 10.8 to Registration Statement on Form S-4, No. 33-76972, filed with the Commission on March 28, 1994. *(10.13) Form of Employment Agreement incorporated by reference from Exhibit 10.13 to the Company's 1996 Annual Report on Form 10-K filed with the Commission on March 31, 1997. *(10.14) Form of Executive Salary Continuation Agreement incorporated by reference from Exhibit 10.14 to the Company's 1996 Annual Report on Form 10-K filed with the Commission on March 31, 1997. *(10.15) Form of Indemnification Agreement incorporated by reference from Exhibit D to the Proxy Statement filed with the Commission on September 3, 1996, in connection with Registrant's 1996 Annual Shareholders' Meeting held on September 23, 1996. 69 (10.16) Purchase and Assumption Agreement for the Acquisition of Wells Fargo Bank Branches incorporated by reference from Exhibit 10.17 to the Registrant's 1996 Annual Report on Form 10-K filed with the Commission on March 31, 1997. (10.17) Lease agreement dated November 27, 2001, related to 491 Tres Pinos Road , Hollister, California. (10.18) Lease agreement dated February 11, 2002, related to 761 First Street, Gilroy, California. (21.1) The Registrant's only subsidiary is its wholly-owned subsidiary, Community Bank of Central California. (23.1) Independent Auditors' Consent *Denotes management contracts, compensatory plans or arrangements. (b) Reports on Form 8-K. A current report on Form 8-K was filed with the Commission on January 29, 2002, reporting a press release dated January 24, 2001 regarding the Company's operating results for the quarter and year ended December 31, 2001, and a second report on Form 8-K was filed with the Commission on February 6, 2002, reporting a press release dated January 28, 2002 regarding the Company's five-for-four stock split declared on January 28, 2002. An Annual Report for the fiscal year ended December 31, 2001, and Notice of Annual Meeting and Proxy Statement for the Company's 2002 Annual Meeting will be mailed to security holders subsequent to the date of filing this Report. Copies of said materials will be furnished to the Commission in accordance with the Commission's Rules and Regulations. 70 SIGNATURES Pursuant to the requirements of Section 13 or 14(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. CENTRAL COAST BANCORP Date: March 25, 2002 By:/s/ NICK VENTIMIGLIA ------------------------------- Nick Ventimiglia, President and Chief Executive Officer (Principal Executive Officer) Date: March 25, 2002 By:/s/ ROBERT STANBERRY -------------------------------- Robert Stanberry, Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ C. EDWARD BOUTONNET Director 3/25/02 - ------------------------ (C. Edward Boutonnet) /s/ BRADFORD G. CRANDALL Director 3/25/02 - ------------------------ (Bradford G. Crandall) Director 3/25/02 - ------------------------ (Alfred P. Glover) Director 3/25/02 - ------------------------ (Michael T. Lapsys) /s/ ROBERT M. MRAULE Director 3/25/02 - ------------------------ (Robert M. Mraule) Director 3/25/02 - ------------------------ (Duncan L. McCarter) /s/ LOUIS A. SOUZA Director 3/25/02 - ------------------------ (Louis A. Souza) Director 3/25/02 - ------------------------ (Mose E. Thomas) /s/ NICK VENTIMIGLIA Chairman, President 3/25/02 - ------------------------ and CEO (Nick Ventimiglia) 71 EXHIBIT INDEX ------------- Exhibit Sequential Number Description Page Number - ------ ----------- ----------- 3.1 Articles of Incorporation, as amended 73 10.17 Lease agreement dated November 27, 2001, related to 81 491 Tres Pinos Road , Hollister, California 10.18 Lease agreement dated February 11, 2002, related to 158 761 First Street, Gilroy, California 23.1 Independent auditors' consent. 200 72 EX-3.(I) 3 exhibit3x1.txt ARTICLES OF INCORPORATION, AS AMENDED EXHIBIT 3.1 Articles of Incorporation, As Amended 1 ARTICLES OF INCORPORATION OF SALINAS VALLEY BANCORP The undersigned incorporator, for the purpose of forming a corporation under the General Corporation Law of the State of California, hereby declares: I The name of the corporation is Salinas Valley Bancorp. II The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III The name and address in the State of California of the corporation's Initial Agent for Service of Process is: John McCarthy, 301 Main Street, Salinas, California 93901. IV The corporation is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock," respectively. The number of shares of Preferred Stock authorized to be issued is One Million (1,000,000) and the number of shares of Common Stock authorized to be issued is Twenty Million (20,000,000). The Preferred Stock may be divided into such number of series as the board of directors may determine. The board of directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to and imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The board of directors, within the limits and restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. V The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. VI This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California General Corporation Law) for breach of duty to the corporation and its shareholders through bylaw provisions, agreements with agents, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California General Corporation Law, subject to the limits on such excess indemnification set forth in Section 204 of the California General Corporation Law. Certified by California Secretary of State on February 24, 1994 2 Article I of Central Coast Bancorp's Articles of Incorporation shall be amended in its entirety as follows: The name of the corporation is Central Coast Bancorp. Certified by California Secretary of State on December 28, 1994 3 Article IV of the articles of incorporation of Bancorp is amended to read as follows: The corporation is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock," respectively. The number of shares of Preferred Stock authorized to be issued is One Million (1,000,000) and the number of shares of Common Stock authorized to be issued is Twenty Million (20,000,000). Upon the amendment of this article, each outstanding share of Common Stock is split into 1.5 shares as of March 28, 1997. The Preferred Stock may be divided into such number of series as the board of directors may determine. The board of directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to and imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The board of directors, within the limits and restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. Certified by California Secretary of State on April 14, 1997 4 Article IV of the articles of incorporation of Bancorp is amended to read as follows: The corporation is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock," respectively. The number of shares of Preferred Stock authorized to be issued is One Million (1,000,000) and the number of shares of Common Stock authorized to be issued is Twenty Five Million (25,000,000). Upon the amendment of this article, each outstanding share of Common Stock is split into 1.25 shares. The Preferred Stock may be divided into such number of series as the board of directors may determine. The board of directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to and imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The board of directors, within the limits and restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. Certified by California Secretary of State on February 8, 1999. 5 The articles of incorporation of Central Coast Bancorp shall be amended by adding thereto a new Article VII which shall read as set forth below: VII (a) The number of directors which shall constitute the whole board of directors of this corporation shall be specified in the bylaws of the corporation. (b) In the event that the authorized number of directors shall be fixed at nine (9) or more, the board of directors shall be divided into three classes: Class I, Class II and Class III, each consisting of a number of directors equal as nearly as practicable to one-third the total number of directors. Directors in Class I shall initially serve for a term expiring at the 2002 annual meeting of shareholders, directors in Class II shall initially serve for a term expiring at the 2003 annual meeting of shareholders, and directors in Class III shall initially serve for a term expiring at the 2004 annual meeting of shareholders. Thereafter, each director shall serve for a term ending at the third annual shareholders meeting following the annual meeting at which such director was elected. In the event that the authorized number of directors shall be fixed with at least six (6) but less than nine (9), the board of directors shall be divided into two classes, designated Class I and Class II, each consisting of one-half of the directors or as close an approximation as possible. At each annual meeting, each of the successors to the directors of the class whose term shall have expired at such annual meeting shall be elected for a term running until the second annual meeting next succeeding his or her election and until his or her successor shall have been duly elected and qualified. The foregoing notwithstanding, each director shall serve until his or her successor shall have been duly elected and qualified, unless he or she shall resign, die, become disqualified or disabled, or shall otherwise be removed. (c) At each annual election, the directors chosen to succeed those whose terms then expire shall be identified as being of the same class as the directors they succeed, unless, by reason of any intervening changes in the authorized number of directors, the board of directors shall designate one or more directorships whose term then expires as directorships of another class in order more nearly to achieve equality in the number of directors among the classes. When the board of directors fills a vacancy resulting from the resignation, death, disqualification or removal of a director, the director chosen to fill that vacancy shall be of the same class as the director he or she succeeds, unless, by reason of any previous changes in the authorized number of directors, the board of directors shall designate the vacant directorship as a directorship of another class in order more nearly to achieve equality in the number of directors among the classes. (d) Notwithstanding the rule that the classes shall be as nearly equal in number of directors as possible, in the event of any change in the authorized number of directors, each director then continuing to serve as such will nevertheless continue as a director of the class of which he or she is a member, until the expiration of his current term or his or her earlier resignation, death, disqualification or removal. If any newly created directorship or vacancy on the board of directors, consistent with the rule that the three classes shall be as nearly equal in number of directors as possible, may be allocated to one or two or more classes, the board of directors shall allocate it to that of the available class whose term of office is due to expire at the earliest date following such allocation. 6 The articles of incorporation of Central Coast Bancorp shall be amended by adding thereto a new Article VIII which shall read as set forth below: VIII No holder of any class of stock of the corporation shall be entitled to cumulative voting in connection with any election of directors of the corporation. Certified by California Secretary of State on June 28, 2001. 7 Article IV of the articles of incorporation of Bancorp is amended to read as follows: The corporation is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock," respectively. The number of shares of Preferred Stock authorized to be issued is One Million (1,000,000) and the number of shares of Common Stock authorized to be issued is Thirty-One Million Two Hundred Fifty Thousand (31,250,000). Upon the amendment of this article, each outstanding share of Common Stock is split into 1.25 shares. The Preferred Stock may be divided into such number of series as the board of directors may determine. The board of directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to and imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The board of directors, within the limits and restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. Certified by California Secretary of State on February 14, 2002. 8 EX-10 4 exhibit10x17.txt EXHIBIT 10X17 HOLLISTER LEASE EXHIBIT 10.17 SUBLEASE Kmart Corporation, Sublessor Central Coast Bancorp, Sublessee (Community Bank of Central California) KMART NO. 3 748 491 Tres Pinos Road Hollister, CA 95023 (Unit 103) SUBLEASE - TABLE OF CONTENTS ARTICLE I GRANT AND TERM Section 1.1 Demised Premises Section 1.2 Length of Term Section 1.3 Construction of Demised Premises Section 1.4 Intentionally Deleted Section 1.5 When Demised Premises are Ready for Possession Section 1.6 Sublessee's Work Section 1.7 Intentionally Deleted ARTICLE II RENT TAXES AND INSURANCE Section 2.1 Rent, Place of Payment Section 2.2 Annual Minimum Rent Section 2.3 Percentage Rent Section 2.4 Gross Sales Defined Section 2.5 Radius Restriction Section 2.6 Real Estate Taxes Section 2.7 Other Taxes Section 2.8 Insurance Section 2.9 Sublessee's Payment of Taxes, Insurance and Common Area Expenses; Sublessee's Proportionate Share Section 2.10 Additional Rent ARTICLE III RECORDS AND REPORTS Section 3.1 Reports by Sublessee Section 3.2 Sublessee's Records Section 3.3 Sublessor's Right to Audit ARTICLE IV OPERATION AND MAINTENANCE OF COMMON AREAS Section 4.1 Designation of Common Areas Section 4.2 Construction of Common Areas Section 4.3 Common Areas to Remain Private Property Section 4.4 Sublessee's Proportionate Share of Common Area Expense ARTICLE V USE OF PREMISES Section 5.1 Use of Premises Section 5.2 Change of Name Section 5.3 Storage, Office Space Section 5.4 Care of Premises Section 5.5 Sublessee's Obligation to Light Display Windows ARTICLE VI UTILITY SERVICES Section 6.1 Sublessor's Obligation to Install Utility Services and Option to Supply Such Services Section 6.2 Sublessee's Obligation for Payment ARTICLE VIIMAINTENANCE OF DEMISED PREMISES Section 7.1 Sublessor's Obligations for Repair and Maintenance Section 7.2 Sublessee's Obligations for Repair and Maintenance Section 7.3 Abuse of Plumbing Walls, Etc. Section 7.4 Surrender of Premises ARTICLE VIII SIGNS Section 8.1 Signs ARTICLE IX FIXTURES AND ALTERATIONS Section 9.1 Sublessee's Fixtures and Alterations Section 9.2 Sublessor's Changes and Additions ARTICLE X INSURANCE AND INDEMNITY Section 10.1 Indemnification Section 10.2 Increase in Fire Insurance Premium Section 10.3 Sublessee's Obligation to Carry Property, Public Liability and Worker's Compensation Insurance Section 10.4 Environmental Covenants and Indemnification ARTICLE XI RECEIVING DELIVERY AND SUBLESSEE PARKING Section 11.1 Receiving and Delivery of Sublessee's Merchandise and Disposition of Refuse Section 11.2 Sublessee and Employee Parking ARTICLE XII ASSIGNMENT AND SUBLETTING Section 12.1 Assignment and Subletting Section 12.2 By Sublessor ARTICLE XIII ACCESS TO PREMISES Section 13.1 Right of Entry by Sublessor Section 13.2 Sublessor's Right to Exhibit Premises ARTICLE XIV EMINENT DOMAIN Section 14.1 Total Condemnation Section 14.2 Partial Condemnation Section 14.3 Sublessor's and Sublessee's Damages ARTICLE XV DESTRUCTION OR DAMAGE TO DEMISED PREMISES Section 15.1 Reconstruction of Damaged Premises Section 15.2 Waiver of Subrogation ARTICLE XVI BANKRUPTCY AND INSOLVENCY Section 16.1 Continuation of Obligations Under This Sublease After Institution of Bankruptcy Proceedings Section 16.2 Conditions to the Assumption and Assignment of this Sublease in Proceedings Under Chapter 7, 11 or 13 of the Bankruptcy Code Section 16.3 Conditions to the Assignment of the Sublease in Bankruptcy Proceedings Section 16.4 Sublessor's Option to Terminate Upon Subsequent Bankruptcy Proceedings of Sublessee Section 16.5 Use and Occupancy Charges Section 16.6 Sublessee's Interest Not Transferable By Virtue of State Insolvency Law Without Sublessor's Consent Section 16.7 Sublessor's Option to Terminate Upon Insolvency of Sublessee or Guarantor Under State Law or Upon Insolvency of Guarantor Under Federal Bankruptcy Act ARTICLE XVII DEFAULT OF THE SUBLESSEE Section17.1 Right to Re-enter Section17.2 Right to Relet Section17.3 Legal Expenses Section 17.4 Waiver of Rights of Redemption Section 17.5 Sublessee's Failure to Operate Continuously ARTICLE XVIII WAIVER OF LIABILITY Section 18.1 Waiver of Liability ARTICLE XIX Section 19.1 Intentionally Deleted ARTICLE XX HOLDING OVER SUCCESSORS Section 20.1 Holding Over Section 20.2 Successors ARTICLE XXI SECURITY DEPOSIT Section 21.1 Security Deposit ARTICLE XXII MISCELLANEOUS Section 22.1 Non-Waiver Section 22.2 Subordination Section 22.3 Notices Section 22.4 No Partnership Section 22.5 No Liability for Loss and Damage Section 22.6 Sublessor's Use of Common Areas Section 22.7 Gender Section 22.8 Sublessee's Acknowledgement of Acceptance of Premises; Estoppel Certificate Section 22.9 Accord and Satisfaction Section 22.10 Captions and Section Numbers Section 22.11 Partial Invalidity Section 22.12 No Option Section 22.13 Recording Section 22.14 Liens Section 22.15 Brokers Commission Section 22.16 Force Majeure Section 22.17 Entire Agreement Section 22.18 Late Charges and Interest Section 22.19 Cumulative Remedies Section 22.20 Rules and Regulations Section 22.21 Time Section 22.22 Attornment Section 22.23 Merchants Association/Promotional Fund Section 22.24 Waiver of Trial by Jury; Injunction Section 22.25 Attachments: Exhibit "A", Legal Description Exhibit "B", Site Plan Exhibit "C", Construction Work Exhibit "D", Sign Design Criteria Exhibit "E", Space Layout Exhibit "F", Commencement Letter Exhibit "G", Guaranty Exhibit "H", Incorporated Sublease Terms, Rents and Conditions SUBLEASE THIS SUBLEASE AGREEMENT, made and entered into on July 17, 2000, by and between KMART CORPORATION, a Michigan corporation, (hereinafter "Sublessor"), whose office address is 3100 West Big Beaver Road, Troy, Michigan 48084, Attention: Vice President - -Real Estate and Central Coast Bancorp, a California corporation, (hereinafter "Sublessee"), whose principal address is 301 Main Street, Salinas, California 93901, doing business as Community Bank of Central California. WITNESSETH: ARTICLE I GRANT AND TERM Section 1.1 Demised Premises. Sublessor, in consideration of the rent to be paid and the covenants to be performed by Sublessee, does hereby demise and subleases unto Sublessee, and Sublessee hereby takes and subleases from Sublessor, that certain building area having a frontage, measuring from center of partition to center of partition, and a depth, measuring from outside of wall to outside of wall, altogether totaling approximately the square feet as set forth within Exhibit H, incorporated herein, the boundaries and location which are shown by cross hatching and designated by the name set forth in Section 5.2 and on Exhibit "E" which is attached hereto, signed or initialed by Sublessor and Sublessee and incorporated herein by reference (hereinafter the "Demised Premises"). The Demised Premises are now or hereafter to be erected within the shopping center development commonly known and located as set forth within Exhibit H, incorporated herein, which is more fully described on Exhibit "A" attached hereto and made a part hereof (hereinafter the "Shopping Center"). Exhibit "B" sets forth the general layout of the Shopping Center and shall not be deemed to be a warranty, representation or agreement on the part of the Sublessor that said Shopping Center will be constructed exactly as indicated on said Exhibits. Sublessor may increase, reduce or change the number, dimensions or locations of the walks, buildings and parking areas (in any manner whatsoever) as Sublessor shall in its sole discretion deem proper and Sublessor reserves the right to make alterations or additions to, and to build additional stories on the building in which the Demised Premises are contained and to modify or add buildings and/or floors adjoining the same or elsewhere in the Shopping Center. The exterior walls and roof of the Demised Premises and the area beneath the Demised Premises are not demised hereunder, and the use thereof, together with the right to install, maintain, use, repair, and replace pipes, ducts, conduits, wires and structural elements leading through the Demised Premises are hereby reserved unto Sublessor. Sublessor's interest in the Demised Premises arises from a Lease, dated as set forth within Exhibit H, and incorporated herein, and Sublessee takes expressly subject to the provisions, as amended, of said "Master Lease", any mortgage, indenture, permitted exceptions, declarations, operating agreements, restrictions, easements, other agreements, and matters of record. Notwithstanding, Sublessee's interest in the Demised Premises shall also be subject to and subordinate to any existing or subsequent mortgage and/or financing in any form on the Demised Premises and/or the Shopping Center and/or any portion thereof, even if the same shall be modified, replaced, amended, renewed, extended, consolidated or supplemented from time to time. Section 1.2a Term. The primary term of this Sublease shall commence on the date as set forth in Exhibit H, incorporated herein, (hereinafter the "Commencement Date"), and shall expire on the date as set forth in Exhibit H, incorporated herein, or unless sooner terminated as hereinafter provided. Promptly after the Commencement Date has occurred, the parties shall execute and attach hereto an agreement in the form of Exhibit F hereto setting forth the dates upon which the term commenced and shall expire. As used herein, the term "Sublease Year" shall mean the twelve (12) consecutive calendar months commencing with the Commencement Date and each succeeding anniversary of such date thereafter. Any rent or other Sublessee payment due hereunder which is based on an annual (twelve months) charge shall be prorated to reflect any fractional Sublease Year. If the Commencement Date is not on the first day of a calendar month, then the first payment of rent for the period between the Commencement Date and the first day of the first full calendar month shall be prorated on a daily basis for such period prior to the first full calendar month and shall be due and payable on the Rent Commencement Date, as hereinafter defined. During the period following Sublessor's notice to Sublessee that the Demised Premises are ready for Sublessee's possession under this Section and prior to the Rent Commencement Date, all of the provisions of this Sublease shall be binding upon Sublessee (other than the duty to pay Annual Minimum Rent), including but not limited to, construction, hold harmless, alterations and additions, property and liability insurance, liens, real estate taxes and common area maintenance. Section l.2b Option to Extend Term. Provided Sublessor is in control of the Demised Premises and has exercised its option to extend its term, as applicable, Sublessee may, at its option, extend the term of this Sublease for a period as set forth within Exhibit H, incorporated herein, by giving written notice of such extension to Sublessor at least NINE (9) months, but no more than TWELVE (12) months prior to the expiration of the then current term. No exercise of any option herein granted shall be effective if Sublessee is in default in any material respect hereunder at the time of exercise or defaults in any material respect prior to the commencement of the extended term. Any extended term of this Sublease shall be on the same terms and conditions as contained in this Sublease except that the rent shall be increased as provided in Article II hereof, and except that Sublessee shall not have any options to extend beyond the period set forth within Exhibit H, or beyond Sublessor's term, whichever terminates. earlier. The extended term shall commence on the date of expiration of the primary term or the immediate preceding extended term, as applicable. Section 1.3 Construction of Demised Premises. The parties acknowledge that Sublessor has prior to the Commencement Date constructed on the site of the Shopping Center the Demised Premises in approximately the location as shown on Exhibit "B". Sublessee shall be permitted to install its trade fixtures so long as such activities do not interfere with other construction work. Sublessor shall have no responsibility or liability whatsoever for any loss of or damage to any fixtures or other equipment so installed or left upon the Demised Premises. Section 1.4 Sublessor Not Liable For Delays Right of Cancellation. Intentionally Omitted. Section 1.5 When Demised Premises are Ready for Possession. THE DEMISED PREMISES ARE NOW READY FOR OCCUPANCY BY SUBLESSEE AND, BY EXECUTION OF THIS SUBLEASE, SUBLESSEE ACKNOWLEDGES AND AGREES THAT IT HAS INSPECTED AND SHALL ACCEPT THE DEMISED PREMISES, THE COMMON AREAS AND THE SHOPPING CENTER ON THE COMMENCEMENT DATE IN THEIR THEN 'AS IS" AND "WHERE IS" PHYSICAL AND ENVIRONMENTAL CONDITION. SUBLESSEE ACKNOWLEDGES AND AGREES THAT NEITHER SUBLESSOR NOR ITS AGENTS OR EMPLOYEES HAS MADE ANY EXPRESS WARRANTY OR REPRESENTATION REGARDING THE PHYSICAL CONDITION OF OR ANY ENVIRONMENTAL CONDITION ON THE DEMISED PREMISES OR THE SHOPPING CENTER, THE QUALITY OF MATERIAL OR WORKMANSHIP OF THE DEMISED PREMISES, LATENT OR PATENT, OR THE FITNESS OF THE DEMISED PREMISES FOR ANY PARTICULAR USE OR PURPOSE, AND THAT NO SUCH REPRESENTATION OR WARRANTY SHALL BE IMPLIED BY LAW, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY SUBLESSEE. Section 1.6 Sublessee's Work. Sublessee shall at its sole cost and expense perform the construction obligations with respect to the Demised Premises described in this Sublease, including those obligations set forth in Section 9 herein and Exhibit C attached hereto, fixture, stock and staff the Demised Premises and open for business to the general public. Section 1.7 Late Opening. Intentionally Deleted. ARTICLE II RENT, TAXES AND INSURANCE Section 2.1 Rent Place of Payment. Sublessee shall pay to Sublessor during the term hereof, as rental for the Demised Premises, at the times designated, all of the amounts designated herein as Annual Minimum Rent, Percentage Rent, additional rent, and any other amount, money or charge required to be paid. pursuant to the terms of this Sublease whether or not the same may be designated by any such label or term. All amounts required to be paid by Sublessee under this Sublease shall, unless otherwise specifically stated, be paid without any prior demand therefore and without any deduction or set-off whatsoever at Sublessor's address set forth on page 1 of this Sublease or such other place as the Sublessor may designate. Should Sublessor, in anyone or more instances, accept any payment that is late, such acceptance shall not be deemed a waiver of any of Sublessor's rights or any of Sublessee's obligations including, but not limited to, the obligation to pay all amounts due under this Sublease on or before the date designated herein for payment thereof. Section 2.2 Annual Minimum Rent. Sublessee shall pay in advance to Sublessor for the original term of this Sublease an aggregate minimum rental of at least the amount set forth within Exhibit H, incorporated herein, (hereinafter "Minimum Rent"). Sublessee's obligation to pay Annual Minimum Rent shall begin on the date as set forth in Exhibit H, incorporated herein, ("Rent Commencement Date"). For so long as Sublessee shall not default in the payment of any sums due under this Sublease and shall not default under any of the other provisions of this Sublease, the Minimum Rent may be paid under the schedule set forth within Exhibit H, incorporated herein, (all amounts, unless otherwise provided, shall be paid in monthly installments, in advance on or before the first day of each calendar month). Notwithstanding the foregoing Rent Commencement Date, Sublessee's obligation to pay all other charges under this Sublease, including but not limited to common area maintenance charges, taxes, insurance, shall in no way be waived. Sublessee shall pay for such charges in advance on or before the first day of each calendar month throughout the Sublease Term including any extended or hold-over period. All Gross Sales during this period shall be added to the Gross Sales of the first Sublease Year for the purposes of calculating Percentage Rent or reporting Gross Sales, as applicable. In the event Sublessee exercises its option to extend Sublessee's term as provided in Section 1.2(b), Sublessee shall pay in advance to Sublessor for the option term of this Sublease an aggregate minimum rental of at least the amount(s) as set forth in Exhibit H, incorporated herein, (hereinafter "Minimum Rent"). For so long as Sublessee shall not default in the payment of any sums due under this Sublease and shall not default under any of the other provisions of this Sublease, the Minimum Rent may be paid under the schedule as set forth in Exhibit H, incorporated herein, (all amounts, unless otherwise provided, shall be paid in monthly installments, in advance on or before the first day of each calendar month). Section 2.3 Percentage Rent. The Percentage Rent, if any, shall be as set forth within Exhibit H, incorporated herein. Notwithstanding, Sublessee shall be required to report Gross Sales (as herein defined) pursuant to this Sublease upon Sublessor's request. Section 2.4 Gross Sales Defined. The term "Gross Sales" as used herein shall mean the total amount in dollars of the actual sales price, whether for cash or otherwise, of all sales of merchandise, service and other receipts whatsoever of all business conducted in or from the Demised Premises, including mail or telephone orders received or filled at the Demised Premises, and including all deposits not refunded to customers, orders taken, although said orders may be filled elsewhere, and sales or service by Sublessee and any sublessee, assignee, concessionaire or licensee or otherwise in the Demised Premises; provided, however, that nothing herein shall prevent Sublessor from requiring an additional or different percentage rental as a condition to approval of any sublessee, assignee, concessionaire or licensee of Sublessee hereunder. Gross Sales shall also include (i) sales from vending machines, pay telephones and video games at the Demised Premises, except that Gross Sales shall include only the net amount received by Sublessee in the event of vending machines installed by other than Sublessee, its subtenant(s), assignee(s), concessionaire(s) or licensee(s) and (ii) rent or fees received by the Sublessee from any subtenant, assignee, licensee or other occupant of the Demised Premises (but only if any such subtenant, assignee, licensee or other occupant does not have sales or services which are included in Gross Sales). No deduction shall be allowed for uncollected or uncollectible credit accounts. Gross Sales shall not include, (i) any sums collected and paid out for any sales or excise tax imposed by any duly constituted governmental authority, (ii) the exchange of merchandise between the stores of Sublessee, if any, where such exchanges of goods or merchandise are made solely for the convenient operation of the business of Sublessee and not for the purpose of consummating a sale which has theretofore been made at, in, from or upon the Demised Premises, and/or for the purpose of depriving Sublessor of the benefit of a sale which otherwise would be made at, in, from or upon the Demised Premises, (iii) the amount of returns to shippers or manufacturers, (iv) the amount of any cash or credit refund made upon any sale where the merchandise sold, or some part thereof, is thereafter returned by the customer and accepted by Sublessee, or (v) the sale of fixtures after their use in the conduct of business in the Demised Premises. Section 2.5 Radius Restriction.During the term of this Sublease, neither Sublessee nor any person, firm nor corporation who or which controls or is controlled by Sublessee directly or indirectly, either individually or as a partner r stockholder, or otherwise, shall own, operate or become financially interested in any similar or competing business located within a radius of four (4) miles from the outside boundary of the Shopping Center. Section 2.6 Real Estate Taxes. During the term of this Sublease and any renewals or extensions thereof, Sublessee agrees to pay, as additional rent, its Proportionate Share (as hereinafter defined) of all real estate taxes and assessments, general and special, and all interest and penalties thereon which may be levied or imposed or assessed during the term of this Sublease, or any extensions or renewals thereof, against the land described in Exhibit 'A' and the improvements located thereon, excluding, however any commercial outparcels which are separately assessed. In the event that separate real estate taxes and assessments are secured for the Demised Premises and the land beneath the same, Sublessee shall pay said taxes plus Sublessee's Proportionate Share of any additional taxes assessed against the land described in Exhibit 'A' and the buildings and common areas located thereon. Sublessee shall furnish receipts for the payment of any such taxes to Sublessor upon demand. Sublessee shall itself pay one hundred (100%) percent of all real property taxes assessed upon or attributable to any alterations, additions, installations, improvements, fixtures, machinery, or equipment placed, used, constructed or installed in, on, or about the Demised Premises, by Sublessee or by Sublessor at the expense of Sublessee, regardless of whether same become a part of the real property and regardless of whether or not title thereto becomes vested in the Sublessor. If for any reason any such taxes are assessed against the Sublessor, then the Sublessee shall, upon demand, fully reimburse the Sublessor therefor. Should Sublessor elect to initiate an appeal regarding real estate taxes and assessments the Sublessee shall fully cooperate with Sublessor as requested by Sublessor. Sublessee may, at its own expense, contest any liens, claims, or charges of any kind with respect to the Demised Premises which Sublessee reasonably believes are unlawful or excessive; provided, however, if Sublessee's activities increase the valuation of the entire Shopping Center, Sublessee shall be solely liable for any such increase and Sublessee shall, if Sublessor requires the same, furnish reasonable security for the payment of any and all liability, cost and expense which may arise from such activities prior to commencing same. Should any governmental authority having jurisdiction thereover impose a tax or surcharge of any kind or nature upon, against or with respect to the parking areas or the number of parking spaces in the Shopping Center, such tax or surcharge shall likewise be deemed to constitute a tax and/or assessment against such land and such buildings for the purpose of this Section and Sublessee shall be obligated to pay its proportionate share thereof as provided herein. The Proportionate Share to be paid by Sublessee shall also include Sublessee's Proportionate Share of any costs, expenses and attorneys' fees incurred by Sublessor in connection with the negotiation for reduction in the assessed valuation of land, buildings and improvements comprising the Shopping Center and any protest or contest of real estate taxes and/or assessments. Section 2.7 Other Taxes. Sublessee shall reimburse Sublessor upon demand for the following taxes, assessments, levies and charges, foreseen and unforeseen: (a) all taxes which are, at any time, imposed or levied upon or assessed against (i) any Annual Minimum Rent, Percentage Rent or any additional rent reserved or payable hereunder or any other sums payable by Sublessee hereunder, (ii) this Sublease or the leasehold estate hereby created or which arise in respect of the operation, possession, occupancy or use of the Demised Premises; (b) any gross receipts or similar taxes imposed or levied upon, assessed against or measured by any Annual Minimum Rent, Percentage Rent, additional rent or such other sums payable by Sublessee hereunder; (c) all sales and use taxes which may be levied or assessed against or payable by Sublessor or Sublessee on account of the acquisition, leasing, subleasing, or use of the Demised Premises or any portion thereof, or on account of any Annual Minimum Rent, Percentage Rent or additional rent reserved or payable hereunder or any other sums payable by Sublessee hereunder. Sublessee shall pay before delinquency all: (i) municipal, county, and state taxes, foreseen and unforeseen, assessed during the term of this Sublease against any leasehold interest or personal property of any kind, owned by or placed in, upon or about the Demised Premises by the Sublessee; and (ii) sales, use, excise, luxury and other taxes, foreseen and unforeseen, upon Sublessee's business or upon any sales made on or from the Demised Premises. Notwithstanding the foregoing provisions of this Section, Sublessee shall not be required to reimburse Sublessor for any franchise or income taxes of Sublessor (other than any gross receipts or similar taxes imposed or levied upon, assessed against or measured by Annual Minimum Rent, Percentage Rent, additional rent or any other sums payable by Sublessee hereunder), unless any such tax or charge is imposed upon or levied or assessed against Sublessor in substitution for or in place or reduction of any other tax, assessment, charge or levy referred to in this Article, in which case Sublessee shall reimburse Sublessor therefor; all such taxes, if any, to be reimbursed by Sublessee to Sublessor shall be determined as if the Demised Premises were the only property of Sublessor and the receipts from the Demised Premises were the only receipts of Sublessor. Section 2.8 Insurance. The Sublessee shall also pay to Sublessor, as additional rent, its Proportionate Share of any premiums payable by Sublessor for Property Insurance covering the buildings and improvements situated within the Shopping Center and Liability Insurance covering Sublessor's legal liabilities. Sublessor's "Property Insurance" (or similar term used herein) shall mean the insurance carried by Sublessor from time to time covering risk of damage to or destruction of the buildings and improvements situated within the Shopping Center and/or loss of rentals caused thereby, including, but not limited to, any of the following to the extent required under the Master Lease or deemed advisable by Sublessor in its sole determination: fire, tornado, flood, other perils, vandalism, malicious mischief, and all risk. Sublessor's "Liability Insurance" (or similar term used herein) shall mean insurance carried by Sublessor from time to time insuring against cost, loss, damage or expense, incurred by reason of any claim, suit, liability or demand for bodily injury, death or property damage arising out of, pertaining to or involving Sublessor's maintenance and repair of the Common Areas. Notwithstanding any provisions of this Sublease to the contrary, Sublessor shall have the right to self-insure, in whole or part, providing its net worth is maintained in excess of ONE HUNDRED MILLION AND NO/lOO ($100,000,000.00) Dollars. In the event Sublessor elects to self-insure then Sublessee shall also pay its Proportionate Share of an estimated premium which would be due under a standard property and/or liability insurance policy. Sublessor will provide Sublessee with specific information describing the basis for an estimated cost attributed to a self-insurance. Should there be a dispute as to the estimated premium provided by Sublessor, Sublessee shall have the right, at its sole expense, to review same with no more than three insurance companies rated as A + according to Best's Insurance Reports, (hereinafter "Consulting Insurers"), as to the reasonableness of Sublessor's premium assessment in light of factors including, but not limited to, the shopping center location and size, demographics, and the physical characteristics of the Shopping Center's improvements. Should the Consulting Insurers find Sublessor's estimated premium to be either unreasonably higher or lower in light of all the circumstances than the local prevailing market rate then Sublessor and Sublessee shall agree on an adjusted premium which shall then take effect on a non-retroactive basis. Section 2.9 Sublessee's Payment of Taxes Insurance and Common Area Expenses: Proportionate Share. Sublessee's Proportionate Share shall mean and be equal to a fraction, the numerator of which shall be the number of square feet of floor area in the Demised Premises, and the denominator of which shall be the total number of square feet of then constructed gross leasable floor area in the Shopping Center. Sublessee's Proportionate Share of all of the aforesaid taxes and assessments, insurance premiums, and common area expenses (as provided in Article IV) levied or assessed for or during the term hereof, and all other charges to be paid by Sublessee on a proportionate basis under this Sublease shall be paid to Sublessor in monthly installments on or before the first day of each calendar month, in advance, in an amount estimated by Sublessor or Sublessor may elect, at its sole option, to bill such amounts in arrears; provided, that in the event Sublessor is required under any mortgage covering the Shopping Center to escrow real estate taxes and insurance, Sublessor may, but shall not be obligated to, use the amount required to be so escrowed as a basis for its estimate of the monthly installments due from Sublessee hereunder. Upon receipt of all bills for taxes, assessments, insurance and Common Area expenses, attributable to any calendar year during the term hereof, Sublessor shall furnish Sublessee with a written statement of the actual amount of Sublessee's Proportionate Share thereof. In the event no tax bill or insurance bill is available, Sublessor will compute the amount of such tax and insurance. If the total amount paid by Sublessee under this Section for any calendar year during the term of this Sublease shall be less than the actual amount due from Sublessee for such year, as shown on such statement, Sublessee shall pay to Sublessor the difference between the amount paid by Sublessee and the actual amount due, such deficiency to be paid within ten (10) days after Sublessor's delivery of such. statement; and if the total amount paid by, Sublessee hereunder for any such calendar year shall exceed such actual amount due from Sublessee for such calendar year, such excess shall be credited against the next installment of taxes and assessments and insurance due from Sublessee to Sublessor hereunder. All amounts due hereunder shall be payable to Sublessor at the place where the Annual Minimum Rent is payable. For the calendar years in which the Sublease Term commences and terminates, the provisions of these Sections shall apply, and Sublessee's liability for its Proportionate Share of any taxes and assessments and insurance for such year shall be subject to a pro rata adjustment based on the number of days of said calendar year during which the term of this Sublease is in effect. A copy of a tax bill or assessment or insurance bill submitted by Sublessor to Sublessee (or Sublessor's good faith calculation if no such bill is available) shall at all times be sufficient evidence of the amount of taxes and/or assessments and insurance assessed or levied against the property to which such bill relates. Prior to or at the commencement of the term of this Sublease and from time to time thereafter throughout the term hereof, Sublessor shall notify Sublessee in writing of Sublessor's estimate of Sublessee's monthly installments due hereunder. Sublessor's and Sublessee's obligations under this Section shall survive the expiration of the term of this Sublease. Section 2.10 Additional Rent. The Sublessee shall also pay, as additional rent, any other money and charges required to be paid pursuant to the terms of this Sublease, whether or not the same may be designated "additional rent". If such amounts or charges are not paid at the time provided in this Sublease, such amounts shall be collectible as additional rent with the next installment of rent thereafter falling due hereunder, but nothing herein contained shall be deemed to suspend or delay the payment of any amount of money or charge at the time the same becomes due and payable hereunder, or limit any other remedy of the Sublessor. All such payments shall be made by Sublessee to Sublessor at the place where the Annual Minimum Rent is payable, and without any deductions or set off whatsoever. ARTICLE III RECORDS AND REPORTS Section 3.1 Reports by Sublessee. Within fifteen (15) days after the end of each Three (3) calendar months, or any portion thereof, during the Sublease Term, Sublessee shall furnish to Sublessor a statement signed and verified by Sublessee (or by an authorized officer if Sublessee be a corporation) of the Sublessee's Gross Sales during such Three (3) month period or portion thereof. Within sixty (60) days after the close of each Sublease Year, Sublessee shall deliver to Sublessor a statement of Gross Sales for each such Sublease Year showing the Gross Sales made during such Sublease Year, certified by a duly qualified officer of Sublessee as being true, complete and correct, and signed by an independent certified public accountant employed by Sublessee, to the effect that nothing came to their attention during their review of the schedules supporting Sublessee's computation of Gross Sales which would cause them to believe such computation was inaccurate or that any Gross Sales were not included therein. Sublessee shall deliver the statements referred to herein to Sublessor at the same address where Rent is then being paid. Section 3.2 Sublessee's Records. Sublessee shall keep in the Demised Premises or in some other location within the metropolitan area in which the Demised Premises are located, a permanent, accurate and complete set of books and records, in accordance with generally accepted accounting methods and principles, of all sales of merchandise and services and all revenue derived from any business conducted in the Demised Premises, whether included in Gross Sales or not, during each day of the term hereof, together with all supporting records. Sublessee further agrees that it and its subtenants shall keep, retain and preserve these records for at least two (2) years after the expiration of each Sublease Year. Section 3.3 Sublessor's Right to Audit. Sublessor shall have the right, after five (5) days written notice, to have its employees, mortgagees or outside auditors conduct a special audit of Sublessee's and its subtenant's books and records pertaining to sales, services, and business conducted on, in or from the Demised Premises. If such audit shall disclose a discrepancy of more than one percent (1%) of Gross Sales, Sublessee shall promptly pay to Sublessor twice the cost of said audit or $500.00, whichever is greater, in addition to the deficiency in Percentage Rent, which amount shall be payable in any event If such discrepancy is more than three percent (3%) of Gross Sales, or if Sublessee shall fail to permit inspection and/or audit of its records, Sublessor shall have the further remedy by not less than ten (10) days notice to Sublessee to declare this Sublease terminated on account of Sublessee's failure to properly report its Gross Sales. Sublessor shall have the right to audit Sublessee's books and records for a period of two (2) years after the close of each Sublease Year. ARTICLE IV OPERATION AND MAINTENANCE OF COMMON AREAS Section 4.1 Designation of Common Areas. The "Common Areas" shall include the parking areas, access roads and facilities which may be furnished by Sublessor within the Shopping Center, the employee parking areas, the truckway or ways, driveways, pedestrian sidewalks, ramps, landscaping and planting areas, fences, retaining walls, retention ponds, if any, and all other areas, buildings and improvements which may be provided by the Sublessor for the general use in common of the tenants of the Shopping Center, their officers, agents, employees and customers and all lighting and drainage facilities incident thereto. Section 4.2 Construction of Common Areas. Sublessor shall hard-surface, properly drain, landscape and light the parking area or parking areas, together with the necessary access roads within the limits of the Shopping Center. The use arid occupancy by the Sublessee of the Demised Premises shall include the use of the Common Areas during the term hereof, in common with all others to whom Sublessor has granted or hereinafter may grant rights to use same. Sublessor shall operate, manage and maintain the Common Areas during the term of the Sublease. The manner in which the Common Areas shall be used, maintained and operated, and the expenditures therefor shall be at the sole discretion of Sublessor and the use of such areas shall be subject to such regulations as Sublessor, in its sole discretion, shall make from time to time. Sublessor may at any time temporarily close any Common Area to make repairs or changes in such area or to discourage non-customer parking. Section 4.3 Common Areas to Remain Private Property. In order to establish that the Shopping Center, and any portion thereof; are and shall continue to remain private property, Sublessor shall have the unrestricted right in the Sublessor's sole discretion, with respect to the entire Shopping Center and/or any portion thereof controlled by the Sublessor, to close the same to the general public for at least one (1) day in each calendar year, and in connection therewith to seal off all entrances to the Shopping Center or any portion thereof. Section 4.4 Sublessee's Proportionate Share of Common Area Expenses. Sublessee shall pay, in addition to the rental, additional rental and other charges set forth in Article II of this Sublease, Sublessee's Proportionate Share of all costs and expenses of every kind and nature paid or incurred by Sublessor in operating, managing, equipping, policing, lighting, draining, repairing, replacing and maintaining the Common Areas and providing security therefor. Such costs and expenses shall include, but not be limited to: illumination and maintenance of the Shopping Center and its signs, whether the signs are located on or off the Shopping Center site; cleaning, lighting and snow removal from, and all repair and replacements of, parking areas and driveways; removal of excessive accumulations of snow, ice or water from the roof surfaces; management fees paid parties other than Sublessor; line painting, and landscaping; premiums for liability, property damage and workmen's compensation insurance, wages, personal property taxes, supplies; and the reasonable depreciation of equipment used in the operation of the Common Areas (but there shall be excluded the original cost of such equipment and original cost of constructing the Common Areas); and an amount equal to ten 10%) percent of the total of all of the foregoing costs and expenses to cover Sublessor's administrative costs. The Proportionate Share to be paid by Sublessee shall be computed and paid in the same manner as taxes and insurance as provided in Article II of this Sublease. ARTICLE V USE OF PREMISES Section 5.1 Use of Premises. Sublessee shall use and occupy the Demised Premises during the continuance of this Sublease solely for the purpose as set forth within Exhibit H, incorporated herein, and for no other purposes without the written consent of Sublessor. If any governmental license or permit shall be required for the proper and lawful conduct of Sublessee's business or other activity carried on in the Demised Premises or if a failure to procure such a license or permit might or would, in any way, affect Sublessor or the Shopping Center, then Sublessee, at Sublessee's expense, shall duly procure and thereafter maintain such license or permit and submit the same for inspection by Sublessor. Sublessee, at Sublessee's expense, shall at all times comply with the requirements of each such license or permit. Sublessee shall continuously operate one hundred (100%) percent of the Demised Premises during the entire term of this Sublease for the purpose stated in this Sublease, conducting Sublessee's business diligently, energetically, and in a high class and reputable manner. Sublessee shall maintain on the Demised Premises a substantial stock of goods, wares and merchandise and equipment adequate to assure successful operation of Sublessee's business. Sublessee shall keep the Demised Premises open and available for business activity therein during all usual days and hours for such type business in the vicinity so long as same does not conflict with the Shopping Center hours of operation hereinafter stated or such periods and hours as may be set by the Sublessor at its option during the term of this Sublease. Sublessee shall include the address and identity of its business activity in the Demised Premises in all advertisements made by Sublessee in which the address and identity of any other local business activity of like character conducted by Sublessee shall be mentioned, and shall not divert elsewhere any trade, commerce or business which ordinarily would be transacted by Sublessee in or from the Demised Premises. No auction, liquidation, going out of business, fire or bankruptcy sales may be conducted in the Demised Premises. Sublessee shall have absolute freedom to determine its own selling prices and sales practices. Sublessee shall not do any act tending to injure the reputation of the Shopping Center as determined by Sublessor. Sublessee shall at all times operate its business in a lawful manner and in compliance with all applicable laws, statutes, ordinances, regulations, codes and orders. Sublessee shall not: (i) use the Common Areas for its own business purposes; or (ii) solicit business in the Common Areas; or (iii) distribute or place any handbills or other advertising matter in or on automobiles parked in the parking area or in other Common Areas. Sublessee will be required to maintain normal business operations pursuant to the following schedule: Monday -9:00 a.m. to 5:00 p.m. (Other Hours Optional) Tuesday -9:00 a.m. to 5:00 p.m. (Other Hours Optional) Wednesday- 9:00 a.m. to 5:00 p.m. (Other Hours Optional) Thursday -9:00 a.m. to 5:00 p.m. (Other Hours Optional) Friday -9:00 a.m. to 6:00 p.m. (Other Hours Optional) Saturday -All Hours Optional Sunday -All Hours Optional Section 5.2 Change of Name. Sublessee's advertised name, as used by Sublessee for identification of the business operated in the Demised Premises, shall be as set forth within Exhibit H, incorporated herein. Sublessee shall not change such advertised name of the business operated in the Demised Premises without the written consent of the Sublessor. Section 5.3 Storage Office Space. Sublessee shall warehouse, store and/or stock in the Demised Premises only such goods, wares and merchandise as Sublessee intends to offer for sale at retail, at, in, from or upon the Demised Premises. This shall not preclude occasional emergency transfers of merchandise to the other stores of Sublessee, if any, not located in the Shopping Center. Sublessee shall use for office, clerical or other non-selling purposes only such space in the Demised Premises as is from time to time reasonably required for Sublessee's business in the Demised Premises. Section 5.4 Care of Premises. (a) Sublessee shall not perform any acts or carry on any practices which may injure the building or be a nuisance or menace to other tenants in the Shopping Center and shall keep the premises under its control, including the show windows, sidewalks, service corridors and receiving and loading areas adjacent to the Demised Premises, orderly, neat, safe, clean and free from rubbish, dirt, snow and ice at all times. Sublessee shall store all trash and garbage within the Demised Premises and arrange for the regular pick-up of such trash and garbage at Sublessee's expense. In the event Sublessor shall provide any service or facilities for such pickup, then Sublessee shall be obligated and shall pay a Proportionate Share of the actual cost thereof. Sublessee shall not burn any trash or garbage of any kind within the Demised Premises or Shopping Center. In the event Sublessee fails to keep the Demised Premises in the condition called for above, Sublessor may enter upon the Demised Premises and have all rubbish, dirt, trash and garbage removed and the sidewalks cleaned, in which event Sublessee agrees to pay all charges incurred by Sublessor therefor. Said charges shall be paid to the Sublessor by Sublessee as soon as a bill is presented to it and the Sublessor shall have the same remedy as is provided in Article XVII of this Sublease in the event of Sublessee's failure to pay said charges within ten (10) days after being billed therefor. (b) Sublessee shall not keep or display any merchandise or signs on or otherwise obstruct the sidewalks or areaways adjacent to the Demised Premises. Sublessee shall not use, permit, or allow the use of any portion of the Demised Premises as sleeping apartments, lodging rooms, or for any immoral or unlawful purposes. Sublessee shall maintain the show windows and signs in neat and clean condition. Sublessee shall not permit noise or odors in the Demised Premises which are objected to by Sublessor or any tenant or occupant of the Shopping Center, and upon written notice from Sublessor, Sublessee shall immediately cease and desist from causing such noise or odor. No radio, television, loudspeakers, phonographs, sound amplifiers or other similar device shall be installed exterior to the Demised Premises and no aerial shall be erected on the roof or exterior walls of the building in which the Demised Premises are located. Sublessor may direct the use of all pest extermination and scavenger contractors at such intervals as Sublessor may require. Section 5.5 Sublessee's Obligation to Light Display Windows. If requested by Sublessor, Sublessee shall keep the display windows in the Demised Premises well lighted from dusk until 11:00 P.M., or such other reasonable time as determined by Sublessor, during each and every day of the term of this Sublease, unless prevented by causes beyond the control of Sublessee. ARTICLE VI UTILITY SERVICES Section 6.1 Sublessor's Obligation to Install Utility Services and Option to Supply Such Services. Sublessor shall cause to be installed the necessary mains and conduits in order that water and sewer facilities and electricity may be available to the Demised Premises. Sublessor is not obligated to supply facilities to make gas available to the Demised Premises. If Sublessee shall use water, gas and/or electricity for any purpose in the Demised Premises and Sublessor shall elect to supply the water, gas and/or electricity, Sublessee shall accept and use the same as tendered by Sublessor and pay therefor at the applicable rates filed with the proper regulating authority and in effect from time to time covering such services. Section 6.2 Sublessee's Obligation for Payment. Sublessee shall be solely responsible for and promptly pay all charges, when due, for water, gas, electricity, heat, sewer, and any other utility used upon or furnished to the Demised Premises, including but not limited to such amounts as Sublessor has expended for service tap-in fees, metering fees and other fees of a similar nature pertaining to the Demised Premises. Payment for any and all water, gas and electricity used by Sublessee, if furnished by Sublessor, shall be made monthly and within ten (10) days of the presentation by Sublessor to Sublessee of bills therefor. Sublessor shall have the right to cut off and discontinue, without notice to Sublessee, said water, gas and electricity, or any other service (regardless of whether or not furnished by Sublessor) whenever and during any period for which bills for the same or rent or any other obligations under this Sublease are not promptly paid by Sublessee. The obligation of Sublessee to pay for such utilities as provided in this Sublease shall commence as of the date on which possession of the Demised Premises is delivered to Sublessee, notwithstanding any other provision of this Sublease. ARTICLE VII MAINTENANCE OF DEMISED PREMISES Section 7.1 Sublessor's Obligations for Repair and Maintenance. Sublessor, after receiving written notice from the Sublessee and having reasonable opportunity thereafter to obtain the necessary workmen therefor, shall keep in good order and repair the foundation, roof and outer walls of the Demised Premises but not the exterior entrances, doors, door frames, closure devices, window glass, window casings or moldings, window frames, windows or any of the hardware or appliances or appurtenances of said entrances, doors or window casings, window frames and windows, or any attachment thereto or attachments to the Demised Premises used in connection therewith; provided, however, that Sublessor shall not be called on to make any repairs to areas for which Sublessor is responsible if the repairs are made necessary by the act, negligence or omission of Sublessee, its subtenants, assignees, concessionaires or their respective agents, employees, invitees or licensees, and the Sublessee shall make all repairs resulting therefrom. Sublessor's obligation with respect to repairs to and maintenance of the Demised Premises shall be only as expressly set forth in this Section. Notwithstanding anything to the contrary contained herein, Sublessee shall be obligated, at its own expense, to repair any damage to the roof or outer walls of the Demised Premises caused by a breaking and entering of the Demised Premises; said repairs shall be coordinated with Sublessor to prevent Sublessor's roof warranty, if any, from being canceled and/or the breach of Sublessor's lease, if any. Section 7.2 Sublessee's Obligations for Repair and Maintenance. Except as specifically otherwise provided in the immediately preceding Section, the Sublessee shall at its own expense at all times take good care of and keep the Demised Premises and every part thereof, including, but without limitation, all walls, floors, ceilings, partitions, additions, alterations, doors, closure devices, windows, fixtures, hardware, equipment and appurtenances thereof (including lighting, sprinkling, heating, plumbing, and air conditioning systems, in good order, condition and repair, and Sublessee shall replace such systems, accessories, appurtenances and related equipment as necessary (including reasonably periodic interior painting and replacement of floor coverings as determined by Sublessor). If Sublessee refuses or neglects to repair and maintain the Demised Premises as required under this Sublease, and to the satisfaction of the Sublessor, as soon as possible after written demand therefore, Sublessor may make any such repairs and perform any such maintenance without liability to Sublessee for any loss or damage that may accrue to Sublessee's merchandise, fixtures, or other property or to Sublessee's business by reason thereof, and upon completion thereof Sublessee shall pay as additional rent, upon presentation of bill therefor, Sublessor's costs for making such repairs and maintenance plus twenty (20%) percent thereof for overhead. Sublessee further covenants that throughout the Sublease Term, it shall at its own expense: (1) make all repairs and replacements in and about the Demised Premises necessary to preserve them in good order and condition (except those specifically required of Sublessor in this Sublease), which repairs and replacements shall be at least equal in quality to the original work and to promptly pay the expenses of such repairs and replacements; (2) suffer no waste or injury to the Demised Premises; (3) give prompt notice to the Sublessor of any damage that may occur to the Demised Premises; (4) keep and maintain the Demised Premises in clean, sanitary and safe condition in accordance with the laws of the state wherein the Demised Premises is located and in accordance with all directions, rules and regulations of the health officer, fire marshal, building inspector, or other proper officials of the governmental agencies having jurisdiction and to execute and comply with all laws, rules, orders, ordinances and regulations at any time issued or in force, applicable to the Demised Premises or to the Sublessee's use and occupancy thereof of the Municipal, City, County, State and Federal governments and each and every department, bureau and official thereof and of the Board of Fire Underwriters having jurisdiction thereof, including installation and maintenance of fire extinguishers and other fire protection devices as may be required from time to time by any agency having jurisdiction thereof or the insurance underwriters insuring the building in which the Demised Premises are located. Sublessee agrees to keep the plate glass insured with a responsible Insurance Company in the name of the Sublessor and to deliver the policy or policies to Sublessor, and upon its failure to do so, Sublessor may place such insurance and charge the same to the Sublessee; provided, however, the failure on the part of the Sublessor to place such insurance does not release the Sublessee of liability for any damage to such plate glass. Section 7.3 Abuse of Plumbing Walls. The plumbing facilities shall not be used for any other purpose than that for which they are constructed, and Sublessee shall not permit or suffer any foreign substance of any kind to be thrown therein, and the cost of repair or replacement necessitated by any breakage, stoppage, or damage (whether on or off the Demised Premises) resulting from a violation of this provision shall be home by Sublessee. The Sublessee, its employees or agents, shall not alter or deface any walls, ceilings, partitions, floors, wood, stone, or iron work without the Sublessor's prior written consent. Section 7.4 Surrender of Premises. At the expiration of the tenancy hereby created, Sublessee shall surrender the Demised Premises in the same condition as the Demised Premises were in upon delivery of possession thereof to Sublessee, reasonable wear and tear excepted, and shall surrender all keys for the Demised Premises to Sublessor at the place then fixed for the payment of rent and shall inform Sublessor of all combinations on locks, safes and vaults, if any, located in the Demised Premises. Sublessee shall fully comply with the provisions of Article IX of this Sublease prior to surrendering the Demised Premises to Sublessor. Sublessee's obligation to observe or perform this covenant shall survive the expiration or other termination of the term of this Sublease. Sublessee shall further leave the Demised Premises in a broom clean condition with all trash and debris removed from the Shopping Center and shall remove all of Sublessee's signs from both the interior and exterior of the Demised Premises in such a manner so as to not cause damage to the walls or other areas. ARTICLE VIII SIGNS Section 8.1 Signs. Sublessee shall not erect or install any exterior signs, exterior or interior window or door signs or advertising media, or window or door lettering or placards without the prior written consent of Sublessor. Sublessee shall not install any exterior lighting or plumbing fixtures, shades or awnings, or any exterior decorations or painting, or build any fences or make any changes to the storefront without the previous written consent of Sublessor. Within 60 days of opening Sublessee shall erect one exterior sign in accordance with the criteria described in Exhibit "D", Sign Control, which is attached and incorporated herein, and as outlined in Sublessor's prior written approval of Sublessee's design. Sublessor's review and approval of Sublessee's sign design and/or package shall not imply that the design and/or legal requirements have been met and Sublessee warrants that it will rely solely upon its own employees, agents, contractors, and consultants in connection with such compliance. Sublessee shall be solely responsible for complying with all legal requirements and for obtaining all permits and any violations thereof. ARTICLE IX FIXTURES AND ALTERATIONS Section 9.1 Sublessee's Fixtures and Alterations. Sublessee shall not modify or alter the exterior of the Demised Premises nor make any structural alterations to the Demised Premises. Sublessee shall not make any significant modification to the interior of the Demised Premises including, but not limited to the mechanical, electrical, plumbing or architectural systems, or any part thereof without the prior written consent of Sublessor. Sublessee shall present to the Sublessor detailed plans and specifications for any modifications desired by Sublessee at the time such approval is sought. Any damage caused to the Demised Premises and/or the common areas of the Shopping Center, or the facilities serving the same, by virtue of any alteration, addition or improvement installed by Sublessee, whether authorized or unauthorized by Sublessor, shall be the responsibility of Sublessee and Sublessee shall be liable for any necessary repairs. Sublessee shall not commence any work until detailed plans and specifications for such work are submitted by Sublessee within the time requirements of Exhibits C and D to Sublessor and are approved in writing by Sublessor, in its sole discretion, with Sublessor reserving the right to inspect during and after Sublessee's buildout and improvements. Sublessor's consent and review of Sublessee's plans and specifications and inspection of Sublessee's buildout and improvements shall not imply that Sublessor has ascertained that such use, plans and specifications, and buildout and/or improvements comply with the requirements of any local, state or federal law, rule or regulation; and Sublessee warrants that it will rely solely upon its own employees, agents, contractors, and consultants in connection with such compliance. Sublessor shall have no responsibility or liability whatsoever for any loss of, or damage to, any improvements, fixtures or other equipment so installed or left upon the Demised Premises. All alterations, decorations, additions, improvements and fixtures, other than trade fixtures, which shall be made or installed by the Sublessee upon the Demised Premises and which in any manner are attached to the floors, walls or ceilings, shall remain the property of the Sublessee for the term of this Sublease; provided, however, that such alterations, decorations, additions, improvements and fixtures shall not be removed from the Demised Premises without the prior consent in writing from the Sublessor. Upon the termination or expiration of this Sublease the Sublessee shall at its own expense remove such alterations, decorations, additions, improvements and fixtures as the Sublessor shall designate in writing for removal, and the Sublessee shall restore the Demised Premises as provided in Article VII of this Sublease. In the event the Sublessee fails to remove such alterations, decorations, additions, improvements and fixtures designated for removal by the Sublessor and so restore the Demised Premises, then upon the expiration of this Sublease, the Sublessor shall have the right to remove any such alterations, decorations, additions, improvements and fixtures at the expense of the Sublessee, and the Sublessee shall upon demand reimburse the Sublessor for the cost of removing same and for restoring the Demised Premises to such condition. Sublessee shall leave upon and surrender with the Demised Premises, as a part thereof, without disturbance or molestation or injury, such of the alterations, decorations, additions, improvements and fixtures that the Sublessor designates for retention by the Sublessor, and such items shall automatically become the property of the Sublessor without any payment to the Sublessee therefor. Any linoleum or other floor covering of similar character which may be cemented or otherwise adhesively affixed to the floor of the Demised Premises shall upon expiration of the Sublease term be and become the property of the Sublessor. However, in the event Sublessee alters the floor surface or attaches or cements any material or substance to the floor which serves Sublessee's trade use, but is "nonstandard" for other potential sublessees, such as, but not limited to, a "pebbled floor", Sublessee shall, at Sublessee's expense remove and repair the floor to its original condition, excepting reasonable wear and tear, upon Sublessor's request. The terms of this provision shall survive the termination and expiration of this Sublease. Section 9.2 Sublessor's Changes and Additions. Sublessor hereby reserves the right at any time, and from time to time, to make alterations or additions to, and to build additional stories on the building in which the Demised Premises are located and to build adjoining the same. Sublessor also reserves the right at any time, and from time to time, to demolish or construct other buildings and improvements in the Shopping Center, and to enlarge the Shopping Center, and to make alterations therein or additions thereto, and to build additional stories on any building or buildings within the Shopping Center, and to build adjoining thereto and to construct decks or elevated parking facilities and free-standing, single story buildings within the parking lot areas of the Shopping Center. Sublessor reserves the right to relocate, at any time, the various buildings, parking areas and other common areas shown on Exhibit B; Sublessee acknowledges that the said Exhibit B creates no easement rights in common areas shown thereon, but only the right to use said areas in common with all other tenants and occupants of the Shopping Center, and to such others to whom Sublessor has granted, or may hereafter grant rights to use the same, as said common areas may exist from time to time during the term of this Sublease. ARTICLE X INSURANCE AND INDEMNITY Section 10.1 Indemnification. Sublessee agrees to indemnify Sublessor, and save it harmless from and against any and all claims, actions, damages, liability and expense, including attorneys fees, in connection with loss of life, personal injury and/or damage to property arising from out of any occurrence in, upon or at the Demised Premises or the occupancy or use by Sublessee of the Demised Premises or any part thdreof, including, but not limited to the sidewalks immediately adjoining the Demised Premises and the loading platform area, if any, allocated to the use of Sublessee, or arising from or out of Sublessee's failure to comply with any of Sublessee's obligations hereunder, or arising from any inaccuracy in Sublessee's representations and warranties contained herein, or occasioned wholly or in part by any act or omission by Sublessee, its agents, contractors, employees, servants, customers, subtenants, assignees, concessionaires or licensees. In case Sublessor shall, without fault on its part, be made a party to any litigation commenced by or against Sublessee, then Sublessee shall protect and hold it harmless and shall pay all costs, expenses and reasonable attorneys' fees incurred or paid by Sublessor in connection with such litigation. Sublessee shall also pay all Sublessor's costs, expenses and reasonable attorneys' fees that may be incurred by Sublessor in enforcing the Sublessee's covenant and agreements in this Sublease. Section 10.2 Increase in Fire Insurance Premium. Sublessee shall not carry any stock of goods or do anything in or about the Demised Premises which will in any way tend to increase the insurance rates on said premises or the building of which they are a part. Sublessee shall pay as additional rental the entire amount of any increase in premiums for insurance against loss by fire that may be charged during the term of this Sublease on the amount of insurance at any time carried by Sublessor on said premises and/or the building of which they are a part, resulting from the business carried on in the Demised Premises by Sublessee, whether or not Sublessor has consented to the same. The obligations of Sublessee under this Section are in addition to its obligations contained elsewhere in this Sublease concerning insurance. If Sublessee installs any electrical equipment that overloads the lines in the Demised Premises, Sublessee shall at its own expense make whatever changes are necessary to comply with the requirements of the Insurance Underwriters and governmental authorities having jurisdiction thereof. Section 10.3 Sublessee's Obligation to Carry Property Commercial General Liability and Workers Compensation Insurance. Sublessee shall maintain, at its own expense, from the date of delivery of possession to it of the Demised Premises through the expiration of the Sublease Term, insurance of the following character: (i) Insurance against fire, vandalism, malicious mischief and such other perils as are from time to time included in a standard extended coverage endorsement, insuring Sublessee's merchandise, trade fixtures, furnishings, windows, plate glass, equipment and all items of personal property of Sublessee located on or within the Demised Premises, in an amount not less than the full amount of the actual replacement cost thereof; (ii) Commercial general liability insurance, and if necessary, Commercial Umbrella Liability Insurance, against claims for bodily injury, death, property damage or other loss occurring on, in or about the Demised Premises and adjoining sidewalks and passageways, or arising from the acts of Sublessee or its agents, employees or invitees on, in or about the Shopping Center, such insurance to afford protection to Sublessor and such other parties as Sublessor shall designate, with a limit of not less than $2,000,000 for each occurrence. If such commercial general liability insurance contains a general aggregate limit, it shall apply separately to the Demised Premises (iii) Workers' compensation insurance covering all persons employed in connection with any work done on or about the Demised Premises with respect to which claims for death or bodily injury could be asserted against Sublessor, Sublessee or the Demised Premises; and (iv) At any time when the Demised Premises are being altered, maintained or repaired on behalf of Sublessee, or its subtenants, assigns, concessionaires or licensees, commercial general liability insurance for each contractor in the amounts set forth in Section 10.3 (ii), and builder's risk insurance (in completed value non-reporting form) in the amount of the full replacement cost of the improvements on the Demised Premises, exclusive of foundations, including the value of the alterations thereto and the materials and supplies therefor. All insurance policies required hereunder shall be issued by companies of recognized financial standing, duly licensed to do business under the laws of the state wherein the Demised Premises are located, and given an "A" rating by Best's Insurance Guide, or upon Sublessee's request, as required by Sublessor's Lease and mortgage, and shall name Sublessor and any other parties in interest designated by Sublessor as additional named insureds, including a mortgagee clause in favor of any mortgagee of the Demised Premises or the Shopping Center or any portion thereof. Each such policy shall contain an agreement by the insurer that it will not cancel or materially modify such policy except after thirty (30) days prior written notice to Sublessor. Sublessee shall deliver to Sublessor, upon delivery of possession of the Demised Premises, the original or duplicate policies or certificates of the insurers, evidencing all the insurance which is required to be maintained by Sublessee hereunder and Sublessee shall, within thirty (30) days prior to the expiration of any such insurance, deliver other original or duplicate policies or other certificates of the insurers evidencing the renewal of such insurance. Should Sublessee fail to effect, maintain or renew any insurance provided for in this Section, or to pay the premium therefor, or to deliver to Sublessor any of such policies or certificates, then and in any of said events Sublessor may, at its option but without obligation so to do, upon five (5) days notice to Sublessee, procure such insurance. Any sums expended by Sublessor to procure such insurance shall be additional rent hereunder and shall be paid by Sublessee immediately after delivery to Sublessee of a statement therefor. Section 10.4 Environmental Covenants and Indemnification. Sublessee represents and covenants that it shall comply in all material respects with the requirements of any applicable federal and state environmental law, regulation, rule or local governmental ordinance ('Environmental Law") relating to the Demised Premises including obtaining required air permits, and shall notify Sublessor promptly and provide copies to Sublessor of any order, notice, permit application or other communication received by Sublessee with respect to the Demised Premises from any governmental agency in connection with the alleged violation of any such Environmental Law. Sublessee further represents that to the best of its knowledge, it is not aware of any toxic or hazardous waste, substance or material (as such are or may be defined under any applicable Environmental Law) which shall or may be used, released, generated, stored, treated, drained, or disposed of from, on, or about the Demised Premises or Shopping Center in violation of any applicable Environmental Law. Sublessee covenants and agrees that it, its employees, agents, representatives, assigns, or successors shall not use, release, generate, store, treat, drain, or dispose of any toxic or hazardous waste(s) upon, from, or about the Demised Premises or Shopping Center not in accordance with the Environmental Laws. Sublessee shall indemnify, defend and hold Sublessor and Master Landlord, if any, harmless from and against all loss, liability, damage, fine, penalty, cost and expense, whatsoever, including attorneys' fees, hereafter incurred by Sublessor or Master Landlord, if any, as a result of Sublessee's violation of any applicable Environmental Law relating to the Demised Premises or Shopping Center. Indemnification under this section shall survive the expiration or termination of this Sublease. ARTICLE XI RECEIVING, DELIVERY AND TENANT PARKING Section 11.1 Receiving and Delivery of Sublessee's Merchandise and Disposition of Refuse. All receiving and delivery of goods and merchandise and all removal of merchandise, supplies, equipment, garbage and refuse shall be made only by way of the rear of the Demised Premises or at any other location designated by Sublessor, and only at such time designated for such purpose by Sublessor. Section 11.2 Sublessee dnd Employee Parking. Notwithstanding any other provision of this Sublease, Sublessee and its employees shall park their automobiles only in areas specifically designated for that purpose from time to time by Sublessor. Sublessee shall, within five (5) days after written notice from Sublessor, furnish to Sublessor the automobile license numbers assigned to its automobiles and the automobiles of all of its employees. Sublessee shall be responsible for its employees and any violation hereof by its employees. In the event that Sublessee or its employees fail tpark their automobiles in designated parking areas, then Sublessor may, at its option, charge the Sublessee and Sublessee shall pay to Sublessor as additional rent Ten ($10.00) Dollars per day per automobile parked in any area other than those designated for Sublessee and employee parking. ARTICLE XII ASSIGNMENT AND SUBLETTING Section 12.1 Assignment and Subletting. Sublessee shall not sell, assign, hypothecate, pledge, or in any manner transfer this Sublease or any estate or interest therein by operation of law or otherwise, nor sublet the Demised Premises or any part thereof, nor allow anyone to conduct business at, upon or from the Demised Premises, without the prior written consent of Sublessor. Consent by Sublessor to one or more assignments of this Sublease or to one or more sublettings of the Demised Premises or the collection of rent by Sublessor from any subtenant or assignee of Sublessee shall not constitute a waiver hereof ot operate to exhaust any of the Sublessor's rights under this Article. The sale, issuance, or transfer of any voting capital stock of Sublessee or Sublessee's Guarantor, if any, (if Sublessee or Sublessee's Guarantor, if any, be a non-public corporation the stock of which is not traded on any exchange or over the counter), which directly or indirectly results in a change in the voting control of Sublessee or Sublessee's Guarantor, if any, shall be deemed to be an assignment of this Sublease within the meaning of this Section. Any such transfer either voluntarily or involuntarily or by operation of law or otherwise, without the consent of Sublessor shall at Sublessor's option terminate this Sublease, in addition to any remedies it may have under Article XVII of this Sublease or at law, and any purported such transfer shall be null and void. If the Sublessee's interest in and to this Sublease is assigned, the Sublessee's liability for performance of any terms, conditions, covenants and agreements contained herein to be performed by Sublessee shall remain in full force and effect, notwithstanding the fact that Sublessor may have consented to such assignment. Sublessor has entered into this Sublease with Sublessee in order to obtain for the benefit of the entire Shopping Center the unique attraction of Sublessee's trade name and the unique merchandising mix and product line associated with Sublessee's business, and the foregoing prohibition on assignment or subletting or the like is expressly agreed to by the Sublessee as an inducement to Sublessor to sublease to Sublessee. If Sublessee's interest in and to this Sublease is transferred, the Percentage Rent payable by Sublessee's transferee hereunder shall continue to be computed as provided in Section 2.3 hereof, but in no event shall such Percentage Rent be less than the average Percentage Rent paid by Sublessee to Sublessor for the two Sublease Years preceding Sublessee's transfer of interest in and to this Sublease. Section 12.2 By Sublessor. Sublessor shall have the right to transfer, assign and convey in whole or in part, any and all rights, obligations and interests of Sublessor under this Sublease. ARTICLE XIII ACCESS TO PREMISES Section 13.1 Right of Entry by Sublessor. Sublessor shall have the right to enter upon the Demised Premises at all reasonable hours for the purpose of inspecting the same, or of making repairs, additions or alterations to the Demised Premises or any property owned or controlled by Sublessor, without the same constituting an eviction of Sublessee in whole or in part, and the rent reserved shall in no way abate while said repairs, alterations, improvements, or additions are being made, by reason of loss or interruption of business of Sublessee, or otherwise so long as the foregoing do not result in any substantial interference with Sublessee's business. Section 13.2 Sublessor's Right to Exhibit. Premises For a period commencing ninety (90) days prior to the expiration of this Sublease, Sublessor may have reasonable access to the Demised Premises for the purpose of exhibiting the same to prospective tenants. ARTICLE XIV EMINENT DOMAIN Section 14.1 Total Condemnation If the whole of the Demised Premises shall be taken by any public authority under the power of eminent domain then the term of this Sublease shall cease as of the day possession shall be taken by such public authority and the rent shall be paid up to that day with a proportionate refund by Sublessor of such rent as may have been paid in advance for a period subsequent to the date of the taking. Section 14.2 Partial Condemnation If less than the whole, but more than twenty (20%) percent of the Demised Premises are taken under the power of eminent domain, Sublessor and Sublessee shall each have the right to terminate this Sublease upon ten (10) days prior written notice to the other and in such event, such termination shall be effective upon the day possession of the Demised Premises shall be acquired for public use. Such notice shall be given within thirty (30) days after such taking. In the event (i) neither party hereto shall elect to terminate this Sublease or (ii) less than twenty (20%) percent of the Demised Premises are so taken, the Sublease Term shall cease only on the part so taken as of the day possession shall be taken by such public authority and Sublessee shall pay rent up to that day, with appropriate refund by Sublessor of such rent as may have been paid in advance for a period subsequent to the date of the taking, and thereafter all the terms herein provided shall continue in effect, except that the Annual Minimum Rent shall be reduced in proportion to the amount of the Demised Premises taken and the breakpoint above which Percentage Rent, if any, is computed and payable shall likewise be proportionately reduced and Sublessor shall, at its own cost and expense, make all necessary repairs or alterations to the basic building as originally installed by Sublessor, so as to constitute the remaining Demised Premises a complete architectural unit. If more than twenty (20%) percent of the building in which the Demised Premises are located or more than ten (10%) percent of the Common Area shall be taken under power of eminent domain, Sublessor may, by written notice to Sublessee delivered within thirty (30) days after the date of surrendering possession to the public authority, terminate this Sublease. Notwithstanding the foregoing, if the Master Lease terminates as a result of condemnation or taking by eminent domain, this Sublease shall also simultaneously terminate. Section 14.3 Sublessor's and Sublessee's Damages. All damages awarded for such taking under the power of eminent domain, whether for the whole or a part of the Demised Premises, shall belong to and be the property of Sublessor whether such damages shall be awarded as compensation for diminution in value to the leasehold or to the fee of the Demised Premises; provided, however, that Sublessor shall not be entitled to any separate and additional award made to Sublessee for loss of business, or for depreciation to, and cost of removal of, stock and trade fixtures. ARTICLE XV DESTRUCTION OR DAMAGE TO DEMISED PREMISES Section 15.1 Reconstruction of Damaged Premises. In the event the Demised Premises shall be partially or totally destroyed by fire or other casualty insured under the Property Insurance carried by Sublessor so as to become partially or totally untenantable, then the damage to the Demised Premises shall be promptly repaired, to the extent, of any proceeds received from such insurance, unless Sublessor shall elect not to rebuild as hereinafter provided. If Sublessor elects to cause such repairs to be made, the obligation of Sublessor hereunder shall be limited to the Sublessor's Work covered by Exhibit "C" hereof. In no event shall Sublessor be required to repair or replace Sublessee's merchandise, trade fixtures, furnishings or equipment. If more than thirtyfive (35%) percent of the floor area of the building in which the Demised Premises are located shall be damaged or destroyed by fire or other casualty, or if during the last three (3) years of the term hereof more than twenty-five (25%) percent of the Demised Premises or of the floor area of the building in which the Demised Premises are located shall be damaged or destroyed by fire or other casualty, then Sublessor may elect either that the building and/or Demised Premises, as the case may be, be repaired or rebuilt or, at its sole option, terminate this Sublease by giving written notice to Sublessee of its election to so terminate, such notice to be given within ninety (90) days after the occurrence of such damage or destruction. If Sublessor elects to repair or rebuild the Demised Premises, it shall, within ninety (90) days after the occurrence of such damage or destruction give Sublessee notice of its intention to repair or rebuild the Demised Premises and then proceed to repair or rebuild same with reasonable dispatch, subject, however, to delays of the type referred to in the Force Majeure Section of this Sublease. If Sublessor is required or elects to repair or rebuild the Demised Premises as herein provided, Sublessee shall repair or replace its merchandise, trade fixtures, furnishings and equipment in a manner and to at least a condition equal to that prior to its damage or destruction, and if closed, promptly reopen for business. Section 15.2 Waiver of Subrogation. Each party does hereby remise, release and discharge the other party hereto and any officer, agent, employee or representative of such party, of and from any liability whatsoever hereafter arising from loss, damage or injury caused by fire or other casualty for which insurance, permitting the foregoing release of liability and waiving the insurer's right of subrogation (but not self-insurance), is carried by such party at the time of such loss, damage or injury to the extent of recovery by such party under such insurance. Each insurance policy required to be carried by Sublessor or Sublessee under this Sublease shall include a clause or endorsement to the effect that the release contained in this Section will not adversely affect or impair such policy or prejudice the right of the insured to recover under such policy, and each such policy shall permit this waiver of liability and contain a waiver of subrogation by the insurer. ARTICLE XVI BANKRUPTCY AND INSOLVENCY Section 16.1 Continuation of Obligations Under This Sublease After Institution of Bankruptcy Proceedings. In the event that a petition concerning Sublessee is filed under Chapter 7, 11, or 13 of the Bankruptcy Code, Sublessee, Sublessee as Debtor-in-Possession or the Trustee shall, until such time as this Sublease is either assumed or rejected by Sublessee, Sublessee as Debtor-in-Possession or the Trustee pursuant to this Article, or otherwise, shall perform in a timely manner all the obligations of Sublessee arising under this Sublease, including, without limitation, the payment of rent as required by this Sublease. Acceptance of such performance by Sublessor shall not constitute a waiver or relinquishment of any of Sublessor's rights arising under this Sublease, the Bankruptcy Code or otherwise. Section 16.2 Conditions to the Assumption of the Sublease in Proceedings Under Chapter 7 11 or 13 of the Bankruptcy Code. In the event that a Petition for discharge, reorganization or adjustment of debts is filed concerning Sublessee under Chapter 7, 11 or 13 of the Bankruptcy Code, or a proceeding is filed under Chapter 7 of the Bankruptcy Code and is transferred or converted to Chapter 11 or 13, the Trustee, Sublessee, or Sublessee as Debtor-in-Possession, must elect to assume this Sublease within sixty (60) days from the date of the filing or transferring of the Petition under Chapter 11 or 13, or the Trustee, Sublessee or Sublessee as Debtor-in-Possession, shall be deemed to have rejected this Sublease and Sublessor thereupon shall be entitled immediately to possession of the Demised Premises without further obligation to the Trustee, Sublessee or Sublessee as Debtor-in-Possession; provided, however, Sublessor's right to be compensated for damages shall survive such rejection. No election by the Trustee, Sublessee, or Sublessee as Debtor-in-Possession to assume this Sublease, whether under Chapter 7, 11, or 13 and whether for the purpose of assigning the same or otherwise, shall be effective unless each of the following conditions (which Sublessor and Sublessee acknowledge are commercially reasonable in the context of a bankruptcy proceeding of Sublessee) have been satisfied, and Sublessor has so acknowledged in writing that: (1) Sublessee, Sublessee as Debtor-in-Possession, or the Trustee shall comply with all requirements of the Bankruptcy Code with regard to curing or giving adequate assurance of curing of all monetary and non-monetary defaults, compensation for pecuniary loss and providing adequate assurance of future performance. (2) The obligations imposed upon the Trustee, Sublessee, or Sublessee as Debtor-in-Possession, shall continue with respect to Sublessee or any assignee of this Sublease after the completion of bankruptcy proceedings. (3) The assumption of the Sublease will not: (a) Breach any provision, including without limitation provisions such as radius, location, use or exclusivity provisions, in any other lease, mortgage, financing agreement or other agreement by which Sublessor is bound relating to the Shopping Center; or (b) Disrupt, in Sublessor's sole judgment, the Sublessee mix of the Shopping Center or any other attempt by Sublessor to provide a specific variety of retail stores in the Shopping Center which, in Sublessor's sole judgment, would be most beneficial to all of the tenants of the Shopping Center and would enhance the image, reputation, and profitability of the Shopping Center; or (4) This Sublease has not been previously terminated by Sublessor as provided herein. For the purpose of this Section 16.2, Sublessor and Sublessee acknowledge, in the context of a bankruptcy proceeding of Sublessee, that a minimum "adequate assurance of curing all defaults" shall mean: (a) The Trustee, Sublessee or Sublessee as Debtor-in-Possession, has and will continue to have sufficient unencumbered assets after the payment of all secured obligations and administrative expenses to assure Sublessor that the Trustee, Sublessee or Sublessee as Debtor-in-Possession, will have sufficient funds to fulfill the obligations of Sublessee under this Sublease, and to keep the Demised Premises stocked with merchandise and properly staffed with sufficient employees to conduct a fully-operational, actively promoted business on the Demised Premises; and (b) The Bankruptcy Court shall have entered an Order segregating sufficient cash payable to Sublessor and/or the Trustee, Sublessee or Sublessee as Debtor-in-Possession, to cure the monetary and/or non-monetary defaults under this Sublease within the time periods set forth above and granting a valid and perfected first lien and security interest and/or mortgage in property of the Trustee, Sublessee or Sublessee as Debtor-in-Possession, acceptable as to value and kind to Sublessor, to secure to Sublessor the obligation of the Trustee, Sublessee or Sublessee as Debtor-in-Possession. For the purpose of this Section 16.2, Sublessor and Sublessee acknowledge that, in the context of a bankruptcy proceeding of Sublessee, at a minimum "adequate assurance of future performance" shall include that: (a) The trustee, Sublessee or Sublessee as Debtor-in-Possession, shall also deposit with Sublessor, as security for the timely payment of rent, an amount equal to three (3) months base rent in accordance with Section referring to annual minimum rent hereof and other monetary charges accruing under this Sublease; and (b) If not otherwise required by the terms of this Sublease, the Trustee, Sublessee or Sublessee as Debtor-in-Possession, shall also pay in advance on each date that Annual Minimum Rent is payable an amount equal to 1/12th of Sublessee's annual obligations under this Sublease, for maintenance, common area charges, real estate taxes, Merchants Association or Sublessor's Promotional Fund dues, insurance and similar charges, as estimated by Sublessor in accordance with the provisions of this Sublease, and subject to adjustment by Sublessor in further accordance with the provisions of this Sublease. Section 16.3 Conditions to the Assignment of the Sublease in Bankruptcy Proceedings. If the Trustee, Sublessee or Sublessee as Debtor-in-Possession, has assumed the Sublease pursuant to the terms and provision of Sections 16.2 hereof, for the purpose of assigning (or elects to assign) Sublessee's interest under this Sulease or the estate created thereby, to any other person, such interest or estate may be so assigned only if all the conditions set forth in Section 16.2 hereof are satisfied both before and after such assignment and Sublessor shall acknowledge in writing that the intended assignee has provided adequate assurance as defined in this Section, of future performance of all of the terms, covenants and conditions of this Sublease to be performed by Sublessee. For purposes of this Section, Sublessor and Sublessee acknowledge that, in the context of a bankruptcy proceeding of Sublessee, at a minimum "adequate assurance of future performance" in connection with an assignment of this Sublease shall mean that each of the following conditions (which Sublessor and Sublessee acknowledge are commercially reasonable) have been satisfied, and Sublessor has so acknowledged in writing: (a) The assignee has submitted a current financial statement audited by a Certified Public Accountant which shows a net worth and working capital in amounts determined to be sufficient by Sublessor to assure the future performance by such assignee of the Sublessee's obligation under this Sublease; (b) The assignee, if requested by Sublessor, shall have obtained guarantees in form and substance satisfactory to Sublessor from one or more persons who satisfy Sublessor's standards of creditworthiness; (c) The assignee has submitted in writing evidence, satisfactory to Sublessor, of substantial retailing experience in shopping centers of comparable size to the Shopping Center and in the sale of merchandise and services permitted under this Sublease; (d) The Sublessor has obtained all consents or waivers from any third party required under any lease, mortgage, financing arrangement or other agreement by which Sublessor is bound to permit Sublessor to consent to such assignment; and (e) The assignee has submitted in writing evidence, satisfactory to Sublessor, that the operating and financial performance of the assignee, and any guarantors, and the net worth and working capital of the assignee, and any guarantors, are at least equal to that of Sublessee as of the date Sublessee executed this Sublease. Section 16.4 Sublessor's Option to Terminate Upon Subsequent Bankruptcy Proceedings of Sublessee. In the event that this Sublease is assumed by a Trustee appointed for Sublessee, by Sublessee or by Sublessee as Debtor-in-Possession, under the provisions of Section 16.2 or otherwise hereof and thereafter Sublessee is liquidated or files or has filed against it a subsequent Petition for reorganization or adjustment of debts under Chapter 7, 11 or 13 of the Bankruptcy Code, then, in any of such events, Sublessor may, at its option, terminate this Sublease and all rights of Sublessee hereunder, by giving Sublessee written notice of its election to so terminate, by no later than thirty (30) days after the occurrence of any such event. Section 16.5 Use and Occupancy Charges. When, pursuant to the Bankruptcy Code, the Trustee, Sublessee or Sublessee as Debtor-in-Possession, shall be obligated to pay reasonable use and occupancy charges for the use of the Demised Premises or any portion thereof, such charges shall not be less than the Annual Minimum Rent provided under Section 2.2 of this Sublease and other monetary obligations of Sublessee for the payment of maintenance, common area charges, real estate taxes, Merchants Association or Sublessor's Promotional Fund dues, insurance and similar charges. The acceptance of such rent and other charges by Sublessor and the acceptance of performance by the Trustee, Sublessee or Sublessee as Debtor-in-Possession, by Sublessor shall not constitute a waiver or relinquishment of any of ublessor's rights arising under this Sublease, the Bankruptcy Code or otherwise. Section 16.6 Sublessee's Interest Not Transferable By Virtue of State Insolvency Law Without Sublessor's Consent. Neither Sblessee's interest in the Sublease, nor any lesser interest of Sublessee herein, nor any estate of Sublessee hereby created, shall pass to any trustee, receiver, assignee for the benefit of creditors, or any other person or entity, or otherwise by operation of law under the laws of any state having jurisdiction of the person or property of the Sublessee (hereinafter referred to as the "state law") unless Sublessor shall consent to such transfer in writing. No acceptance by Sublssor of rent or any other payments from any such trustee, receiver, assignee, person or other entity shall be deemed to have waived, nor shall it waive the requirement to obtain Sublessor's consent of Sublessor's right to terminate this Sublease for any transfer of Sublessee's interest under this Sublease withouisuch consent. Section 16.7 Sublessor's Option to Terminate Upon Insolvency of Sublessee or Guarantor Under State Law or Upon Insolvency of Guarantor Under Federal Bankruptcy Act. In the event the estate of Sublessee created hereby shall be taken in execution or by other process of law, or if Sublessee or any guarantor of Sublesee's obligations hereunder (hereinafter referred to as the "guarantor") shall be adjudicated insolvent pursuant to the provisions of any present or future insolvency law under state law, or if any proceedings are filed by or against the guarantor under the Bankruptcy Code, or any similar provisions of any future federal bankruptcy law, or if a Receiver or Trustee of the property of Sublessee or the guarantor shall be appointed under state law by reason of Sublessee's or the guarantor's insolvency or inability to pay its debts as they become due or otherwise, or if any assignment shall be made of Sublessee's or the guarantor's property for the benefit of creditors under state law, then and in such event Sublessor may, at its option, terminate this Sublease and all rights of Sublessee hereunder by giving Sublessee written notice of termination within thirty (30) days after the occurrence of such event. ARTICLE XVII DEFAULT OF THE TENANT Section 17.1 Right to Re-enter. In the event Sublessee shall: (i) fail to pay any Annual Minimum Rent, additional rent or other amounts payable and due hereunder as and when each such payment shall be due; or (ii) fail to move into the Demised Premises and to conduct its business as required by the provisions of this Sublease; or (iii) fail to use the Demised Premises in the manner set forth in Section 5.) hereof entitled Use of Premises or (iv) fail to perform any other of the terms, conditions or covenants of this Sublease to be observed or performed by Sublessee for more than thirty (30) days after written notice of such default shall have been mailed to Sublessee; or (v) if Sublessee shall abandon said premises, or permit this Sublease to be taken under any writ of execution, then the Sublessor, in addition to any other rights or remedies it may have, shall have the right to declare this Sublease terminated and the term ended (in which event, this Sublease and the term hereof shall expire, cease and terminate with the same force and effect as though the date set forth in said notice were the date originally set forth herein and fixed for the expiration of the term and Sublessee shall vacate and surrender the premises but shall remain liable as hereafter provided), and/or Sublessor shall have the immediate right to possession of the Demised Premises and of reentry and may, without notice, re-enter the Demised Premises either by force or otherwise, and dispossess, Sublessee and the legal representative of Sublessee or other occupant of the Demised Premises and remove their effects and hold the Demised Premises as if this Sublease had not been made, and Sublessee hereby waives service of notice of intention to re-enter or to institute legal proceedings to that end, in the event of re-entry by Sublessor, Sublessor may remove all persons and property from the Demised Premises and such property may be removed and stored in a public warehouse or elsewhere at the cost of, and for the account of Sublessee, without notice or resort to legal process and without being deemed guilty of trespass, or becoming liable for any loss or damage which may be occasioned thereby. Section 17.2 Right to Relet. Should Sublessor elect to re-enter, as herein provided, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this Sublease or it may from time to time without terminating this Sublease, make such alterations and repairs as may be necessary in order to relet the Demised Premises, and relet said premises or any part thereof for such term or terms (which may be for a term extending beyond the term of this Sublease) and at such rental or rentals and upon such other terms and conditions as Sublessor in its sole discretion may deem advisable. Upon each such reletting all rentals and other sums received by Sublessor from such reletting shall be applied, first, to the payment of any indebtedness other than rent due hereunder from Sublessee to Sublessor; second, to the payment of any costs and expenses of such reletting, including reasonable brokerage fees and attorney's fees and of costs of such alterations and repairs; third, to the payment of rent and other charges due and unpaid hereunder, and the residue, if any, shall be held by Sublessor and applied in payment of future rent as the same may become due and payable hereunder. If such rentals and other sums received from such reletting during any month be less than that to be paid during that month by Sublessee hereunder, Sublessee shall pay such deficiency to Sublessor, and if such rentals and sums shall be greater, Sublessor shall retain the excess. Such deficiency shall be calculated and paid monthly. No such re-entry or taking possession of said premises by Sublessor shall be construed as an election on its part to terminate this Sublease unless a written notice of such intention be given to Sublessee or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Sublessor may at any time thereafter elect to terminate this Sublease for such previous breach. Should Sublessor at any time terminate this Sublease for any breach, in addition to any remedies it may have, it may recover from Sublessee all damages it may incur by reason of such breach, including the cost of recovering the Demised Premises, reasonable attorney's fees and the worth at the time of such termination of the excess, if any, of the amount of rent and charges reserved in this Sublease for the remainder of the stated term over the then reasonable rental value of the Demised Premises for the remainder of the stated term, all of which amounts shall be immediately due and payable from Sublessee to Sublessor. In determining the rent which would be payable by Sublessee hereunder subsequent to default, the annual rent for each year of the unexpired term shall be equal to the Annual Minimum Rent set forth in Section 2.2 hereof, plus an amount equal to the average Annual Percentage Rent paid by Sublessee from the commencement of the term to the time of default, or during the preceding three full calendar years, whichever period is shorter. The failure or refusal of Sublessor to relet the Demised Premises shall not affect Sublessee's liability hereunder. The terms "entry" and "re-entry" are not limited to their technical meanings. Section 17.3 Legal Expenses. If suit shall be brought for recovery of possession of the Demised Premises, for the recovery of rent or any other amount due under the provisions of this Sublease, or because of the breach of any other covenant herein contained on the part of Sublessee to be kept and performed, and a breach shall be established, Sublessee shall pay to Sublessor all expenses incurred therefor, including a reasonable attorney's fee. Section 17.4 Waiver of Rights of Redemption. Sublessee hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Sublessee being evicted or dispossessed for any cause, or in the event of Sublessor obtaining possession of the Demised Premises, by reason of the violation by Sublessee of any of the covenants or conditions of this Sublease, or otherwise. Section 17.5 Sublessee's Failure to Operate Continuously. The parties covenant and agree that because of the difficulty or impossibility of determining Sublessor's damages by way of loss of the anticipated Percentage Rent, if any, from the Sublessee or other tenants or occupants in the Shopping Center, or by way of loss of value in the property because of adverse publicity or appearances by Sublessee's action, should Sublessee at any time during the term: (a) vacate, abandon, or desert the Demised Premises; or (b) cease operating its business therein for any reason other than damage or destruction as provided in Article XV, then, in any such event, if Sublessor elects not to terminate this Sublease as set forth in this Article, then, in addition to any other rights and remedies available to Sublessor under the terms of this Sublease, Sublessee shall pay to Sublessor (in addition to Minimum Annual Rent and all other charges due under this Sublease) an amount equal to 1-30th of the monthly installment of the Annual Minimum Rent then due for each day the Demised Premises and Sublessee's business therein are not continuously and uninterruptedly operated by Sublessee. ARTICLE XVIII WAIVER OF LIABILITY Section 18.1 Waiver of Liability. Anything in this Sublease to the contrary notwithstanding, Sublessee agrees that it shall look solely to the estate and property of the Sublessor in the land and buildings comprising the Shopping Center of which the Demised Premises are a part or in the underlying lease, as the case may be, subject to prior rights of any mortgagee of the premises or underlying lessor, for the collection of any judgment (or other judicial process) requiring the payment of money by Sublessor in the event of any default or breach by Sublessor with respect to any of the terms, covenants and conditions of this Sublease, and no other assets of the Sublessor shall be subject to levy, garnishment, attachment, execution or other procedures for the satisfaction of Sublessee's remedies. In the event the Sublessor named on this Sublease transfers this Sublease, except as collateral security for a loan, upon such transfer such Sublessor will be released from all liability arid obligations hereunder, provided that the Transferee assumes the obligations of this Sublease thereafter accruing. ARTICLE XIX Section 19.1 Intentionally Deleted. ARTICLE XX HOLDING OVER, SUCCESSORS Section 20.1 Holding Over. Any holding over after the expiration of the term hereof with or without the consent of the Sublessor, shall be construed to be a tenancy from month to month at double the Annual Minimum Rent herein specified for said period of holdover plus double the annual percentage rent for Percentage Rent as payable hereunder for the three Sublease Years immediately preceding, or the entire portion of the Sublease Term, if less than three Sublease Years, and shall otherwise be on the same terms and conditions herein specified so far as applicable. Section 20.2 Successors. Except as otherwise expressly provided in this Sublease, all rights and liabilities herein given to, or imposed upon, the respective parties hereto shall extend to and bind the several respective heirs, executors, administrators, successors, and assigns of the said parties; and if there shall be more than one Sublessee, they shall all be bound jointly and severally by the terms, covenants and agreements herein. No rights, however, shall inure to the benefit of any assignee of Sublessee unless the assignment to such assignee has been approved by Sublessor in writing as provided in the Assignment and Subletting Section hereof. ARTICLE XXI SECURITY DEPOSIT Section 21.1 Security Deposit. Sublessee shall deposit with Sublessor a certified check in the amount as set forth in Exhibit H, incorporated herein. Said deposit shall be held by Sublessor without liability for interest as security for the faithful performance by Sublessee of all the terms and provisions of this Sublease by Sublessee to be observed and performed. The security deposit shall not be mortgaged, assigned, transferred or encumbered by Sublessee, without the written consent of Sublessor, and any such act on the part of the Sublessee shall be without force and effect and shall not be binding upon Sublessor. If any of the rents herein reserved or any other sum payable by Sublessee to Sublessor shall be overdue and unpaid or should Sublessor make payments on behalf of the Sublessee, or Sublessee shall fail to perform any of the provisions or terms of this Sublease, the Sublessor may, at its option and without prejudice to any other remedy which Sublessor may have on account thereof, appropriate and apply said entire deposit or so much thereof as may be necessary to compensate Sublessor toward the payment of Annual Minimum Rent, Percentage Rent or additional rent or loss or damage sustained by Sublessor due to such breach by Sublessee, and Sublessee shall forthwith upon demand restore said security to the original sum deposited. Should- Sublessee duly comply with all of said terms and provisions of this Sublease and promptly pay all of the rentals as they fall due and all other sums payable by Sublessee to Sublessor, then said deposit shall be returned in full to Sublessee at the end of the term but in no event is the said security to be returned until the Sublessee has vacated the Demised Premises and delivered possession satisfactorily to the Sublessor. Sublessor's right to the possession of the Demised Premises for non-payment of rent or for any other reason shall not in any event be affected by reason of the fact that he Sublessor holds this security. In the event of bankruptcy or other credit-debtor proceedings against Sublessee, all securities shall be deemed to be applied first to the payment of rent and other charges due Sublessor for all periods prior to the filing of such proceedings. The Sublessor shall not be obliged to keep the said security as a separate fund, but may mix the said security with its own funds. In the event of a sale of the Demised Premises or lease of the land on which it stands subject to this Sublease, the Sublessor shall have the right, at its option, to transfer this security to the vendee or lessor and the Sublessor shall thereupon be considered released by the Sublessee from all liability for the return of such security and the Sublessee shall look solely to the new Sublessor for the return of said security. In the event of any rightful and permitted assignment of this Sublease by Sublessee, the said security deposit shall be deemed to be held by Sublessor as a deposit made by the assignee and Sublessor shall have no further liability with respect to the return of said security deposit to the assignor. Any mortgagee of Sublessor shall be relieved and released from any obligation to return such security in the event such mortgagee comes into possession of the Demised Premises and/or the Shopping Center by reason of foreclosure of its security interest or any proceeding in lieu thereof. ARTICLE XXII MISCELLANEOUS Section 22.1 Non-Waiver. The failure of the Sublessor to insist, in any one or more instances, upon a strict performance of any of the covenants of this Sublease, or to exercise any option herein contained, shall not be construed as a waiver or a relinquishment for the future of such covenant or option, but the same shall continue and remain in full force and effect. The receipt by the Sublessor of rent, with knowledge of the breach of any covenant hereof, shall not be deemed a waiver of such breach and no waiver by the Sublessor of any provision hereof shall be deemed to have been made unless expressed in writing and signed by the Sublessor. Section 22.2 Subordination. This Sublease shall be subject and subordinate at all times to the lien of any mortgage or mortgages now on or hereafter placed on the Demised Premises or the Shopping Center or any part thereof, and to all advances made or hereafter to be made upon the security thereof, and also subject and subordinate to any lease or other arrangement or right to possession under which Sublessor is, or may hereafter be, in control of the Demised Premises or the Shopping Center or any part thereof. The Sublessee shall execute and deliver such further instrument or instruments subordinating this Sublease to the lien of any such mortgage or mortgages or underlying lease or leases as shall be desired by any mortgagee or proposed mortgagee or lessor or proposed lessor, and the Sublessee hereby irrevocably appoints the Sublessor as the attorney-in-fact of the Sublessee to execute and deliver any such instrument or instruments for and in the name of the Sublessee. Sublessee also agrees that any mortgagee or trustee may elect to have this Sublease a prior lien to its mortgage or deed of trust, and in the event of such election and upon notification by such mortgagee or trustee to Sublessee to that effect, this Sublease shall be deemed prior in lien to the said mortgage or deed of trust, whether this Sublease is dated prior to or subsequent to the date of said mortgage or deed of trust. Failure of the Sublessee to execute any statement or instruments necessary or desirable to effectuate the foregoing provisions of this Section regarding Subordination, or other provisions of this Sublease regarding Attornment and Estoppel Certificates within ten (10) days following written request so to do by Sublessor, shall constitute a breach of this Sublease and the Sublessor shall have the right by not less than ten (10) days notice to Sublessee to declare this Sublease terminated and the term ended, in which event, this Sublease shall cease and terminate on the date specified on such notice with the same force and effect as though the date set forth in such notice were the date originally set forth herein and fixed for the expiration of the term, and Sublessee shall vacate and surrender the Demised Premises but shall remain liable as provided in this Sublease. Further, Sublessee hereby irrevocably appoints Sublessor as attorney-in-fact for the Sublessee with full power and authority to execute and deliver in the name of the Sublessee any such statements or instruments necessary to effectuate such provisions of this Sublease. Section 22.3 Notices. Any notice, demand, request or other instrument which is required to be given under this Sublease shall be delivered in person or sent by United States Certified, Registered Mail, return receipt requested, postage prepaid or Express Mail, and shall be addressed (a) if to the Sublessor, at the address set forth on page 1; and (b) if to Sublessee, at the Demised Premises. Either party may designate such other address as shall be given by written notice, provided, however, that in all events any notice to Sublessee addressed to the Demised Premises shall be deemed served as of the date of mailing. Notice need be sent to only one Sublessee or Sublessor where Sublessee or Sublessor consists of more than one person or party. Section 22.4 No Partnership Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership or of joint venture between the parties hereto, it being understood and agreed that neither the method of computation of rent, nor any other provision contained herein, nor any acts of the parties herein, shall be deemed to create any relationship between the parties hereto other than the relationship of Sublessor and Sublessee. Section 22.5 No Liability for Loss and Damage Sublessor shall not be under any responsibility or liability in any way whatsoever for the quality, quantity, impairment, interruption, stoppage, or other interference with service involving water, heat, gas, electric current for light and power, telephone, or any other service of whatsoever kind or nature. Sublessor shall not be liable for any damage to property of Sublessee or of others located on the Demised Premises, nor for the loss of or damage to any property of Sublessee or of others by theft, burglary or otherwise. Sublessor shall not be liable for any injury or damage to persons or property resulting from (but not limited to) fire, explosion, falling plaster, steam, gas, electricity, water, rain, snow or leaks from any part of the Demised Premises, or from the pipes, appliances or plumbing works, or by dampness or by any other cause of whatsoever nature. Sublessor shall not be liable for any such damage caused by other tenants or persons in the Demised Premises, occupants of adjacent property, of the Shopping Center, or the public, or caused by operations in construction of any private, public or quasi-public work. All property of Sublessee kept or stored on the Demised Premises shall be so kept or stored at the risk of Sublessee only and Sublessee shall hold Sublessor harmless from any claims arising out of damage to the same, including subrogation claims by Sublessee's insurance carriers. Section 22.6 Sublessor's Use of Common Areas. Sublessor reserves the right, from time to time, to utilize portions of the common areas for carnival type shows, rides and entertainment, outdoor shows, displays, automobile and other product shows, the leasing of kiosks, or such other uses which in Sublessor's judgment tend to attract the public. Further, Sublessor reserves the right to utilize the lighting standards and other areas in the parking lot for advertising purposes. Section 22.7 Gender. In this Sublease the use of gender references is not intended to be a limitation, and the use of a particular gender shall be interpreted to include the other of masculine, feminine and neuter where the situation so demands; similarly, the use of the singular shall be interpreted to include the plural where the situation so demands, and vice versa; and references to "heirs, devisees, executors and administrators" also includes "successors and assigns" where the situation so demands, and vice versa. Section 22.8 Sublessee's Acknowledgment of Acceptance of Premises Estoppel Certificate. Sublessee shall furnish Sublessor, upon request at any time after Sublessee has opened its doors for business in the Demised Premises, a letter and/or Estoppel Certificate addressed to the mortgagee or proposed mortgagee. or financial institution or such other party designated by Sublessor, providing the following information: 1) that the emised Premises have been, satisfactorily completed as of the date of such letter and that Sublessee has accepted possession, subject to the terms of the Sublease; 2) the Commencement Date of the Sublease and the expiration date of the Sublease; 3) the date when rent commenced; 4) that Sublessee has opened for business within the Demised Premises; 5) that Sublessee has no claim, set-off or recoupment against Sublessor (and if Sublessee does have such a claim it shall be stated in specific detail); and 6) such other information as Sublessor shall request. Upon failure of Sublessee to provide Sublessor at, the request of such mortgagee or financial institution a letter or certificate as above described Sublessor shall have the right, in addition to its other remedies, to cancel this Sublease and Sublessee shall remain liable to the Sublessor for any damages sustained by the Sublessor as a result of such failure by Sublessee. Section 22.9 Accord and Satisfaction. No payment by Sublessee or receipt by Sublessor of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Sublessor may accept such check or payment without prejudice to Sublessor's right to recover the balance of such rent or pursue any other remedy provided in this Sublease or at law. Section 22.10 Captions and Section Numbers. The captions, section numbers, article numbers and index appearing in this Sublease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of such sections or articles of this Sublease nor in any way affect this Sublease. Section 22.11 Partial Invalidity. If any term, covenant or condition of this Sublease or the application thereof to any person or circumstance shall, to any extent, be determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Sublease, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Sublease shall be valid and be enforced to the fullest extent permitted by law. This Sublease shall be governed by and construed in accordance with the laws of the State in which the Shopping Center is located. Section 22.12 No Option. The submission of this Sublease for examination does not constitute a reservation of or option for the Demised Premises, and this Sublease becomes effective as a Sublease only upon execution and delivery thereof by Sublessor and Sublessee. Section 22.13 Recording. Sublessee shall not record this Sublease without the written consent of Sublessor. Sublessor and Sublessee shall each, at the request of the other, execute a short form sublease in recordable form, containing such information as shall be satisfactory to Sublessor, which short form sublease may be recorded; provided, however, Sublessee shall not record any such short form sublease or any other reference to this Sublease until the term of this Sublease has commenced. Section 22.14 Liens. The Sublessee shall have no power to do any act or make any contract which may create or be the foundation for any lien, mortgage or other encumbrance upon the estate of the Sublessor or of any interest of the Sublessor in the Demised Premises, or upon or in the building or buildings or improvements thereon or hereafter erected or placed thereon, it being agreed that should the Sublessee cause any improvements, alterations or repairs to be made to the Demised Premises, or material furnished or labor performed therein, or thereon, neither the Sublessor nor the Demised Premises not, any improvements shall under any circumstances be liable for the payment of any expense incurred or for the value of any work done or material furnished to the Demised Premises or any part thereof. All such improvements, alterations, repairs, materials and labor shall be done at the Sublessee's expense and the Sublessee shall be solely and wholly responsible to contractors, laborers and materialmen furnishing labor and material to said premises and building or buildings and improvements or any part thereof and all such laborers, materialmen and contractors are hereby charged with notice that they must look solely and wholly to the Sublessee and the Sublessee's interest in the Demised Premises to secure the payment of any bills for work done and materials furnished. In the event a mechanic's lien shall be filed against the Demised Premises or Sublessee's interest therein or against the Shopping Center or any part thereof as the result of any repairs, fixturing, alterations or other work undertaken by the Sublessee, Sublessee shall, within ten (10) days after receiving notice of such lien, discharge such lien either by payment of the indebtedness due or by filing a bond (as provided by statute) as security therefor. In the event Sublessee shall fail to discharge such lien, Sublessor may, but shall not be obligated to, in addition to its remedies as provided in the Section of this Sublease entitled "Default of the Sublessee", have the right to procure such discharge by filing such bond and Sublessee shall pay the cost of such bond to Sublessor as additional rent upon the first day that rent shall be due thereafter. Section 22.15 Broker's Commissions. Sublessee represents and warrants that there are no claims for brokerage commissions or finder's fees in connection with the execution of this Sublease and agrees to indemnify Sublessor against and hold it harmless from all liabilities arising from any such claim, including the cost of reasonable attorney fees. Section 22.16 Force Majeure. In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lockouts, labor troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, war or other reason of a like nature not the fault of the party delayed in performing the work or doing acts required under the term of this Sublease, then performance of such act shall be excused for the period of the delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay; provided, however, that such delay and extended period shall in no event exceed ninety (90) days. The party entitled to such extension hereunder shall give written notice as soon as possible to the other party hereto of its claim of right to such extension and the reason(s) therefor. Should any such delay or extended period required hereunder exceed ninety (90) days, Sublessor may, at its option, terminate this Sublease, and Sublessor's and Sublessee's obligations and liabilities hereunder shall be of no further force and effect. The provisions of this Section shall not operate to excuse Sublessee from the prompt payment of rent, Percentage Rent, if any, or any other payments required by the terms of this Sublease or the obligations of Sublessee to surrender the Demised Premises pursuant to this Sublease. Section 22.17 Entire Agreement. This Sublease and the Exhibits, Riders and/or Addenda, if any are attached and signed by the parties, set forth the entire agreement between the parties. Any prior conversations or writings are merged herein and extinguished. No subsequent amendment to this Sublease shall be binding upon Sublessor or Sublessee unless reduced to writing and signed by both parties. Section 22.18 Late Charges and Interest. Any sums to be paid by Sublessee to Sublessor and paid after the date same are due shall bear interest at eighteen (18%) per annum or the maximum allowable rate by law, whichever is lesser, from the date same initially became due through the date of full payment of such indebtedness. The payment of such interest shall not excuse or cure any default of Sublessee under the Sublease. Sublessee acknowledges that any late payment by Sublessee to Sublessor of rent or other charges payable by Sublessee under this Sublease or late reporting of Gross Sales as required in this Sublease will cause Sublessor to incur costs not contemplated by this Sublease, the exact amount of such costs being extremely difficult and impracticable to determine. Such costs include, without limitation, processing and accounting charges. Therefore, if any installment of rent or other charges due from Sublessee is not received by Sublessor when due, then Sublessee shall reimburse to Sublessor an additional sum of any cost incurred, including attorney fees. The parties agree that the charges do not constitute a late penalty as set forth above since the charges shall be reimbursement of the costs incurred by Sublessor rather than a late fee penalty. Acceptance of any late charges or reimbursement of costs shall not constitute a waiver of Sublessee's default with respect to the overdue rent or other charges or requirement to report Gross Sales nor prevent Sublessor from exercising any of the other rights and remedies available to Sublessor. Section 22.19 Cumulative Remedies. Each and every one of the rights, remedies and benefits provided by this Sublease to Sublessor shall be cumulative and shall not be exclusive of any other such rights, remedies and benefits allowed by law. Section 22.20 Rules and Regulations. Sublessor reserves the right to promulgate rules and regulations from time to time pertaining to the Demised Premises arid the Shopping Center. All such rules and regulations shall apply substantially uniformly to all of Sublessor's tenants in the Shopping Center. Sublessee agrees to comply with and observe all such rules and regulations. Failure by Sublessee to keep and observe such rules and regulations shall constitute a breach of this Sublease as if same were contained herein as covenants of Sublessee. Section 22.21 Time. Time of performance by Sublessee of its obligations under this Sublease is of the essence. Section 22.22 Attormnent. In the event of the sale or assignment (except as collateral security for a loan) of Sublessor's interest under this Sublease, Sublessee shall attorn to the purchaser or assignee and recognize such purchaser or assignee as Sublessor under this Sublease, and in such event Kmart Corporation shall be released from all obligations and liabilities arising as Sublessor under this Sublease. Section 22.23 Merchants Association. The Sublessor may create a Merchants Association comprised of merchants doing business in the Shopping Center and such other parties, if any, as shall be permitted to join the Merchants Association. The bylaws, charter, rules and regulations of such association will be in substantially the same form as those which are used by other Merchants Associations in shopping centers of comparable size and quality and approved by the parties hereto. Should Sublessor create such association, or if such an association exists at the time Sublessee takes possession of the Demised Premises, Sublessee agrees to become a member and to remain a member so long as it is doing business at the Demised Premises. Sublessee agrees to pay minimum dues to said association in the initial amount to be determined payable in advance on the first day of each month. Said minimum dues shall be subject to annual adjustments as approved by a majority vote of the members of the association, or as provided in the bylaws of the association. Sublessor reserves the right to create a Promotional Fund instead of a Merchants Association, which Promotional Fund shall be managed and controlled by Sublessor. Sublessor shall use such Promotional Fund to provide promotional services for the benefit of the Shopping Center. Sublessor agrees that Sublessee shall have the right, upon written request, to audit the books and records of any such Promotional Fund. At the option of Sublessor, the minimum dues payable by Sublessee for the Promotional Fund may be increased annually, effective at the commencement of each Sublease Year after the first, by an amount equal: i) to the annual percentage increase in the Consumer Price Index (CPI) published in the second month preceding the commencement of each such Sublease Year over and above the CPI index for the same month in the previous year or, ii) by the amount of 10%. Each subsequent increase shall be applied to the then current minimum dues. Sublessee will, during the term of this Sublease, to the fullest extent possible, participate in all coordinated advertising and promotion programs outlined by Sublessor under either the Promotional Fund or under the Auspices of the Merchants Association. The failure of any other Sublessee in the Shopping Center to contribute to the Promotional Fund or become a member of the Merchants Association shall in no way release Sublessee from Sublessee's obligations hereunder. Sublessee further acknowledges that Sublessor retains the right to discontinue the activities of any Merchants Association established at any time and, at Sublessor's option, substitute a Promotional Fund. Section 22.24 Waiver of Trial by Jury. Injunction Sublessor and Sublessee each hereby waive trial by jury of any dispute arising under this Sublease. In addition to all other remedies, Sublessor is entitled to the restraint by injunction of all violations by Sublessee, whether actual, attempted or threatened, of any covenant, condition or provision of this Sublease. Section 22.25 Attachments. Attached hereto and incorporated herein by reference are the following: Exhibit "A", Legal Description; Exhibit "B", Site Plan; Exhibit "C", Construction Work; Exhibit "D", Sign Design Criteria; Exhibit "E", Space Layout Exhibit "F", Commencement Letter; Exhibit "G", Guaranty Exhibit "H", Incorporated Sublease Terms, Rents, and Conditions IN WITNESS WHEREOF, Sublessor and Sublessee have signed their names and affixed their seals on the day and year first above written. IN THE PRESENCE OF: SUBLESSOR: KMART CORPORATION By: /s/ LORRENCE T KELLER ------------------------ Lorrence T. Kellar Its: Vice President of Real Estate SUBLESSEE: CENTRAL COAST BANCORP (d/b/a Community Bank of Central California) By: /s/ HARRY WARDWELL ----------------------- Harry Wardwell Its: Senior Vice President, Branch Manager EXHIBIT A LEGAL DESCRIPTION Parcel A: Parcel 4 as said Parcel is shown on that certain Parcel Map filed for record June 28, 1991 in Book 8 of Parcel Maps, at page 34, San Benito County Records. Parcel B: A non-exclusive Easement for ingress and egress as described in the Reciprocal Easement and Operation Agreement executed by and between Kmart, a Michigan Corporation and K & S Market, Inc., a California Corporation, Recorded June 14, 1989 as Document No. 8905249, Records of San Benito County, California. Hoilister, CA Kmart Store #3748 Ground Lease Property February 24, 1997 Page 1 of 1 [Picture Omitted] EXHIBIT "C" CONSTRUCTION WORK DIVISION I - TENANT'S/SUBTENANT'S WORK (Minimum Requirements) The Tenant/Subtenant acknowledges that the Demised Premises are accepted "AS IS". This work will be performed by the Tenant/Subtenant at the Tenant's/Subtenant's own cost and expense in accordance with the Tenant's/Subtenant's Plans and Specifications previously approved in writing by the Landlord/Lessor. Tenant's/Subtenant's contractor(s) shall secure and pay for all necessary permits, Certificate of Occupancy and/or fees required by public authorities and/or utility companies with respect to Tenant's/Subtenant's work. A. General Requirements 1. All work installed by the Tenant/Subtenant shall be coordinated with and completed so as not to interfere with the Landlord's/Lessor's construction schedule, business operations, nor any other Tenant's/Subtenant's activities. 2. All contractors employed by either the Landlord/Lessor or the Tenant/Subtenant shall allow other contractors, even of the same trade, to work on the Demised Premises without interference. 3. The Tenant/Subtenant and Tenant's/Subtenant's contractors shall provide all insurances required by the Landlord/Lessor, prior to the start of any construction work within the Demised Premises. The Landlord/Lessor, Kmart Corporation, shall be named as an additional insured. 4. The Tenant/Subtenant shall at all times, keep the Demised Premises and the surrounding area free from accumulations of waste materials and/or rubbish caused by his employees or workers. The Tenant/Subtenant or his contractor shall provide dumpsters and maintenance of said dumpsters during the construction period. B. Interior Partitions All partitions will be furnished and installed by the Tenant/Subtenant. C. Interior Finishes All wallboard, trim, painting, staining, enameling and any wall coverings or decor shall be provided and installed by the Tenant/Subtenant. D. Flooring Tenant/Subtenant shall provide carpet or resilient tile flooring on all concrete floors. E. Cabinets Shelving Counters etc. Cabinets, shelving, counters, etc., are to be furnished and installed complete by Tenant/Subtenant, including connections to utilities. CONSTRUCTION WORK (continued) F. Plumbing Any plumbing facilities in excess of existing facilities provided by the Landlord/Lessor, such as kitchen equipment, toilet facilities, janitor's sink, hose bibbs, laboratory sinks, special fixturing or outlets, will be provided and installed and connected by Tenant/Subtenant. The Tenant/Subtenant will provide fire extinguishers as required by building code and insurance underwriters; see also "H'. G. Heating, Cooling and Ventilating Exhaust air vent systems as required for hoods, etc., including outlets or connections thereto will be provided by Tenant/Subtenant. Heating and cooling required will be by the Tenant/Subtenant. All vents and hoods shall comply with local governing agencies. Tenant/Subtenant will submit HVAC unit manufacturer, data and shop drawings for Kmart approval. Upon approval, maintenance brochures and 5-year warranty (HVAC unit - 1 year and compressor - 4 year) shall be forwarded to Kmart Corporation. H. Fire Protection Sprinklers The Tenant/Subtenant shall pay for and supply any items required in excess of the existing sprinkler system. Tenant/Subtenant will provide a sprinkler layout and calculations for Governing Authorities and Landlord/Lessor's approval. If the Tenant/Subtenant is required to have a dry chemical fire extinguisher system, it shall be provided, installed and maintained by the Tenant/Subtenant; see also "F". I. Electrical Power and Lighting Tenant/Subtenant will furnish and install the electrical work in excess of that provided by Landlord/Lessor. Such items may include, but not limited to, lighting, special outlets, high voltage outlets, exit light, telephone, communication and music systems, burglar alarms and/or warning systems, emergency generator, Tenant's/Subtenant's store signs and controlling time clocks. If Tenant/Subtenant furnished its own light fixtures, the same will be installed at the Tenant's/Subtenant's expense including the cost of additional outlets. J. Storefronts Changes to the storefront design shall only be initiated upon approval of the Landlord/Lessor. K. Tenant/Subtenant Signs - (See Exhibit "D") The Tenant/Subtenant shall furnish, install and connect all identification signs at locations provided at the canopy or building fascia at the Tenant's/Subtenant's expense. All outside signs shall be submitted to Landlord/Lessor for approval before installation. Canopy or building fascia sign design, lighting and sign copy color shall be subject to Landlord's/Lessor's approval. Said sign shall be in conformance with the detailed sign criteria, as prepared by Landlord's/Lessor's architect and attached as Exhibit "D". Prior to fabrication, three (3) copies of sign detail and copy must be submitted to Landlord/Lessor for Landlord's/Lessor's approval. L. Roof Openings Except as provided by Landlord/Lessor, pursuant to J above, the Tenant/Subtenant will furnish all curbs, lintels, flashings, counter flashings, pipes, ducts, vent caps, air inlets, exhaust hoods, louvers, etc., as necessary for Tenant's/Subtenant's equipment requiring openings through roof and/or exterior walls. Any cutting, patching, or flashing of the roof for the Tenant's/Subtenant's equipment must be performed by the Landlord's/Lessor's roofing contractor responsible for the roof guarantee. All such work will be done at the Tenant's/Subtenant's expense. DIVISION II CONSTRUCTION PROCEDURES A. Upon execution of the Lease/Sublease the Tenant/Subtenant will have thirty (30) working days to provide to the Landlord/Lessor, a Preliminary Floor Plan and Storefront Elevation for review and preliminary approval. When submitting Construction Plans and Specifications (preliminary or completed) Tenant/Subtenant shall send five (5) sets of prints and specifications. The approval of said "Preliminary Floor Plan and Storefront Elevation" will require fifteen (15) working days. B. The Tenant/Subtenant can elect to contract with an "outside" architect of its choosing for the preparation of the "Construction Plans and Specifications". The "outside" architect shall prepare detailed construction drawings for the Demised Premises, incorporating the improvements desired by the Tenant/Subtenant (to the extent such improvements are acceptable to the Sublessor). Such drawings will be forwarded to the Tenant/Subtenant for its approval. C. All contractors engaged by the' Tenant/Subtenant as permitted by the Landlord/Lessor shall-be bondable, licensed contractors, possessing good labor relations capable of performing quality workmanship and working in harmony with any contractor hired by Landlord/Lessor. All work shall be coordinated with the general project work. D. Construction shall comply in all respects with applicable Federal, State, County, Township and City Statutes, ordinances, regulations, laws and codes. E. The Tenant/Subtenant shall not permit any mechanic's liens to attach to the Demised Premises or the shopping center development in which the Demised Premises are located on account of any labor or materials furnished or supplied to the Demised Premises in connection with Tenant's/Subtenant's work. In the event that such a lien is attached, Tenant/Subtenant shall forthwith cause the same to be discharged or in lieu thereof furnish a bond for the benefit of Landlord/Lessor issued by a duly licensed surety company authorized to do business in the State wherein the Demised Premises is located, acceptable to Landlord/Lessor, which by its terms indemnifies and holds the Landlord/Lessor harmless from the effects of such lien. F. The Landlord/Lessor, Landlord's/Lessor's agent, an independent contractor, or an authorized utility company as the case may be, shall have the right, subject to the Landlord's/Lessor's written approval, to run utility lines, pipes, conduits or duct work, where necessary or desirable, through attic space, or other parts of the Demised Premises and to repair, alter, replace or remove the same, all in a manner which does not interfere unnecessarily with the Tenant's/Subtenant's use thereof. CONSTRUCTION WORK (continued) G. Construction Coordinator Assistant Manager of Design Division Kmart Corporation 3100 West Big Beaver Road Troy, MI 48084-3163 (248) 643-1224 H. Real Estate Coordination Shopping Centers Asset Manager Real Estate Department, West Annex Suite 400 Kmart Corporation 3100 West Big Beaver Road Troy, MI 48084-3163 (248) 637-0714 (248) 637-9305 (fax) THE USE OF "TENANT/SUBTENANT" AND "LANDLORD/LESSOR" THROUGHOUT THIS EXHIBIT SHALL ALSO BE INTERPRETED TO INCLUDE "TENANT/ LESSEE/SUBLESSEE" AND "LANDLORD/SUBLESSOR", RESPECTWELY, AS APPLICABLE. EXHIBIT "D" SIGN DESIGN CRITERIA NO SIGN INSTALLATION IS TO COMMENCE UNTIL WRITTEN APPROVAL IS RECEIVED FROM THE REAL ESTATE DEPARTMENT OF KMART CORPORATION. REQUIREMENTS FOR SUBMITTAL OF TENANT/SUBTENANT SIGNING PROPOSALS Building Sign: 1) Complete written description of tenant's/subtenant's sign to include: Colors. Construction. Method of illumination. Dimensioned scale drawing showing exact size and location of sign on building. Section and details of sign. Detail showing attachment to building. Amperage and voltage requirements (assume 480 volt) 2) Color photograph of tenant's/subtenant's storefront, minimum of 3" x 5". 3) Color photograph of the front of the entire building including Kmart and tenant's/subtenant's Demised Premises, minimum of 3" x 5". Pylon Sign: 1) Complete written description of tenant's/subtenant's sign to include: .Colors .Construction .Method of illumination .Dimensioned scale drawing .Section and details of sign .Detail showing attachment to pylon .Amperage and voltage requirements (assume 480 volt) 2) Color photograph of Kmart pylon with: .Overall height dimension .Height dimension of letter K panel 3) Site plan indicating location of Kmart pylon. NOTE: Tenants/Subtenants proposing the installation of an individual pylon sign must indicate the proposed location of the new sign on the site plan. TENANT/SUBTENANT BUILDING SIGN DESIGN CRITERIA A. Length (1) May not exceed 50% of the building width. (2) Length may vary in the instance of a lengthy name or because the building architecture may justify a larger or smaller sign for aesthetic reasons. (3) Shall comply with local sign ordinances. B. Height (1) May not exceed 5'-O". (2) Shall comply with local sign ordinances. C. Location (1) Should always be on the (front) building facade. (2) Sign must be located to comply with local sign ordinances. (3) May not project above roof and/or parapet. D. Construction (1) Internally illuminated plastic faced letters. (2) Individual internally illuminated plastic faced cabinet letters. (3) One single internally illuminated plastic faced cabinet sign. (4) Absolutely no exposed conduits, wiring, neon tubing, or spotlighted signing. (5) All wiring shall be "UL' rated. (6) Moving or blinking lights will not be approved. E. Maintenance (1) When an existing sign is removed for the installation of a new sign, it is the responsibility of the tenant/subtenant to restore the building facade in the event any damage is incurred. This includes repairing chips, cracks and holes and repainting faded areas to match existing color. NOTE All signing outlined above is subject to the written approval of Kmart's Design Division. Tenant/Subtenant must also obtain the approval of the appropriate governmental agencies and conform to all applicable regulatory codes. Tenant/Subtenant must submit sign drawings of all proposed signing for each location. Absolutely no reader boards or attraction boards will be approved for installation on the building. The entire installation must be done in a neat and workmanlike fashion; the quality and workmanship shall be equivalent to that of Kmart Corporation. TENANT/SUBTENANT CORPORATE LOGO BUILDING SIGN DESIGN CRITERIA A. Corporate Logo Approval (1) Permitted only when absolutely pertinent to the tenants/subtenant's identity. B. Size (1) Should not exceed 5'-O" x 8'-O". C. Location (1) Approximately 5'-O" to 10'-0" from building end. (2) Should be at least 12'-O" above sidewalk. D. Construction and Maintenance (1) All construction and maintenance guidelines for building signs shall apply to corporate logo signs. NOTE Absolutely no reader boards or attraction boards will be approved for installation on the building. All signing outlined above is subject to the approval of Kmart's Design Division. Tenant/Subtenant must also obtain the approval of the appropriate governmental agencies and conform to all applicable regulatory codes. Tenant/Subtenant must submit sign drawings of all proposed signing for each location. The entire installation must be done in a neat and workmanlike fashion; the quality and workmanship shall be equivalent to that of Kmart Corporation. TENANT/SUBTENANT PYLON SIGN PANEL DESIGN CRITERIA A. Size (1) Shall not be larger in width than the clear space between column supports and a maximum height of 6'-O". B. Location (1) Installed a minimum of 5'-O" below the Kmart panel. C. Design (1) Simple and straightforward, in keeping with the Kmart signing. D. Construction (1) Sign must be double-faced and internally illuminated. (2) Moving or blinking lights will not be approved. E. Absolutely no reader boards will be approved for installation on the Kmart pylon. F. Maintenance (1) We will expect any damage incurred to the Kmart pylon during the installation or removal of any signs to be repaired by the tenant/subtenant. This includes removal of any existing reader boards. G. Fees (I) A one-time fee for the use of the Kmart pylon must be negotiated with the Real Estate Department at Kmart Corporation International Headquarters, Troy, Michigan 48084. (2) The tenant/subtenant will be responsible for the cost of all electricity consumed by its sign. NOTE All dimensions above are based on a sign installation on a standard Kmart pylon. In the event Kmart Corporation installs a pylon smaller than the standard pylon, all dimensions above will be proportionately reduced. All signing outlined above is subject to the approval of Kmart's Design Division. Tenant/Subtenant must also obtain the approval of the appropriate governmental agencies and conform to all applicable regulatory codes. Tenant/Subtenant must submit sign drawings of all proposed signing for each location. The entire installation must be done in a neat and workmanlike fashion; the quality arid workmanship shah be equivalent to that of Kmart Corporation. THE ABOVE CRITERIA ARE SUBJECT TO REVISION AT THE SOLE DISCRETION OF KMART CORPORATION. THE USE OF "TENANT/SUBTENANT" AND "LANDLORD/LESSOR" THROUGHOUT THIS EXHIBIT SHALL ALSO BE INTERPRETED TO INCLUDE "TENANT/ LESSEE! SUBLESSEE" AND "LANDLORD/SUBLESSOR", RESPECTIVELY, AS APPLICABLE. [Picture Omitted] EXHIBIT "F" COMMENCEMENT LETTER August 1, 2000 Mr. Harry Wardwell Senior Vice President, Branch Manager Central Coast Bancorp. 301 Main Street Salinas, CA 93901 Re: Kmart No. 3748- Hollister, CA 491 Tres Pinos Road, Unit 103 Hollister, CA 95023 Dear Mr. Wardwell: Central Coast Bancorp has entered into a sublease with Kmart Corporation for premises at the referenced location. This letter will outline procedures regarding payments and clarify questions you may have relative to administration of the sublease. The commencement date of your sublease is August 1, 2000. The expiration date of your initial primary term is July 31, 2003. Unless otherwise noted, your liability for all payments is effective as of the commencement date. MINIMUM RENT $1,890.00 per month commencing November 1, 2000. If your sublease provides for periodic rent increases it is your responsibility to initiate the require change at the proper time. PERCENTAGE RENT Not applicable. ADDITIONAL RENT 1.5061% of Kmart's costs for [real estate taxes, common area maintenance, exterior repairs, parking lot lighting and building fire insurance]; payable by monthly escrow payments with an annual reconciliation of costs and payments. Real Estate Taxes: Monthly escrow payment $97.00. Common Area Maintenance: Monthly escrow payment $102.00. Repairs Parking Lot Lighting: Monthly escrow payment is included in CAM. Building Fire Insurance: Monthly escrow payment $12.00. LATE PENALTY Please note that a late fee as set forth in your sublease will be charged on all late payments. Therefore, it is necessary that your payments are received on or before the first of each calendar month. UTILITIES Electricity, gas and water, is directly metered to your store, therefore you should immediately establish an account with the local utility company. IT IS IMPERATIVE THAT YOU MAKE ARRANGEMENTS WITH THE APPROPRIATE UTILITY COMPANIES TO ESTABLISH ACCOUNTS IN YOUR NAME, AS KMART CORPORATION WILL ARRANGE FINAL READINGS TO CLOSE OUR ACCOUNT ON JULY 31, 2000. ESCROW PAYMENTS Your initial escrow rates have been based on estimated costs. At the end of each sublease year, scheduled payments will be reconciled with actual costs and you will be invoiced for any additional amount owed or issued a refund, whichever is applicable. New escrow rates are established annually based on costs over the previous year. Occasionally an escrow rate is adjusted during the year if it appears that costs will significantly exceed your scheduled payments.
SUMMARY OF MONTHLY PAYMENTS: Minimum Rent $1,890.00 Real Estate Taxes $ 97.00 CAM [/Repairs] $ 102.00 Parking Lot lighting Included in CAM Building Fire Insurance $ 12.00 ----------- TOTAL MONTHLY PAYMENT $2,101.00
ADDRESS FOR PAYMENTS Rent and escrow payments are due, in advance on the first day of each month. Payment for invoiced items is due ten (10) days following the date of the invoice. Checks must be payable to "Kmart Corporation" and should be mailed to the address below in time to be received on or before the date they are due. Kmart #3748 Department G P.O. Box 4771G Carol Stream, IL 60197- 4771 Please identify your payments with the Kmart location number (No. 3748), your tenant identification number (No. 103), and a notation of what you are paying, i.e. rent, utilities, etc. NOTE: The street address in Troy Michigan should be used for all correspondence going to Kmart Corporation All correspondence must include the Kmart location number (No 3748 and the city and state wherein your demised premises is located. ADDRESS FOR CORRESPONDENCE Shopping Centers Asset Manager Real Estate Department Kmart Corporation 3100 West Big Beaver Road Troy, MI 48084 (248-637-0714) (Fax No. 248-637-9305) A carbon copy is to be sent to the Property Management Company: PM Realty Group 225 W. Wacker Drive Suite 2200 Chicago, IL 60606 Attn: Retail Division Inquiries regarding your sublease or administrative matters, including those related to your account, should be directed to PM Realty Group's property manager, Kathy Douglas at 415.288.9559. Unless otherwise advised, we will mail all correspondence, invoices and statements to the address used on this letter. If you would like us to use an alternate address, please advise the writer, with a carbon copy to Kmart Corporation, Shopping Centers Asset Manager. PROOF OF INSURANCE You are required to provide proof of insurance as referred to in Article X of your sublease. MAINTENANCE AND REPAIRS Requests for maintenance and repairs, other than those for which you are responsible, are to be directed to the property management company of the Kmart shopping center. If repairs are not completed within a reasonable period of time, you should advise the Shopping Centers Asset Manager, Judy M. Chambers, listed above. We acknowledge receipt of your security deposit in the amount of $2,101.00. This letter is not intended to modify the captioned sublease. In the event of error or discrepancy between the sublease and this letter, the sublease will prevail. Sincerely, PM Realty Group Susan M. Ahlert Vice President-Retail Leasing cc: S. Bartos, Real Estate Accounting D. Hurley, Real Estate Accounting Shopping Centers Asset Manager, Real Estate Department EXHIBIT "G" GUARANTY INTENTIONALLY DELETED. EXHIBIT H INCORPORATED SUBLEASE TERMS, RENTS, AND CONDITIONS (Sublease, dated July 17, 2000, between Kmart Corporation, Sublessor, and Central Coast Bancorp, Sublessee, doing business as Community Bank of Central California) The terms, rent(s), and conditions listed below are incorporated within the specific sections of the Sublease, as defined therein, and are as follows: Section 1.1 Demised Premises The approximate dimensions of the Demised Premises (Unit 103) are twenty (20) feet (frontage) and seventy (70) feet (depth) totaling approximately One Thousand Four Hundred (1,400) square feet of space within the Kmart No. 3648, Hollister, California Shopping Center located at 491 Tres Pinos Road, Hollister, California 95023. Sublessor Master Lease Dated: March 4, 1997; Ground Lease Dated: November 2, 1988 Section 1.2(a) Term: Sublease Primary Term "Commencement Date": August 1, 2000 Sublease Primary Term Expiration Date: July 31, 2003, or unless sooner terminated as provided within the Sublease. Section 1.2 (b) Option to Extend Term: Two (2) three (3) year options not beyond July 31, 2009. Section 2.2 Annual Minimum Rent Primary Term Aggregate Minimum Rent of at least SIXTY FOUR THOUSAND EIGHT HUNDRED NINETY AND 00/100 DOLLARS ($64,890.00): A. Commencing November 1, 2000, ("Rent Commencement Date", as defined within the Sublease) for the period from August 1, 2000, through July 31, 2001, SEVENTEEN THOUSAND TEN AND 00/100 DOLLARS ($17,010.00), payable in equal monthly installments of ONE THOUSAND EIGHT HUNDRED NINETY AND 00/100 DOLLARS ($1,890.00); B. From August 1, 2001, through July 31, 2002, TWENTY THREE THOUSAND FIVE HUNDRED TWENTY AND 00/100 DOLLARS ($23,520.00) per Sublease Year, payable in equal monthly installments of ONE THOUSAND NINE HUNDRED SIXTY AND 00/100 DOLLARS ($1,960.00); and C. From August 1, 2002, through July 31, 2003, TWENTY FOUR THOUSAND THREE HUNDRED SIXTY AND 00/100 DOLLARS ($24,360.00) per Sublease Year, payable in equal monthly installments of TWO THOUSAND THIRTY AND 00/100 DOLLARS ($2,030.00)). The third (3rd) Sublease Year shall terminate on July 31, 2003, whether or not that period shall be for twelve (12) calendar months or some other number of calendar months more or less than that and in such event the Annual Minimum Rent shall be adjusted so that the sum of TWO THOUSAND THIRTY AND 00/100 DOLLARS ($2,030.00) shall be paid for every calendar month of the Sublease Year. Likewise, any other amounts due under this Sublease shall be adjusted higher or lower on a proportional basis to reflect the actual number of calendar months in the Sublease Year. First Option Term Aggregate Minimum Rent of at least SEVENTY EIGHT THOUSAND ONE HUNDRED TWENTY AND 00/loo DOLLARS ($78,120.00): D. From August 1, 2003, through July 31, 2004, TWENTY FIVE THOUSAND TWO HUNDRED AND 00/100 DOLLARS ($25,200.00) per Sublease Year, payable in equal monthly installments of TWO THOUSAND ONE HUNDRED AND 00/100 DOLLARS ($2,100.00); E. From August 1, 2004, through July 31, 2005, TWENTY SIX THOUSAND FORTY AND 00/loo DOLLARS ($26,040.00) per Sublease Year, payable in equal monthly installments of TWO THOUSAND ONE HUNDRED SEVENTY AND 00/100 DOLLARS ($2,170.00); and F. From August 1, 2005, through July 31, 2006, TWENTY SIX THOUSAND EIGHT HUNDRED EIGHTY AND 00/100 DOLLARS ($26,880.00) per Sublease Year, payable in equal monthly installments of TWO THOUSAND TWO HUNDRED FORTY AND 00/100 DOLLARS ($2,240.00). The sixth (6th) Sublease Year shall terminate on July 31, 2006, whether or not that period shall be for twelve (12) calendar months or some other number of calendar months more or less than that and in such event the Annual Minimum Rent shall be adjusted so that the sum of TWO THOUSAND TWO HUNDRED FORTY AND 00/100 DOLLARS ($2,240.00) shall be paid for every calendar month of the Sublease Year. Likewise, any other amounts due under this Sublease shall be adjusted higher or lower on a proportional basis to reflect the actual number of calendar months in the Sublease Year. Second Option Term Aggregate Minimum Rent of at least EIGHTY FIVE THOUSAND SIX HUNDRED EIGHTY AND 00/100 DOLLARS ($85,680.00): G. From August 1, 2006, through July 31, 2007, TWENTY SEVEN THOUSAND SEVEN HUNDRED TWENTY AND 00/100 DOLLARS ($27,720.00) per Sublease Year, payable in equal monthly installments of TWO THOUSAND THREE HUNDRED TEN AND 00/loo DOLLARS ($2,310.00); H. From August 1, 2007, through July 31, 2008, TWENTY EIGHT THOUSAND FIVE HUNDRED SIXTY AND 00/100 DOLLARS ($28,560.00) per Sublease Year, payable in equal monthly installments of TWO THOUSAND THREE HUNDRED EIGHTY AND 00/100 DOLLARS ($2,380.00); and I. From August 1, 2008, through July 31, 2009, TWENTY NINE THOUSAND FOUR HUNDRED AND 00/100 DOLLARS ($29,400.00) per Sublease Year, payable in equal monthly installments of TWO THOUSAND FOUR HUNDRED FIFTY AND 00/100 DOLLARS ($2,450.00). The ninth (9th) Sublease Year shall terminate on July 31, 2009, whether or not that period shall be for twelve (12) calendar months or some other number of calendar months more or less than that and in such event the Annual Minimum Rent shall be adjusted so that the sum of TWO THOUSAND FOUR HUNDRED FIFTY AND 00/100 DOLLARS ($2,450.00) shall be paid for every calendar month of the Sublease Year. Likewise, any other amounts due under this Sublease shall be adjusted higher or lower on a proportional basis to reflect the actual number of calendar months in the Sublease Year. Section 2.3 Percentage Rent All references to Percentage Rent within the Sublease shall be deleted if in reference to payment of Percentage Rent since Sublessee does not pay Percentage Rent. Sublessee shall, however, be required to report Gross Sales (as defined within the Sublease pursuant to this Sublease. Section 5.1 Use Of Premises Purpose: Bank facility to the general public. Section 5.2 Change of Name Business Name: Community Bank of Central California Section 21.1 Security Deposit TWO THOUSAND ONE HUNDRED ONE AND 00/l00 DOLLARS ($2,101.00). FIRST AMENDMENT TO SUBLEASE This First Amendment to Sublease (hereinafter "First Amendment") is made and entered into on October 11, 2000, between Kmart Corporation, a Michigan corporation, having its principal office at 3100 West Big Beaver Road, Troy, Michigan 48084 (hereinafter referred to as "Sublessor") and Central Coast Bancorp, a California corporation, having its principal office at 301 Main Street, Salinas, California 93901 doing business as Community Bank of Central California (hereinafter referred to as "Sublessee"). WHEREAS, Sublessor and Sublessee entered into a Sublease, dated July 17, 2000, (hereinafter referred to as "Sublease"); and 'WHEREAS, Sublessor and Sublessee seek to amend the terms of said Sublease as hereinafter provided; NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties agree to the following: 1. ATM Definition. As used herein, the term "ATM" shall mean an electronic fund transfer terminal consisting of any automated teller machine, together with the fixtures, access lines, equipment, and furnishings (hereinafter "ATM") necessary to, or, which will facilitate the operation of the automated teller machine in the performance of certain banking services and/or the dispensing of cash to Sublessee's customers. 2. ATM Installation/Taxes/Security/Indemnification/ Insurance/Legal Compliance. The provisions of the Sublease and master leases and agreements shall apply to the installation of the ATM, including, without limitation, repair of any damage caused thereof and subsequent removal. The installed ATM will for all purposes be and remain Sublessee's personal property and shall not become a fixture or real property. During the Sublease Term, Sublessee shall pay any and all excise, privilege, sales, use, or other taxes levied against or upon the ATM or upon any or all associated fixtures and equipment. Sublessor, in its sole discretion, may upon thirty (30) days prior written notice require Sublessee, at Sublessee's expense, to remove or relocate the ATM and to restore the area to as good or better condition which existed prior to the installation of the ATM thereof, and Sublessee agrees to the same. In the event Sublessee fails to perform as contemplated herein, Sublessor is authorized by Sublessee to remove the ATM, in Sublessor's sole discretion, without incurring any liability to Sublessee or any third party. In such event, Sublessee shall pay to Sublessor upon demand all costs for removal, repair, and restoration and indemnify, hold harmless, and defend Sublessor from and against any liablity or claims arising thereof. Sublessee shall submit to Sublessor its plans and specifications for its ATM installation and signage and performed such work pursuant to the Sublease and its exhibits. Sublessee shall not commence any work until the same is approved in writing by Sublessor, in its sole discretion, its Landlord, its Ground Lessor, and its/their mortgagee(s), as applicable. Sublessee shall pay all expenses incurred by Sublessor to obtain any consent(s) associated with the ATM. Sublessee, at its sole expense, shall provide, without limitation, all necessary heating, ventilation air-conditioning, and electrical power support at the ATM location and will further pay all utility usage charges applicable to the operation of the ATM, including, without limitation, all costs of access and connection to the designated electrical junction box and/or panel. Servicing and other operational functions shall be performed by Sublessee only during pre-opening and post-closing facility hours with the prior approval of Sublessor. Notwithstanding any provisions to the contrary within the Sublease, Sublessee shall provide its own security and indemnify, hold harmless, and defend Sublessor, with counsel acceptable to Sublessor, from any and all claims, costs, including attorneys' fees, expenses, causes of action, lawsuits, demands, and liabilities arising, directly or indirectly, from, without limitation, the installation, existence, use, operation, maintenance, repair, and removal, of the ATM, including, without limitation, the insertion of explosive devices and any resulting claims or damage caused thereof. Sublessee shall provide sufficient and adequate insurance, satisfactory to Sublessor, for and against the foregoing. Such claims shall also include, without limitation, third party assertions that any ATM or its equipment infringes any patent, copyright, trademark or other proprietary right or constitutes a misuse of any trade secret information. Sublessee shall pay all costs, attorney fees, settlement payments, and damages arising in connection with any such claims. Sublessee also agrees to reimburse, indemnify, and hold harmless Sublessor from and against all claims, costs, including attorney fees, expenses, causes of action, lawsuits, demands, and liabilities against Sublessor due to Sublessee's business activities, including, without limitation, the negligent or intentional acts, or omissions, of Sublessee's, without limitation, agents, employees, customers, contractors, or invitees. Sublessee shall comply with all applicable laws and regulations pertaining to the ATM, including without limitation, the regulations of the Federal Reserve Board. 3. Reciprocal Easement and Operation Agreement. Sublessee shall be responsible to comply with the provisions of the Reciprocal Easement and Operation Agreement (hereinafter "REOA"), dated June 13, 1989, between Sublessor and K & S Market, Inc. and to obtain, at Sublessee's sole expense, any consent(s) which may be required. A copy of the REOA is attached hereto and and incorporated herein as Exhibit I to the Sublease. 5. No Agency Partnership or Joint Venture. Nothing contained within the Sublease or this First Amendment shall be construed as creating a relationship of principle and agent, or a partnership, or joint venture between Sublessee and Sublessor and Sublessee shall at all times conduct its activities independently thereof. 6. Entire Agreement. This First Amendment contains the entire agreement of Sublessee and Sublessor with respect to the subject matter hereof and the same shall not be modified unless in writing and signed by the parties. 7. Captions and Section Numbers. The captions and section numbers appearing in this First Amendment are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of such sections of this First Amendment in any way affect the same. 8. Contingency. This First Amendment is contingent upon Sublessee submitting to Sublessor detailed plans and specifications of the modifications of the Demised Premises, including, but not limited to, to proposed signage, and obtaining Sublessor, its Landlord, its Ground Lessor, and its/their mortagee's(s'), as applicable, prior written approval(s) prior to any work being commenced. Any such modifications shall be completed in accordance with the Sublease and its exhibits. This First Amendment shall become binding upon the respective parties, their successors, heirs, and assigns. Except for the modifications herein stated, all provisions of the Sublease shall continue in full force and effect. IN WITNESS WHEREOF, Sublessor and Sublessee have cause this First Amendment to be executed in quadruplicate as of the day and year first above written. WITNESSES: SUBLESSOR: KMART CORPORATION By: /s/ LORRENCE T. KELLER ----------------------- Lorrence T. Kellar Its: Vice President of Real Estate SUBLESSEE: CENTRAL COAST BANCORP (d/b/a Community Bank of Central California) By: /s/ HARRY WARDWELL ----------------------- Harry Wardwell Its: Senior Vice President, Branch Manager Kmart #3748 - Hollister, CA Central Coast Bancorp (Community Bank of Central California) First Amendment - Exhibit I RECIPROCAL EASEMENT AND AGREEMENT Hollister, CA TABLE OF CONTENTS I. DEFINITION 1.01 Arby's Parcel 1.02 Base Parcel 1.03 Building Areas 1.04 Common Areas 1.05 Developer 1.06 Developer Parcel 1.07 Floor Area 1.08 K mart 1.09 K mart Building 1.10 K mart Parcel 1.11 Mortgage 1.12 Mortgagee 1.13 Owner 1.14 Parcel 1.15 Person 1.16 Responsible Owner 1.17 Shopping Center 1.18 State II. LAND USE 2.01 No interference with Common Areas 2.02 Conformity to Size Plan III. COMMON AREAS 3.01 Parking Areas 3.02 Unimproved Building Area as Common Area 3.03 Rules for Use of Common Areas 3.04 Grant and Declaration of Reciprocal Easement 3.05 Temporary Use of Common Areas During. Construction and For Maintenance and Repair 3.06 Barriers and Traffic Control 3.07 Easement for Minor Encroachments 3.08 No Easements Beyond Shopping Center IV. OPERATION AND MAINTENANCE OF COMMON AREAS 4.01 Responsibility for Maintenance 4.02 Taxes 4.03 Common Area Liability Insurance V. UTILITY EASEMENT 5.01 Separate Utility Lines 5.02 Common Utility Lines 5.03 Location of Easements 5.04 Installation, Maintenance and Repair 5.05 Relocation 5.06 Master Storm Drain Easement VI. BUILDING DESIGN AND CONSTRUCTION [Intentionally Omitted] VII SIGNS 7.01 Permitted Signs 7.02 Pylon Signs VII EMINENT DOMAIN IX. MORTGAG SUBORDINATE TO AGREEMENTES X. NATURE OF AGREEMENT 10.01 Obligations of Agreement 10.02 No Dedication to Public 10.03 Amendment, Modification or Termination 10.04 Term of Agreement XI. APPROVALS XII. REMEDIES 12.01 Default of Owner 12.02 Other Remedies 12.03 Liens 12.04 No Waiver 12.05 No Termination for Breach XIII. MISCELLANEOUS 13.01 Severability 13.02 Estoppel Certificate 13.03 Governing Law 13.04 Headings 13.05 No Partnership 13.06 Notices 13.07 Mechanics' Liens RECIPROCAL EASEMENT AND OPERATION AGREEMENT AGREEMENT made as of this 13th day of June, 1989 by and between K MART CORPORATION, a Michigan corporation, having its principal address at 3100 West Big Beaver Road, Troy, Michigan 48084 ("K mart') and K & S MARKET, INC., a California corporation, having an address at. 591 Tres Pinos Road, Hollister, California 95023 ("Developer'). WITNESSETH: WHEREAS, Developer is the owner of a certain parcel of real property containing approximately 6.91 acres located in Hollister, California, which real property is more particularly described on Exhibit "A-1" attached hereto and incorporated herein by reference (hereinafter referred to as the "Developer Parcel"); and WHEREAS, K mart is the owner of a certain parcel of real property containing approximately 7.67 acres located in Hollister, California, which real property adjoins and is contiguous with the Developer Parcel and is more particularly described on Exhibit "A-2" attached hereto and incorporated herein by reference (hereinafter referred to as the "K mart: Parcel"); and WHEREAS, K mart and Developer have agreed to develop the Developer Parcel and the K mart Parcel (the combined legal description of which Parcels is set forth on Exhibit A attached hereto) as an integrated shopping center (hereinafter referred to as the "Shopping Center') substantially in accordance with the site plan shown on Exhibit '3' attached hereto and incorporated herein by reference; and WHEREAS, the parties desire to subject the K mart Parcel and the Developer Parcel to the covenants, conditions and restrictions hereinafter set forth, to establish the easements hereinafter described, and to provide for the maintenance and operation of the Common Areas, as hereinafter defined, for the mutual benefit of the parties hereto and their respective heirs, executors, successors, assigns, employees, mortgagees, tenants, customers and invitees. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein set forth and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by each party hereto, the parties agree as follows: ARTICLE 1 DEFINITIONS For purposes of this Agreement, the following terms shall, unless otherwise indicated, have the following meanings and the use of the singular shall include the plural: 1.01 Arby's Parcel: That certain parcel of land depicted as 'Arby's" on Exhibit B hereto. 1.02 Base Parcel The K mart Parcel and the Developer Parcel and any other Parcel resulting from a subdivision of the Developer Parcel which other Parcel contains a building designed for a single user having a ground Floor Area plan of at. least 25,000 square feet. 1.03 Building Areas Those areas marked on Exhibit B as K mart, Garden Shop, Retail, New Office/Retail, Existing Office/Retail, Taco Bell and Pad. 1.04 Common Areas All public and common facilities erected on the Shopping Center intended for common use, including but not limited to entrances, exits, driveways, access roads, parking areas, walks, service drives, directional signs, lighting facilities, utility services, drainage and retention pond facilities, landscaped areas and other facilities and areas intended for common use, as the same may exist from time to time in the Shopping Center, but not including any buildings erected on the Building Areas. 1.05 Developer K & S Market, Inc., a California corporation, its successors and assigns, so long as it is the Responsible Owner of the Developer Parcel, otherwise the Responsible Owner of the Developer Parcel. 1.06 Developer Parcel That certain parcel of land described in Exhibit A-1 attached hereto and made a part hereof. 1.07 Floor Area Floor area measured from exterior surface of exterior walls and from the center of common walls or interior demising partitions, but shall exclude mezzanines, if any. 1.08 K mart K mart Corporation, a Michigan corporation, its successors and assigns, so long as it is the Responsible Owner of the K mart Parcel, otherwise the Responsible Owner of the K mart Parcel. 1.09 K mart Building The K mart retail store building plus adjacent retail space and garden shop as the same is shorn on Exhibit 3. 1.10 K mart Parcel That certain parcel of land described in Exhibit A-2 attached hereto and made a part hereof. 1.11 Mortgage Any mortgage or deed of trust or any leasehold mortgage. 1.12 Mortgagee The mortgagee under any mortgage, the beneficiary under any deed of trust and the leasehold mortgagee under any leasehold mortgage. 1.13 Owner Any person who or which is the record owner of fee simple title to a Parcel or any portion thereof which is part of the Shopping Center; provided, however, in the event of the sale by an owner of all or a portion of a Parcel and a simultaneous leaseback of the Parcel or portions thereof (a "sale/leaseback"), the seller/lessee under such sale/leaseback shall be deemed to be the "Owner" of such Parcel or portion thereof for the purposes of this Agreement so long as it is designated in the lease as the "Owner" for the purposes of this Agreement, and provided further, the lessee of a Parcel or a portion of a Parcel under a ground lease or other lease having an initial term of twenty-five (25) years or longer shall be deemed to be an "Owner" of such Parcel or a portion thereof for the purposes of this Agreement so long as it is designated in the ground lease or other lease as the "Owner" for the purposes of this Agreement. 1.14 Parcel The K mart Parcel, the Developer Parcel, and all parcels resulting from the subdivision thereof. 1.15 Person An individual, partnership, firm, association, corporation, or other form of business or government entity. 1.16 Responsible Owner The Owner of a Base Parcel, provided, however, that if any such Owner shall transfer, convey or ground lease its interest in any portion of a Base Parcel in such a manner as to create multiple Owners of the Base Parcel, then such multiple Owners shall designate one of their number to act on behalf of all such Owners in the performance of the provisions of this Agreement, which Owner so designated shall be herein referred to as the "Responsible Owner". Any such designation shall be in writing, duly executed and acknowledged by all multiple Owners of a Base Parcel (including the Owner so designated), and recorded with the Office of the County Recorder of the County in which the Shopping Center is located. A copy of such designation shall be sent to each other Responsible Owner in the Shopping Center. In the absence of any such written, recorded and mailed designation, the Owner of the largest subparcel of any such divided Base Parcel shall be the Responsible Owner, provided however that for so long as K mart is the Owner of any portion of the K mart Parcel it shall be deemed to be the Responsible Owner of the K mart Parcel. 1.17 Shopping Center The K mart Parcel and the Developer Parcel. 1.18 State: The State of California. ARTICLE 2 LAND USE 2.01 No Interference With Common Areas. No use of the Shopping Center shall be made which shall interfere with the use of the Common Areas within the Shopping Center for the purposes for which they were intended as provided in this Agreement or impede the free flow of vehicular or pedestrian traffic thereon. 2.02 Conformity to Site Plan. The parties hereto agree to develop their respective Base Parcels in the manner shown in the site plan attached hereto as Exhibit 3. Subject to Section 3.02, any changes to the Exhibit 3 site plan may be made only with the prior written consent of the Responsible Owners, provided however, minor modifications of an immaterial nature to the Common Areas may be made by a Responsible Owner on such Responsible Owner's Parcel without such consent if such changes do not alter traffic flow, visibility, or parking arrangements upon or access with respect to the Shopping Center. ARTICLE 3 C0MMON AREAS 3.01 Parking Areas There shall at all times be maintained on Developer Parcel and the K mart Parcel respectively parking spaces for a: least 4 automobiles for each 1,000 square feet of gross square footage of Floor Area of all buildings constructed on the Developer Parcel and the K mart Parcel. There shall be no change in parking layout or pattern of traffic flow within the Shopping Center from that depicted on Exhibit 3 without the prior written consent of the Responsible Owners. 3.02 Unimproved Building Areas as Common Area Any portion of the Building Areas from time to time not occupied by a building or buildings or otherwise exclusively appropriated to the use of the Owner of a particular Parcel (or to the use of a tenant(s) of such Owner), shall, until such time as construction is commenced thereon, be deemed "Common Areas", provided the Owner of such vacant Building Area shall be solely responsible for paying taxes and assessments on and the costs of. maintaining such vacant Building Areas. Nothing contained in this Section 3.02 shall be deemed to prohibit any Owner from building on any Building Area, even though such Building Area may have previously been included within the Common Areas. 3.03 Rules for Use of Common Areas The Responsible Owners shall adopt reasonable rules and regulations restricting the time, manner and place of political and charitable activities in the Common Areas of the Shopping Center. No merchandise may be stored on the Common Areas. No business may be conducted or performed in or on the Common Areas or merchandise sold therefrom except for one day" Shopping Center wide sales conducted on any one or more of the Base Parcels. Such sales shall be located only on the sidewalks and walkways adjoining the buildings to be constructed in the Shopping Center. No more than two (2) such sales may be conducted in any calendar year without the prior written approval of all the Responsible Owners, which approval shall not be unreasonably withheld. Anything hereinabove to the contrary notwithstanding, K mart shall have the right for so long as it operates a K mart retail store on the K mart Parcel to use the Common Areas within the K mart Parcel and Developer shall have the right for so long as it operates retail stores on the Developer Parcel to use the Common Areas within the Developer Parcel for special promotional events, including truck and trailer sales, provided, however, that such use by K mart or Developer, as the case may be, does not unreasonably interfere with the operations of the Shopping Center. There shall be no distribution of flyers, circulars or advertisements in, on or from the Common Areas. The Responsible Owners shall each have the right to obtain restraining orders, injunctions, or other legal process in order to enjoin any such activities not approved or consented to as hereinabove set forth. 3.04 Grant and Declaration of Reciprocal Easements Developer and K mart, each as grantor, hereby reserves to itself and grants to the other for the benefit of the other and the others respective successors, assigns, mortgagees, lessees, sub-lessees, employees, agents, customers, licensees and invitees, and each declare for the benefit of each of the respective Parcels within the Shopping Center permanent, mutual, reciprocal and nonexclusive easements and rights to use the Common Areas for the purposes for which they are provided and intended, including, but not. limited to, ingress, egress, access, and parking for vehicular or pedestrian traffic, upon or across the parking areas, entrances, exits, driveways, walks or service drives located within the Common Areas and the use of storm drainage and retention facilities, landscaping, public rest rooms and other public facilities, direction signs and other areas intended for common use. 3.05 Temporary Use of Common Areas During Construction and For Maintenance and Repair. In connection with work performed within any Building Area, incidental encroachments upon the Common Areas as a result of the use of ladders, scaffolding, storefront barricades, and similar facilities resulting in temporary obstruction of portions of the Common Areas shall be permitted hereunder so long as their use is kept within reasonable requirements of construction or maintenance repair work expeditiously pursued. Common Areas may be utilized for ingress and egress of vehicles transporting construction materials, equipment, and persons employed in connection with any work provided for herein and temporary storage of material and vehicles being utilized in connection with such construction, subject to all of the other terms of this Agreement. 3.06 Barriers and Traffic Control Except as provided in Section 3.05 above, no walls, fences, or barriers of any sort or kind shall be constructed or maintained in the Common Areas of the Shopping Center, or any portion thereof, which shall prevent or impair the use or exercise of any of the easements granted herein, or the free access and movement, including without limitation, pedestrian and vehicular traffic, between the various Parcels; provided, however, reasonable traffic controls as may be necessary to guide and control the orderly flow of traffic may be installed so long as access driveways to the parking area in the Shopping Center are not closed or blocked and the traffic circulation pattern of the Common Areas, as depicted on Exhibit 3, is not changed or affected in any way, unless the prior written approval of the Responsible Owners is first obtained. 3.07 Easement for Minor Encroachments. Each of the parties hereby grants to the other the non-exclusive right (a) to install, maintain and repair footings and underground supports which extend not more than three (3) feet beyond the boundaries of the respective Building Areas and (b) to maintain such minor encroachments as are shown on the final exterior plans of any party where such encroachments have been approved by Developer and K mart, provided such encroachments do not extend more than three (3) feet beyond the boundaries of the respective Building Areas. 3.08 No Easements Beyond Shopping Center. No Owner shall grant an easement or easements of the type set forth in this Article III for the benefit of any property not within the Shopping Center (except for easements for ingress and egress for the benefit of the Arby's Parcel) without the prior written consent of each other Owner, which consent may be granted or withheld in the sole discretion of such other Owner. ARTICLE 4 OPERATION AND MAINTENANCE OF COMMON AREAS 4.01 Responsibility for Maintenance. Upon completion of construction of the improvements on the Common Areas or any portion thereof, the Responsible Owner shall, during the term of this Agreement, at its sole cost and expense, operate, maintain and repair or cause to be operated, maintained and repaired all Common Areas within its respective Parcel and shall keep the same, or cause the same to be continuously kept, in good condition and repair, in a safe and sound condition, and clean and free of rubbish, debris, and other hazards to Persons using the same. Such maintenance, operation and repair shall include, but not be limited to, the following: (a) The care and replacement of all shrubbery, plantings, and other landscaping; (b) Maintenance, repair and replacement of concrete and asphalt paving and other surface materials used on drives, parking areas and walkways using, to the extent reasonably possible, the same type of material originally installed, to the end that drives, parking areas and walkways are at all times kept in a level, smooth and substantially uniform condition; (c) Adequate marking, striping and directional signing of all parking areas; (d) Maintenance, repair and replacement of all common electrical and other common utility equipment and facilities so that the same are at all times in good operating condition, including lighting in the Common Areas, and electric light replacements; (e) Payment of all electrical, water and other utility charges or fees for services furnished to the Common Areas; and, (f) Snow removal, when and if necessary, and sweeping and removal of rubbish and debris at least two (2.) times per week. 4.02 Taxes Developer and K mart shall cooperate in undertaking to obtain separate tax assessments for each Parcel within the Shopping Center. Each Responsible Owner shall pay or cause to be paid all Taxes levied against that Responsible Owner's Base Parcel and the buildings and improvements thereon. 4.03 Common Area Liability Insurance Each Responsible Owner shall, at all times, maintain, or cause to be maintained, general public liability insurance against claims for personal injury or death and property damage occasioned by accident occurring upon, in or on the Common Areas on its Base Parcel, such insurance in each case to afford protection to the limit of not less than $1,000,000 in respect to injury or death to any one person and to a limit of not less than $3,000,000 in respect of the injury or death to any number of persons arising out of any one accident, such insurance against property damage to afford protection to the limit of not less than $1,000,000 in respect to any instances of property damage. Such insurance shall be written by companies of nationally recognized financial standing legally qualified to issue such insurance and shall name each Responsible Owner as an insured, as its interest may appear. Anything contained in this- Section 4.03 to the contrary notwithstanding, any and all insurance which any. Responsible Party is obligated to carry hereunder may be carried pursuant to a prudent selfinsurance program so long as such Party maintains a tangible net worth, determined in accordance with generally accepted accounting principles consistently applied, of at least $100,000,000. Upon request, any Responsible Party shall deliver to the other Responsible Parties and any mortgagee thereof duplicate policies or certificates of insurance evidencing the existence of all insurance required to be maintained hereunder. ARTICLE 5 UTILITY EASEMENTS 5.01 Separate Utility Lines Each Responsible Owner hereby reserves to itself and grants to each other Responsible Owner, respectively, nonexclusive easements in, to, over, under and across the Common Areas of the respective parcels for the installation, operation, flow and passage, use, maintenance, repair, relocation and removal of sanitary sewers, storm drains, water and gas mains, electrical power lines, telephone lines and other utility lines, all of such sewers, drains, mains and lines to be underground, serving the respective Parcels of each of the Responsible Owners. 5.02 Common Utility Lines Each Responsible Owner hereby reserves to itself and grants to each other Responsible Owner, respectively, nonexclusive easements in, to, over, under and across the Common Areas of the respective Parcels for the installation, operation, flow and passage, use, maintenance, repair, relocation and removal of sanitary sewers, storm drains, water and gas mains, electrical power lines, cable T.V., telephone lines and other utility lines, all of such sewers, drains, mains and lines to be underground, for the service of Common Areas and for use in common with other parties. Each such Responsible Owner further reserves to itself the right to grant such easements in, to, over, under and across its respective Parcels, for the purposes hereinabove enumerated, to such other Persons as may from time to time be entitled thereto. 5.03 Location of Easements The location of all easements of the character described in this Article V shall be subject to the prior written approval of the Owner in, to, over and under whose Parcel the same is to be located. If requested by any utility company or an Owner upon completion of construction of such utility facilities the Owners of Parcels affected thereby shall join in the execution of an agreement, in recordable form, appropriately identifying the type and location of such respective utility facility. 5.04 Installation Maintenance and Repair. The grantee of any of the utility easements referred to in this Article V shall be responsible as between the grantor and the grantee thereof for the installation, maintenance and repair of all sanitary sewers, storm drains, pipes and conduits, mains and lines and related equipment installed pursuant to such grant. Any such maintenance and repair shall be performed only after two (2) weeks notice to the grantor of the grantee's intention to do such work, except in the case of emergency, and any such work shall be done without cost or expense to the grantor, and in such manner as to cause as little disturbance in the use of the Common Area as may be practicable under the circumstances. 5.05 Relocation At any time the grantor of any of the utility easements granted pursuant to said Article V shall have the right to relocate on the land of the grantor any such sewers, drains, mains and lines and related equipment then located on the land of the grantor provided that such relocation shall be performed only after thirty (30) days notice of the grantor's intention to so relocate shall be given to the grantee, and such relocation: (a) shall not interfere with or diminish the utility services to the grantee; (b) shall not reduce or unreasonably impair the usefulness or function of such utility; and (c) shall be performed without cost or expense to grantee. Notwithstanding such relocation, maintenance shall be the obligation of the grantee; provided that if there shall be any material increase in such cost as a result of any such relocation, the grantor shall bear such excess. 5.06 Master Storm Drain Easement Developer and K mart hereby grant to and for the benefit of the other and, if so required by the City of Hollister, agree to grant to the City of Hollister, a thirty (30') foot storm drainage easement along the south boundary of the Shopping Center as depicted on Exhibit B hereto. Developer further hereby grants to K mart corporation a twenty (20') foot storm drainage easement along the west boundary of the Shopping Center, which easement shall terminate upon the earlier to occur of the termination of K mart's Ground Lease of the Premises or the extension of the thirty (30') foot storm drain on the southerly boundary of the Shopping Center to hook up on to a public drain on the west boundary of the Shopping Center. K mart shall have the right to enter the Developer Parcel to install and maintain, at its sole cost and expense, such storm drain within the boundaries of the easement. K mart shall use its best efforts to minimize any disruption to business activity caused by such entry. ARTICLE 6 [INTENTIONALLY OMITTED] ARTICLE 7 SIGNS 7.01 Permitted Signs The following signs shall be permitted in the Shopping Center: (a) directional signs for guidance upon the parking and driveway areas, (b) exterior building identification signs of any single occupant of the Building Areas of the Shopping Center, so long as such signs are similar to the standard identification signs from time to time being used by any such occupant in its other stores in similar shopping centers in the State or so long as the Responsible Owner of the Parcel on which the sign is to be located shall approve such sign; (c) a temporary sign identifying the lender(s) providing construction and/or permanent financing for any improvement to be located in the Shopping Center, (d) a sign or signs identifying an automated teller machine(s) or similar financial equipment operated on any of the Building Areas, so long as similar to other such signs in first-class shopping centers in the State, and (e) one (1) pylon (monument) sign at the approximate location depicted on Exhibit B hereto and one (1) pylon sign (monument) sign at the western entrance to the Shopping Center if and when such a sign is approved by municipal authorities. No other signs shall be erected or maintained upon the Common Areas or Building Areas of the Shopping Center without the prior written approval of the Responsible Owners, which approval shall not be unreasonably withheld. In no event shall any sign be installed on the roof of a building or which projects above the to? of any parapet wall or roof line if it is to be affixed to the side of a building not having a parapet wall unless such sign is of a design which is customary and commonly used by the occupant of the K mart Building. Each building identification sign located in the Shopping Center and which identifies a single Shopping Center occupant shall be maintained in good condition and repair by the Shopping Center occupant identified on such building identification sign. 7.02 Pylon Signs All pylon signs and the identification panels thereon shall be maintained in good condition and repair (or caused to be so maintained) by the Responsible Party on whose Parcel the pylon sign is located. ARTICLE 8 EMINENT DOMAIN In the event any part of the Shopping Center shall be taken by eminent domain or any other similar exercise of governmental authority, the entire award for value of the land and improvements so taken shall belong to the Owner of the property so taken or to any Mortgagee or tenant of such Owner, as their respective interests may appear, and no other Owner, Mortgagee or tenant in the Shopping Center shall claim any portion of such award by virtue of any interest created by this Agreement. In the event that (a) all of a Parcel or (b) such portion thereof as shall render the continued use of the remainder thereof impracticable, shall be taken by eminent domain or by other similar authority of law, then the Owner of such Parcel may by written notice given to the then Owners of all Parcels comprising the Shopping Center and thereafter duly recorded in the office of the County Recorder of the County in which the Shopping Center is located, terminate, for itself, its successors and assigns, all of its rights and obligations under this Agreement as to the Parcel so taken. Any taking in eminent domain of parking areas of a Parcel below 80% of the ratio required to be maintained under Section 3.01, shall permit any Owner to terminate this Agreement as to such Parcel. The right of termination herein provided shall be exercised only by thirty (30) days written notice by an Owner to all other Owners and the holders of recorded first Mortgagee on the Shopping Center and thereafter duly recorded in the office of the County Recorder in the County in which the Shopping Center is located. Nothing hereinabove shall be deemed to affect the rights of Developer and K mart under that certain Ground Lease dated November 2, 1988, with respect to a taking of the K mart Parcel. ARTICLE 9 MORTGAGES SUBORDINATE TO AGREEMENT Any Mortgage affecting any portion of the Shopping Center shall at all times be subject and subordinate to the terms of this Agreement and any Person foreclosing any such Mortgage or acquiring title by reason of a deed in lieu of foreclosure shall acquire title to the premises affected thereby subject to all of the terms of this Agreement. ARTICLE 10 NATURE OF AGREEMENT 10.01 Obligations of Agreement. Except as otherwise herein provided, each and every covenant, undertaking, condition, easement, right, privilege, and restriction (herein referred to -as "Obligations of this Agreement") made, granted or assumed, as the case may be, by any party to this Agreement, is made by such party for the personal benefit of the other parties hereto, and also as Owner and Owners of a portion of the Shopping Center, and shall be an equitable servitude on the portion of the Shopping Center owned by such party appurtenant to or for the benefit of the other portions of the Shopping Center. Every Obligation of this Agreement shall run with the land, and shall be binding upon the party making or assuming the several Obligations of this Agreement, and such party's successors, assigns, Mortgagees, tenants, customers and invitees and shall inure to the benefit of all other parties to this Agreement and to their respective successors, assigns, Mortgagees, tenants, customers and invitees. Any transferee of any part of the Shopping Center shall automatically be deemed, by acceptance of title to such Parcel to have assumed all the Obligations of this Agreement relating thereto, but only to the extent such Obligations of this Agreement accrue after the effective date of such transfer of title, and to have agreed with the Owner or Owners of all other portions of the Shopping Center to- execute any and all instruments and do any and all things reasonably required to carry out the intention of this Agreement. Any transferor shall upon the consummation of such transfer be relieved of all further liability under this Agreement. except such liability as may have arisen during his (its) period of ownership of the portion of the Shopping Center so conveyed and which remains unsatisfied, unless such transferor remains an Owner hereunder. 10.02 No Dedication to Public Nothing contained in this Agreement shall be deemed to be a gift or dedication of any portion of the Shopping Center to the general public or for any public use or purpose whatsoever, it being the intention of the parties hereto that this Agreement is for the exclusive benefit of all Owners of any portion of the Shopping Center and their successors, assigns, Mortgagees, tenants, customers and invitees, and that nothing in this Agreement, express or implied, shall confer upon any Person, other than such Owners, and their successors, assigns, Mortgagees, tenants, customers and invitees any rights or remedies under or by reason of this Agreement. The Owners of all Parcels comprising the Shopping Center shall have the right from time to time to close all or any portion of the Shopping Center to such extent as may be necessary to prevent a dedication thereof to the public or the accrual of any rights in any Person, not expressly granted rights hereunder. 10.03 Amendment Modification or Termination This Agreement may be amended or modified at any time by a declaration in writing mutually agreed to, executed and acknowledged by all the Responsible Owners of any Base Parcel and thereafter duly recorded in the Office of the County Recorder of the County in which the Shopping Center is located, provided this Agreement shall not be terminated during the term hereof or amended or modified without the prior written consent of all Owners whose interests would be adversely affected by such amendment or modification. This Agreement shall not be terminated, amended, altered or modified in any way without the prior written consent of each first Mortgagee then encumbering the Shopping Center, or any Parcel thereof. 10.04 Term of Agreement This Agreement shall be effective as of the date of recording hereof in the Office of the County Recorder of San Benito County and shall continue in full force and effect until 11:59 p.m. on December 31, 2065; provided, however, that in the event that no portion of the Shopping Center is utilized for retail purposes for a continuous period of two (2) years (excluding any period during which an Owner is prevented from engaging in such use by reason of strikes, lockouts or other labor difficulties, the elements or act of God, the requirements of any governmental act, law, rule or regulation, fire or other casualty, condemnation, war, riot, or insurrection), then this Agreement and the restrictions and easements hereunder shall terminate and be of no further force or effect. ARTICLE 11 APPROVALS Upon receipt by an Owner of a request for approval or consent hereunder, such Owner shall, within thirty (30) days after receipt of such request, notify in writing the Person making such request of any objections thereto (such objections to be specifically stated) and such Person may within fifteen (15) days thereafter resubmit its request for approval rectifying any such objections to the appropriate Owner. The Owner shall then have an additional fifteen (15) days after receipt of said revisions to approve or disapprove same. Failure to give any written notice of disapproval within the periods provided for above shall constitute approval thereof by such Owner. Whenever in this Agreement an Owner is given the right to approve or disapprove in its sole discretion, it may disapprove without specifying the reason therefor. ARTICLE 12 REMEDIES 12.01 Default of Owner. In the event a Responsible Owner shall fail to perform its obligations under this Agreement, the Responsible Owners of the other Parcels or any of them may send notice to the Responsible Owner who failed to perform setting forth the obligation which the Responsible Owner has failed to perform. In the event such obligation is not performed within thirty (30) days after receipt of such notice (unless the Responsible Owner shall have commenced to perform the same within such period and shall be diligently proceeding to perform the same), then the other Responsible Owners or any one of them upon ten (10) days prior written notice to the Responsible Owner who failed to perform, shall have the right to perform the same. A Responsible Owner shall not be deemed to have failed to perform its obligations hereunder for so long as such delay is prevented due to strikes, lockouts, inability to procure materials, power failure, acts of God, governmental restrictions, enemy action, civil commotion, fire, unavoidable casualty or other causes beyond the control of the Responsible Owner, provided that lack of funds shall not be deemed a cause beyond the control of the Responsible Owner. In the event failure to perform any repair or maintenance causes an emergency, or performance of such repair or maintenance is necessary to prevent or relieve an emergency, then the notice required to be given hereunder need only be such reasonable notice, if any, as is warranted by the nature of the specific condition involved. If appropriate action is not timely taken by the Responsible Owner failing to perform, the other Responsible Owners or any of them shall be entitled immediately to perform such repair or maintenance. In the event a Responsible Owner performs any of the obligations of a Responsible Owner who fails to perform as aforesaid, the Responsible Owner so performing, in addition to any, other remedies it may have, shall be reimbursed by the defaulting Responsible Owner within thirty (30) days of presentation of the appropriate statement therefor, failing which, in addition to any other remedies it may have, the Responsible Owner so performing shall have a lien against real property and improvements of the defaulting Responsible Owner for the unpaid amount together with interest thereon from the date said reimbursement was due at the rate of 15% per annum or the highest rate permitted by law, whichever is lower. Such lien shall be subordinate to the interest of any mortgagee, lessee or sublessee of the affected property, irrespective of when their interest attached, and may be enforced and foreclosed in a suit or action brought in any court of competent jurisdiction. 12.02 Other Remedies In addition to the foregoing, if any Owner defaults in the performance of any other material provision of this Agreement, which default continues for a period of thirty (30) days following receipt of written notice specifying the particulars of such default, any other Owner may institute legal action against the defaulting Owner for specific performance, declaratory relief, damages or other suitable legal or equitable remedy. In addition to the recovery of damages and of any sums expended on behalf of the defaulting Owner, the prevailing party in the action shall be entitled to receive from the other party its actual attorneys' fees and costs for services rendered to the prevailing party in any such action (including any appeal thereof). The remedies and liens provided in this Article XII and the enforcement thereof as herein provided shall be in addition to and not in substitution for or exclusion of any other rights and remedies which the parties may have under this Agreement or at law or-in equity. 12.03 Liens. The lien provided for in Section 12.01 shall only be effective when filed for record by the curing party as a claim of lien against the defaulting Owner in the Office of the County Recorder of the County in which the Shopping Center is located, signed and verified, which claim of lien shall contain the following as well as any other information required by law in order to make the lien effective. (i)A statement of the unpaid amount of costs and expenses; (ii) A description sufficient for identification of that portion of the property of the defaulting Owner which is the subject of the lien; (iii) The last known name and address of the owner or reputed Owner of the property which is the subject of the alleged lien; and (iv)The name and address of the lien claimant. The lien, when so established against the real property described in the lien, shall be prior and superior to any right, title, interest, lien or claim which may be or has been acquired or attached to such real property after the time of filing of the lien. The lien shall be for the use and benefit of the person curing the default of the defaulting Owner, and may be enforced by any remedies afforded lien claimants under applicable law or otherwise, including, without limitation, causing a Notice of Default, to be recorded against the defaulting Owner's Parcel and thereafter causing the Parcel to be sold in the manner provided by applicable law. Any such sale shall be held as promptly as possible. The curing party shall have the power to bid on the Parcel of the defaulting Owner at such foreclosure sale and thereafter to hold, lease, mortgage and convey the same. Upon payment in full (prior to such a foreclosure) of the Delinquent Assessment together with all applicable interest due thereon, the curing party shall promptly cause to be recorded a further notice stating the satisfaction and release of the lien against the defaulting Owner's Parcel. 12.04 No Waiver. No delay or omission of any Owner in the exercise of any right accruing upon any default of any other Owner shall impair any such right or be construed to be a waiver thereof, and every such right maybe exercised at any time during the continuance of such default. A waiver by any Owner of a breach or a default of any of the terms and conditions of this Agreement by any other Owner shall not be construed to be a waiver of any subsequent breach or default of the same or any other provision of this Agreement. Except as otherwise specifically provided in this Agreement, no remedy provided in this Agreement shall be exclusive, but each shall be cumulative with all other remedies provided in this Agreement and at law or in equity. 12.05 No Termination For Breach It is expressly agreed that no breach, whether or not material, of the provisions of this Agreement shall entitle any Owner to cancel, rescind or otherwise terminate this Agreement, but such limitation shall not affect, in any manner, any other rights or remedies which any Owner may have hereunder by reason of any breach of the provisions of this Agreement. ARTICLE 13 MISCELLANEOUS 13.01 Severability. If any provision, or a portion thereof, of this Agreement, or the application thereof to any person or circumstances shall, to any extent, be held invalid, inoperative or unenforceable, the remainder of this Agreement, or the application of such provision, or portion thereof, to any other persons or circumstances shall not be affected thereby; the remainder of this Agreement shall be given effect as if such invalid, inoperative or unenforceable portion has not been included; such invalid, inoperative or unenforceable provision, or portion thereof, or the application thereof to any person or circumstances, shall not be given effect; it shall not be deemed that any such invalid, inoperative or unenforceable provision affects the consideration for this Agreement; and each provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 13.02 Estooel Certificate At any time, and from time to time, within thirty (30) days after notice or request by the holder of any actual or proposed first Mortgage or ground lease affecting or intended to affect any portion of the Shopping Center, or any actual or proposed purchaser of any portion of the Shopping Center, the then Owners of all Parcels comprising the Shopping Center shall execute and deliver to such Mortgagee, ground lessee or purchaser a statement certifying that this Agreement is unmodified and in full force and effect or if there have been modifications, that it is in full force and effect as modified in the manner specified in the statement, and that to the knowledge of such Owner there exists no default under this Agreement or circumstances which with the passage of time would result in the existence of such a default, other than as specified therein. 13.03 Governing Law. This Agreement shall be construed in accordance with the laws of the State of California. 13.04 Headings The section headings in this Agreement are for convenience only, shall in no way define or limit the scope or content of this Agreement and shall not be considered in any construction or interpretation of this Agreement or any part thereof. 13.05 No Partnership Nothing in this Agreement shall be construed to make the Owners partners or joint venturers or render any of said Owners liable for the debts or obligations of the others. 13.06 Notices Any notice, demand, request, consent, approval, designation, or other communication made pursuant to this Agreement by one Owner to any other Owner shall be in writing and shall be given or made or communicated by personal delivery or by United States registered or certified mail, return receipt requested, addressed, in the case of Developer, to: K & S Market, Inc. 591 Tres Pinos Road Hollister, California 95023 and addressed, in the case of K mart to: K mart Corporation 3100 W. Big Beaver Road Troy, Michigan 48084 Attention: Vice President -- Real Estate subject to the rights of any Owner to designate a different address by notice similarly given. No party other than K mart Corporation or K & S Market, Inc. shall be entitled to notice as a Responsible Owner unless such party shall have recorded a notice of its designation as Responsible Owner as provided in this Agreement with a description of the Parcel with respect to which it is Responsible Owner with the County Records for the County in which the Shopping Center is located. Any notice, demand, request, consent, approval, designation or other communication so sent shall be deemed to have been given, made or communicated, as the case may be, on the date the same was personally delivered or delivered by the United States mail as registered or certified matter, with postage thereon fully prepaid. 13.07 Mechanic's Liens If because of any act or omission (or alleged act or omission) of an Owner, its employees, agents, contractors or subcontractors, any mechanic's or other lien, charge or order for the payment of money or other encumbrance shall be filed against the Parcel of another Owner or Owners, the first Owner shall, at its own cost and expense, cause the same to be discharged of record or bonded within ten (10) days after notice to said Owner of the filing thereof; provided however, if the first Owner has a net worth in excess of One Hundred Million Dollars ($100,000,000) it need not furnish the bond otherwise required hereunder. In any event said Owner shall indemnify and save harmless the other Owner(s) from and against all costs, liabilities, expenses, suits, penalties, claims and demands (including actual attorneys fees and costs incurred) resulting therefrom. If the first Owner fails to comply with the foregoing provisions, the other Owner(s) shall have the option of discharging or bonding any such lien, charge, order or encumbrance, and the first Owner agrees to reimburse the other Owner(s) for all costs, expenses and other sums of money expended in connection therewith. IN WITNESS WHEREOF, the parties hereto have hereunto set their respective authorized signatures as of the day and year first above written. WITNESSED: SUBLESSOR: K & S MARKET, INC By: /s/ FRANK KLANER ------------------------- Frank Klaner Its: Secretary/ Treasurer K MART CORPORATION, a Michigan corporation By: /s/ M.L. SKILES ------------------------ M.L. Skiles Its: Vice President EXHIBIT A Legal Description - Shopping Center Parcel 2 and Parcel 3 of Parcel Map of a portion of Homestead Lot 40 San Justo Rancho, in the City of Hollister, County of San Benito, State of California, according to the map thereof, recorded in Book 6 of Parcel Maps at Page 23, San Benito County Records. EXHIBIT A-1 Legal Description - Developer Parcel All of Parcel 2 of Parcel Map of a portion of Homestead Lot 40 San Justo Rancho, in the City of Hollister, County of San Benito, State of California, according to the map thereof, recorded in Book 6 of Parcel Maps at Page 23, San Benito County Records. EXCEPTING THEREFROM being more particularly described as follows: BEGINNING at the Southeast corner of said Parcel 2; thence North 87 degrees 13 minutes 30 seconds West along the South line of said Parcel 2, a distance of 578.00 feet; thence leaving the South line of said Parcel 2 North 02 degrees 46 minutes 30 seconds East, a distance of 170.00 feet; thence North 87 degrees 13 minutes 30 seconds West parallel with the. South line of said Parcel 2, a distance of 55.00 feet; thence North 02 degrees 46 minutes 30 seconds East, a distance of 136.00 feet; thence North 87 degrees 13 minutes 30 seconds West parallel with the South line of said Parcel 2, a distance of 104.00 feet; thence North 02 degrees 46 minutes 30 seconds East, a distance of 156.12 feet to the point of intersection with the Northwesterly prolongation of the South line of that unrecorded lease dated September 18, 1987 between K & S Market, Inc. and Gary A. Laabs and Betty H. Laabs, husband and wife, disclosed by that memorandum of lease recorded September 23, 1987, Instrument No. 8707041; thence South 75 degrees 03 minutes 55 seconds East along the Northwesterly prolongation of the South line of said unrecorded lease, a distance of 62.38 feet to the Southwest corner of said unrecorded lease; thence South 75 degrees 03 minutes 55 seconds East along said South line, a distance of 185.15 feet to a point on the West line of Parcel 4 of said Parcel Map; thence South 02 degrees 46 minutes 30 seconds West along the West line of said Parcel 4, a distance of 4.00 feet to the Southwest corner of said Parcel 4; thence South 87 degrees 13 minutes 30 seconds East along the South line of said Parcel 4, a distance of 140.00 feet to the Southeast corner of said Parcel 4; thence North 02 degrees 46 minutes 30 seconds East along the East line of said Parcel 4, a distance of 200.00 feet to the Northeast corner of said Parcel 4; thence South 87 degrees 13 minutes 30 seconds East along the North line of Parcel 2 of said Parcel Map, a distance of 210.00 feet to the Northwest corner of Parcel 3 of said Parcel Map; thence South 02 degrees 46 minutes 30 seconds West along the West line of said Parcel 3, a distance of 200.00 feet to the Southwest corner of said Parcel 3; thence South 87 degrees 13 minutes 30 seconds East along the South line of said Parcel 3, a distance of 141.42 feet to the Southeast corner of said Parcel 3; thence South 02 degrees 16 minutes 00 seconds West along the East line of Parcel 2 of said Parcel Map, a distance of 406.00 feet to the TRUE POINT OF BEGINNING. Containing 6.91 acres more or less. EXHIBIT A-2 Legal Description - K mart Parcel All of Parcel 3 and a portion of Parcel 2 of Parcel Map of a portion of Homestead Lot 40 San Justo Rancho, in the City of Hollister, County of San Benito, State of California, according to the map thereof, recorded in Book 6 of Parcel Maps at Page 23, San Benito County Records and being more particularly described as follows: BEGINNING at the Southeast corner of said Parcel 2; thence North 87 degrees 13 minutes 30 seconds West along the South line of said Parcel 2, a distance of 578.00 feet; thence leaving the South line of said Parcel 2 North 02 degrees 46 minutes 30 seconds East, a distance of 170.00 feet; thence North 87 degrees 13 minutes 30 seconds West parallel with the South line of said Parcel 2, a distance of 55.00 feet; thence North 02 degrees 46 minutes 30 seconds East a distance of 136.00 feet; thence North 87 degrees 13 minutes 30 seconds West parallel with the South line of said Parcel 2, a distance of 104.00 feet; thence North 02 degrees 46 minutes 30 seconds East, a distance of 156.12 feet to the point of intersection with the Northwesterly prolongation of the South line of that unrecorded lease dated September 18, 1987 between K & S Market, Inc. and Gary A. Laabs and Betty H. Laabs, husband and wife disclosed by that memorandum of lease recorded September 23, 1987, Instrument No. 8707041; thence South 75 degrees 03 minutes 55 seconds East along the Northwesterly prolongation of the South line of said unrecorded lease, a distance of 62.38 feet to the Southwest corner of said unrecorded lease; thence South 75 degrees 03 minutes 53 seconds East along said South line, a distance of 185.15 feet to a point on the West line of Parcel 4 of said. Parcel Map; thence South 02 degrees .6 minutes 30 seconds West along the West line of said Parcel 4, a distance of 4.00 feet to the Southwest corner of said Parcel 4; thence South 87 degrees 13 minutes 30 seconds East along the South line of said Parcel 4, a distance of 140.00 feet to the Southeast corner of said Parcel 4; thence North 02 degrees 46 minutes 30 seconds East along the East line of said Parcel 4, a distance of 200.00 feet to the Northeast corner of said Parcel 4; thence South 87 degrees 13 minutes 30 seconds East along the North line of Parcel 2 of said Parcel Map, a distance of 210.00 feet to the Northwest corner of Parcel 3 of said Parcel Map; thence South 02 degrees 46 minutes 30 seconds West along the West line of said Parcel 3, a distance of 200.00 feet to the Southwest corner of said Parcel 3; thence South 87 degrees 13 minutes 30 seconds East along the South line of said Parcel 3, a distance of 141.42 feet to the Southeast corner of said Parcel 3; thence South 02 degrees 16 minutes 00 seconds West along the East line of Parcel 2 of said Parcel Map, a distance of 406.00 feet to the POINT OF BEGINNING. Containing 7.67 acres, ore or less. EXHIBIT B Shopping Center Site Plan SECOND AMENDMENT TO SUBLEASE This Second Amendment to Sublease (hereinafter "Second Amendment") is made and entered into on October 11, 2000, between Kmart Corporation, a Michigan corporation, having its principal office at 3100 West Big Beaver Road, Troy, Michigan 48084 (hereinafter referred to as "Sublessor") and Central Coast Bancorp, a California corporation, having its principal office at 301 Main Street, Salinas, California 93901 doing business as Community Bank of Central California (hereinafter referred to as "Sublessee"). WHEREAS, Sublessor and Sublessee entered into a Sublease, dated July 17, 2000, (hereinafter referred to as "Sublease"); and WHEREAS, Sublessor and Sublessee entered into a First Amendment to Sublease, dated October 11, 2000; WHEREAS, Sublessor and Sublessee seek to amend the terms of said Sublease as hereinafter provided; NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties agree to the following: 1. Section 1.2a of the Sublease and Exhibit H is amended by deleting the Commencement Date of the Primary Sublease Term, "August 1, 2000," and inserting in lieu thereof the Commencement Date of "September 15, 2000," said date being applicable pursuant to Section 2.2 of the Sublease regarding all other charges other than Minimum Rent; 2. Section 2.2 of the Sublease and Exhibit H is amended by deleting the Rent Commencement Date, "November 1, 2000", and inserting in lieu thereof the Rent Commencement Date of "December 15, 2000"; 3. Section 2.2 of the Sublease and Exhibit H is further amended by denoting that the Aggregate Minimum Rent for the Primary Term, September 15, 2000, through July 31, 2003, shall be at least SIXTY TWO THOUSAND ONE HUNDRED FORTY SIX AND 45/100 DOLLARS ($62,146.45) rather than SIXTY FOUR THOUSAND EIGHT HUNDRED NINETY AND 00/100 DOLLARS ($64,890.00); 4. Section 2.2 A of Exhibit H is amended by deleting this paragraph in its entirety and inserting in lieu thereof the following: A. Commencing December 15, 2000, ("Rent Commencement Date", as defined within the Sublease) for the period from September 15, 2000, through July 31, 2001, FOURTEEN THOUSAND TWO HUNDRED SIXTY SIX AND 45/lOO DOLLARS ($14,266.45), payable in the first payment of ONE THOUSAND THIRTY SIX AND 45/100 DOLLARS ($1,036.45) and equal monthly installments thereafter through said period of ONE THOUSAND EIGHT HUNDRED NINETY AND 00/100 DOLLARS ($1,890.00); and This Second Amendment shall become binding upon the respective parties, their successors, heirs, and assigns. Except for the modifications herein stated, all provisions of the Sublease shall continue in full force and effect. IN WITNESS WHEREOF, Sublessor and Sublessee have cause this Second Amendment to be executed in quadruplicate as of the day and year first above written. WITNESSES: SUBLESSOR: KMART CORPORATION By: /s/ LORRENCE T. KELLAR ----------------------- Lorrence T. Kellar Its: Vice President of Real Estate SUBLESSEE: CENTRAL COAST BANCORP By: /s/ HARRY WARDWELL ---------------------- Harry Wardwell Its: Senior Vice President, Branch Manager THIRD AMENDMENT TO SUBLEASE This Third Amendment to Sublease ("Third Amendment") is entered into on November 27, 2001, between Kmart Corporation, a Michigan corporation, having its principal office at 3100 West Big Beaver Road, Troy, Michigan 48084 (hereinafter referred to as "Sublessor") and Central Coast Bancorp, a California corporation, (hereinafter referred to as "Sublessee"), whose address is 301 Main Street, Salinas, California 93901. WHEREAS, Sublessor and Tuan Anh Ngo ("Original Sublessee:) entered into a sublease, dated September 22, 1994, ("Sublease"); WHEREAS, Original Sublessee assigned its interest in the Sublease to Thong Ngoc Mai ("First Assignee") on or around June 16, 1995; WHEREAS, First Assignee assigned his/her interest in the Sublease to Phuong Linh Vu and Tu Tuan Cao on or around December 18, 1998; WHEREAS, Phuong Linh Vu and Tu Tuan Cao ("Assignor") assigned his interest in the Sublease to Sublessee on or around January 1, 2002. WHEREAS, Sublessor and Sublessee seek to amend the Sublease as hereinafter provided; NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties agree to the following: 1. Section 5.1 of the Sublease is amended by deleting the following, "conducting the business of a nail salon offering nail and facial services and other incidental, related products and services", and inserting in lieu thereof the following, "operating a bank facility opened to the general public"; 2. Section 5.2 of the Sublease is amended by deleting the name, "Fancy Nails", and inserting in lieu the name, "Community Bank of Central California"; 4. This Third Amendment is contingent upon Assignor's interest in the Sublease being assigned to Sublessee as contemplated within the Consent to Assignment, dated November 1, 2001, and the same being fully executed; This Third Amendment shall become binding upon the respective parties, their successors, heirs, and assigns. This Third Amendment constitutes the entire agreement of Sublessor and Sublessee with respect to the subject matter thereof. Except for the modifications herein stated, all provisions of the Sublease shall continue in full force and effect. IN WITNESS WHEREOF, Sublessor and Sublessee have cause this Third Amendment to Sublease to be executed in quadruplicate as of the day and year first above written. WITNESSES: SUBLESSOR: KMART CORPORATION By: /s/ LORRENCE T. KELLAR ------------------------ Lorrence T. Kellar Its: Vice President of Real Estate SUBLESSEE: CENTRAL COAST BANCORP By: /s/ HARRY WARDWELL ------------------------ Harry Wardwell Its: Senior Vice President, Branch Manager ASSIGNOR: Phuong Linh Vu and Tu Tuan Cao, jointly and severally, as Assignor, by signing below agree that they were aware of the contemplated change of use when they assigned their interest in the Sublease to Assignee and approve the same. WITNESSES: By: /s/ PHUONG LINH VU --------------------- Phuong Linh Vu By: /s/ TU TUAN CAO --------------------- Tu Tuan Cao FOURTH AMENDMENT TO SUBLEASE This Fourth Amendment to Sublease ("Fourth Amendment") is entered into on November 27, 2001, between Kmart Corporation, a Michigan corporation, having its principal office at 3100 West Big Beaver Road, Troy, Michigan 48084 (hereinafter referred to as "Sublessor") and Central Coast Bancorp, a California corporation, whose address is 301 Main Street, Salinas, California 93901 (hereinafter referred to as "Sublessee"). WHEREAS, Sublessor and Tuan Anh Ngo ("Original Sublessee") entered into a Sublease, dated September 22, 1994, for Demised Premises (Unit 491C, formerly Unit 102) as more fully described therein; WHEREAS, the Original Tenant assigned its interest in the Sublease to Thong Ngoc Mai ("First Assignee") on or about June 16, 1995; WHEREAS, First Assignee assigned his/her interest in the Sublease to Phuong Linh Vu and Tu Tuan Cao ("Assignor") on or around December 18, 1998; WHEREAS, Sublessor and Assignor entered into a First Amendment to Sublease, dated June 9, 1999; WHEREAS, Sublessor and Assignor entered into a Second Amendment to Sublease, dated October 10, 2000; WHEREAS, Assignor assigned its interest in the Sublease to Sublessee on or around November 1, 2001; WHEREAS, Sublessor and Sublessee entered into a Third Amendment to Sublease ("Third Amendment"), dated November 27, 2001; said Third Amendment modifying this September 22, 1994, Sublease and being a separate Third Amendment than the Third Amendment to the July 17, 2000, sublease as described below; WHEREAS, Sublessor and Sublessee seek to cancel this Sublease, effective the same date that the Third Amendment to the Sublease is fully executed; said sublease being a separate sublease, dated July 17, 2000, and defined below; WHEREAS, Sublessor and Sublessee entered into a separate Sublease, dated July 17, 2000, as amended, ("July 17, 2000, Sublease") between Sublessor and Sublessee and desire that this July 17, 2000, sublease replace this September 22, 1994, Sublease in its entirety which is the subject of this Fourth Amendment; NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties agree to the following: 1. Upon the Third Amendment to Sublease for the July 17, 2000, sublease between Sublessor and Sublessee being fully executed, this September 22, 1994, Sublease shall be canceled and of no force and effect and the July 17, 2000, sublease shall govern the relationship between Sublessor and Sublessee for the Demised Premises; This Fourth Amendment shall become binding upon the respective parties, their successors, heirs, and assigns; This Fourth Amendment constitutes the entire agreement of Sublessor and Sublessee with respect to the subject matter thereof; and IN WITNESS WHEREOF, Sublessor and Sublessee have cause this Fourth Amendment to Sublease to be executed in quadruplicate as of the day and year first above written. WITNESSES: SUBLESSOR: KMART CORPORATION By: /s/ LORRENCE T. KELLAR ----------------------- Lorrence T. Kellar Its: Vice President of Real Estate SUBLESSEE: CENTRAL COAST BANCORP By: /s/ HARRY WARDWELL ------------------------- Harry Wardwell Its: Senior Vice President, Branch Manager EX-10 5 exhibit10x18.txt EXHIBIT 10X18 GILROY LEASE Exhibit 10.18 LEASE AGREEMENT TOWN PLACE SHOPPING CENTER GILROY, CALIFORNIA This Lease Agreement is dated January 30, 2002 for reference purposes only, and is made and entered into by and between Town Place LLC, a California limited liability company ("Landlord"), whose address is 15335 Calle Enrique, Morgan Hill, California 95037, and Central Coast Bancorp, a California corporation dba "Community Bank of Central California" ("Tenant"), whose address is 301 Main Street, Salinas, California 93901. The terms "the Lease Agreement", "the Lease", "this Lease" and "this Lease Agreement" are interchangeable terms and refer to this Lease Agreement dated February 1, 2002. ARTICLE 1. BASIC LEASE PROVISIONS Section 1.01 Basic Lease Provisions. The following basic lease provisions (the "Basic Lease Provisions") are (i) an integral part of this Lease, (ii) are referred to in other Sections of this Lease and (iii) are set forth in this Section 1.01 for the convenience of the parties. Each reference in this Lease to a Basic Lease Provision shall incorporate all of the terms and conditions applicable to such Basic Lease Provision as provided for in this Lease. (a) Date of this Lease: February 1, 2002 (b) Landlord: Town Place LLC, a California limited liability company (c) Tenant: Central Coast Bancorp, a California corporation dba Community Bank of Central California (d) Premises: Section 2.02 The Premises consist of approximately 2,670 square feet which consists of (i) 2,470 square feet with a frontage of approximately 38 feet and a depth of approximately 65 feet plus (ii) 200 square feet (approximately 10' x 20') within a fire exit corridor as shown on the site plan which is attached hereto and made a part hereof as Exhibit B. The Premises are commonly known as 761 First Street, Gilroy, California. (e) Term: Section 2.05 Lease Term is five (5) years. (e-1) Option to Extend Lease Term: Section 2.11 Tenant has one (1) option to extend the Lease Term for an additional five (5) years. The terms and conditions of the option and the rent and rental increases to be paid during the option period are set forth in Section 2.11 of the Lease. (f) Base Rent: Section 3.01 The Base Rent for months 1-12 of the Lease Term is $23.40 per square foot, or $62,478. Commencing with the second (2nd) year of the Lease Term, the Base Rent shall be adjusted annually according to increases in the CPI Index. (g) Monthly Base Rent: Section 3.01 The Base Rent payable on a monthly basis for months 1-12 of the Lease Term is $1.95 per square foot, or $5,206.50 per month. Commencing with the second (2nd) year of the Lease Term, the Base Rent shall be adjusted annually according to increases in the CPI Index. (h) Percentage Rent Rate: Section 3.02 None. (i) Breakpoint: Section 3.02 None. (j) Tenant's Use: Section 7.01, 7.02 Tenant shall use the Premises for the operation of a bank using the trade name "Community Bank of Central California". Tenant shall not use the Premises for any other purpose without the prior written consent of Landlord, which may be granted or withheld by Landlord, in Landlord's sole and absolute discretion as provided in Sections 7.01(a) and 7.01(b) of this Lease. (k) Tenant's Trade Name: Section 16.01 Tenant's trade name shall be "Community Bank of Central California." (l) Annual Promotional Charge: Section 16.03 Tenant's participation in any Advertising and Promotional Program, if established by Landlord, shall be at Tenant's option. If Tenant does elect to participate in such a program, then Tenant shall pay Tenant's proportionate share of the Annual Promotional Charge as determined by Landlord. (m) Security Deposit: Section 25.01 Deleted. (n) Landlord's Address: Section 26.05 Town Place LLC c/o Pacific Oak Properties, Inc. 15335 Calle Enrique Morgan Hill, CA 95037 Attention: Mr. John Kent (o) Tenant's Address: Section 26.05 Community Bank of Central California 301 Main Street Salinas, California 93901 Attention: Mr. Harry Wardwell ARTICLE II. GRANT AND TERM Section 2.01 Shopping Center Defined. Landlord has executed that certain Ground Lease dated October 23, 1996 ("Ground Lease") pursuant to which Landlord leases the property described on Exhibit A, attached hereto and made a part hereof ("Property") for a period of twenty-five (25) years. Landlord has constructed a shopping center known as "Town Place Shopping Center" ("Shopping Center") on the Property in accordance with the site plan ("Site Plan") which is attached hereto and made a part hereof as Exhibit B. Section 2.02 Premises. Landlord, in consideration of the Rent to be paid and the covenants to be performed by Tenant, does hereby demise and lease unto Tenant, and Tenant hereby rents from Landlord, those certain premises in the Shopping Center, being a portion of the building identified as Pad 1 as shown on the Site Plan ("the Premises"). The exterior walls and roof of the Premises and the area beneath said Premises are not demised hereunder, and the use thereof together with the right to install, maintain, use, repair, and replace pipes, ducts, conduits, wires and structural elements leading through the Premises in locations which will not materially interfere with Tenant's use thereof and serving other parts of the Shopping Center are hereby reserved unto Landlord; provided, however, that such reservation shall in no way affect the maintenance obligations as provided herein. Subject to the provisions of Sections 6.02 and 26.13 of this Lease, the Premises shall consist of a storebuilding having a frontage of approximately thirty-eight (38) feet, a depth of approximately sixty-five (65) feet, a finished ceiling at least ten (10) feet from the finished floor, a fire exit corridor of approximately two hundred (200) square feet and containing a floor area of approximately two thousand six hundred seventy (2,670) square feet as shown on Exhibit B. Tenant shall have rights of ingress and egress from the Premises and the streets shown on Exhibit B and through the entrances shown on Exhibit B. Section 2.03 Easement and Covenant Agreement. This Lease Agreement and the Premises are subject to that certain Agreement ("Easement Agreement") recorded on December 14, 1984 which creates certain reciprocal easements between the Property and other adjoining property. It is expressly understood between Landlord and Tenant that this Lease is subject to the provisions of the Easement Agreement and that the Easement Agreement shall control over any conflicting provisions of this Lease. Landlord has also provided Tenant with a copy of an Agreement dated June 23, 1972 executed between Gavilan Bank and Margiorino Chiesa ("Gavilan Agreement"). The Chiesa Parcel referred to in the Gavilan Agreement includes the Shopping Center. Section 4 of the Gavilan Agreement provides that "no portion of the Chiesa Parcel shall be devoted to commercial banking" for a period of 35 years ("Bank Restriction"). Landlord makes no warranty or representation regarding the Bank Restriction including, without limitation, the validity, enforceability and/or legal effect of the Bank Restriction. Landlord and Tenant agree that if a future claim or threat of legal action is made against either Landlord or Tenant on the basis that this Lease violates the Bank Restriction, then either Landlord or Tenant may elect to terminate the Lease by providing written notice to the other party. In the event of such termination, (a) Landlord waives and releases Tenant from any and all claims and/or damages arising out of the termination of this Lease due to the Bank Restriction, (b) Tenant waives and releases Landlord from any and all claims and/or damages arising out of the termination of this Lease due to the Bank Restriction and (c) Tenant shall pay Landlord all Rent due under this Lease through the date of such termination. Section 2.04 Common Area. The term "Common Area" shall mean all areas within the exterior boundaries of the Shopping Center exclusive of buildings and shall include, without limitation, the parking areas, roadways, driveways, sidewalks, truckways, loading docks, delivery areas, landscaped areas, public bathrooms and comfort stations, and all other areas or improvements of the Shopping Center which may be provided by Landlord for the convenience and use of the Tenants of the Shopping Center, and their respective subtenants, agents, employees, customers, invitees, and any other licensees of Landlord. Landlord hereby grants to Tenant, its agents, customers, licensees, invitees, employees, vendors and visitors, the right, privilege and easement to use the Common Area provided that Tenant is not in default of any of the performance of any of its obligations as provided in this Lease and that such use is in accordance with all of the provisions of this Lease and the Rules and Regulations attached hereto and made a part hereof as Exhibit G. Section 2.05 Lease Term. The term of this Lease ("the Lease Term") shall be for a period of five (5) Lease Years following the Rent Commencement Date. Section 2.06 Rent Commencement Date. The term "Rent Commencement Date" shall mean the date which is forty-five (45) days after the date on which Landlord and Tenant have executed the Lease. Section 2.07 Termination Date. The term "Termination Date" shall mean the date which is five (5) Lease Years following the Rent Commencement Date or the earlier termination of this Lease as provided herein. Section 2.08 Lease Year Defined. The term "Lease Year" as used herein shall be defined to mean a period of twelve (12) consecutive calendar months. The first (1st) Lease Year shall begin on the Rent Commencement Date if the Rent Commencement Date shall occur on the first day of a calendar month: if not, then the first (1st) Lease Year shall commence on the first (1st) day of the month immediately following the Rent Commencement Date and the period between the Rent Commencement Date and the last day of such month shall be added to the first Lease Year. Each succeeding Lease Year shall commence on the anniversary date of the first (1st) Lease Year. Section 2.09 Supplemental Agreement. When the Rent Commencement Date and the Termination Date have been determined, Landlord and Tenant shall execute a supplemental agreement in the form attached hereto and made a part hereof as Exhibit C. Section 2.10 Deleted. Section 2.11 Option to Extend Lease Term. (a) For separate, independent and bargained for consideration, Landlord hereby grants to Tenant one (1) option to extend the Lease Term ("Option") for an additional five (5) years ("Option Period") subject to the following terms and conditions: (b) The Option shall be exercised by Tenant, if at all, by delivering to Landlord, not later than twelve (12) months prior to the expiration of the original Lease Term written notice stating Tenant's election to exercise its Option to extend the Lease Term ("Tenant's Option Notice"). (c) All terms and conditions of the Lease Agreement shall remain the same during the Option Period (provided that in no event shall Tenant have the right to extend the Lease Term after the expiration of the Option Period) except the payment of Base Rent, which shall be determined as provided in Sections 2.11(d) of this Lease. (d) In the event that Tenant elects to exercise the Option to extend the Lease Term as provided herein, then the Base Rent payable during the first year of the Option Period (Lease Year 6) shall be one hundred percent (100%) of the prevailing fair market rental rate for the Premises ("FMRR") as determined in Section 2.11(e) of this Lease; provided, however, that in no event shall the Base Rent during the first year of the Option Period (Lease Year 6) be less than the Base Rent payable in the last year of the original Lease Term (Lease Year 5). The Base Rent shall be increased at the commencement of the second year of the Option Period (Lease Year 7) and at the commencement of each Lease Year thereafter (each of which is referred to herein as an "Adjustment Date") based on increases in the CPI Index in the same manner as provided in Section 3.01(b) of this Lease. (e) The FMRR shall be determined as follows: (i) Landlord and Tenant shall meet and attempt to determine the FMRR by mutual agreement within thirty (30) days after Landlord has received Tenant's Option Notice. (ii) In the event that the parties fail to agree on the FMRR during such thirty (30) day period, then each party shall, within ten (10) days following the expiration of the thirty (30) day period, select an MAI appraiser with at least five (5) years experience in the appraisal of commercial/retail properties and shopping centers in Santa Clara County. The appraisers so selected shall, in turn, select an additional appraiser meeting the same qualifications as the appraisers selected by Landlord and Tenant. (iii) Landlord shall pay the fees of the appraiser selected by Landlord, Tenant shall pay for the fees of the appraiser selected Tenant and Landlord and Tenant shall share equally the fees of the third appraiser. (iv) Within thirty (30) days of being selected, all appraisers shall submit their respective opinions of FMRR to Landlord and Tenant. The average of the three (3) FMRR numbers submitted by the appraisers shall be the FMRR for purposes of this Lease. (v) For purposes of this Lease, FMRR shall mean the Base Rent charged for similar premises located within the City of Gilroy of comparable type and quality, taking into account the condition of the Shopping Center and site improvements, the nature, extent and quality of interior improvements and the Shopping Center, the other tenants of the Shopping Center, the amount of parking and other relevant factors. (e) Notwithstanding other provision of this Lease, in the event that Tenant is in default of any of its obligations under the Lease, and such default is not cured as provided herein, then Tenant's Option shall immediately terminate without any further action of the parties and shall be of no further force or effect. (f) The Option shall be personal to the originally named Tenant and any Affiliate of Tenant, as defined in Section 14.01 of this Lease, and shall be exercisable only by the originally named Tenant and such Affiliate (and not any other assignee, sublessee or other Transferee of the originally named Tenant's interest in this Lease). The originally named Tenant and any Affiliate may exercise the Option only if that Tenant or Affiliate occupies the entire Premises as of the last date on which the Tenant and/or Affiliate may properly exercise the Option. (g) In the event of any sublease, assignment or other transfer of all or part of the Premises by Tenant or of Tenant's interest in this Lease without the prior written consent of Landlord, then the Option shall immediately terminate and be of no further force or effect. ARTICLE III. RENT Section 3.01 Base Rent. (a) The Base Rent during the Lease Term shall be the amount set forth in Section 1.01(f) hereof, which sum shall be payable by Tenant in monthly installments in the amounts set forth in Section 1.01(g) hereof, on or before the first (1st) day of each month, in advance, without notice or demand and without any deduction, offset or abatement, in lawful money of the United States of America, at the office of Landlord, or such other place as Landlord may designate. If the Lease Term commences on a day other than the first (1st) day of a calendar month, then the Rent, as hereinafter defined, for such month shall be prorated upon a daily basis based upon a thirty (30) day calendar month. (b) The Base Rent set forth in Section 3.01 of this Lease shall be adjusted at the commencement of the second (2nd) year of the Lease Term and at the commencement of each Lease Year thereafter (each of which is referred to herein as an "Adjustment Date") as follows: (i) The adjustment shall be calculated upon the basis of the percentage increase in the Consumer Price Index, San Francisco Bay Area, All Urban Consumers, with a base year of 1982 - 1984 = 100, as published by the United States Department of Labor, Bureau of Labor Statistics, (referred to herein as the "CPI Index") for the twelve (12) months immediately preceding the Adjustment Date in question. If the percentage change in the CPI Index for such prior twelve (12) month period is either negative or zero, then the Base Rent shall remain unchanged until the next Adjustment Date. (ii) If the CPI Index is discontinued or is revised during the Lease Term, then the adjustment to the Base Rent shall be based on such other government index or computation with which it is replaced in order to obtain substantially the same result as would be obtained if the CPI Index had not been discontinued or revised. Section 3.02 Percentage Rent. Deleted. Section 3.03 Gross Sales. Deleted. Section 3.04 Tenant's Tax Obligations. (a) During the Lease Term, Tenant shall pay to Landlord its proportionate share of real property taxes and assessments applicable to the Shopping Center ("Real Estate Taxes") as defined herein. In the event that a property tax bill applies to a period of time which is prior to the Rent Commencement Date or after the Termination Date, as defined in this Lease, then such property tax bill shall be prorated based upon Tenant's occupancy of the Premises. Tenant's proportionate share of Real Estate Taxes shall mean 3.36 % (2,670 square feet in a total of 79,385 square feet). The term "Real Estate Taxes" shall mean all taxes and existing and future assessments, general and special, and governmental charges of any kind or nature whatsoever, which may be levied or assessed by any lawful authority against the land, buildings, and improvements comprising the Shopping Center, including without limitation (i) all charges, taxes and assessments set forth on the real property tax bill from the tax collector for the County of Santa Clara, (ii) any fee, tax, levy, charge or assessment imposed by any taxing authority, (iii) any tax or charge for fire protection, streets, sidewalks, road maintenance, refuse or other services provided to the property by any governmental agency, (iv) all ad valorem real property taxes and assessments (including installments of special assessments required to be paid during the calendar year) including any increase in taxes resulting from a reappraisal of the Shopping Center from time to time by virtue of a change in the ownership of Landlord's interest or otherwise by operation of law and (v) any costs, expenses and attorneys' fees (including the costs of tax consultants) incurred by Landlord in connection with the negotiation for reduction in the assessed valuation of land, buildings and improvements comprising the Shopping Center. (b) Tenant's proportionate share of Real Estate Taxes levied or assessed for or during the term hereof, as determined by Landlord shall be paid in monthly installments on or before the first (1st) day of each calendar month, in advance, in an amount estimated by Landlord. Upon receipt of all tax bills and assessment bills, Landlord shall furnish Tenant with a written statement of the actual amount of Tenant's proportionate share of Real Estate Taxes for such year. In the event no tax bill is available, Landlord will compute the amount of such tax. If the total amount paid by Tenant under this Section 3.04 for any calendar year during the term of this Lease shall be less than the actual amount due from Tenant for such year, as shown on such statement, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the actual amount due, such deficiency to be paid within ten (10) days after demand therefore by Landlord; and if the total amount paid by Tenant hereunder for any such calendar year shall exceed such actual amount due from Tenant for such calendar year, such excess shall be credited against the next installment of taxes and assessments due from Tenant to Landlord hereunder. All amounts due hereunder shall be payable to Landlord at the place where the Base Rent is payable. Landlord's and Tenant's obligations under this Section 3.04 shall survive the expiration of the term of this Lease. (c) Tenant shall pay all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant. Section 3.05 Additional Payments. Tenant shall pay any and all sums of money or charges required to be paid by Tenant under this Lease promptly when the same are due, without any deductions or setoff whatsoever. Tenant's failure to pay any such amounts or charges when due shall carry with it the same consequences as Tenant's failure to pay Rent. All such amounts or charges shall be payable to Landlord at the place where the Base Rent is payable. Section 3.06 Definition of Rent. The Base Rent, Amortized Rent and Additional Rent shall be collectively referred to in this Lease as "Rent." Section 3.07 Definition of Additional Rent. Tenant's proportionate share of all Real Estate Taxes, insurance premiums, Common Area charges, utility services paid by Tenant to Landlord, and all other charges, costs, expenses and other sums which Tenant is required to pay to Landlord under the terms of this Lease (together with all interest and penalties that may accrue in the event of Tenant's failure to pay such charges) and all damages, costs and expenses which Landlord may incur by reason of any default by Tenant shall be deemed to be "Additional Rent" under the terms of this Lease. Landlord shall have all of the same rights and remedies with respect to the non-payment of Additional Rent as Landlord has for the non-payment of Rent. Section 3.08 Returned Check. In the event that any payment of Rent is made by a check which is not honored by the bank upon which it is drawn, whether the check is returned for insufficient funds (NSF) or any other reason, then all future payments of Rent during the Lease Term, or any extension thereof, shall be made by cashier's check payable to Landlord. Section 3.09 Three Day Notice. In the event that Tenant defaults in the payment of Rent and Landlord delivers a written notice to Tenant pursuant to California Code of Civil Procedure 1161(2) (commonly referred to as a 3 Day Notice to Pay Rent or Quit), then Tenant shall be required to (1) cure such default by making the payments referred to in the written notice with a cashier's check payable to Landlord and (2) subject to Tenant properly curing such default, then all future payments of Rent during the Lease Term, or any extension thereof, shall be made by cashier's check payable to Landlord. Section 3.10 Late Charges. If any payment of Rent due from Tenant is not received by Landlord within ten (10) days of the due date two (2) times during any one year of the Lease Term, then Tenant shall pay to Landlord, in all future instances where the payment of Rent due from Tenant is not received by Landlord within ten (10) days of the due date, an additional sum equal to ten percent (10%) of the amount of the Rent then due ("Late Charge"). The ten (10) day period during which Landlord agrees to accept the Rent due without the imposition of a Late Charge shall be referred to herein as the "Grace Period". Landlord and Tenant agree that the Late Charge is reasonable under the circumstances existing at the time of the execution of this Lease and represents a fair and reasonable estimate of, and is intended to reimburse Landlord for, additional administrative and other costs that are likely to be incurred by Landlord by reason of Tenant's failure to pay Rent in a timely manner. Acceptance of any Late Charge shall not constitute a waiver of Tenant's default with respect to the overdue amount, nor prevent or delay Landlord from exercising any of the other rights and remedies available to Landlord. Landlord and Tenant intend and agree that (i) Rent is due as and when provided for in this Lease notwithstanding the existence of the Grace Period and (ii) the Grace Period shall not affect the definition of a Tenant default (as provided in Section 19.01 of this Lease) or the exercise of any of Landlord's remedies in the event of a Tenant default (as provided in Section 19.02 of this Lease), it being the understanding of Landlord and Tenant that the Grace Period is solely an agreement that a Late Charge will not be imposed if the payment of Rent then due and owing is received by Landlord within the Grace Period. Section 3.11 Interest on Past Due Obligations. Any amount owed by Tenant to Landlord which is not paid when due shall bear interest at the rate of ten percent (10%) per annum (the "Interest Rate") from the due date of such amount until paid. The payment of interest on such amounts shall not excuse or cure any default by Tenant under this Lease. If the Interest Rate specified in this Lease is higher than the rate permitted by law, then the Interest Rate shall be decreased to the maximum legal interest rate then permitted by law. ARTICLE IV. RECORDS AND BOOKS OF ACCOUNT Section 4.01 Tenant's Records. Deleted. Section 4.02 Reports by Tenant. Deleted. ARTICLE V. AUDIT Section 5.01 Right to Examine Books. Deleted. Section 5.02 Audit. Deleted. ARTICLE VI. CONSTRUCTION AND IMPROVEMENTS Section 6.01 Lease of Premises AS IS. As of the date of this Lease, Landlord has already constructed certain improvements within the Premises. Tenant hereby accepts the existing improvements within the Premises, accepts the Premises in an "AS IS" condition and acknowledges and agrees that Landlord shall have no obligation to construct any additional improvements in, on or about the Premises. Section 6.02 Changes and Additions. Landlord reserves the right at any time and from time to time (a) to make or permit changes or revisions in its plan for the Shopping Center including additions to, subtractions from, rearrangements of, alterations of, modifications of or supplements to the building areas, walkways, parking areas, driveways or other areas, (b) to construct other buildings or improvements in Shopping Center and to make alterations thereof or additions thereto and to build additional stories on any such building or buildings and to build adjoin same, and (c) to make or permit changes or revisions in the Shopping Center, including additions thereto, and to convey portions of the Shopping Center to others for the purpose of constructing thereon other buildings or improvements, including additions thereto and alterations thereof; provided, however, that no such changes, rearrangements or other construction shall reduce the parking areas provided by Landlord below the number of parking spaces required by law. Landlord reserves to itself the right, from time to time, to grant such easements, rights and dedications that Landlord deems necessary or desirable, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Tenant. Tenant shall sign any such documents upon the request of Landlord and failure to do so shall constitute a material breach of this Lease. Section 6.03 Construction of Premises By Tenant. (a) If Tenant intends to construct additional improvements within the Premises, then Tenant shall prepare all plans and working drawings ("Tenant's Plans") for the Tenant's Improvement Work described in Exhibit E which is attached hereto and made a part hereof and shall deliver Tenant's Plans to Landlord for Landlord's approval. Tenant's Plans shall be approved by Landlord prior to submittal to the City of Gilroy. Tenant is authorized to construct all of the improvements described in Exhibit E (at Tenant's sole cost and expense) including the installation of Tenant's trade fixtures (which shall be new unless otherwise approved in writing by Landlord) and is further authorized to furnish and install its exterior sign or signs, which sign or signs shall be subject to Landlord's prior written approval. All Tenant's Improvement Work shall be constructed by and under the supervision of a qualified and licensed general contractor approved in advance by Landlord, which approval shall not be unreasonably withheld. (b) In the event that Landlord shall require any modifications to the plans and specifications referred to in Section 6.03(a) of this Lease, Tenant shall promptly make such modifications and resubmit them to Landlord for approval. If Tenant fails to furnish such plans and specifications within the required time period, or fails to make the modifications as directed by Landlord, then Landlord may, at its option, either prepare the same and the cost thereof shall be paid by Tenant to Landlord upon receipt of an invoice therefor, or cancel this Lease at any time thereafter while such information has not been so furnished. No deviation from the final set of plans and specifications, once approved by Landlord, shall be made by Tenant without Landlord's prior written approval. Landlord's approval of Tenant's plans or drawings shall create no liability of Landlord for their completeness, design, sufficiency or compliance with any laws, rules, regulations or ordinances. (c) All alterations, additions, and improvements constructed by Tenant shall be constructed in a good and workmanlike manner, in conformity with all applicable laws and regulations and by a contractor approved by Landlord. Tenant shall keep the Premises free and clear of any liens in accordance with the provisions of Section 9.02(b) of this Lease. Upon completion of any such work, Tenant shall provide Landlord with copies of all construction contracts, "as built" plans approved by the appropriate governmental agency, building permits and written evidence that all improvements have been inspected and approved by the appropriate governmental officials. Section 6.04 Settlement of Disputes. It is understood and agreed that any disagreement or dispute which may arise between Landlord and Tenant with reference to the work to be performed with respect to the Premises pursuant to Exhibit E shall be submitted to Landlord's architect, whose decision shall be final and binding on both Landlord and Tenant. ARTICLE VII. CONDUCT OF BUSINESS BY TENANT Section 7.01 Use of Premises. (a) Tenant shall use and occupy the Premises during the continuance of this Lease solely for the purpose of conducting the business set forth in Section 1.01(j) hereof. Tenant acknowledges and agrees that a material consideration and inducement for Landlord to execute this Lease is Tenant's agreement to use the Premises for the operation of a bank ("Bank Use"). Tenant, and any proposed Transferee or Affiliate (as defined in Section 14.01 of this Lease) shall not use the Premises for any use other than a Bank Use; provided, however, that Landlord may, in Landlord's sole and absolute discretion, approve of a non-Bank Use ("Non-Bank Use") if (i) such Non-Bank Use is a retail use and not an "office" use and (ii) Landlord determines, in Landlord's sole and absolute discretion, that such Non-Bank Use would be complementary to the then-existing uses in the Shopping Center and otherwise complies with the provisions of Article XIV (Assignment and Subletting) of this Lease. (b) Tenant acknowledges and agrees that the success of a project such as the Shopping Center is dependent upon Landlord being able to maintain, in Landlord's sole and absolute discretion, a so-called "quality tenant mix," whereby Landlord selects and leases space in the Shopping Center to quality tenants providing different services, goods and merchandise to customers, so as to create the synergism necessary for a successful retail project. Tenant agrees that neither Tenant, nor Tenant's successors and assigns as permitted by this lease, shall have the right to change the permitted Bank Use unless Landlord agrees, in Landlord's sole and absolute discretion as provided in Section 7.02(a) of this Lease. (c) Tenant shall keep all portions of the Premises clean at all times. Tenant shall enforce such rules and regulations with respect to the Premises as may be promulgated by Landlord from time to time. Tenant shall not use or permit the use of the Premises in any manner that will constitute a waste or a nuisance or in any way interfere with the use and quiet enjoyment of adjoining property and/or tenants. Tenant shall not do or permit anything on the Premises that will cause damage to the Premises and Tenant shall be responsible for the cost to repair any damage caused to the Premises by Tenant and Tenant's agents. Tenant shall not deposit or store any materials, supplies, equipment, products or refuse on the Premises without the prior written consent of Landlord. (d) No auction, liquidation, going out of business, fire or bankruptcy sales may be conducted in the Premises. Tenant agrees that it will conduct its business in the Premises during all hours established for the Shopping Center by Landlord and will conduct such business in a lawful manner and in good faith, and will not do any act tending to injure the reputation of the Shopping Center. Tenant shall not permit noise or odors in the Premises which are objected to by any Tenant or occupant of the Shopping Center and upon written notice from Landlord, Tenant shall immediately cease and desist from causing such noise or odor, and failing of which Landlord may deem the same a material breach of this Lease. Tenant shall not permit the operation of any vending machines, pinball machines, video games or other amusement devices, or pay telephones on the Premises unless otherwise approved in writing by Landlord. Tenant shall not use the areas adjacent to the Premises for business purposes; provided, however, that Tenant is authorized, subject to Landlord's prior written consent and compliance with the other terms of this Lease, to install and maintain an automatic teller machine ("ATM") in a location to be approved by Landlord. Tenant shall be solely responsible to pay for all expenses related to the installation, construction, maintenance, repair and/or replacement of an ATM. Tenant agrees that all receiving and delivery of goods and merchandise and all removal of merchandise, supplies, equipment, trash and garbage shall be made only by way of the areas provided therefore by Landlord. Tenant shall not use or permit the use of any portion of said Premises as sleeping apartments, lodging rooms, or for any unlawful purposes. No radio or television or other similar device shall be installed exterior to the Premises and no aerial shall be erected on the roof or exterior walls of the building in which the Premises are located. No merchandise or other obstruction shall be placed or permitted on the walks immediately adjoining the Premises. Landlord may direct the use of all pest extermination contractors at such intervals as Landlord may require. Section 7.02 Operation of Business. (a) Tenant agrees and covenants to operate one hundred percent (100%) of the Premises during the entire term of this Lease unless prevented from doing so because of fire, accident, or acts of God, and to conduct its business at all times in a high class and reputable manner, maintaining at all times a full staff of employees and a full and compete stock of merchandise. (b) Tenant shall, at Tenant's sole cost and expense, comply with all present and future laws, rules, requirements, ordinances, orders, directions and regulations of any federal, state, city, municipal or other governmental or lawful authority ("Governmental Laws") affecting the Premises and the operation of Tenant's business on the Premises, including but not limited to, any Governmental Laws pertaining to hazardous materials, safety and any building codes applicable to the Tenant's Improvement Work. Tenant shall not use the Premises or permit anything to be done in or about the Property which will in any way conflict with any Governmental Laws. Tenant agrees to indemnify, defend and hold Landlord and Landlord's officers, employees and agents harmless from any cost, liability, loss, damage or expense, including without limitation those for legal services, arising out of the breach of Section 7.02 of this Lease and this indemnity shall survive the termination of this Lease. (c) (i) Notwithstanding anything contained in this Lease to the contrary: (A) Deleted. (B) Tenant, at its sole cost and expense, shall be responsible for complying with all applicable provisions of Title III (hereinafter referred to as "Title III") of the Americans with Disabilities Act of 1990 (hereinafter referred to as the "ADA"") relating to: (aa) the physical condition of the Premises, (bb) Tenant's policies and the operation of its business in or from the Premises, and (cc) Tenant's employment and employment-related practices, (2) Landlord shall have no responsibility whatsoever for compliance with the ADA within the Premises; and (3) Tenant shall indemnify, defend and hold harmless Landlord from and against any and all claims, actions, damages, liability, cost and expense, including reasonable attorney fees, in connection with or resulting from compliance or non-compliance with the ADA relating to those matters described in Section 7.02(c)(ii)(B)(1) hereof. (C) Notwithstanding the foregoing or anything to the contrary contained in this Lease, Landlord's consent shall not be required with respect to any work done in and/or alterations to the Premises by or on behalf of Tenant in order to comply with the ADA; provided, however, (1) with respect to any such work or alterations which are structural in nature, Tenant shall give Landlord thirty (30) days' prior written notice of any such work or alterations and (aa) such structural work or alterations shall be subject to Landlord's prior written approval, which shall not be unreasonably withheld, and (bb) Landlord shall have the option, exercisable by notice to Tenant within such thirty (30) day period, to perform such work or alterations at Tenant's cost and expense, (2) at least thirty (30) days prior to commencing such work or alterations, Tenant shall provide Landlord with plans and specification for any such work or alterations, and whether or not Landlord shall exercise its option to perform such work pursuant to Section 7.02(c)(i)(C)(1) hereof, Landlord shall have the right to approve the aesthetic aspects of such work, such approval not to be unreasonably withheld, and (3) within thirty (30) days after completing such work or alterations, Tenant shall provide Landlord with as-built drawings of such work or alterations. Section 7.03 Care of Premises. Tenant shall keep the Premises (including the service areas adjacent to the Premises, show windows and signs) orderly, neat, safe and clean and free from rubbish, insects, pests and dirt at all times and shall store all trash and garbage within the Premises and arrange for the regular pick up of such trash and garbage at Tenants expense. No such trash or garbage shall be stored in the Premises for in excess of twenty-four (24) hours. Tenant shall not burn any trash or garbage at any time in or about the building. If Landlord shall provide any services or facilities for such pick up, then Tenant shall be obligated to use the same and shall pay as additional rent a proportionate share of the actual cost thereof within ten (10) days after being billed therefore. ARTICLE VIII. EXPENSES AND COMMON AREA Section 8.01 Maintenance of Common Area. Landlord agrees to cause to be operated, managed and maintained during the term of this Lease the Common Area. The manner in which the Common Area shall be maintained and operated and the expenditures therefor shall be at the sole discretion of Landlord and the use of such areas and facilities shall be subject to such reasonable regulations as Landlord shall make from time to time. Notwithstanding any other provision of this Lease, Tenant shall have no right to (i) make any repairs to the Common Area of the Shopping Center, (ii) make any repairs to any other buildings located in the Shopping Center or (iii) replace any portion of the Shopping Center outside of the Premises. Section 8.02 Tenant's Share of Expenses. Tenant shall pay to Landlord in the manner hereinafter provided, but not more often than once each calendar month, Tenant's proportionate share of all costs and expenses of every kind and nature paid or incurred by Landlord in operating, equipping, policing, protecting, lighting, insuring, repairing, replacing and maintaining all or a portion of the Shopping Center, including, without limitation, (i) the maintenance, repair and replacement of the Common Area and all other areas, facilities, parking lots, paved areas and buildings in the Shopping Center, (ii) illumination and maintenance of Shopping Center signs, (iii) cleaning, (iv) lighting, (iv) painting of buildings and restriping of paved areas, (v) removal of trash and debris, (vi) landscaping, (vii) repairs and replacements, including roof and building repairs and replacements, (viii) heating, ventilating and air conditioning (HVAC) repairs and replacements, (ix) repairs and replacements of all parking lots and paved surfaces, (x) alarm systems, (xi) premiums for the liability and property insurance described in Article XI of this Lease, (xi) plate glass in the Common Area, (xii) fidelity bonds for employees of Landlord (xiii) personal property taxes, (xiv) supplies, (xv) holiday decorations, (xvi) the cost of maintenance and replacement of equipment, (xvii) the reasonable depreciation of maintenance equipment used in the operation and maintenance of the Common Area, (xviii) rental for offsite parking, (xix) total compensation and benefits (including premiums for worker' compensation and other insurance) paid to or on behalf of employees involved in the performance of the work specified in this Section 8.02, (xx) cost of water, utilities and other services, if any, furnished by Landlord for the non-exclusive use of tenants; (xxi) parcel pickup and delivery services, (xxii) the amount of any depreciation reserves as reasonably determined by Landlord, for the maintenance, repair and/or replacement of any of the foregoing costs and expenses and (xxiii) an amount equal to fifteen percent (15%) of the total of all costs incurred in accordance with Section 8.02 of this Lease to cover Landlord's administrative cost. The proportionate share to be paid by Tenant shall initially be 3.36%, which is 2,670 square feet in a total of 79,385 square feet. Notwithstanding any other provision of this Lease, Landlord reserves the right to equitably adjust Tenant's proportionate share if such adjustment is required, as reasonably determined by Landlord, in order to fairly apportion and charge Tenant for Tenant's share of the costs and expenses described herein based on Tenant's use of the Premises and the actual charges incurred. Tenants proportionate share of such costs and expenses for such calendar year and partial calendar year shall be paid in monthly installments on the first (1st) day of each calendar month, in advance, in an amount estimated by Landlord. Within ninety (90) days after the end of each calendar year or partial calendar year, Landlord shall furnish Tenant with a statement of the actual amount of Tenants proportionate share of such costs and expenses for such period. If the total amount paid by Tenant under this Section 8.02 for any calendar year shall be less than the actual amount due from Tenant for such year as shown on such statement, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the actual amount due, such deficiency to be paid within thirty (30) days after the furnishing of each such statement, and if the total amount paid by Tenant hereunder for any such calendar year shall exceed such actual amount due from Tenant for such calendar year, such excess shall be credited against the next installment due from Tenant to Landlord under this Section 8.02. Section 8.03 Use of Common Area. (a) The term "Common Area," as used in this Lease, shall mean the areas described in Section 2.04 of this Lease. The use and occupancy by Tenant of the Premises shall include the use, in common with all others to whom Landlord has granted or may hereafter grant rights to use the same, of the Common Area located within the Shopping Center, and of such other facilities as may be designated from time to time, subject, however, to rules and regulations for the use thereof as prescribed from time to time by Landlord. Tenant shall be responsible for compliance with such rules and regulations by the employees, servants, agents, visitors and invitees of Tenant. (b) Landlord may at any time close temporarily any Common Area to make repairs or changes, to prevent the acquisition of public rights in such area or to discourage non-customer parking; and may do such other acts in and to the Common Area as in its judgment may be desirable to improve the convenience thereof. (c) Tenant and its employees, subtenants, licensees and concessionaires shall park their cars only in areas specifically designated from time to time by Landlord for that purpose. Automobile license numbers of employees', subtenants', licensees' and concessionaires' cars shall be furnished to Landlord upon Landlord's request. In the event Tenant or its employees, subtenants, licensees concessionaires or their employees fail to park their automobiles in designated parking areas, then Landlord may, at its option, charge Tenant and Tenant shall pay to Landlord as additional rent, Twenty-Five Dollars ($25.00) per day per automobile in any areas other than those designated as employee parking and distinguished form public parking areas and/or to have such automobiles towed from the Shopping Center at Tenant's expense. (d) Landlord reserves the right, from time to time, to utilize portions of the Common Area for carnival type shows, rides and entertainment, outdoor shows, displays, automobile and other product shows, the leasing of kiosks, or such other uses which, in Landlord's judgment, tend to attract the public. Further, Landlord reserves the right to utilize the lighting standards and other areas in the parking lot for advertising purposes. ARTICLE IX. ALTERATIONS AND SIGNS Section 9.01 Installation by Tenant. Tenant shall not make or cause to be made any alterations, additions or improvements to the Premises, or install or cause to be installed any exterior signs, floor covering, interior or exterior lighting, plumbing fixtures, shades, canopies or awnings or make any changes to the storefront, mechanical, electrical or sprinkler systems without the prior written approval of Landlord. Tenant shall present to Landlord plans and specifications for such work at the time approval is sought. At least twenty (20) days prior to the commencement of any such alterations, additions or improvements pursuant to this Section 9.01, Tenant shall notify Landlord, so that Landlord may record and post notices of non-responsibility. Notwithstanding the foregoing, Tenant may, without Landlord's consent, make interior non-structural alterations in and to the Premises which are consistent in quality, color and decor to the plans and specifications previously approved by Landlord; provided that (a) the cost thereof does not exceed Five Thousand Dollars ($5,000.00) during any Lease Year, and (b) electrical, plumbing and HVAC systems and the storefront shall be deemed structural for purposes of the foregoing. Section 9.02 Removal of Improvements. (a) Landlord may, at Landlord's option and in Landlord's sole and absolute discretion, require Tenant, at Tenant's sole cost and expense, to remove any alterations, additions, or improvements upon termination of the Lease and to restore the Premises to a "vanilla shell" condition. As used in this Lease, the term "vanilla shell" means (i) the removal of all floor coverings, (ii) the removal of all wall coverings and the walls are ready for paint, (iii) the removal of all interior, non-structural partition walls, (iv) the repair and/or replacement of any damaged T-Bar ceiling and/or ceiling tiles and (v) the repair of any damaged caused by the foregoing items. Tenant acknowledges that restoring the Premises to a "vanilla shell" condition will involve the removal of certain interior improvements that were constructed by the former tenant and Tenant agrees to do so as provided herein. All alterations, additions and improvements which Landlord has not required Tenant to remove shall become Landlord's Property and shall be surrendered to Landlord upon termination of the Lease, except that Tenant may remove any of Tenant's machinery or equipment which can be removed without material damage to the Property. Tenant shall repair, at Tenant's sole cost and expense, any damage to the Premises and/or Property caused by the removal of any such machinery or equipment. In no event, however, shall Tenant remove any of the following materials or equipment without Landlord's prior written consent: any power wiring, power panels or electrical distribution systems, security systems, heaters, air conditioners or any other heating or air conditioning equipment. Tenant shall, at its cost and expense, repair any damage to the Premises or the Shopping Center by such removal, including restoring the sign fascia to its original condition and capping off all utilities (b) Tenant shall pay, when due, all claims for labor or materials furnished for Tenant at or for use in the Premises, which claims are or may be secured by any mechanic's or materialman's lien against the Premises or any interest therein. Tenant shall keep the Premises free from any liens arising out of any work performed, materials furnished, or obligations incurred by or on behalf of Tenant. Upon completion of the improvements, Tenant shall provide Landlord with proof of payment and lien releases for all labor and materials. Tenant shall protect, defend, indemnify and hold Landlord harmless from all liability and cost, including attorneys' fees, incurred in connection with or arising out of any such lien or claim of lien as described in the paragraph. In the event Tenant fails to remove any liens against the Premises, then Landlord may do so and Tenant shall reimburse Landlord for all reasonable costs incurred, including attorney's fees. Section 9.03 Signs. Tenant will not place or cause to be placed or maintained any sign or advertising matter of any kind anywhere within the Shopping Center, except in the interior of the Premises, without Landlord's prior written approval and no handwritten signs shall be permitted. No symbol, design, name, mark or insignia adopted by Landlord for the Shopping Center shall be used without the prior written consent of Landlord. No illuminated signs located in the interior of the Premises and which are visible from the outside shall be permitted without Landlord's prior written approval. All signs located in the interior of the Premises shall be professionally prepared and in good taste so as not to detract from the general appearance of the Premises and the Shopping Center. Tenant further agrees to maintain in good condition and repair at all times any such sign or advertising matter of any kind which has been approved by Landlord for use by Tenant. Tenant's storefront sign shall comply with the sign criteria set forth in Exhibit F, which is attached hereto and made a part hereof, and shall be subject to Landlord's prior written approval. Tenant shall comply with all applicable Governmental Laws pertaining to signage at the Premises and/or Shopping Center. ARTICLE X. MAINTENANCE OF PREMISES Section 10.01 Landlord's Obligations for Maintenance. (a) Landlord shall, subject to reimbursement from Tenant as provided in Section 8.02 of this Lease, keep and maintain the foundation, exterior walls and roof of the building in which the Premises are located and the structural portions of the Premises which were originally installed by Landlord, exclusive of store fronts, plate glass windows, doors, door frames, door closure devices, windows, and window frames, in good repair except that Landlord shall not be called upon to make any such repairs occasioned by the act or negligence of Tenant, its agents, employees, invitees, licensees or contractors, except to the extent that Landlord is reimbursed therefor under any policy of insurance permitting waiver of subrogation in advance of loss. In the event that the Premises should require maintenance or repairs for which Landlord is responsible hereunder, Tenant shall give immediate written notice thereof to Landlord and Landlord shall not be responsible in any way for failure to perform any such maintenance or make any such repairs until a reasonable time shall have elapsed after receipt of such written notice by Landlord. (b) Landlord may, at Landlord's option and subject to reimbursement from Tenant as provided in Section 8.02 of this Lease, contract for, in its own name, a qualified service contractor to inspect, adjust, clean and repair heating, ventilating and air conditioning (HVAC) equipment, including changing filters on a regular basis. The service contract shall include all services suggested by the equipment manufacturer within the operation/maintenance manual and shall become effective within thirty (30) days of the date Tenant takes possession of the Premises. If Landlord so elects, Tenant shall be responsible, at Tenant's sole cost and expense, to maintain the HVAC equipment and system as described herein and shall (i) deliver to Landlord a copy of Tenant's current service contract from time to time during the term of this Lease, (ii) from time to time upon Landlord's request furnish proof reasonably satisfactory to Landlord that all such system and equipment are being serviced in accordance with the maintenance/service contract and (ii) within the thirty (30) day period preceding moveout by Tenant, Tenant shall have the HVAC systems and equipment checked and serviced to ensure proper functioning and shall furnish Landlord satisfactory proof thereof upon request. Section 10.02. Tenant's Obligations for Maintenance. (a) Except as provided in Section 10.01(a) and 10.01(b) of this Lease, Tenant, at Tenant's expense, shall keep and maintain in good order, condition and repair (including replacement of parts, equipment and cracked or broken glass) the Premises and every part thereof and any and all appurtenances thereto wherever located, including, but without limitation, the exterior and interior portion of all doors, door frames, door checks, windows, window frames, plate glass, storefront, all plumbing and sewage facilities within the Premises, including free flow up to the main sewer line, fixtures, HVAC equipment and systems (if Landlord so elects as provided herein), electrical systems, sprinkler system, walls, floors and ceilings. (b) Tenant shall keep and maintain, at Tenant's sole cost and expense, the Premises in a clean, sanitary and safe condition in accordance with all applicable Governmental Laws. If Tenant refuses or neglects to commence and to complete repairs promptly and adequately, Landlord may, but shall not be required to do so, make and complete said repairs and Tenant shall pay the cost thereof to Landlord as Additional Rent upon demand. Subject to Section 9.02 of this Lease, upon termination of this Lease, Tenant shall surrender the Premises in good condition, reasonable wear and tear excepted. Any damage or injury sustained by any person because of mechanical, electrical, plumbing or any other equipment or installations, whose maintenance and repair shall be the responsibility of Tenant shall be paid for by Tenant and Tenant shall indemnify and hold harmless Landlord from and against all claims, actions, damages and liability in connection therewith, including, but not limited to, attorneys' and other professional fees, and any other costs which Landlord might reasonably incur, which indemnity shall survive the termination of this Lease. (c) Deleted. (d) Tenant, at its own expense, shall install and maintain fire extinguishers and other fire protection devices as may be required from time to time by any agency having jurisdiction thereof an the insurance underwriters insuring the building in which the Premises are located. (e) Tenant hereby waives the benefit of any present or future law, including without limitation California Civil Code Sections 1941 and 1942, which may give Tenant the right to repair the Premises at Landlord's expense or to terminate his Lease due to a condition of the Premises or the building of which it is a part. ARTICLE XI. INSURANCE AND INDEMNITY Section 11.01 Landlord's Insurance. (a) During the Lease Term, Landlord shall obtain and maintain a Commercial General Liability policy of insurance insuring Landlord against liability arising out of the ownership, use, occupancy or maintenance of the Property in an amount not less than Two Million Dollars ($2,000,000). (b) Landlord also agrees to carry, during the Lease Term or any extension thereof, all risk property insurance covering fire and extended coverage, vandalism and malicious mischief, sprinkler leakage and such other perils of direct physical loss or damage (as are from time to time covered under an all risk insurance policy) insuring the Shopping Center and the building in which the Premises is located (but excluding Tenant's personal property, equipment, furniture and fixtures) in an amount reasonably determined by Landlord but not less than an amount equal to ninety percent (90%) of the replacement cost of such improvements excluding foundations and excavations. In addition, Landlord may, in Landlord's sole discretion, elect to carry (i) earthquake insurance, (ii) flood insurance and (iii) rental income insurance not to exceed one (1) year's Rent. Landlord, upon Tenant's request, shall furnish Tenant a certificate of such Landlord's Property Insurance. 11.02 Tenant's Insurance. (a) Tenant shall obtain and maintain in full force and effect at all times during the term of the Lease, a Commercial General Liability policy of insurance protecting Tenant and Landlord (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving, or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than Two Million Dollars ($2,000,000) per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Tenant's indemnity obligations under this Lease. The limits of the insurance required by this Lease or as carried by Tenant shall not limit the liability of Tenant nor relieve Tenant of any obligation hereunder. All insurance to be carried by Tenant shall be primary to and not contributory with any similar insurance carried by Landlord, whose insurance shall be considered excess insurance only. Landlord shall be named as an additional insured on Tenant's insurance policy. Tenant shall provide a certificate to Landlord duly issued by the insurer verifying that such insurance is in full force and effect not later than thirty (30) days after receipt of Landlord's written request. (b) Tenant shall be responsible for the maintenance and repair of the plate glass in or on the Premises and may elect to obtain such insurance at Tenant's expense. (c) Tenant, at its expense, shall carry worker's compensation insurance in compliance with California law. (d) Tenant shall not carry any stock of goods or do anything in or about the Premises which will in any way tend to increase the insurance rates or invalidate any insurance policy on the Premises and/or the building of which they are a part. If Tenant installs any electrical equipment that overloads the lines in the Premises, Tenant shall at its own expense make whatever changes are necessary to comply with the requirements of the insurance underwriters and governmental authorities having jurisdiction. Tenant shall pay as additional rent, upon demand of Landlord, any such increased premium cost due to Tenant's use or occupancy of the Premises. All property kept, stored or maintained within the Premises by Tenant shall be at Tenant's sole risk. Section 11.03 Tenant's Contractor's Insurance. Tenant shall require any contractor of Tenant performing work on the Premises to take out and keep in force, at no expense to Landlord, comprehensive general liability insurance and business auto liability insurance, including contractor's liability coverage, employer's liability coverage, contractual liability coverage, completed operations coverage, broad form property damage endorsement and contractor's protective liability coverage, to afford protection to the limit, for each occurrence, of not less than Two Million Dollars ($2,000,000) with respect to personal injury or death and One Million Dollars ($1,000,000) with respect to property damage; and (b) worker's compensation or similar insurance in form and amounts required by law. Tenant's contractor shall be required to maintain such other and additional insurance coverage as reasonably determined by Landlord. Section 11.04 Policy Requirements. The company or companies writing any insurance which Tenant is required to take out and maintain or cause to be taken out or maintained pursuant to this Lease, as well as the form of such insurance shall at all times be subject to Landlord's approval and any such company or companies shall be licensed to do business in the State. Each policy evidencing such insurance shall name Landlord and/or its designee as additional insured(s) and shall also contain a provision by which the insurer agrees that this policy shall not be canceled except after thirty (30) days written notice to Landlord or its designee. A copy of each paid up policy evidencing such insurance or a certificate of insurance certifying to the issuance of such policy shall be delivered to Landlord prior to commencement of Tenant's work on the Premises and upon renewals not less than thirty (30) days prior to the expiration of such coverage. If Tenant shall fail to perform any of its obligations under this Article XI, Landlord may, but shall not be obligated to, perform the same and the cost of same shall be deemed Additional Rent and shall be payable upon Landlord's demand. Section 11.05 Waiver of Subrogation. Each party hereby releases and discharges the other party, and waives any and all rights of recovery against the other party, or against the officers, employees, agents or representatives of the other party, for any liability arising from loss, damage or injury caused by fire or other casualty if such loss, damage or injury is covered by any insurance policy in force at the time of such loss, damage or injury. Upon obtaining the policies of insurance described herein, Landlord and Tenant shall give notice to the insurance carrier or carriers of this mutual waiver of subrogation. Section 11.06 Tenant's Indemnity. Tenant covenants to protect, defend, indemnify and hold harmless Landlord and Landlord's successors, assigns, representatives, officers, employees and agents from and against any and all liabilities, losses, claims, damages, lost profits, consequential damages, interest, penalties, fines, monetary sanctions, personal injuries, property damage, attorney's fees, experts fees and court costs which result from or arise in any manner whatsoever out of (i) any breach of and/or default by Tenant or Tenant's successors and assigns in the performance of any of Tenant's obligations under this Lease and (ii) any damage to person or property sustained by any person or persons arising out of or in consequence of the performance of this Lease, provided such injuries to persons or damage to property are due to the negligence or willful misconduct of Tenant, its agents, employees, servants, licensees, contractors or invitees. In case Landlord shall, without fault on its part, be made a party to any litigation commenced by or against Tenant, then Tenant shall protect and hold it harmless and shall pay all costs, expenses and reasonable attorneys' fees incurred or paid by Landlord in connection with such litigation. Tenant shall also pay all costs, expenses and reasonable attorneys' fees that may be incurred in enforcing Tenant's covenants and agreements in this Lease. Section 11.07 Landlord's Indemnity. Landlord hereby agrees to protect, defend, indemnify and hold Tenant harmless from and against any and all claims, demands, liabilities, losses and expenses, including attorney's fees, arising from the use, operation or maintenance by Landlord (or Landlord's contractors, licensees, agents or employees) of the Shopping Center, provided such injuries to persons or damage to property are due to the negligence or willful misconduct of Landlord, its agents, employees, servants, licensees, contractors or invitees. In the event any action or proceeding shall be brought against Tenant by reason of any such claim or demand, Landlord shall defend the same at Landlord's expense by counsel reasonably satisfactory to Tenant. Except as otherwise provided herein, Landlord shall not be liable for any damage or injury to the person, business, goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Premises regardless of the reason for the damage or injury. Section 11.08 Survival of Indemnities. The indemnities set forth in Sections 11.06 and 11.07 of this Lease shall survive the termination of the Lease. ARTICLE XII. UTILITIES Section 12.01. Utility Charges. Tenant shall be solely responsible for and promptly pay all charges for water, gas, heat, electricity, sewer, refuse disposal and any other utility used upon or furnished to the Premises. If Tenant shares with other tenant's of the Shopping Center a common meter for utility service, then Tenant's share of the charges for such utility service shall be reasonably and equitably determined by Landlord. Notwithstanding any other provision of this Lease, Landlord reserves the right to equitably adjust charges for utilities, refuse disposal and/or other utilities and services provided or supplied to the Premises based on Tenant's use of the Premises as reasonably determined by Landlord and Tenant agrees to pay such charges as Additional Rent. The obligation of Tenant to pay for such utilities shall commence as of the date on which possession of the Premises is delivered to Tenant. Tenant shall be responsible for payment of all connection and use charges and fees imposed by any governmental units or any public or private utility in connection with utility services to the Premises. Section 12.02 Discontinuance and Interruption of Utility Services. Landlord shall not be liable to Tenant in damages or otherwise (a) if any utility shall become unavailable from any public or private utility company, public authority or any other person or entity (including Landlord) supplying or distributing such utility, or (b) for any interruption in a utility service (including, without limitation, any heating, ventilation or air conditioning) caused by the making of any necessary repairs or improvements or by any cause beyond Landlord's reasonable control, and the same shall not constitute a termination of this Lease or an eviction of Tenant. ARTICLE XIII. OFF-SET STATEMENT, ATTORNMENT AND SUBORDINATION Section 13.01 Off-Set Statement. Tenant agrees within ten (10) days after request therefor by Landlord to execute in recordable form and deliver to Landlord a statement, in writing, certifying to Landlord and/or any party designated by Landlord (a) that this Lease is in full force and effect, (b) the date of commencement of the term of this Lease, (c) that Rent is paid currently without any off-set or defense thereto, (d) the amount of Rent, if any, paid in advance, (e) that there are no uncured defaults by Landlord or stating those claimed by Tenant, provided that, in fact, such facts are accurate and ascertainable, and (f) any other information reasonably requested by Landlord. Section 13.02 Attornment. In the event any proceedings are brought for the foreclosure of, or in the event of the conveyance by deed in lieu of foreclosure of, or in the event of exercise of the power of sale under, any mortgage made by Landlord covering the Premises, Tenant hereby attorns to, and covenants and agrees to execute an instrument in writing reasonably satisfactory to the new owner whereby Tenant attorns to such successor in interest and recognizes such successor as the Landlord under this Lease. Section 13.03. Subordination. Tenant agrees that this Lease shall be subordinate to any first mortgages or deeds of trust that may be placed upon the Premises before or after the date hereof and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacements and extensions thereof; provided, however, that so long as Tenant is not in default of any of its obligations under this Lease, Tenant's tenancy and Tenant's rights under this Lease shall not be disturbed, nor shall this Lease be affected by any default under such mortgage or deed of trust and any successor to Landlord shall be bound by and agrees to recognize this Lease and to perform all of the obligations under this Lease required to be performed by Landlord. Tenant also agrees that any mortgagee or trustee may elect to have this Lease constitute a prior lien to its mortgage or deed of trust, and in the event of such election and upon notification by such mortgagee or trustee to Tenant to that effect, this Lease shall be deemed a prior lien to the said mortgage or deed of trust, whether this Lease is dated prior to or subsequent to the date of said mortgage or deed of trust. Tenant agrees, that upon the request of Landlord, any mortgagee or any trustee, it shall execute whatever instruments may be required to carry out the intent of this Section 13.03. Section 13.04 Modifications to Lease. If in the connection with obtaining financing for the Shopping Center the proposed lender shall request reasonable modifications of this Lease as a condition of such financing, Tenant covenants not to withhold or delay unreasonably its agreement to such modifications, provided that such modifications do not materially increase the obligations, or materially and adversely affect the rights of Tenant under this Lease. Section 13.05 Waiver. Tenant hereby waives the protection of any statute or rule of law which gives or purports to give Tenant any right to terminate this Lease or surrender possession of the Premises upon a transfer of Landlord's interest in the Shopping Center and/or this Lease. ARTICLE XIV. ASSIGNMENT AND SUBLETTING Section 14.01 Assignment and Subletting. (a) Except as provided in Section 14.02 of this Lease, Tenant shall have no right to assign, sublet, mortgage, pledge or otherwise transfer or encumber any portion of the Premises or of Tenant's interest in this Lease, either voluntarily or by operation of law, in whole or in part (collectively referred to herein as a "Transfer"), without the prior written consent of Landlord, which consent shall not be unreasonably withheld; provided, however, that any Transfer that proposes to use the Premises for a Non-Bank Use must be approved by Landlord, in Landlord's sole and absolute discretion, as provided in Section 7.01(a) of this Lease. Any person or entity to whom any Transfer is made or sought to be made is a "Transferee". Any attempted assignment, subletting or Transfer of the Property or of Tenant's interest in this Lease without Landlord's prior written consent shall be null and void and shall, at the option of Landlord, terminate this Lease. (b) In connection with any proposed Transfer, Tenant shall submit to Landlord in writing ("Tenant's Transfer Notice") the following information: (i) The name, address and legal composition of the proposed Transferee, (ii) The financial responsibility of the proposed Transferee, (iii) The proposed Transferee's intended use for the Property so that Landlord may determine the suitability of that use, in Landlord's sole and absolute discretion, in the Premises as provided in Section 7.02(a) of this Lease, (iv) Any alterations that must be made to the Premises to accommodate the proposed Transferee, (v) Written consent by the proposed Transferee of all of the terms and conditions of this Lease Agreement, (vi) All of the terms and conditions upon which the proposed assignment, subletting or other transfer is to be made, and (vii) The types and quantities of hazardous materials, if any, intended to be used by the proposed Transferee on the Premises. In the case of an assignment, then the Transferee shall execute and deliver to Landlord an assignment agreement in form and content reasonably satisfactory to Landlord and assignee shall (A) assume all of Tenant's obligations under the Lease, (B) agree to be bound by all of the provisions of the Lease and (C) agree to perform all of the obligations of Tenant under the Lease as a direct obligation to Landlord from and after the effective date of the assignment. In the case of a sublease, then the Transferee shall execute a sublease in form and content reasonably satisfactory to Landlord and shall comply with the provisions of Section 14.01(f) of this Lease. (c) In the case of a Transfer in which the Premises will continue to be used for a Bank Use, Landlord shall have reasonable grounds upon which to withhold its consent to an assignment or sublease, including, but not limited to, the following: (i) At the time that Landlord receives Tenant's Transfer Notice, Tenant is in default of its obligations under the Lease Agreement and Landlord reasonably believes that such default would not be cured as a result of the proposed assignment or sublease, (ii) Based upon a review of Tenant's Transfer Notice, Landlord or Landlord's lender determine that the proposed Transferee presents an unwarranted risk due to the proposed use of hazardous materials on the Premises, (iii) Landlord or Landlord's lender determines that the financial condition of the proposed Transferee does not meet relevant standards for tenants of comparable facilities, and (iv) The sublease does not comply with the provisions of Section 14.01(f) of this Lease. In the case of a Transfer in which the Premises are proposed to be used for a Non-Bank Use, the provisions of Section 7.01(a) of this Lease shall apply. (d) Tenant shall be required to deliver the Tenant's Transfer Notice to Landlord at least forty-five (45) days prior to the proposed commencement date of the Transfer. Landlord shall either approve or disapprove Tenant's request in writing within fifteen (15) days of receiving Tenant's Transfer Notice. In the event that Landlord does not respond within such fifteen (15) day period, then Tenant's request for the proposed Transfers shall be deemed approved. (e) No assignment, sublease or other Transfer shall release Tenant of Tenant's obligations hereunder or alter the primary liability of Tenant to pay Rent and other payments required hereunder and to perform all other obligations required to be performed by Tenant under this Lease Agreement. The acceptance of Rent by Landlord from any other person or entity shall not be deemed to be a waiver by Landlord of any provision set forth herein. Consent to one Transfer shall not be deemed a waiver of the necessity for consent to any subsequent Transfer. In the event of any default by any assignee, sublessee or other Transferee, by Tenant or any successor of Tenant, in the performance of any of the terms of this Lease, then Landlord may proceed directly against Tenant without the necessity of exhausting remedies against the assignee, sublessee, Transferee or other successor of Tenant. (f) Landlord reserves the right to approve the form of any sublease to be executed by Tenant and such sublease shall include, without limitation, the following provisions: (i) the sublease is subject to all of the terms and conditions of this Lease, (ii) the sublease will terminate if this Lease is terminated, (iii) the subtenant will not permit any act or omission to act in, on or about the Premises that will violate any of the provisions of this Lease and (iv) subtenant will obtain and maintain all liability insurance described in this Lease which is required to be obtained and maintained by Tenant and shall name Landlord as an additional insured on all such policies. Section 14.02 Transfers to Affiliates. (a) Landlord Consent Not Required. In connection with any proposed Transfer, Landlord's consent shall not be required for any Transfer to an Affiliate, as defined herein, as long as the following conditions are satisfied: (i) at least fifteen (15) days before the Transfer, Landlord receives written notice of the Transfer (as well as any documents or information reasonably requested by Landlord regarding the Transfer and the Affiliate), (ii) if the Transfer is an assignment, the Affiliate executes and delivers to Landlord an assignment which satisfies the provisions of Section 14.01(b) of this Lease, and (iii) if the Transfer is a sublease, the Affiliate executes a sublease which satisfies the provisions of Section 14.01(f) of this Lease. (b) Affiliate Defined. For purposes of this Lease, the term "Affiliate" means any entity that controls, is controlled by or is under common control with Tenant, provided that such entity satisfies the Net Worth requirement set forth in Section 14.02(b) of this Lease, or (b) any entity with which Tenant may merge, consolidate or become affiliated as a parent, subsidiary, holding company or otherwise, provided that such acquiring entity, combined entity or surviving entity (if other than Tenant), as applicable, shall have a net worth, as evidenced by financial statements delivered to Landlord and certified by an independent CPA in accordance with GAAP ("Net Worth"), at least equal to Tenant's Net Worth either immediately before the Transfer or as of the date of this Lease, whichever is greater. "Control" means the direct or indirect ownership of more than fifty percent (50%) of the voting securities of an entity or possession of the right to vote more than fifty percent (50%) of the voting interest in the ordinary direction of the entity's affairs. Section 14.03 Recapture. Notwithstanding any other provision of this Lease, except as otherwise provided in Section 14.02 (Transfer to Affiliates), for a period of thirty (30) days following Landlord's receipt of Tenant's Transfer Notice, Landlord shall have the right by written notice to Tenant, to terminate this Lease ("Landlord's Termination Notice"), such termination to be effective as of the last day of the month following the date that Landlord delivers to Tenant the Landlord's Termination Notice. If Landlord so terminates this Lease, then Landlord may, if Landlord so elects, enter into a new lease with the proposed Transferee on such terms and conditions as Landlord and such proposed Transferee may agree or enter into a new lease covering the Premises with any other person or entity; in such event, Tenant shall not be entitled to any portion of the profit, if any, which Landlord may realize on account of such termination and reletting. From and after the date of such termination of this Lease, Tenant shall have no further obligation to Landlord hereunder, except for matters occurring or obligations arising hereunder prior to the date of such termination. ARTICLE XV. WASTE Section 15.01 Waste or Nuisance. Tenant shall not commit or suffer to be committed any waste upon the Premises or any nuisance or other act or thing which may disturb the quiet enjoyment of any other tenant in the building in which the Premises may be located, or in the Shopping Center. Tenant shall not use or permit to be used, any medium that might constitute a nuisance, such as loud speakers, sound amplifiers, phonographs, radios, televisions, or any other sound producing device which will carry sound outside the Premises. Section 15.02 Hazardous Materials. Tenant and Tenant's employees, agents, contractors and invitees shall not use, store or bring onto the Shopping Center or within, upon or under the Premises any toxic or hazardous materials (collectively referred to herein as "Hazardous Materials") without the prior written consent of Landlord. Tenant shall indemnify, defend upon demand with counsel reasonably acceptable to Landlord, and hold harmless Landlord from and against any and all (i) liabilities, losses, claims, damages, lost profits, consequential damages, interest, penalties, fines, monetary sanctions, attorneys' fees, experts fees and courts costs and (ii) reasonably incurred remediation costs, investigation costs and other expenses which result from or arise in any manner whatsoever out of the use, storage or disposal of Hazardous Materials in, on, under or about the Premises by Tenant, its agents, employees, contractors, or invitees. As used herein, the term "Hazardous Materials" means any substance, material or waste which is or shall become regulated by a local governmental authority, the State of California, the United States government or any other federal, state or local law, ordinance, regulation or order regulating Hazardous Materials. The obligations and indemnity of Tenant as set forth in Section 15.02 of this Lease shall survive the termination of this Lease. ARTICLE XVI. ADVERTISING Section 16.01 Change of Name. Tenant agrees (a) to operate its business in the Premises under the name set forth in Section 1.01(k) hereof, so long as the same shall not be held to be in violation of any applicable law, and (b) not to change the advertised name or character of the business operated in the Premises without the prior written approval of Landlord, and (c) to refer to the Shopping Center by its name in designating the location of the Premises in all newspaper and other advertising and in all other references to the location of the Premises. Section 16.02 Solicitation of Business. Tenant and Tenant's employees and agents shall not solicit business in the parking or other Common Area, nor shall Tenant distribute any handbills or other advertising matter in the parking area or in other Common Areas. Section 16.03 Advertising and Promotional Program. Landlord may, but shall not be required to, establish an Advertising and Promotional Program (hereinafter referred to as the "Program") to furnish and maintain advertising and sales promotions, which in Landlord's sole judgment, will benefit the Shopping Center from time to time. If Tenant, at Tenant's option, elects to participate in the Program, then during each Lease Year, Tenant shall pay to Landlord, in monthly installments in advance, its proportionate share of the costs of the Program as determined by Landlord from time to time in Landlord's sole and absolute (hereinafter referred to as the "Annual Promotional Charge"). ARTICLE XVII. DESTRUCTION OF PREMISES Section 17.01 Partial Damage to Premises. Tenant shall notify Landlord in writing immediately upon the occurrence of any damage to the Premises and the following provisions shall apply: (a) If the Premises is only partially damaged and if the proceeds received by Landlord from the insurance policies are sufficient to pay for the necessary repairs, this Lease shall remain in effect and Landlord shall repair the damage as soon as reasonably possible. Landlord may elect, but shall not be obligated, to repair any damage to Tenant's fixtures, equipment, or improvements. (b) If the insurance proceeds received by Landlord are not sufficient to pay the entire cost of repair, or if the cause of the damage is not covered by the insurance policies which Landlord maintains, Landlord may elect either to (1) repair the damage as soon as reasonably possible, in which case this Lease shall remain in full force and effect, or (2) terminate this Lease as of the date the damage occurred. Landlord shall notify Tenant within forty-five (45) days after receipt of notice of the occurrence of the damage, whether Landlord elects to repair the damage or terminate the Lease. (c) If Landlord elects to terminate this Lease, Tenant may elect to continue this Lease in full force and effect, in which case Tenant shall repair any damage to the Premises and the Building in which the Premises is located. Tenant shall pay the cost of such repairs, except that, upon satisfactory completion of such repairs, Landlord shall deliver to Tenant any insurance proceeds received by Landlord for the damage repaired by Tenant. Tenant shall give Landlord written notice of such election within ten (10) days after receiving Landlord's termination notice. (d) If the damage to the Premises occurs during the last six (6) months of the lease term, Landlord may elect to terminate this Lease as of the date the damage occurred, regardless of the sufficiency of any insurance proceeds. In such event, Landlord shall not be obligated to repair or restore the Premises and Tenant shall have no right to continue this Lease. Landlord shall notify Tenant of its election within thirty (30) days after receipt of notice of the occurrence of the damage. Section 17.02 Total or Substantial Destruction. If the Premises is totally or substantially destroyed by any cause whatsoever, or if the Premises is in a building which is substantially destroyed (even though the Premises is not totally or substantially destroyed), this Lease shall terminate as of the date the destruction occurred regardless of whether Landlord receives any insurance proceeds. However, if the Premises can be rebuilt within one (1) year after the date of destruction, Landlord may elect, but shall not be obligated, to rebuild the Premises at Landlord's own expense, in which case this Lease shall remain in full force and effect. Landlord shall notify Tenant of such election within sixty (60) days after the occurrence of such total or substantial destruction. Section 17.03 Temporary Reduction of Rent. If the Premises is destroyed or damaged and Landlord or Tenant repairs or restores the Premises pursuant to the provisions of this Article XVII, any Rent payable during the period of such damage, repair and/or restoration shall be reduced according to the degree, if any, to which Tenant's use of the Premises is impaired, as reasonably determined by Landlord. Except for such possible reduction in Rent, Tenant shall not be entitled to any compensation, reduction, or reimbursement from Landlord as a result of any damage, destruction, repair, or restoration of or to the Premises. Section 17.04 Waiver. Tenant waives the provisions of Civil Code Section 1932(2) and Civil Code Section 1933(4) with respect to any destruction of the Premises. Tenant agrees that the provisions of Section 17.02 of this Lease shall govern the rights and obligations of Landlord and Tenant in the event of any substantial or total destruction to the Premises. ARTICLE XVIII. EMINENT DOMAIN Section 18.01 Condemnation. If any portion of the Premises is taken under the power of eminent domain or sold under the threat of that power (referred to herein as "Condemnation"), this Lease shall remain in effect and the Rent shall be reduced proportionately; provided, however, that in the event the Condemnation affects more than twenty (20%) of the Premises, then this Lease shall terminate. Each party waives the provisions of California Code of Civil Procedure Section 1265.130 allowing either party to petition the superior court to terminate this Lease in the event of a partial taking of the Premises. Any Condemnation award or payment shall be distributed as follows: (i) to Tenant, only the amount of any award specifically designated for loss of or damage to Tenant's trade fixtures or removable personal property and (ii) to Landlord, the remainder of any award, whether such award is made as compensation for diminution in value of the leasehold or the taking of the fee, or as severance damages, or otherwise. If this Lease is not terminated as set forth above, Landlord shall only be obligated to repair any damage to the Premises caused by the condemnation to the extent of any proceeds actually received by Landlord. Landlord shall not be obligated to repair any damage for which Tenant has been reimbursed by the condemning authority. If the severance damages received by Landlord are not sufficient to pay for such repair, then Tenant shall pay any amount in excess of such severance damages required to complete the repair. ARTICLE XIX. DEFAULT AND REMEDIES Section 19.01 Default by Tenant. The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Tenant: (a) Failure by Tenant to make any payment of monthly Base Rent or Additional Rent, as and when due, where such failure shall continue for a period of five (5) days from the due date. (b) The failure by Tenant to perform any of the covenants, conditions, provisions or obligations of this Lease to be performed by Tenant, other than as described in Section 19.01(a) above, where such failure shall continue for a period of five (5) days after written notice from Landlord to Tenant. If the nature of Tenant's default is such that more than five (5) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within the five (5) day period and thereafter diligently pursues such cure to completion. Section 19.02 Remedies Upon Default. In the event of any default or breach of this Lease by Tenant, then Landlord may, at Landlord's option, proceed as follows: (a) Continue this Lease in full force and effect, in which case the Lease will continue in effect as long as Landlord does not terminate Tenant's right to possession and Landlord shall have the right to collect Base Rent and Additional Rent when due. During the period Tenant is in default, Landlord can enter the Property and relet all or a portion of the Property to third parties for Tenant's account. Tenant shall be liable immediately to Landlord for all costs Landlord incurs in reletting the Property, including, without limitation, brokerage commissions, expenses of remodeling the Property required by the reletting and similar costs. Reletting can be for a period shorter or longer than the remaining term of this Lease. Tenant shall pay to Landlord the Rent due under this Lease on the dates the Rent is due, less the Rent Landlord receives from any reletting. No act by Landlord allowed by this paragraph shall terminate this Lease unless Landlord notifies Tenant that Landlord elects to terminate the Lease. (b) Terminate Tenant's right to possession of the Property by giving notice to Tenant or by any other lawful means in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Property to Landlord. In such event, Landlord shall be entitled to recover from Tenant: (i) All damages incurred by Landlord by reason of Tenant's default including, but not limited to, the amounts described in Section 1951.2 of the California Civil Code, (ii) The worth at the time of award of the unpaid Rent which had been earned at the time of termination, (iii) The worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Tenant proves could have been reasonably avoided, (iv) 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 the Tenant proves could be reasonably be avoided, and (v) Any other amount necessary to compensate Landlord for all the detriment proximately caused by the Tenant's failure to perform its obligations under the Lease including, but not limited to, the cost of recovering the Premises, reasonable attorneys' fees, real estate commissions and any other amount which in the ordinary course of things would be likely to result from Tenant's failure to perform its obligations under the Lease. (vi) The "worth at the time of award" of the amounts referred to in Sections 19.02(b)(ii) and 19.02(b)(iii) of this Lease is computed by allowing interest at the legal rate. The "worth at the time of award" of the amount referred to in Section 19.02(b)(iv) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (c) The remedies set forth herein are cumulative and not exclusive and Landlord may exercise them at any time after Tenant's default or breach with or without demand, and without limiting Landlord in the exercise of any right or remedy now or later allowed by law which Landlord has by reason of such default or breach. Landlord's exercise of any right or remedy shall not prevent it from exercising any other right or remedy. (d) In addition to the other remedies described in Section 19.02 of this Lease, Landlord shall have all remedies not inconsistent with the provisions of this Lease available to it under California law as provided in Section 1951.4 of the California Civil Code (Landlord may continue Lease in effect after Tenant's breach and abandonment and recover rent as it becomes due, if Tenant has right to sublet or assign, subject only to reasonable limitations). Section 19.03 Legal Proceedings. In any action between the parties to enforce any of the terms of this Lease, whether it be an action at law or in equity, including an action for declaratory relief, the prevailing party ("Prevailing Party") shall be entitled to recover reasonable attorney's fees, reasonable accountant's and expert witness fees, and such other costs as may be set by the court whether provided for by statute or not. The Prevailing Party shall be determined in accordance with Civil Code section 1717(b)(1) or any successor statute. If as a result of any breach or default in the performance of any of the provisions of this Lease, Landlord uses the services of an attorney in order to secure compliance with such provisions or recover damages for the breach thereof, or to terminate this Lease or evict Tenant, Tenant shall reimburse Landlord upon demand for any and all reasonable attorney's fees and expenses so incurred by Landlord whether or not a complaint or other action is filed in the appropriate court. This Lease Agreement shall be construed and interpreted in accordance with, and governed and enforced in all respects by, the laws of the State of California. The venue for any judicial action or proceeding concerning this Lease shall be Santa Clara County. Landlord and Tenant desire and intend that any disputes arising between them with respect to, or in connection with, this Lease be subject to expeditious resolution in a court trial, without a jury. Landlord and Tenant each hereby waive the right to a trial by jury of any cause of action, claim, counterclaim, or cross-complaint in any action, proceeding or other hearing brought by either Landlord or Tenant relating to this Lease. Landlord and Tenant further agree that each party shall have the right at any time to file this Lease with the clerk or judge of any court in which any disputes may be pending as Landlord's and Tenant's written consent to waiver of trial by jury in accordance with California Code of Civil Procedure section 631. ARTICLE XX. ACCESS BY LANDLORD Section 20.01 Right of Entry. Landlord or Landlord's agent shall have the right to enter the Premises at all reasonable times to examine the same, and to show them to prospective purchasers or mortgagees of the building, and to make such repairs, alterations, improvements or additions as Landlord may deem necessary or desirable, and Landlord shall be allowed to take all material into and upon the Premises that may be required therefor without the same constituting an eviction of Tenant in whole or in part, and the Rent reserved shall in no ways abate while said repairs, alterations, improvements, or additions are being made, by reason of loss or interruption of business of Tenant, or otherwise. During the six (6) months prior to the expiration of the term of this Lease or any renewal term, Landlord may exhibit the Premises to prospective Tenant's and place upon the Premises the usual notices "To Let" or "For Rent" which notices Tenant shall permit to remain thereon without molestation. All such rights of entry are limited to reasonable times and places, as may be reasonable within the security and vault procedures required by the banking industry. ARTICLE XXI. TENANT'S PROPERTY Section 21.01 Taxes on Tenant's Property. Tenant shall be responsible for and shall pay before delinquency all municipal, county, state and federal taxes assess during the term of this Lease against any leasehold interest or Tenant's Property. Section 21.02 Loss and Damage. Landlord, or its agents, shall not be liable for any damage to property entrusted to employees of Tenant, nor for loss or damage to any property by theft or otherwise, nor for any injury to or damage to persons or property resulting from fire, explosion, falling plaster, 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, resulting from dampness or any other cause whatsoever, unless caused by or due to the negligence of Landlord, its agents, servants or employees, and as to which Tenant has given Landlord reasonable notice. Landlord, or its agents, shall not be liable for interference with the loss of business by Tenant, nor shall Landlord be liable for any damages arising from any act or neglect of any other tenant of the building. Section 21.03 Notice by Tenant. Tenant shall give immediate notice to Landlord in case of fire or accidents in the Premises or in the building of which the Premises are a part or of defects therein or in any fixtures or equipment. ARTICLE XXII. HOLDING OVER Section 22.01 Holding Over. Tenant shall vacate the Premises upon the Termination Date or earlier termination of this Lease. Notwithstanding any other provision of this Lease Agreement, Tenant shall indemnify, defend upon demand with counsel reasonably acceptable to Landlord, and hold harmless Landlord and the heirs, successors, personal representatives and assigns of Landlord, from and against any and all liabilities, losses, claims, damages, lost profits, consequential damages, interest, penalties, fines, monetary sanctions, attorney's fees, experts fees and court costs which result from or arise in any manner whatsoever out of the failure of Tenant to vacate the Premises upon the Termination Date or earlier termination of this Lease. This indemnity shall survive the termination of this Lease. If Tenant does not vacate the Premises upon the Termination Date or earlier termination of this Lease, and if Landlord thereafter accepts Rent from Tenant, then Tenant's occupancy of the Premises shall be a month-to-month tenancy, subject to all of the terms of this Lease applicable to a month-to-month tenancy, except that the Rent shall be one hundred fifty percent (150%) of the Rent payable at the end of the lease term. Section 22.02 Successors. All rights and liabilities herein given to or imposed upon, the respective parties hereto shall extend to and bind permitted heirs, executors, administrators, successors and assigns of the said parties; and if there shall be more than one Tenant, they shall all be bound jointly and severally by the terms, covenants and agreements herein. No rights, however, shall inure to the benefit of any assignee of Tenant unless the assignment to such assignee has been approved by Landlord in writing. ARTICLE XXIII. RULES AND REGULATIONS Section 23.01 Rules and Regulations. Tenant agrees to comply with and observe the rules and regulations set forth on Exhibit G, attached hereto and made a part hereof, and all rules and regulations established by Landlord from time to time. Tenant's failure to keep and observe said rules and regulations shall constitute a breach of the terms of this Lease. ARTICLE XXIV. QUIET ENJOYMENT Section 24.01 Landlord's Covenant. Upon payment by Tenant of the Rent herein provided, and upon the observance and performance of all the covenants, terms and conditions on Tenant's part to be observed and performed, Tenant shall peaceably and quietly hold and enjoy the Premises for the term hereby demised without hindrance or interruption by Landlord or any other person or persons lawfully or equitably claiming by, through or under Landlord, subject, nevertheless, to the terms and conditions of this Lease and mortgages to which this Lease is subordinate. ARTICLE XXV. SECURITY DEPOSIT Section 25.01 Security Deposit. Deleted. ARTICLE XXVII. MISCELLANEOUS Section 26.01 Waiver. One or more waivers of any covenant or condition by Landlord shall not be construed as a waiver of a subsequent breach of the same covenant or condition, and the consent or approval by Landlord to or of any act by Tenant requiring Landlord's consent or approval shall not be deemed to render unnecessary Landlord's consent or approval to or of any subsequent similar act by Tenant. No breach of a covenant or condition of this Lease shall be deemed to have been waived by Landlord, unless such waiver be in writing signed by Landlord. Section 26.02 Entire Agreement. This Lease and the Exhibits attached hereto and forming a part hereof, sets forth all the covenants, promises, agreements, conditions and understandings between Landlord and Tenant concerning the Premises and there are no covenants, promises, agreements, conditions or understandings, either oral or written, express or implied between them other than are herein set forth. Tenant has not relied upon any warranty or representation of Landlord or its agents, express or implied, other than any items contained in this Lease, as an inducement to enter into this Lease. No alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by each party. Section 26.03 Interpretation and Use of Pronouns. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership or of joint venture between the parties hereto, it being understood and agreed that neither the method of computation of Rent, nor any other provision contained herein, nor any acts of the parties herein, shall be deemed to create any relationship between the parties hereto other than the relationship of Landlord and Tenant. Whenever herein the singular number is used, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders. Section 26.04 Delays. In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lockouts, labor troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, war or other reason of a like nature not the fault of the party delayed in performing work or doing acts required under the terms of this Lease, then performance of such act shall be excused for the period of the delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. The party entitled to such extension hereunder shall give written notice as soon as possible to the other party hereto of its claim of right to such extension and the reason(s) therefor. The provisions of this Section 26.04 shall not operate to excuse Tenant from prompt payment of Rent or any other payments required by the terms of this Lease. Section 26.05 Notices. Any and all notices or other communications required or permitted by this Lease Agreement or by law to be served on, given to, or delivered to any party hereto by any other party to this Lease Agreement shall be in writing and shall be deemed duly served, given or delivered when personally delivered to the party or to an officer of the party, or when sent by registered, certified or "Express Mail", or by Federal Express or other similar courier service of comparable reliability, returned receipt requested, postage prepaid, to the recipient at the addresses set forth in the opening paragraph of this Lease. Either party may, by notice given to the other party in accordance with Section 26.05 of this Lease, specify a different address for notice purposes, except that upon Tenant's taking possession of the Premises, the Premises shall constitute Tenant's address for notice purposes. Notwithstanding the foregoing, a written notice to Tenant pursuant to California Code of Civil Procedure 1161(2) (commonly referred to as a 3 Day Notice to Pay Rent or Quit), may be sent to Tenant by United States first class mail, postage prepaid. Section 26.06 Brokers. Tenant represents and warrants unto Landlord that there are no claims for brokerage commissions or finder's fee in connection with this Lease, and Tenant agrees to indemnify Landlord and hold it harmless from all liabilities arising from any such claim arising from an alleged agreement or act by Tenant (including, without limitation, the cost of attorneys' fees in connection therewith); such agreement to survive the termination of this Lease. Section 26.07 Furnishing of Financial Statements. Upon Landlord's written request, Tenant shall promptly furnish Landlord, from time to time, financial statements reflecting Tenant's current financial condition. Section 26.08 Transfer of Landlord's Interest. As used in this Lease Agreement, the term "Landlord" means the person or entity which is (i) the current tenant, assignee and/or sublessee of the Ground Lease and (ii) the owner of the Shopping Center at the time in question. Any Landlord who transfers all of its right, title and interest in and to the Ground Lease and the Shopping Center is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date such transfer. Section 26.09 Liability of Landlord. If Landlord shall fail to perform any covenant, term or condition of this Lease upon Landlord's part to be performed, and if as a consequence of such default Tenant shall recover a money judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Landlord in the Shopping Center and out of rents or other income from such property receivable by Landlord, or out of the consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title and interest in the Shopping Center, and Landlord shall not be liable for any deficiency. Section 26.10 Accord and Satisfaction. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent herein stipulated shall be deemed to be other than on account of the earliest stipulated Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord shall accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or pursue any other remedy in this Lease provided. Section 26.11 Execution of Lease. The submission of this Lease for examination does not constitute a reservation of or option for the Premises, and this Lease shall become effective as a lease only upon execution and delivery thereof by Landlord and Tenant. Section 26.12 Laws of the State of California. This Lease shall be governed by, and construed in accordance with, the laws of the State of California. If any provision of this Lease or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Lease shall not be affected thereby and each provision of the Lease shall be valid and enforceable to the fullest extent permitted by the law. Section 26.13 Relocation of Premises. (a) Landlord hereby reserves the right at any time prior to or during the term hereof to change the location of the Premises in the Shopping Center subject to the following: (i) such relocated premises shall contain at least the same number of square feet as the original Premises, (ii) such relocated premises shall be comparable to the original Premises in terms of customer traffic pattern, visibility, accessibility and parking, (iii) such relocated premises may be of a different depth and width provided that the overall configuration and dimensions of the relocated premises are commercially reasonable, (iv) Landlord shall pay the cost of constructing new interior improvements in such relocated premises and such improvements shall be substantially the same as and comparable to the improvements constructed in the original Premises and (v) Landlord shall pay the cost of moving and reinstalling Tenant's trade fixtures and storefront sign In the event Landlord elects to exercise such right of relocation, it shall so advise Tenant by sixty (60) days prior written notice, and Tenant hereby agrees to be bound by such election and, further, to execute, upon receipt from Landlord, whatever amendments or other instruments as may be required to correctly reflect the foregoing. Except as provided herein, Landlord shall have no further or additional obligations in connection with such relocated premises. (b) In the event Landlord elects to expand the Shopping Center in a manner which requires Landlord to obtain possession of the Premises, Landlord upon one hundred eighty (180) days prior notice in writing to Tenant may terminate this Lease. Section 26.14 Authority. Each individual executing this Lease Agreement on behalf of an entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of such entity and that the Lease Agreement shall be binding upon and enforceable against such entity. The submission of this document for examination and negotiation does not constitute an offer to lease or a reservation of or option to lease the Premises, and this document will become effective and binding only upon execution and delivery by Landlord and Tenant or such authorized officer or officers of Tenant. Section 26.15 Time of Essence. Time is of the essence of each and every provision of this Lease Agreement. Section 26.16. Binding on Successors and Assigns. Subject to the provisions of Article XIV of this Lease, this Lease Agreement shall be binding on the parties hereto and on each of their heirs, executors, personal representatives, successors and assigns. Section 26.17 Security. Tenant hereby agrees and acknowledges that Landlord reserves the right but shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Shopping Center. Tenant assumes the risk and all responsibility for the protection of Tenant, its officers, directors, employees, agents, invitees and customers and the property of Tenant and Tenant's agents from acts or omissions of third parties. Notwithstanding the foregoing, in the event that Landlord elects to provide guard service or other security measures at the Shopping Center, then Tenant shall pay to Landlord as additional rent its proportionate share of such costs as reasonably determined by Landlord and as provided in Section 8.02 of this Lease. Section 26.18 Exhibits: This Lease includes the following Exhibits which are made an integral part of this Lease and fully incorporated by this reference: Exhibit A: Property Description (Section 2.01) Exhibit B: Site Plan of Premises (Section 2.02) Exhibit C: Supplemental Agreement (Section 2.09) Exhibit D: Deleted Exhibit E: Tenant's Improvement Work (Section 6.03) Exhibit F: Sign Criteria (Section 9.03) Exhibit G: Rules and Regulations (Section 23.01) IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of February 11, 2002. LANDLORD: Town Place LLC, a California limited liability company, by Pacific Oak Properties, Inc., a California corporation, Manager By: /s/ JOHN P. KENT ------------------------- John P. Kent, President Pacific Oak Properties, Inc. TENANT: Central Coast Bancorp, a California corporation, dba Community Bank of Central California By: /s/ HARRY D. WARDWELL ------------------------- Harry D. Wardwell, Senior Vice President, Branch Administrator, Authorized Representative EXHIBIT A TO LEASE AGREEMENT PROPERTY DESCRIPTION All that certain real property in the City of Gilroy, County of Santa Clara, State of California described as Parcel Three of that certain Parcel Map recorded in the Official Records of the County of Santa Clara on July 29, 1997 at Book 691 of Maps, at Page 45, consisting of approximately 6.25 acres, as shown on the attached drawing. [DRAWING NOT INCLUDED] EXHIBIT B TO LEASE AGREEMENT SITE PLAN (Attach site plan as per section 2.02 of the Lease) [DRAWING NOT INCLUDED] EXHIBIT C TO LEASE AGREEMENT SUPPLEMENTAL AGREEMENT This Supplemental Agreement is made as of February 11, 2002 and is entered into by and between Town Place LLC, a California limited liability company ("Landlord"), whose address is 15335 Calle Enrique, Morgan Hill, California 95037 ("Landlord"), and Central Coast Bancorp, a California corporation, dba "Community Bank of Central California" whose address is 301 Main Street, Salinas, California 93901. Landlord and Tenant have executed that certain Lease Agreement dated February 1, 2002 ("the Lease") affecting those premises described in the Lease ("Premises"). The parties hereto agree as follows: 1. The Rent Commencement Date of the Lease is April 1,2002. 2. The Termination Date of the Lease is March 31, 2007. 3. The Lease is in full force and effect, neither party is in default of its obligations under the Lease, and Tenant has no setoffs, claims or defenses to the enforcement of the Lease. 4. This Supplemental Agreement is executed in accordance with Section 2.09 of the Lease. LANDLORD: Town Place LLC, a California limited liability company, by Pacific Oak Properties, Inc., a California corporation, Manager By: /s/ JOHN P. KENT -------------------- John P. Kent, President Pacific Oak Properties, Inc. TENANT: Central Coast Bancorp, a California corporation, dba Community Bank of Central California By: /s/ HARRY D. WARDWELL ------------------------- Harry D. Wardwell, Senior Vice President, Branch Administrator, Authorized Representative EXHIBIT E TO LEASE AGREEMENT (Tenant's Improvement Work) Tenant is authorized to construct, at Tenant's sole cost and expense, all improvements and fixtures necessary to bring the Premises to a finished condition for the conduct of Tenant's business in accordance with the Lease, subject to the following: 1. Tenant shall be required to pay the cost of any permits and fees assessed due to Tenant's Improvement Work, Tenant's use and/or operation including, without limitation, water and sewer fees. 2. Tenant shall submit to Landlord, detailed plans and specifications for review and written approval by Landlord prior to the commencement of construction of any interior or exterior improvements. 3. Tenant shall submit to Landlord, the names, addresses, phone numbers and contact personsfor all contractors performing improvements within Tenant's space. Tenant, in advance of commencement of work, will provide acceptable certificates of insurance from Tenant and/or its contractor with Landlord listed as an additional insured. 4. Tenant or its contractor will provide Landlord with all necessary permits prior to the commencement of work and Certificates of Occupancy prior to opening for business and Tenant and/or its contractor shall pay all fees required by public authorities with respect to Tenant's work. 5. All utilities must be in Tenant's name prior to the commencement of work in Tenant's space. 6. All of Tenant's fixtures, equipment and materials shall be new and first-class quality. 7. Any roof penetrations as required for Tenant improvements shall only be performed by Landlord unless otherwise approved in advance by Landlord. EXHIBIT F TO LEASE AGREEMENT SIGN CRITERIA (Attach additional sign criteria as per section 9.03 of the Lease) TOWN PLACE Gilroy, California SIGN CRITERIA for STORES A + B, PAD 1 These criteria have been established for the purpose of assuring a coordinated sign program for the benefit of Town Place Shopping Center and its tenants. Landlord shall administer and interpret the criteria. Conformance will be strictly enforced. A. General Requirements 1. Tenant shall submit to Landlord at least three (3) copies of detailed sign drawings. Landlord's written approval is required prior to submittal to governmental authorities. 2. Once Landlord's written approval has been granted, Tenant shall submit the sign drawings to the City of Gilroy for review. Planning Department and/or Building Department approval shall be required for all signage. 3. All permits for signage and installation shall be obtained by Tenant at Tenant's expense. 4. Tenant shall be responsible for the fulfillment of all requirements and specifications. B. Design Requirements for Building Fascia Signs 1. Tenants are encouraged to use corporate colors, logos, letter styles, and sign designs in order to promote tenant identity and name recognition. Landlord shall, however, have the right to disapprove or require revisions to Tenant's proposed signage if Landlord reasonably determines that Tenant's proposed signage is inappropriate, detrimental to adjacent tenants and/or the shopping center, or in need of improvement. 2. The suggested height for individual sign characters for Stores A and B, and Pad I is twenty-four inches (24"). However, for tenants occupying over 3000 square feet of retail space, suggested height of sign characters is thirty inches (30"). Larger or smaller signs, unconventional designs and other creative signage proposals may be approved by Landlord if Landlord in its sole and absolute judgment, determines that Tenant's request is in keeping with a high quality sign program. and will not be detrimental to adjacent tenants and/or the shopping center. NOTWITHSTANDING THE FOREGOING, City of Gilroy sign requirements specify that the total area of Tenant's signage shall not exceed one and one half square feet (1.50 SF) for each lineal foot of storefront. However, a minimum of twenty square feet (20 SF) shall be allowed for all tenants. 3. The length of Tenant's fascia signage shall not exceed the frontage of Tenant's premises, less a reasonable "blank space" at each side of the sign. The suggested minimum blank space for twenty-four inch (24") characters is at least two feet (2') at each side of the sign. Suggested blank space for characters larger than twenty-four inches (24") is at least thirty-six inches (36"). 4. Tenants occupying the end of a building shall be permitted to have both front and side facing signage. 5. No signs shall be permitted on the roof of a building. 6. Signs shall be internally illuminated. 7. All signs shall be comprised of individual characters or connected script, unless otherwise approved by Landlord. TOWN PLACE Sign Criteria Page Two C. Other Building Signage 1. Tenant may place signage at the store entrance indicating hours of business, telephone number and other similar information. Size, design and type of signage shall be approved in writing by Landlord. 2. Tenant may have uniform signage applied upon non-customer receiving door indicating Tenant's name and address. Written Landlord approval required. 3. Tenant may install under canopy signage. Size, design, material and color shall be approved by Landlord. D. General Specifications 1. All electrical signs shall bear the UL label, and their installation must comply with all local building and electrical codes. 2. All conductors, transformers and other equipment shall be concealed. 3. Electrical service to signs shall be on Tenant's meter and shall be part of Tenant's construction and operation costs. 4. No signmaker's label or other identification will be permitted on the exposed surface of sign. except for those required by local ordinance and these shall be placed in an inconspicuous location 5. All penetrations of the building structure required for sign installation shall be neatly sealed in a watertight condition. 6. Sign contractor shall repair all damage caused by their work. Damage not repaired by sign contractor shall become Tenant's responsibility to correct.. 7. Tenant shall be responsible for the actions of Tenant's sign contractor. E. Administration 1. Landlord shall administer and interpret the criteria. 2. With respect to administration and interpretation. Landlord's decision shall be final. However, Landlord and Tenant recognize that final authority rests with the City of Gilroy. 3. Landlord reserves the right to make additions, deletions, and/or revisions to the Sign Criteria at any time with or without notifying tenant. EXHIBIT G TO LEASE AGREEMENT (Rules and Regulations) 1. The sidewalks and entry passages of the Shopping Center shall not be obstructed by Tenant or used by Tenant for any purpose other than ingress and egress; provided, however, that Landlord may, in Landlord's sole and absolute discretion and only with Landlord's prior written consent,grant individual tenants of the Shopping Center the right to use the Common Area for variouspurposes, including outdoor dining The floors and windows that reflect or admit light into anyplace in the Premises shall not be covered or obstructed by Tenant except that Tenant shall be allowed to install levelor style blinds to front window. The water closets and other water apparatus shall not be used for any other purpose than those for which they were constructed, and no sweepings, rubbish or other obstructing substances shall be thrown therein. 2. Nothing shall be thrown by Tenant, its agents and/or servants out of the windows, doors or down the passages of the Premises. 3. Unless otherwise approved in writing by Landlord, no animals, birds, bicycles or other vehicles shall be allowed in the Premises. 4. No painting shall be done, nor shall any alterations be made to any part of the Premises by putting up or changing any partitions, doors or windows, nor shall there be any nailing, boring or screwing into the woodwork or plastering, nor shall any connection be made to the electric wires orgas or electric fixtures, without the prior written consent of Landlord or its agent. All glass, locks and trimmings in or upon the doors and windows of the Premises shall be kept whole and, when any part thereof shall be broken, the same shall be immediately replaced or repaired and putin order under the direction and to the satisfaction of Landlord or its agents, and shall be left whole and in good repair. Tenant shall not injure, overload or deface the Premises or any part of the Shopping Center, the woodwork or the walls of the Premises or any part of the Building, nor carry on upon the Premises any noisy or offensive business. 5. Safes, furniture, heavy equipment, boxes or other bulky articles shall be carried into the Premises or removed from the Premises only with prior written consent of Landlord, and then only bemeans of passageways, doors, or through the windows of the Premises as Landlord may in writing direct. Heavy articles shall only be placed by Tenant in such places as may be specified in writing by Landlord, and any damage done to the Premises, to other tenants in the Building or to other persons by moving said bulky articles in or out of the Premises, by the overloading of floors by said articles, or in any other manner, shall be paid for by Tenant. 6. Deleted. 7. Tenant shall load and unload its merchandise, equipment and supplies and remove its rubbishonly by way of the truck loading area (if any) and service doors (if any) designated for Tenant'suse at hours established from time to time by Landlord. Tenant shall not permit the use of any fork lift truck, tow truck or any other mechanically powered machine or equipment for handling freight in the Premises or other portions of the Building, except in the truck loading areas. All equipment and devices hauling freight in the Premises or portions of the Building other than the said excepted areas shall be propelled by hand and shall have no mark type rubber tires or wheels. No freight shall be hauled into or through covered areas in the Building. EXHIBIT G TO LEASE AGREEMENT (Rules and Regulations) 8. When reasonably practical, all printed material referring to the location of Tenant's Premises and in all advertising (by newspaper, radio, television or otherwise) Tenant shall includein any reference to Tenant's place of business the name of the Shopping Center. 9. Common areas shall not be used for solicitations, distribution of hand bills or other advertising matter, demonstrations or any other activity of Tenant and Tenant shall not sell or displaymerchandise on or otherwise obstruct common areas or any other area outside the confines of the Premises. 10. Tenant shall not conduct any going out of business auction, distress, fire or bankruptcy sales, provided, however, that Tenant may conduct periodic seasonal promotional or clearance sales. 11. Tenant shall not sell, display or distribute any alcoholic liquors or beverages for consumption on or off the Premises without the prior written consent of Landlord. 12. Tenant shall not install or operate in the Premises any coin operated vending machines or similar devices for the sale of merchandise, food and beverages without the prior written consent of Landlord, except for those vending machines which are for the exclusive use of Tenant's employees and are not in view of or available to the public. 13. Tenant shall not permit the extermination of vermin to be performed in, on or about the Premises, except by a person or company designated or approved by Landlord. Refuse or rubbishaccumulated in Tenant's operations or on the Premises shall not be collected or removed except by the person or company, if any, designated or approved by Landlord, but in any such case Landlord agrees that the prices to be charged therefore by the person or company so designated shall be competitive. Only Tenant's employees or a person or company designated or approved by Landlord, if any, shall clean the windows or perform janitorial services or any other cleaning or maintenance service in or for the Premises or on the exterior of the Premises, during reasonable hours designated from time to time for such purposes by Landlord. 14. Tenant shall not install, operate or maintain or suffer to be installed, operated or maintained any public telephone within or without the Premises. 15. Tenant shall maintain displays of merchandise in the display windows, if any, and shall keep the same well lighted during such hours and days that the common areas are lighted by Landlord. 16. Tenant shall store or stock in the Premises only such merchandise as Tenant intends to offer for sale at, in, from or upon the Premises. 17. All signs shall be professionally prepared and in good taste so as not to detract from the general appearance of the leased premises or the Shopping Center, and under no circumstances shall Tenant attach or affix to the Premises any hand-lettered signs, notices, or other materials. EX-23 6 exhibit23x1.txt EXHIBT 23X1 INDEPENDENT AUDITORS CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS'CONSENT We consent to the incorporation by reference in Registration Statement No. 33-89948 of Central Coast Bancorp on Form S-8 of our report dated January 24, 2002 (February 28, 2002 as to the stock dividend information in Note 1), appearing in this Annual Report on Form 10-K of Central Coast Bancorp for the year ended December 31, 2001. DELOITTE & TOUCHE LLP San Francisco, California March 25, 2002 -----END PRIVACY-ENHANCED MESSAGE-----