-----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, UgeFxPeUt91vKM1KQIBIZUXH0YMGa+44pRzShYUZbquqhNUxcJI71Mu/nN58P37/ c/O6/FFv57IBEQB4906E/Q== 0000912057-97-011028.txt : 19970401 0000912057-97-011028.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011028 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA INDEPENDENT BANCORP CENTRAL INDEX KEY: 0000948976 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 680349947 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-26552 FILM NUMBER: 97568720 BUSINESS ADDRESS: STREET 1: 1005 STAFFORD WAY STREET 2: P O BOX 1575 CITY: YUBA CITY STATE: CA ZIP: 95992 BUSINESS PHONE: 9166744444 MAIL ADDRESS: STREET 1: P O BOX 1575 STREET 2: 1005 STAFFORD WAY CITY: YUBA CITY STATE: CA ZIP: 95992 10-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 ------------------------------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to --------------------- --------------------------- Commission file number 0-26552 --------------------------------------------------------- California Independent Bancorp - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 68-0349947 - ----------------------------------- ---------------------------------------- State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization 1005 Stafford Way, Yuba City, California 95991 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (916) 674-4444 ------------------------------ Securities registered pursuant to Section 12(b) of the Act: Title of each class None - ----------------------------------- ---------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value - -------------------------------------------------------------------------------- (Title of class) 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. [X[ Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X] Aggregate market volume of Common Stock held by non-affiliates of California Independent Bancorp at February 28, 1997: $29,816,105 Number of shares of Common Stock outstanding at February 28, 1997: 1,546,032 Documents Incorporated by Reference Proxy Statement for 1997 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A. Part III, Items 10, 11, 12 and 13 THIS REPORT INCLUDES A TOTAL OF ___ PAGES EXHIBIT INDEX IS ON PAGE 73 I N D E X ---------- DESCRIPTION PAGE NO. ITEM 1. BUSINESS.............................................................1 ITEM 2. PROPERTIES..........................................................23 ITEM 3. LEGAL PROCEEDINGS...................................................25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................25 ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.............................................................25 ITEM 6. SELECTED FINANCIAL DATA.............................................26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS......27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................27 ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................28 ITEM 11 EXECUTIVE COMPENSATION..............................................31 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................................39 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................42 ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.........................................................43 2 PART I ITEM 1. BUSINESS GENERAL California Independent Bancorp ("Company") is a California corporation and the bank holding company for Feather River State Bank ("Bank"), both located in Yuba City, California. The Bank was incorporated as a California state banking corporation on December 1, 1976, and commenced operations on April 6, 1977. The Company was incorporated on October 28, 1994 and became the bank holding company for Feather River State Bank (the "Bank") on May 2, 1995 pursuant to the Bank Holding Company Act ("BHC Act"). On October 1, 1996, the Company acquired E.P.I. Leasing Co., Inc., an equipment lessor ("EPI"). GENERAL BANKING SERVICES The Bank engages in a broad range of financial services activities, and its primary market is located in the northern portion of the Sacramento Valley, with a total of seven branches in Yuba City, Marysville, Colusa, Arbuckle, Wheatland and Woodland, California serving Sutter, Yuba, Colusa and Yolo Counties. The total population base in these six counties is approximately 1.6 million people, the majority of which is in Sacramento County which has 1.1 million people. The Bank's branch in Wheatland, California opened on March 6, 1997 in a temporary facility. Bank of America closed its branch in Wheatland on March 21, 1997, which was the only other banking facility in Wheatland. The Bank decided to open a branch in Wheatland after requests by numerous residents and the City Council. Wheatland is primarily an agricultural area. In addition, the Bank operates two loan production offices ("LPOs"), in Roseville, California in Sacramento County and in Chico, California in Butte County. Both of these LPOs emphasize residential mortgage and construction lending. The Bank intends to open an LPO in Madera, California, an agricultural area just north of Fresno, in the second quarter of 1997. The decision to open an LPO in Madera was based upon residents contacting the Bank suggesting that the Bank open a facility and the results of a focus group conducted in December, 1996, showing a need for agricultural lending and other services in this area. The Bank currently has agricultural loans in this area. The Bank intends to offer agricultural loans, residential real estate and construction loans and equipment leasing through its subsidiary, E.P.I. With the exception of Sacramento County, whose main economic force is government, the Bank's operating territory is predominantly agricultural in nature. 1 Food crops grown in the area are all grown on irrigated land and range from tomatoes and rice to tree nuts, peaches and prunes. Due to the agricultural nature of the economy in the Bank's operating territory and the diversification of crops produced, economic conditions in the Bank's market areas have remained more stable than in other parts of California during the recent recession. The Bank's branches in Yuba City and Marysville (Sutter and Yuba Counties) are in areas which are at the periphery of housing for those individuals who work in the growing Sacramento area. The Bank currently has no applications pending to open additional branch offices or LPOs, other than for Madera, California, but the Bank may increase the number of its banking facilities in the Bank's trade areas when such expansion is appropriate. The Bank's expansion program is, of course, dependent on obtaining the necessary governmental approvals, a continued earnings pattern and absence of adverse effects from economic conditions, governmental monetary policies or competition. No assurance can be given that all or any part of the Bank's expansion program can be accomplished without the Bank being required to raise additional capital in the future. The Bank conducts a commercial banking business including accepting demand, savings and time deposits and making commercial, real estate, agricultural and consumer loans and factoring of accounts receivable. The Bank also offers equipment leasing through its subsidiary, EPI. It also offers installment note collection, issues cashier's checks and money orders, sells traveler's checks, and provides bank-by-mail, night depository, safe deposit boxes and other customary banking services. The Bank installed ATMs for the first time in 1996 at each of its branches. In connection with the relocation of the Bank's Agricultural and Real Estate Departments in March 1997 to a separate building on Tharp Road in Yuba City, which formerly was a bank branch, it has installed two ATMs at this building. The Bank is a member of the Federal Deposit Insurance Corporation and each depositor's account is insured up to $100,000. The Bank does not offer trust services or international banking services and does not plan to do so in the near future. DEPOSITS Most of the Bank's deposits are attracted from individuals, small and medium-sized businesses and professionals. A material portion of the Bank's deposits has not been obtained from a single person or a few persons, the loss of any one or more of which would not have a materially adverse effect on the business of the Bank. 2 LENDING ACTIVITIES The Bank engages in a full complement of lending activities, including commercial, agricultural, real estate and consumer/ installment loans and factoring of accounts receivable. Agricultural loans are made to finance agricultural production generally as nonrevolving lines of credit that are drawn on when crop expenses are incurred and are repaid as crop sale proceeds are received. These loans are secured by the crops and the proceeds. The Bank generally requires a repayment margin of 25% for permanent plantings (i.e., tree and vine crops) and 20% for row crops. As of December 31, 1996, the Bank had agricultural production loans outstanding of $46,786,000 which represented 31.0% of the Bank's loan portfolio. Approximately 5% of these loans are guaranteed by the Farm Service Agency (FSA). The Bank makes real estate loans for farm land and residential loans. Loans for farm land include loans for farm residences and other improvement loans and are secured by a first lien on real estate. The maximum loan-to-value ratio for farm land is 65%. Residential loans are made to purchase or refinance 1 to 4 family residences or multi-family residential properties and are secured by a first deed of trust on the property except for loans to improve existing properties which are secured by junior liens. The maximum loan-to-value ratio for these loans is 80%. As of December 31, 1996, these types of real estate secured loans equalled $13,765,000 or 9.11% of the Bank's loan portfolio. The Bank also makes real estate construction and development loans for acquisition of raw land to be developed into subdivisions and for the construction of one to four family and multi-family housing. These loans are secured by a first deed of trust and have maximum loan to value ratios ranging from 65% to 80%. As of December 31, 1996, the Bank had outstanding loans of $29,521,000 for these purposes representing 19.54% of the Bank's loan portfolio as compared to $18,048,000 or 13.96% as of December 31, 1995. This increase in real estate construction and development loans reflects the economy recovery in Northern California following the last recession. The Bank makes commercial real estate loans for such purposes as offices, warehouses, professional buildings, retail and storage facilities, and other purposes. These loans are secured by first deeds of trust and typically are fully or partially owner-occupied, have a maximum loan-to-value ratio of 65% and mature in five years or less. As of December 31, 1996, the Bank had a total of $15,194,000 in these loans representing 10.06% of the Bank's loan portfolio. 3 The Bank makes commercial and industrial loans to small-to-medium-sized businesses for working capital, loans secured by inventory and receivables, term loans for equipment and for working capital. Typically, the Bank obtains a security interest in the collateral being financed or in other available assets of the customer. Loan to value ratios vary but generally do not exceed 75%. As of December 31, 1996, the Bank had outstanding loans for these purposes of $26,891,000 representing 17.80% of the Bank's loan portfolio. Consumer and installment loans and leases are made for household, family and other personal expenditures. These loans are made on both a secured and unsecured basis. As of December 31, 1996 the Bank had a total of $18,943,000 in consumer and installment loans and leases or 12.54% of its loan portfolio. The Bank originates mortgage loans on residential and farm properties which it sells into the secondary market in order to divest itself of the interest rate risk associated with these mostly fixed interest rate products. The Bank accounts for these loans in accordance with the Emerging Issues Task Force Issues No. 88-11, "Allocation of Recorded Investment when a Loan is Sold", No. 86-38, "Implication of Mortgage Prepayments on Amortization of Servicing Rights", and No. 84-21, "Sale of a Loan with a Partial Participation Retained". These loans are sold without recourse. As of December 31, 1996, 1995, and 1994, total loans serviced by the Bank were $107,637,000, $107,141,759, and $105,307,587. For the years ended December 31, 1996, 1995 and 1994, total loans sold by the Bank were $36,302,000, $8,935,100 and $17,617,681. Being in an agricultural area the Bank participates in the Farmer Mac I loan program, pursuant to which it makes and then sells agricultural real estate loans to the Travelers Realty Insurance Company and the Federal Agricultural Mortgage Corporation. In addition, the Bank participates in the Farmer Mac II loan program pursuant to which it makes FmHA guaranteed farm real estate loans and subsequently sells the 90% guaranteed portion of these loans directly to the Federal Agricultural Mortgage Corporation ("Farmer Mac") and often retains the servicing of these loans for which it receives a fee. The Bank is one of the largest lenders in the U.S. in the Farmer Mac program. The Bank's real estate department makes mortgage and construction loans. Its mortgage loans are typically 15 year and 30 year loans with either adjustable or fixed interest rates. These mortgage loans are pre-sold to minimize the Bank's interest rate risk. The Bank sells mortgage loans to Fannie Mae, Freddie Mac, and to other mortgage lenders. The loans sold to Fannie Mae and Freddie Mac are usually sold servicing retained, for which the Bank continues to be paid a fee for collecting payments on the loan and performing other services, and are also sold servicing released, where the Bank does not perform these services but receives higher 4 compensation upon purchase of the loan. With the opening of the Woodland branch in 1993, the Bank makes mortgage loans in Yolo County and the Greater Sacramento area. In 1995 and 1996 the Bank generated approximately $20,000,000 and $28,297,000 in residential mortgage loans. Pursuant to California law, the Bank's legal lending limit to any one borrower is 15% of its shareholders' equity and allowance for loan losses for unsecured loans and 25% for secured loans. In May of 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard 122, Accounting for Mortgage Servicing Rights. This statement eliminates the accounting distinction between rights to service mortgage loans for others that are acquired through loan origination activities and those acquired through purchase transactions. Under this statement, if the Company sells or securitizes loans and retains the mortgage servicing rights, the Company should allocate the total cost of the mortgage loan to the loan and the mortgage servicing rights based on their relative fair values. Any cost allocated to the mortgage servicing rights should be recognized as a separate asset and amortized over the period estimated net service income. The provisions of this statement apply to fiscal years beginning after December 15, 1995. Accordingly, the Company adopted this statement on January 1, 1996. The adoption of this statement does not have a significant impact on its financial position and results of operations. The risks associated with commercial banking consist primarily of interest rate risk and credit risk. The Bank attempts to manage its interest rate risk by making variable rate loans and by interest rate gap analysis. Credit risk relates to the ability of a borrower to repay the principal and interest on their loan and is managed by adherence to credit standards and the taking of collateral to secure most of the Bank's loans. The majority of the Bank's loan portfolio consists of loans with variable interest rates. The following chart illustrates the composition of the Bank's loan portfolio as of December 31, 1996, as it pertains to interest-rate sensitivity: FIXED RATE -------------------------------- TOTAL LOAN VARIABLE-RATE PORTFOLIO LOANS UNDER 1 YR. OVER 1 YR. - ---------- ------------- --------------- ------------ $151,100,000 $108,419,000 $20,219,000 $22,462,000 5 This chart shows that a total of $128,638,000 of the Bank's loans are repriceable within one year. On a monthly basis, the Bank calculates its interest-rate gap position whereby interest-rate-sensitive assets are compared with interest-rate-sensitive liabilities for specific periods to determine if the Bank is susceptible to significant earnings changes as a result of changes in interest rates. If the gap percentage is positive, the Bank's interest earnings would increase during a period of increasing interest rates and the Bank's interest earnings would decrease during a period of declining interest rates. The reverse would be true if the Bank has a negative gap. The Bank puts more emphasis on its gap position for periods up to one year, as it is felt that a longer horizon gives the Bank more time and flexibility to reposition its assets and liabilities to counteract any potential earnings decrease. The following chart illustrates the gap position of the Bank as of December 31, 1996: MATURE OR REPRICE 1-90 91-183 184-365 IMMEDIATELY DAYS DAYS DAYS ----------- -------- --------- ---------- (IN THOUSANDS) Rate-sensitive Assets $142,485 $ 21,340 $ 5,568 $ 8,563 Rate-sensitive Liabilities 41,741 88,797 19,867 22,745 Interest Rate Sensitivity Gap $100,744 $(67,457) $(14,299) $(14,182) Cumulative Interest Rate Sensitivity Gap $100,744 $33,287 18,988 $ 4,807 Cumulative Gap as a Percentage of Total Assets 38.7% 12.8% 7.3% 1.8% It is the Bank's policy to maintain a one-year gap of between 0% and 6%. Most of the Bank's deposits are attracted by the Bank's established reputation in the communities it serves and through advertising in the local media. A material 6 portion of the Bank's deposits has not been obtained from a single person or a few persons, the loss of any or more of which would not have a materially adverse effect on the business of the Bank. The underwriting criteria for agricultural and mortgage loans sold in the secondary market are established by the purchasers of the loans. In certain instances the Bank will make mortgage loans for its own portfolio at variable interest rates. The Bank has made Small Business Administration ("SBA") loans since its inception. The Bank offers both SBA 7(a) and SBA 504 real estate guaranteed loans ranging from amounts of $50,000 to $2,000,000. SBA 7(a) loans are for such purposes as working capital, inventory and other purposes, and are guaranteed up to 80%. SBA 504 loans are made to finance commercial real estate. The SBA loan program is continually subject to political and budgetary uncertainty which, in recent years has resulted in a reduction of the guaranteed portion of SBA loans and lower maximum loan amounts. The Bank also offers business and industrial guaranteed loans through the Rural Development Administration ("RDA"). These loans are designated for businesses that create jobs in rural areas. RDA loans are in amounts up to $10 million and are 90% guaranteed by the RDA. The Bank sells the guaranteed portion of its SBA and RDA loans in the secondary market. INVESTMENT POLICY The Bank's investment policy is to provide the Bank with the maximum return on its investment securities consistent with safety and liquidity. In accordance with this policy and state laws regarding permissible investments the Bank invests in U.S. Treasury and Agency securities with a maturity of 10 years or less; tax-free municipal bonds rated "A" or better by Moody's with a maturity not to exceed 13 years; corporate bonds rated "A" or better by Standard and Poors or Moody's with a maturity not to exceed 7 years. The Bank also invests in Federal funds. The Bank's investment securities may also be used as collateral for public deposits and for other borrowings. OTHER SERVICES The Bank also offers other financial products and services including annuities, mutual funds, mutual fund advisory service, IRA's, brokerage and custodial services, 7 401(k) plans, estate plans, asset management, asset consulting, charitable remainder trusts, fiduciary services, pension plans, nonqualified deferred compensation, retirement plans and trust services. All of these investments and/or financial services are offered by a registered investment representative through the Bank's affiliation with Select Advisors, Inc., a registered broker/dealer and a member of the National Association of Securities Dealers ("NASD") and the Securities Investor Protection Corporation ("SIPC"). Trust services are provided by the Boston Safe Deposit and Trust Company of California. The Bank's primary service area consists of Colusa, Sutter, Yolo and Yuba Counties. It is estimated that this service area contains 37 competitive banking offices, of which nine offices are owned by other independent banks. It is estimated that the primary service area also contains 4 offices of savings and loan associations, and 6 offices of credit unions. Based upon total bank deposits as of June 30, 1996 (the last period for which data is available), the Bank is first in market share in Sutter County, fourth in Yuba and Colusa counties and tenth in Yolo County which the Bank entered in 1993. The banking business in California generally, and in the Bank's primary service area specifically is highly competitive with respect to both loans and deposits, and is dominated by a relatively small number of major banks with many offices operating over a wide geographic area. Among the advantages such major banks have over the Bank are their ability to finance wide ranging advertising campaigns and to allocate their investment assets to regions of highest yield and demand. Such institutions offer certain services such as trust services and international banking which are not offered directly by the Bank (but are offered indirectly through correspondent institutions) and, by virtue of their greater total capitalization (legal lending limits to an individual customer are limited to a percentage of a bank's total capital accounts), they have substantially higher lending limits than does the Bank. Other entities, both governmental and in private industry, seeking to raise capital through the issuance and sale of debt or equity securities also provide competition for the Bank in the acquisition of deposits. The Bank also competes with money-market funds for deposits. In order to compete with major financial institutions and other competitors in its primary service areas, the Bank relies upon the experience of its executive and senior officers in serving business individuals, and upon its specialized service, local promotional activities and the personal contacts made by its officers, directors and employees. For customers whose loan demand exceeds the Bank's legal lending limit, the Bank may arrange for such loans on a participation basis with correspondent banks. The Bank's lending limit is 15% of its capital and allowance for loan losses for unsecured loans and 25% of its capital and allowance for loan losses for unsecured and secured loans. 8 SUPERVISION AND REGULATION The Bank is chartered under the banking laws of the State of California and is subject to the supervision of, and is regularly examined by, the Superintendent and the FDIC. The Company is a bank holding company within the meaning of the BHC Act, is registered as such with and is subject to the supervision of the Federal Reserve Board ("FRB") and regularly files proxy statements, periodic and other reports with the Securities and Exchange Commission as a registered company under Section 12 of the Securities Exchange Act of 1934, as amended. Certain legislation and regulations affecting the businesses of the Company and the Bank are discussed below. GENERAL As a bank holding company, the Company is subject to the BHC Act. The Company reports to, registers with, and is examined by the FRB. The FRB also has the authority to examine the Company's subsidiaries which includes the Bank. The FRB requires the Company to maintain certain levels of capital. See" Capital Standards" herein. The FRB also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, or violates certain laws, regulations, or conditions imposed in writing by the FRB. See "Prompt Corrective Action and Other Enforcement Mechanisms" herein. Under the BHC Act, a company generally must obtain the prior approval of the FRB before it exercises a controlling influence over, or acquires directly or indirectly, more than 5% of the voting shares or substantially all of the assets of any bank or bank holding company. Thus, the Company is required to obtain the prior approval of the FRB before it acquires, merges or consolidates with any bank, or bank holding company; any company seeking to acquire, merge or consolidate with the Company also would be required to obtain the FRB's approval. The Company is generally prohibited under the BHC Act from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than banking, managing banks, or providing services to affiliates of the holding company. A bank holding company, with the approval of the FRB, may engage, or acquire the voting shares of companies engaged, in activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. A bank holding company must demonstrate that the 9 benefits to the public of the proposed activity will outweigh the possible adverse effects associated with such activity. The FRB generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company's financial position. The FRB's policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. Transactions between the Company, the Bank and any future subsidiaries of the Company are subject to a number of other restrictions. FRB policies forbid the payment by bank subsidiaries of management fees which are unreasonable in amount or exceed the fair market value of the services rendered (or, if no market exists, actual costs plus a reasonable profit). Additionally, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit, sale or lease of property, or furnishing of services. Subject to certain limitations, depository institution subsidiaries of bank holding companies may extend credit to, invest in the securities of, purchase assets from, or issue a guarantee, acceptance, or letter of credit on behalf of, an affiliate, provided that the aggregate of such transactions with affiliates may not exceed 10% of the capital stock and surplus of the institution, and the aggregate of such transactions with all affiliates may not exceed 20% of the capital stock and surplus of such institution. The Company may only borrow from depository institution subsidiaries if the loan is secured by marketable obligations with a value of a designated amount in excess of the loan. Further, the Company may not sell a low-quality asset to a depository institution subsidiary. CAPITAL STANDARDS The FRB, FDIC and other federal banking agencies have risk based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans. 10 A banking organization's risk based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off balance sheet items. The regulators measure risk-adjusted assets and off balance sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in certain subsidiaries, less most other intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital are subject to certain other requirements and limitations of the federal banking agencies. Since December 31, 1992, the federal banking agencies have required a minimum ratio of qualifying total capital to risk-adjusted assets and off balance sheet items of 8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off balance sheet items of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. It is improbable, however, that an institution with a 3% leverage ratio would receive the highest rating by the regulators since a strong capital position is a significant part of the regulators' rating. For all banking organizations not rated in the highest category, the minimum leverage ratio is at least 100 to 200 basis points above the 3% minimum. Thus, the effective minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. The following tables present the capital ratios for the Company and the Bank as of December 31, 1996. THE COMPANY THE BANK ------------------ ----------------- AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- (000's) (000's) RISK-BASED CAPITAL RATIOS: Tier 1 Capital . . . . . . . . . . . $ 21,813 11.31% $21,804 11.32% Minimum Requirement 7,713 4.00% 7,708 4.00% -------- ------ -------- ------ 11 THE COMPANY THE BANK ------------------ ----------------- AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- (000's) (000's) Excess. . . . . . . . . . . . . . $ 14,100 7.31% $ 14,096 7.32% -------- ------ -------- ------ -------- ------ -------- ------ Total Capital. . . . . . . . . . . . $ 22,918 11.89% $ 24,225 12.57% Minimum Requirement. . . . . . . . . 15,426 8.00% 15,415 8.00% -------- ------ -------- ------ Excess. . . . . . . . . . . . . . $ 7,492 3.89% $ 8,810 4.57% -------- ------ -------- ------ -------- ------ -------- ------ Risk-Adjusted Assets. . . . . . . . . $192,825 $192,693 LEVERAGE RATIO: Tier 1 Capital . . . . . . . . . . . $ 21,813 8.82% $ 21,804 8.82% Minimum Requirement . . . . . . . . 9,891 4.00% 9,890 4.00% -------- ------ -------- ------ Excess. . . . . . . . . . . . . . . $ 11,922 4.82% $ 11,914 4.82% -------- ------ -------- ------ -------- ------ -------- ------ Total Adjusted Assets . . . . . . . . $247,274 $247,255 SAFETY AND SOUNDNESS STANDARDS The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") implemented certain specific restrictions on transactions and required the regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation, and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, the use of brokered deposits and the aggregate extension of credit by a depository institution to an executive officer, director, principal stockholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. The federal financial institution agencies published a final rule effective on August 9, 1995, implementing safety and soundness standards. The FDICIA added a new Section 39 to the Federal Deposit Insurance Act which required the agencies to establish safety and soundness standards for insured financial institutions covering (1) internal controls, information systems and internal audit systems; (2) loan 12 documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; (6) compensation, fees and benefits; (7) asset quality, earnings and stock valuation; and (8) excessive compensation for executive officers, directors or principal shareholders which could lead to material financial loss. The agencies issued the final rule in the form of guidelines only for operational, managerial and compensation standards and reissued for comment proposed standards related to asset quality and earnings which are less restrictive than the earlier proposal in November 1993. Unlike the earlier proposal, the guidelines under the final rule do not apply to depository institution holding companies and the stock valuation standard was eliminated. If an agency determines that an institution fails to meet any standard established by the guidelines, 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. Under the final rule, an institution must file a compliance plan within 30 days of a request to do so from the institution's primary federal regulatory agency. The agencies may elect to initiate enforcement action in certain cases rather than rely on an existing plan particularly where failure to meet one or more of the standards could threaten the safe and sound operation of the institution. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. FDICIA prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized. The FRB has issued a policy statement that a bank holding company should not declare or pay a cash dividend to its stockholders if the dividend would place undue pressure on the capital of its subsidiary banks or if the dividend could be funded only through additional borrowings or other arrangements that might adversely affect the financial position of the bank holding company. Specifically, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each consistent with its capital needs, asset quality, and overall financial condition. Further, the Company is expected to act as a source of financial strength for each of its subsidiary banks and to commit resources to support each subsidiary bank in circumstances when it might not do so absent such policy. 13 The Company's ability to pay dividends depends in large part on the ability of the Bank to pay management fees and dividends to the Company. The ability of its subsidiary banks to pay dividends will be subject to restrictions set forth in the California Banking Law and regulations of the FDIC. The payment of dividends by a state bank is further restricted by additional provisions of state law. Under Section 642 of the California Financial Code, funds available for cash dividend payments by a bank are restricted to the lesser of: (i) retained earnings; or (ii) the bank's net income for its three fiscal years (less any distributions to stockholders made during such period). However, under Section 643 of the California Financial Code, with the prior approval of the Superintendent, a bank may pay cash dividends in an amount not to exceed the greater of the: (1) retained earnings of the bank; (2) net income of the bank for its last fiscal year; or (3) net income of the bank for its current fiscal year. However, if the Superintendent finds that the stockholders' equity of the bank is not adequate or that the payment of a dividend would be unsafe or unsound, the Superintendent may order such bank not to pay a dividend to stockholders. Currently, it is permissible for the Bank to pay cash dividends without the Superintendent's prior approval. Additionally, under FDICIA, a bank may not make any capital distribution, including the payment of dividends, if after making such distribution the bank would be in any of the "under-capitalized" categories under the FDIC's Prompt Corrective Action regulations. Also, under the Financial Institution's Supervisory Act, the FDIC also has the authority to prohibit a bank from engaging in business practices which the FDIC considers to be unsafe or unsound. It is possible, depending upon the financial condition of a bank and other factors, that the FDIC could assert that the payment of dividends or other payments in some circumstances might be such an unsafe or unsound practice and thereby prohibit such payment. INTERSTATE BANKING AND BRANCHING On September 29, 1994, the Reigle/Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") was signed into law. This Interstate Act effectively permits nationwide banking. The Interstate Act provides that one year after enactment, adequately capitalized and adequately managed bank holding companies may acquire banks in any state, even in those jurisdictions that currently bar acquisition by out-of-state institutions, subject to deposit concentration limits. The deposit concentration limits provide that regulatory approval by the Federal Reserve Board may not be granted for a proposed interstate acquisition if after the acquisition, the acquiror on a consolidated basis would control more than 10% of the total deposits nationwide or would control more than 30% of deposits in the state where 14 the acquiring institution is located. The deposit concentration state limit does not apply for initial acquisitions in a state and in every case, may be waived by the state regulatory authority. Interstate acquisitions are subject to compliance with the Community Reinvestment Act ("CRA"). States are permitted to impose age requirements not to exceed five years on target banks for interstate acquisitions. Branching between states may be accomplished either by merging separate banks located in different states into one legal entity, or by establishing de novo branches in another state. Consolidation of banks is not permitted until June 1, 1997 provided that the state has not passed legislation "opting-out" of interstate branching. If a state opts-out prior to June 1, 1997, then banks located in that state may not participate in interstate branching. A state may opt-in to interstate branching by bank consolidation or by de novo branching by passing appropriate legislation earlier than June 1, 1997. California has passed legislation to opt-in to this legislation. Interstate branching is also subject to a 30% statewide deposit concentration limit on a consolidated basis, and a 10% nationwide deposit concentration limit. The laws of the host state regarding community reinvestment, fair lending, consumer protection (including usury limits) and establishment of branches shall apply to the interstate branches. De novo branching by an out-of-state bank is not permitted unless the host state expressly permits de novo branching by banks from out-of-state. The establishment of an initial de novo branch in a state is subject to the same conditions as apply to initial acquisition of a bank in the host state other than the deposit concentration limits. Effective one year after enactment, the Interstate Act permits bank subsidiaries of a bank holding company to act as agents for affiliated depository institutions in receiving deposits, renewing time deposits, closing loans, servicing loans and receiving payments on loans and other obligations. A bank acting as agent for an affiliate shall not be considered a branch of the affiliate. Any agency relationship between affiliates must be on terms that are consistent with safe and sound banking practices. The authority for an agency relationship for receiving deposits includes the taking of deposits for an existing account but is not meant to include the opening or origination of new deposit accounts. Subject to certain conditions, insured saving associations which were affiliated with banks as of June 1, 1994, may act as agents for such banks. An affiliate bank or saving association may not conduct any activity as an agent which such institution if prohibited from conducting as principal. If an interstate bank decides to close a branch located in a low-or moderate-income area, it must comply with additional branch closing notice requirements. The appropriate regulatory agency is authorized to consult with community organizations 15 to explore options to maintain banking services in the affected community where the branch is to be closed. To ensure that interstate branching does not result in taking deposits without regard to a community's credit needs, the regulatory agencies are directed to implement regulations prohibiting interstate branches from being used as "deposit production offices." The regulations to implement this provision are due by June 1, 1997. The regulations must include a provision to the effect that if loans made by an interstate branch are less than fifty percent of the average of all depository institutions in the state, then the regulator must review the loan portfolio of the branch. If the regulator determines that the branch is not meeting the credit needs of the community, it has the authority to close the branch and to prohibit the bank from opening new branches in the state. The Caldera, Weggeland and Killea California Interstate Banking and Branching Act of 1995, effective October 2, 1995, (the "Caldera Act") amends the California Financial Code to, among other matters, regulate the operations of state banks to eliminate conflicts with and to implement the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 discussed above. The Caldera Act includes (1) an election to permit early interstate merger transactions; (2) a prohibition against interstate branching through the acquisition of a branch business unit located in California without acquisition of the whole business unit of the California bank; and (3) a prohibition against interstate branching through de novo establishment of California branch offices. The Caldera Act mandates that initial entry into California by an out-of-state institution be accomplished by acquisition of or merger with an existing whole bank which has been in existence for at least five years. COMMUNITY REINVESTMENT ACT In October 1994, the federal financial institution regulatory agencies proposed a comprehensive revision of their regulations implementing the Community Reinvestment Act ("CRA"), enacted in 1977 to promote lending by financial institutions to individuals and businesses located in low and moderate income areas. In May 1995, the proposed CRA regulations were published in final form effective as of July 1, 1995. The revised regulations included transitional phase-in provisions which generally require mandatory compliance not later than July 1, 1997, although earlier voluntary compliance is permissible. Under the former CRA regulations, compliance was evaluated by an assessment of the institution's methods for determining, and efforts to meet, the credit needs of such borrowers. This system was highly criticized by depository institutions and their trade groups as subjective, inconsistent and burdensome, and by consumer representatives for its alleged failure to aggressively penalize poor CRA performance by financial institutions. The revised CRA regulations emphasize an assessment of actual performance rather than of the procedures 16 followed by a bank, to evaluate compliance with the CRA. Overall CRA compliance continues to be rated across a four-point scale from "outstanding" to "substantial noncompliance," and continues to be a factor in review of applications to merge, establish new branches or form bank holding companies. In addition, any bank rated in "substantial noncompliance" with the revised CRA regulations may be subject to enforcement proceedings. The regulations provide that "small banks", which are defined to include any independent bank with total assets of less than $50 million, are to be evaluated by means of a so-called "streamlined assessment method" unless such a bank elects to be evaluated by one of the other methods provided in the regulations. The differences between the evaluation methods may be summarized as follows: (1) The "streamlined assessment method" presumptively applicable to small banks requires that a bank's CRA compliance be evaluated pursuant to five "assessment criteria," including its (i) loan-to-deposit ratio (as adjusted for seasonal variations and other lending-related activities, such as sales to the secondary market or community development lending); (ii) percentage of loans and other lending-related activities in the bank's service area(s); (iii) distribution of loans and other lending-related activities among borrowers of different income levels, given the demographic characteristics of its service area(s); (iv) geographic distribution of loans and other lending-related activities within its service area(s); and (v) record of response to written complaints, if any, about its CRA performance. (2) The "lending, investments and service tests method" is applicable to all banks larger than $250 million which are not wholesale or limited purpose banks and do not elect to be evaluated by the "strategic plan assessment method." Central to this method is the requirement that such banks collect and report to their primary federal banking regulators detailed information regarding home mortgage, small business and farm and community development loans which is then used to evaluate CRA compliance. At the bank's option, data regarding consumer loans and any other loan distribution it may choose to provide also may be collected and reported. Using such data, a bank will be evaluated regarding its (i) lending performance according to the geographic distribution of its loans, the characteristics of its borrowers, the number and complexity of its community development loans, the innovativeness or flexibility of its lending practices to meet low and moderate income credit needs and, at the bank's election, lending by affiliates or through consortia or third-parties in which the bank has an investment interest; (ii) investment performance by measure of the bank's "qualified investments," that is, the extent to which the bank's investments, deposits, membership shares in a credit union, or grants primarily to benefit low or moderate income individuals and small businesses and farms, address affordable housing or other needs not met by the private market, or 17 assist any minority or women-owned depository institution by donating, selling on favorable terms or provisioning on a rent-free basis any branch of the bank located in a predominately minority neighborhood; and (iii) service performance by evaluating the demographic distribution of the bank's branches and ATMs, its record of opening and closing them, the availability of alternative retail delivery systems (such as telephone banking, banking by mail or at work, and mobile facilities) in low and moderate income geographies and to low and moderate income individuals, and (given the characteristics of the bank's service area(s) and its capacity and constraints) the extent to which the bank provides "community development services" (services which primarily benefit low and moderate income individuals or small farms and businesses or address affordable housing needs not met by the private market) and their innovativeness and responsiveness. (3) Wholesale or limited purpose banks which do not make home mortgage, small farm or business or consumer loans to retail customers may elect, subject to agency approval of their status, to be evaluated by the "community development test method," which assesses the number and amount of the bank's community development loans, qualified investments and community development services and their innovativeness and complexity. (4) Any bank may request to be evaluated by the "strategic plan assessment method" by submitting a strategic plan for review and approval. Such a plan must involve public participation in its preparation, and contain measurable goals for meeting low and moderate income credit needs through lending, investments and provision of services. Such plans generally will be evaluated by measuring strategic plan goals against standards similar to those which will be applied in evaluating a bank according to the "lending, investments and service test method." The federal institution regulatory agencies issued a final rule effective as of January 1, 1996 to make certain technical corrections to the revised CRA regulations. Among other matters, the rule clarifies the transition from the former CRA regulations to the revised CRA regulations by confirming that when an institution either voluntarily or mandatorily becomes subject to the performance tests and standards of the revised regulations, the institution must comply with all of the requirements of the revised regulations and is no longer subject to the provisions of the former CRA regulations. DEPOSIT INSURANCE On December 11, 1996 the FDIC finalized a rule lowering the rates on assessments paid to the Savings Association Insurance Fund ("SAIF"), effective October 1, 1996. As a result of the special assessment required by the Deposit Insurance Funds Act of 1996 ("Funds Act"), the SAIF must be capitalized at the target 18 designated reserve ratio ("DRR") of 1.25 percent of estimated insured deposits on October 1, 1996. Section 7 of the Federal Deposit Insurance Act, as amended by the Funds Act, requires the FDIC to set assessments in order to maintain the target DRR. Therefore, the FDIC has lowered the rates on assessments paid to the SAIF, while simultaneously widening the spread between the lowest and highest rates to improve the effectiveness of the FDIC's risk-based premium system. The FDIC also established a process, similar to that which has applied to the Bank Insurance Fund ("BIF"), for adjusting the rate schedules for both the SAIF and BIF within a limited range without notice and comment to maintain each of the fund balances at the targeted DRR. The Funds Act also separates, effective January 1, 1997, the Financing Corporation ("FICO") assessment to service the interest on its bond obligations from the SAIF assessment. The amount assessed on individual institutions by the FICO will be in addition to the amount paid for deposit insurance according to the FDIC's risk-related assessment rate schedules. The final rule establishes a SAIF assessment rate schedule of 0 to 27 basis points effective for all institutions beginning January 1, 1997, in addition to a special interim rate schedule for the fourth quarter of 1996. The Funds Act also provides that the assessment rates for SAIF members may not be less than the assessment rates for BIF members which pose a comparable risk to the Deposit Insurance Fund. The Funds Act provides that assessments are authorized only if necessary to maintain the DRR of a Deposit Insurance Fund. In the event the balance in a Deposit Insurance Fund is in excess of the DRR of such fund, such excess amount shall be refunded to insured depository institutions by the FDIC on such basis as the FDIC determines to be appropriate, taking into account the factors considered under the risk-based assessment system. In the case of any payment of an assessment by an insured depository institution in excess of the amount due to the FDIC, the FDIC may refund the amount of the excess payment to the insured depository institution or credit such excess amount toward the payment of subsequent semi-annual assessments until such credit is exhausted. The Funds Act also provides that the BIF and the SAIF shall be merged into one Deposit Insurance Fund effective January 1, 1999, if no insured depository institution is a savings association on that date. ECONOMIC GROWTH AND REGULATORY PAPERWORK REDUCTION ACT OF 1996 The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the "Regulatory Reduction Act"), was enacted in September 1996. The Regulatory Reduction Act streamlines many banking laws and Federal bank regulatory agencies are in the process of promulgating regulations to implement the law. The Regulatory Reduction Act changes: (i) the procedures for merging, acquiring, or assuming all or a part of another depositary institution have been simplified for banks with the two highest regulatory ratings. The regulators have streamlined their internal approval procedures and expedited the review process for proposals. Top rated banks and 19 well run bank holding companies, qualify for the expedited treatment; (ii) the new rules eliminate the requirement for well capitalized and well managed banks to obtain prior approval for investment in bank premises or the stock of a corporation holding bank premises; (iii) per branch capital requirements are eliminated for well performing banks as are the requirement that a bank file a branch application for ATMs; (iv) the approval requirement for divestitures by well run banks have been eliminated. The process for acquisition of an interest in certain nonbank activities has been simplified by eliminating notice requirements for well capitalized and well managed banks. Acquisitions are still limited to permitted nonbank activities. Permitted nonbank activities have been greatly expanded. The acquisition is limited in size to ten percent of the consolidated total risk-weighted assets of the acquiring bank; (v) a qualified bank holding company may engage in permissible activities listed in 12 USC 1843(c)(8) without prior notification to its federal regulator, but must still give notification within 10 days of commencing the activity; (vi) banks meeting minimum capital requirements may appoint directors without giving prior notice to their regulator. A bank that does not meet its minimum capital requirements must give notice to its regulator 30 days prior to an appointment. Once the notice is received, the federal regulator has 90 days to file an objection to the appointment; (vii) the prohibitions against dual service of management officials for large banks have been amended to increase the size of the bank. The effect of this change is to exempt some of the smaller banks from this particular part of the management interlock prohibitions. Those persons who were grandfathered under the old regulations have had five years added to the grandfathering statute; (viii) the requirements for notice to the regulators and to customers for the closure of an ATM site is eliminated. Relocation or consolidation of branches no longer require notice if the relocation or consolidation occurs within the immediate neighborhood or it does not substantially affect the nature of the business or customers served; (ix) the Regulatory Reduction Act expanded the eligibility of some banks to qualify for an 18 month examination schedule by increasing the total asset size for those banks rated outstanding or good from $175,000,000 to $250,000,000; (x) all federal regulatory agencies are required to review regulations for outdated or otherwise unnecessary regulatory requirements not less frequently than once every 10 years; (xi) in order to encourage self testing and correction of regulatory errors, the Regulatory Reduction Act establishes a privilege for information accumulated during self testing of regulatory compliance. Information obtained by a bank during self testing may not be used in any civil action, examination or investigation, and generally may not be obtained by any agency or department for use in such a proceeding. If the bank elects to disclose this information in connection with a particular action, it may not be used in any other actions; and (xii) as a result of the passage of the Regulatory Reduction Act the federal bank regulators have begun a process of regulatory simplification. 20 The Real Estate Settlement Procedures Act ("RESPA") regulations and the Truth-in-Lending Act ("TILA") regulations have been changed to adopt matching definitions for common terms. Federal regulators recently asked for additional comments from banks for consolidation and simplification of the consumer protection regulations. Those comments are to be published sometime in the Spring of 1997. ASSET CONSERVATION, LENDER LIABILITY AND DEPOSIT INSURANCE PROTECTION ACT OF 1996 Environmental Protection Agency regulations excluding financial institutions from liability for the clean up of toxic materials on property held as collateral for loans were over turned by the federal courts. Due to concerns expressed by interested parties (owners, realtors and lenders) Congress passed amendments to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") to reinstate certain safeguards for fiduciaries and lenders. A bank or other party acting as a fiduciary may hold property in such capacity and shall have no liability for the release or threatened release of a hazardous substance in excess of the value of the property held in a fiduciary capacity. For example, a bank acting as trustee under the terms of a written trust agreement, will not have any liability in excess of the actual value of the assets in that particular trust. The assets of the Bank will not be at risk for a release occurring on property belonging to the trust. This amendment does not limit the liability of the fiduciary to private parties that may have a cause of action outside of the scope of CERCLA. Fiduciary as used in CERCLA includes, trustees, executors, administrators, custodians, guardians, receivers, conservators, and personal representatives. The amendments to CERCLA include changes in the definitions contained in 42 USC 9601(20) entitled definitions. A major change in the definition of "owner" or "Operator" has the effect of limiting the liability of a financial institution that does not participate in management of an environmentally impaired property. Section 9607 of CERCLA states that owners and operators of a vessel or facility are liable for damages arising out of discharge of a hazardous substance on property. The amendment specifically states that a financial institution holding a deed of trust on real property that does not participate in the management of the operations carried out on the property is not an owner or an operator under the statute. The amendments further state that a financial institution that forecloses on such property does not incur liability simply by the act of foreclosing on the property or through the subsequent sale of the property to a third party. INTER-COMPANY BORROWINGS Bank holding companies are also restricted as to the extent to which they and their subsidiaries can borrow or otherwise obtain credit from one another, or engage 21 in certain other transactions. The "covered transactions" that an insured depository institution and its subsidiaries are permitted to engage in with their nondepository affiliates are limited to the following amounts: (1) in the case of any one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 10% of the capital stock and the surplus of the insured depository institution; and (ii) in the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 20% of the capital stock and surplus of the insured depository institution. In addition, extensions of credit that constitute covered transactions must be collateralized in prescribed amounts. "Covered transactions" are defined by statute to include a loan or extension of credit to the affiliate, a purchase of securities issued by an affiliate, a purchase of assets from the affiliate (unless otherwise exempted by the Federal Reserve Board), the acceptance of securities issued by the affiliate as collateral for a loan and the issuance of a guarantee, acceptance, or letter of credit for the benefit of an affiliate. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. IMPACT OF MONETARY POLICIES Banking is a business which depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and other borrowings, and the interest rate earned by banks on loans, securities and other interest-earning assets comprises the major source of banks' earnings. Thus, the earnings and growth of banks are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the FRB. The FRB implements national monetary policy, such an seeking to curb inflation and combat recession, by its open-market dealings in United States government securities, by adjusting the required level of reserves for financial institutions subject to reserve requirements and through adjustments to the discount rate applicable to borrowings by banks which are members of the FRB. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits and also affect interest rates. The nature and timing of any future changes in such policies and their impact on Central Coast and Cypress cannot be predicted. In addition, adverse economic conditions could make a higher provision for loan losses a prudent course and could cause higher loan loss charge-offs, thus adversely affecting a bank's net earnings. ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has recently issued SFAS No. 125, "Accounting for the Transfer and Servicing of Financial Assets and Extinguishments of Liabilities" effective for transactions occurring after December 31, 1996. SFAS NO. 125 requires that an asset seller must meet defined conditions to demonstrate that it has surrendered control over the assets. The failure to meet these conditions usually results in on-balance-sheet treatment for the assets and a libility for the sale proceeds received. SFAS No. 125 also requires that contracts to service are recorded as an asset or a liability based on fair value or on an allocation of the carrying amount of the financial asset. SFAS 125 covers subsequent accounting, including impairments, and eliminates the distinction between excess and normal servicing. In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" to defer for one year the effective date of implementation for transactions related to repurchase agreements, dollar-roll repurchase agreements, securities lending and other similar transactions. The Company does not believe that adoption of these standards will have a significant impact on its financial position or results of operations. 22 GENERAL On June 25, 1984, the Bank formed Yuba-Sutter Financial Services Corporation ("Yuba-Sutter") as a wholly-owned subsidiary. This subsidiary is inactive. There has been no material effect upon the Bank's capital expenditures, earnings, or competitive position as a result of federal, state or local provisions regarding the discharge of materials into the environment. At December 31, 1996, the Company employed one hundred seventy-nine (179) persons including six (6) part-time employees, four (4) executive officers and forty-seven (47) other officers. None of the Company's employees is presently represented by a union or covered under a collective bargaining agreement. Management of the Company believes that its employee relations are excellent. ITEM 2. PROPERTIES The Bank currently conducts its banking operations from an administrative office, seven (7) branch offices and two loan production offices and another loan production office is scheduled to open in the second quarter of 1997. The Bank's principal office in Yuba City, California, is located at 777 Colusa Avenue in a modern, single story, shopping center end building which has drive-up windows and off-street parking for its customers. This office was opened in 1982. In 1991, the Bank purchased a building located at 1005 Stafford Way, Yuba City, California, located directly behind its main branch. This building serves as the headquarters for the Company. The Bank's note department will move from the Bank's Colusa Avenue office to this location in the second quarter of 1997, after the Company's headquarters have moved to another location. The Bank purchased land for the Bank's office at 1221 Bridge Street, Yuba City, in 1978. In 1991, the Bank purchased a combined retail and office building with parking located at 1227 Bridge Street, adjacent to the Bank's Bridge Street branch. Presently, the Bank's Data Center, Administrative services and financial consulting services are located in this building. In the second quarter of 1997, the Company's and the Bank's headquarters will be moved to this location. The Bank's Marysville branch office was located at 231 D Street in a leased portion of an office building called "Library Square" until March 31, 1996. The Bank's lease obligations also terminated on March 31, 1996. 23 The new location of the Bank's Marysville office is 700 "E" Street in Marysville. The Bank purchased this building, which was a branch of another bank, in September 1995 for a purchase price of $405,000 including all of the improvements, furniture, fixtures and equipment which were located there. The Bank's Colusa branch office is located at 655 Fremont Street in an office building which was converted to banking quarters. The Bank owns the land and premises for the branch. In 1985, the Bank purchased premises for its Arbuckle office located at the corner of Amanda and Sixth Streets. The Bank moved its Arbuckle office to this location in June, 1986. The Bank leases 1,800 square feet plus a common area of these premises to an unaffiliated party. In 1993, the Bank purchased the building which is now the location of its new Woodland branch office located at 203 Main Street. This was formerly the site of the Security Pacific Bank branch. The purchase price for this building of approximately 4,000 square feet was $430,100 and the Bank spent $154,381 remodeling the building. The Bank's former Citrus Heights loan production office was located at 6545 Sunrise Boulevard, Citrus Heights, California. The premises contained approximately 1,556 square feet of office space, and was leased for a three year term beginning on September 15, 1994. The lease was terminated on March 31, 1996. The rent during the first year was $1,400 per month and increases each year with a rent of $1,556 per month during the third year. On October 1, 1996, the Bank entered into a month to month lease for an office located at 2140 Professional Drive, in Roseville, California where it has a real estate LPO. The rent is $405 per month plus an additional $235 per month for office services. On April 30, 1996, the Bank entered into a lease for premises located at 194 East Sixth Street, Chico California, the site of one of its LPOs. The lease is for two (2) years commencing on June 1, 1996 at a rent of $900 per month. The lease provides for three options to renew for a period of two (2) years each. On December 2, 1996, the Bank purchased a former bank branch located at 995 Tharp Road in Yuba City, California for a purchase price of $650,000. After remodeling, the Bank relocated its Agricultural Real Estate and Residential Real Estate Departments at this location. 24 In connection with the purchase of E.P.I., the Bank entered into a lease for premises where E.P.I. is located at 6929 Sunrise Boulevard in Citrus Heights. The lease commenced on August 1, 1996 at a monthly rent of $3,322 which increased to $3,449 on November 1, 1996 and until the lease terminates on December 31, 1997. ITEM 3. LEGAL PROCEEDINGS The Company is a party to ordinary routine litigation incidental to its business and is not a party to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is trading on the NASDAQ National Market under the trading symbol "CIBN". The Company's Common Stock began trading on the NASDAQ National Market on July 31, 1996. Prior to that time, the Company's Common Stock was listed on the NASDAQ Bulletin Board and was the subject of limited trading. Set forth below is information regarding trading in the Company's Common Stock for the last two years. The prices indicated below may not necessarily represent actual transactions. SALE PRICE OF COMMON STOCK -------------------------- PERIOD ENDED 1996 BID ASK ----------- ----------- March 31 $19.52 $20.48 June 30 18.10 21.90 September 30 22.75 23.00 December 31 24.00 25.00 25 PERIOD ENDED 1995 BID ASK ----------- ----------- March 31 $18.10 $18.57 June 30 18.10 18.70 September 30 19.76 20.40 December 31 18.10 18.46 Cash dividends paid on the Company's Common Stock were $.42 per share for the year ending December 31, 1996, and $.41 per share for the year ending December 31, 1995, both adjusted to reflect the 5 percent stock dividends paid on July 14, 1995 and September 20, 1996, and a 5-for-4 stock split paid on May 26, 1994. It is currently the intention of the Board of Directors of the Company to pay cash dividends on a quarterly basis. However, there is no assurance that cash dividends will be paid in the future as they are dependent upon the earnings, financial condition and capital requirements of the Company and its subsidiary, Feather River State Bank, as well as legal and regulatory requirements. As of December 31, 1996, the Company had $6,792,619 available for payment of dividends to its shareholders without any restrictions. As of February 28, 1997, there were 1,160 holders of record of the Company's Common Stock. ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992 -------------- ------------- ------------- ------------- ------------- FOR THE YEAR Interest Income $20,574,833 $19,002,834 $15,120,346 $12,805,981 $12,419,781 Interest expense 7,448,898 6,316,594 4,502,067 4,388,018 4,915,960 -------------- ------------- ------------- ------------- ------------- Net Interest income 13,125,935 12,686,240 10,618,279 8,417,963 7,503,821 Provision for loan losses 385,000 875,000 347,000 155,000 180,000 -------------- ------------- ------------- ------------- ------------- Net interest income after provision for loan losses 12,740,935 11,811,240 10,271,279 8,262,963 7,323,821 Noninterest income 3,136,423 2,226,967 1,878,349 2,353,021 1,922,883 Noninterest expense (10,269,529) (8,936,485) (8,189,991) (7,118,212) (5,999,167) -------------- ------------- ------------- ------------- ------------- 26 1996 1995 1994 1993 1992 -------------- ------------- ------------- ------------- ------------- Income before provision for income taxes 5,607,829 5,101,722 3,959,637 3,497,772 3,247,537 Provision for income taxes 2,206,778 2,036,000 1,540,000 1,309,000 1,200,000 -------------- ------------- ------------- ------------- ------------- Net income $ 3,401,051 $ 3,065,722 $ 2,419,637 $ 2,188,772 $ 2,047,537 -------------- ------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- ------------- PER COMMON SHARE DATA Net income $ 2.18 $ 1.88 $ 1.52 $ 1.37 $ 1.28 Cash dividends $ 0.42 $ 0.41 $ 0.36 $ 0.29 $ 0.29 Book value $ 14.16 $ 12.26 $ 10.83 $ 9.67 $ 8.46 Dividend payout ratio 19.05% 21.70% 23.80% 21.50% 23.10% AVERAGE COMMON SHARES OUTSTANDING 1,560,949 1,629,474 1,588,874 1,600,926 1,605,070 FINANCIAL RATIOS Return on average assets 1.51% 1.56% 1.33% 1.34% 1.33% Return on average common shareholders' equity 16.71% 17.54% 15.92% 17.88% 19.46% Net interest margin 5.64% 5.45% 4.96% 4.25% 3.95% Net charge-offs to average loans, net 0.16% 0.19% 0.12% 0.34% (0.01%) Allowance for loan loss as a percent of net loans 2.68% 3.05% 2.57% 2.87% 3.13% Efficiency ratio 63.05% 59.92% 65.54% 66.09% 63.64%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 THE COMPANY California Independent Bancorp (the "Company") through its wholly-owned subsidiary, Feather River State Bank (the "Bank"), engages in a broad range of financial service activities. The Bank commenced operations in 1977. The Company was formed in 1995 and, after receiving regulatory and shareholder approval, became the bank holding company for the Bank in May 1995. In October 1996, the Bank acquired E.P.I. Leasing Co., Inc., ("EPI") and operates it as a subsidiary. The Bank's other subsidiary, Yuba-Sutter Financial Services, Inc., is currently inactive. SUMMARY OF FINANCIAL RESULTS In 1996, the Company's earnings increased to $3,401,000 or 10.9%, representing the fourteenth consecutive year of increases in net income. In 1995, earnings were $3,066,000, an increase of 26.7% from 1994. Earnings per share in 1996 were $2.18 an increase of 16.0% as compared to earnings of $1.88 per share in 1995, which was an increase of 23.7% from 1994. The Company paid cash dividends of $.36 per share in 1994, $.41 per share in 1995 and $.42 in 1996, 5% stock dividends in 1995 and 1996, and a 5-for-4 stock split of its Common Stock in 1994. Earnings per share have been adjusted retroactively to reflect the stock dividends and stock split. The increase in the Company's earnings from 1994 to 1996 generally reflects an increase in the volume of interest-earning assets and the economic recovery in Northern California. Certain information concerning the Company's average balances, yields and rates on average interest-earning assets and interest-bearing liabilities is set forth in the table below. The Company's average interest-earning assets increased from $155,309,000 in 1994, to $175,020,000 in 1995, and to $201,233,000 in 1996, while the average yield on these assets increased in 1995 to 10.86% from 9.74% in 1994, and then declined in 1996 to 10.22%. The increase in average yield in 1995 reflected a rising interest rate environment from the previous year, while the decrease in average yield in 1996 of .64% reflects both a decrease in prevailing interest rates nationally and amongst the Company's local competitors. Average interest- bearing liabilities, consisting of interest paid on interest-bearing deposits, increased from $129,454,000 in 1994, to $141,339,000 in 1995, and $162,582,000 in 1996, while the average rate paid on these deposits was 3.48%, 4.47%, and 4.58% respectively. The increase in interest rates on deposits is reflective of the increase in market rates. Noninterest-bearing demand accounts, consisting primarily of business checking accounts, has increased from $36,912,000 in 1994, to $35,864,000 in 1995, and to $40,128,000 in 1996. The increase in both interest-bearing and noninterest- bearing deposits from 1995 to 1996, reflects normal growth and also reflects the closing of branches by large statewide banks in Marysville, where the branch accounted for a significant part of the overall increase in deposits. Management believes that the Company has adequate liquidity to meet its needs such as funding the undisbursed portion of borrower's lines of credit, withdrawals by depositors, managing interest and market rate risk in the event of significant changes in interest rates, and meeting its cash needs. Federal Funds Sold is the means by which the Company invests its excess cash overnight with other banks. - -------------------------------------------------------------------------------- AVERAGE BALANCE SHEETS
1996 1995 1994 ------------------------------- --------------------------------- -------------------------------- Average Yield/ Interest Average Yield/ Interest Average Yield/ Interest Balance Rate Amount Balance Rate Amount Balance Rate Amount ----------- ------ ---------- ----------- ------ ---------- ---------- ------ ---------- (Dollars in thousands) Assets Earning-assets Short-term investments: Federal funds sold $27,962,872 5.30% $1,482,801 $12,305,263 5.73% $705,422 $8,872,954 4.44% $393,770 ----------- ------ ---------- ----------- ------ ---------- ---------- ------ ---------- Total $27,962,872 5.30% $1,482,801 $12,305,263 5.73% $705,422 $8,872,954 4.44% $393,770 ----------- ------ ---------- ----------- ------ ---------- ---------- ------ ---------- Investment securities: Taxable 20,654,011 7.70% 1,591,086 26,081,024 6.99% 1,823,710 22,202,577 5.16% 1,146,082 Nontaxable 4,322,277 6.36% 274,808 4,741,005 6.61% 313,293 5,276,970 6.84% 360,830 ----------- ------ ---------- ----------- ------ ---------- ---------- ------ ---------- Total 24,976,288 7.47% 1,865,894 30,822,029 6.93% 2,137,003 27,479,547 5.48% 1,506,912 ----------- ------ ---------- ----------- ------ ---------- ---------- ------ ---------- AVERAGE BALANCE SHEETS (CONTINUED) 1996 1995 1994 -------------------------------- ---------------------------------- --------------------------------- Average Yield/ Interest Average Yield/ Interest Average Yield/ Interest Balance Rate Amount Balance Rate Amount Balance Rate Amount ----------- ------ ---------- ----------- ------ ---------- ---------- ------ ---------- (Dollars in thousands) Loans: (1) 148,293,868 11.62% 17,226,138 131,892,742 12.25% 16,160,409 118,956,336 11.11% 13,219,664 ------------ ------- ---------- ------------ ------ ----------- ------------ ------ ----------- Total earning assets $201,233,028 10.22% $20,574,833 $175,020,034 10.86% $19,002,834 $155,308,837 9.74% $15,120,346 ------------ ------ ----------- ------------ ------ ----------- ------------ ------ ----------- Allowance for possible loan losses (3,952,228) (3,592,222) (3,157,839) Nonearning assets Cash and due from banks $ 13,751,241 $ 11,579,838 $ 17,887,422 Premises and equipment 6,769,581 6,214,843 6,237,337 Other 7,140,684 7,225,503 5,906,097 ------------ ------------ ------------ Total nonearning assets 27,661,506 25,020,184 30,030,856 Total assets $224,942,306 $196,447,996 $182,181,854 ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits: Demand, savings and money market $ 92,765,254 3.80% $ 3,524,331 $ 87,893,048 3.65% $ 3,211,937 $ 96,101,626 3.01% $ 2,894,702 ------------ ------ ----------- ------------ ------ ----------- ------------ ------ ----------- Time certificates 68,959,042 5.64% 3,891,406 52,245,879 5.82% 3,041,354 32,452,971 4.82% 1,564,253 Other 858,176 3.86% 33,161 1,200,548 5.27% 63,303 899,241 4.79% 43,112 ------------ ------ ----------- ------------ ------ ----------- ------------ ------ ----------- Total $162,582,472 4.58% $ 7,448,898 $141,339,475 4.47% $ 6,316,594 $129,453,838 3.48% $ 4,502,067 ------------ ------ ----------- ------------ ------ ----------- ------------ ------ ----------- Noninterest-bearing deposits and other liabilities: Demand, noninterest-bearing $ 40,127,679 $ 35,863,668 $ 36,912,054 Other liabilities 1,881,981 1,768,835 620,713 Shareholders' equity 20,350,174 17,476,018 15,195,249 ------------- ------------ ------------ Total $ 62,359,834 $55,108,521 $ 52,728,016 ------------- ------------ ------------ Total liabilities and shareholders' equity $224,942,306 $196,447,996 $182,181,854 ------------- ------------ ------------ ------------- ------------ ------------ Net interest income $11,283,053 $12,686,240 $10,618,279 Net interest margin 5.64% 6.39% 6.26% ------- ------- -------
(1) Includes loan origination fees of $808,336 for 1996; $1,854,024 for 1995; $2,020,074 for 1994. - -------------------------------------------------------------------------------- NET INTEREST INCOME Net interest income, the difference between interest earned on loans and investments and the interest paid on deposits and other sources of funds, is the principal component of the Company's earnings. The preceding table shows the composition of average earning assets and average interest-bearing liabilities, average yields and rates, and the Company's net interest margin. Interest income increased from $15,120,000 in 1994, to $19,003,000 in 1995, and $20,575,000 in 1996, or by 25.7% in 1995 and 8.27% in 1996. The average interest rate earned on loans was 11.62% in 1996 versus 12.25% in 1995 and 11.11% in 1994. The Company's loan portfolio consists mainly of loans that reprice immediately with changes in the prime rate and, therefore, closely follow interest rate trends. The increase in 1995 is a result of an increase in the volume of interest-earning assets and a larger net interest margin due to the average yield on interest-earning assets increasing more steeply than the average rate paid on interest-bearing liabilities. The increase in interest income in 1996 is due to the increase in the volume of interest-earning assets as both average yield and the net interest margin decreased. Average Federal Funds Sold were $8,873,000 in 1994, $12,305,000 in 1995, and $27,963,000 in 1996, representing increases of 38.7% in 1995 and 127% in 1996. The increase in Federal Funds Sold in 1996 is due to the increase in both interest and noninterest-bearing deposits of $25,507,000 and a lower average balance of investment securities. Total interest expense increased from $4,502,000 in 1994, to $6,317,000 in 1995, and to $7,449,000 in 1996, or an increase of 40.3% in 1995, and 17.9% in 1996. The volume of average interest-bearing liabilities increased by 15.0% in 1996, 9.0% in 1995, and 12.8% in 1994. The increase in the Company's cost of funds is due to increases in both volume and rate. The Company's net yield on interest-earning assets is affected by changes in the rates earned and paid and the volume of interest-earning assets and interest- bearing liabilities. The impact of changes in volume and rate on net interest income in 1996 and 1995 is shown in the following table. Changes attributable to both volume and rate have been allocated to rate. - -------------------------------------------------------------------------------- CHANGES IN VOLUME/RATE
1996 Compared to 1995 1995 Compared to 1994 ---------------------------- --------------------------- Volume Rate Total Volume Rate Total -------- -------- ------- ------- ------- ------- (Dollars in thousands) Federal funds sold $ 897 $ (119) $ 778 $ 152 $ 159 $ 311 Investment securities: Taxable (379) 146 (233) 200 478 678 Nontaxable (28) (10) (38) (36) 84 (48) Loans 2,009 (2,786) (777) 1,437 1,504 2,941 -------- -------- ------- ------- ------- ------- Total $2,499 $(2,769) $(270) $1,753 $2,129 $3,882 -------- -------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- Demand, savings and money market 178 134 312 (247) 564 317 Time certificates 973 (123) 850 954 523 1,477 -------- -------- ------- ------- ------- ------- Total $1,151 $(1,181) $ (30) $ 707 $1,087 $1,794 -------- -------- ------- ------- ------- ------- Increase in net interest income $1,349 $(1,589) $(240) $1,046 $1,042 $2,088 -------- -------- ------- ------- ------- ------- -------- -------- ------- ------- ------- -------
- -------------------------------------------------------------------------------- LOANS Outstanding total loans averaged $148,294,000 in 1996 as compared to $131,893,000 in 1995, and $118,956,000 in 1994. This represents increases of $16,401,000 or 12.4% in 1996, $12,937,000 or 10.9% in 1995, and $3,562,000 or 3.1% in 1994. While the Company continues to emphasize its agricultural lending and lending under programs such as the Federal Agricultural Mortgage Corporation (Farmer Mac) and Farmers Service Agency (FSA), the increase in average total loans in 1995 and 1996 primarily reflects increases in loans for real estate construction and land development due to the economic recovery in the Company's market area and a significant increase in lease financing. In 1996, the Company purchased equipment leases from three sources including EPI, which it acquired in October 1996. The Company purchases leases with its excess liquidity as the average yield on leases is in excess of 10%. The following table summarizes the composition of the loan portfolio as of December 31 for the years indicated: - -------------------------------------------------------------------------------- COMPOSITION OF LOAN PORTFOLIO
December 31, -------------------------------------------------------------------------- 1996 1995 1994 1993 1992 Commercial and agricultural $ 71,527,482 $ 74,355,093 $ 69,143,245 $ 51,166,003 $ 41,646,415 Real estate-construction 29,916,204 18,048,005 12,647,669 15,619,506 11,159,497 Real estate-mortgage 28,564,640 28,288,337 33,450,751 37,435,688 46,508,307 Consumer 2,983,939 2,814,717 3,111,243 2,923,728 3,513,747 Lease financing 15,892,783 3,216,140 6,501,110 23,844 137,476 Other 2,214,574 1,522,174 3,109,201 464,524 3,152,019 -------------- ------------- ------------- ------------- -------------- Total $151,099,622 $128,244,466 $127,963,219 $107,633,293 $106,117,461 -------------- ------------- ------------- ------------- -------------- -------------- ------------- ------------- ------------- --------------
The Company lends to consumers, small to medium-sized businesses and farmers. A significant portion of the Company's loan portfolio consists of loans secured by residential, commercial and agricultural real estate. Real estate mortgage and construction loans and agricultural real estate equalled $58,481,000 or 38.7% and $46,336,000 or 36.13% of the total loan portfolio at December 31, 1996 and 1995, respectively. These loans are secured by real estate, and advances are limited to 65% to 80% of appraised value depending on the type of loan. The Company makes agricultural production loans and other agricultural loans which are secured by the crops and the proceeds. These loans generally are at their peak in the third quarter of each year. The Company had $46,786,000 or 31.0% and $49,966,000 or 39.0% of its loan portfolio in agricultural production loans outstanding at December 31, 1996 and 1995, respectively. Approximately 15% of these loans are guaranteed by the Farm Service Agency (FSA). In October 1995, the Company established a Commercial Finance Division. The Commercial Finance Division makes commercial and industrial loans to small and medium-sized businesses for working capital, inventory and equipment. These loans are secured by the assets being financed or by the customer's receivables, with loan-to-value ratios which generally do not exceed 75%. The Company also does factoring (the purchase of accounts receivable) at discounts from 50% to 80% of the amount of the accounts receivable which are purchased. At December 31, 1996, the Commercial Finance Division had outstanding extensions of credit of approximately $4,500,000. The Company originates mortgage loans on residential and agricultural properties which it sells into the secondary market in order to divest itself of the interest rate risk associated with these mostly fixed-interest rate products. The Company accounts for these loans in accordance with the Emerging Issues Task Force Issues No. 88-11, "Allocation of Recorded Investment when a Loan is Sold", No. 86-38, "Implication of Mortgage Prepayments on Amortization of Servicing Rights", and No. 84-21, "Sale of a Loan with a Partial Participation Retained". These loans are sold without recourse. As of December 31, 1996, 1995, and 1994, total loans serviced by the Company were $107,637,000, $107,141,759 and $105,307,587. Total loans sold by the Company were $28,297,103 in 1996, an increase of 217% from 1995; $8,935,100 in 1995, a decrease of 49.28% from 1994; and $17,617,681 in 1994. The decrease in loans sold in 1995 reflects a change in the market for residential mortgage loans and the Company's decreased activity in that area. The significant increase in loans sold in 1996 reflects both Farmer Mac and FSA changing their procedures for the sale of loans into the secondary market whereby they purchase the loans directly from the Company rather than have "poolers" purchase these loans to assemble a pool of loans to be sold in the secondary market. This has made it easier and less time consuming for the Company to sell these loans. The Company in 1996 sold many of these loans as servicing released, as the Company receives more income per loan if it is sold in this manner. INTEREST RATE SENSITIVITY Interest rate sensitivity is the relationship between market interest rates and net interest income due to the repricing characteristics of assets and liabilities. If more liabilities than assets reprice in a given period (a liability sensitive position), market interest rate changes will be reflected more quickly in liability rates. If interest rates decline, a liability sensitive position will benefit net income. Alternatively, where assets reprice more quickly than liabilities in a given period (an asset sensitive position), a decline in market rates will have an adverse effect on net interest income. Management's objective is to maintain the stability of the net interest margin in times of fluctuating interest rates by maintaining an appropriate mix of interest rate sensitive assets and liabilities. The following table presents the interest rate sensitivity of the Company as of December 31, 1996. INTEREST RATE SENSITIVITY AS OF DECEMBER 31, 1996
Repricing Opportunity 0-90 91-180 181-365 Over Days Days Days One Year Total ---------- ---------- ------------ ---------- --------- (Dollars in thousands) Federal funds sold $ 41,300 $ 0 $ 0 $ 0 $ 41,300 Loans 121,598 5,862 3,121 20,519 151,100 Taxable investments 6 4,830 1,990 24,298 31,124 Nontaxable investments 115 150 1,575 1,700 3,540 ---------- ---------- ------------ ---------- --------- Total earning assets $163,019 $10,842 $ 6,686 $46,517 $227,064 ---------- ---------- ------------ ---------- --------- ---------- ---------- ------------ ---------- --------- Interest-bearing demand 33,659 0 0 0 33,659 Savings and money market deposits 67,756 0 0 0 67,756 Time certificates 29,028 19,695 22,574 10,063 81,360 ---------- ---------- ------------ ---------- --------- Total interest-bearing liabilities 130,443 19,695 22,574 10,063 182,775 ---------- ---------- ------------ ---------- --------- Gap $ 32,576 $(8,853) $(15,888) $36,454 $ 44,289 ---------- ---------- ------------ ---------- --------- Cumulative gap 32,576 23,723 7,835 44,289 ---------- ---------- ------------ ---------- ---------- ---------- ------------ ----------
- -------------------------------------------------------------------------------- Management does not manage its interest rate sensitivity to maximize income based on its prediction of interest rates, but to minimize interest rate risk to the Company by stabilizing the Company's net interest margin in all interest rate environments. Additionally, the Company is subject to considerable competitive pressure in generating deposits and loans at rates and terms prevailing in the Company's market areas. Management has developed a matrix that calculates pre-tax impact on earnings as determined by its gap position, that takes into consideration delays in the timing of repricing based on actual experience. The matrix is of a static nature and assumes that Management and market forces effect no changes and leave the rate-sensitive balance sheet virtually unchanged. QUALITY OF LOANS Inherent in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan extended and the creditworthiness of the borrower. To reflect the estimated risks of loss associated with its loan portfolio, provisions are made to the Company's allowance for loan losses. As an integral part of this process, the allowance for loan losses is subject to review and possible adjustment as a result of regulatory examinations conducted by governmental agencies and through Management's assessment of risk. The Company uses the allowance method in providing for loan losses. Loan losses are charged to the allowance for loan losses and recoveries are credited to it. Management believes that the total allowance for loan losses is adequate and continues to be maintained at a level above the Company's peer group, particularly when considering the Company's historically lower level of loan losses. While Management uses available information to provide for loan losses, future additions to the allowance may be necessary based on changes in economic conditions. The allowance for loan losses at December 31, 1996, was $4,053,000 or 2.68% of total loans outstanding as compared to $3,911,000 or 3.05% of total loans outstanding at December 31, 1995. Management believes that the allowance for loan losses at December 31, 1996, was adequate to provide for losses that can be reasonably anticipated. Additions to the allowance for loan losses are made by provisions for possible loan losses. The provision for possible loan losses is charged to operating expense and is based upon past loan loss experience and estimates of potential losses which, in Management's judgment, deserve current recognition. Management determines the appropriate size of the allowance for loan losses based upon specific allocations for classified loans and a general allocation for other loans based upon the loss experience during the past twelve rolling months for each particular type of loan. Other factors considered by Management include growth, composition and overall quality of the loan portfolio, and current economic conditions that may affect the borrower's ability to pay. Actual losses may vary from current estimates. The estimates are reviewed periodically, and adjustments, as necessary, are charged to operations in the period in which they became known. - -------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSESS
1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ----------- (Dollars in thousands) Total loans outstanding $151,100 $128,244 $127,963 $107,633 $106,117 Average net loans 148,294 131,893 118,956 115,394 126,869 BALANCE, JANUARY 1 3,911 3,288 3,087 3,320 3,128 Charge-offs by loan category Commercial 323 413 29 133 376 Consumer 0 46 43 8 2 Real Estate 4 96 125 300 0 ---------- ---------- ---------- ---------- ----------- Total $ 327 $ 555 $ 197 $ 441 $ 378 ---------- ---------- ---------- ---------- ----------- Recoveries by loan category Commercial $53 $ 249 $48 $ 18 $ 380 Consumer 31 44 3 5 9 Real Estate 0 10 0 30 1 ---------- ---------- ---------- ---------- ----------- Total $ 84 $ 303 $ 51 $ 53 $ 390 ---------- ---------- ---------- ---------- ----------- Net charge-offs (recoveries) 243 252 146 388 (12) Provision charged to expense 385 875 347 155 180 ---------- ---------- ---------- ---------- ----------- BALANCE, DECEMBER 31 $ 4,053 $ 3,911 $ 3,288 $ 3,087 $ 3,320 ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- Ratios: Net charge-offs (recoveries) to average loans 0.16% 0.19% 0.12% 0.34% (0.01)% Allowance to loans at end of year 2.68% 3.05% 2.57% .87% 3.13%
- -------------------------------------------------------------------------------- The Company had loan charge-offs of $327,000 in 1996, $555,000 in 1995, and $197,000 in 1994, and net loan charge-offs (which include recoveries) of $243,000, $252,000 and $146,000 in 1996, 1995 and 1994, respectively. These net charge-offs are equal to .16%, .19% and .12% of average loans for 1996, 1995 and 1994. The charged-off loans in 1996 included two row crop loans consisting of a charge-off of $203,000 of a loan with an original balance of $1,500,000, and a charge-off of $42,000 from an original balance of $450,000, and a letter of credit of $35,000, which the Company was obligated to pay when its customer defaulted on an obligation. The Company has recovered approximately $6,000 from its customer regarding the letter of credit and recoveries are expected to continue, but there can be no assurance that the Company will recover the full amount. In 1995, the Company charged-off $194,000 consisting of three unsecured loans to one borrower and recovered this same amount during the year. The Company also charged-off a real estate loan to another borrower in 1995 with a remaining balance of $55,000, which was also recovered during the year. The remainder of the loan charge-offs in 1995 consisted of 11 loans of various dollar amounts and a $55,000 writedown of property subsequently transfered to OREO. ALLOCATION OF ALLOWANCE
1996 1995 1994 1993 1992 Category to Category to Category to Category to Category to ----------------- ---------------- ---------------- ----------------- ---------------- $ % $ % $ % $ % $ % ------- ------- ------ ------- ------ ------- ------- ------- ------ ------- (Dollars in thousands) Loans in Each Category to Toal Loans Balance applicable to: Commercial and agricultural $1,918 47.34% $2,267 57.98% $1,776 54.03% $1,467 47.54% $1,302 39.25% Real Estate- construction 802 19.80% 550 14.07% 325 9.88% 448 14.51% 349 10.52% Real Estate- mortgage 766 18.90% 863 22.06% 860 26.14% 1,074 34.78% 1,455 43.83% Consumer 80 1.97% 86 2.19% 80 2.43% 84 2.72% 110 3.31% Other 487 11.99% 145 3.70% 247 7.52% 14 .45% 104 3.09% ------- ------- ------ ------- ------ ------- ------- ------- ------ ------- Total $4,053 100.00% $3,911 100.00% $3,288 100.00% $3,087 100.00% $3,320 100.00% ------- ------- ------ ------- ------ ------- ------- ------- ------ ------- ------- ------- ------ ------- ------ ------- ------- ------- ------ ------- Nonperforming Loans Loans Accounted for on a Nonaccrual Basis $ 846 $ 293 $1,110 $1,355 $1,042 Other Loans Contractually Past Due 90 Days or More 2,202 60 50 317 20 ------- ------ ------ ------- ------ Total $3,048 $ 353 $1,160 $1,672 $1,062 ------- ------ ------ ------- ------ ------- ------ ------ ------- ------
- -------------------------------------------------------------------------------- Any allocation or breakdown in the allowance for loan losses lends an appearance of exactness that does not exist. Thus, the allocation above should not be interpreted as an indication of expected amounts or categories where charge-offs will occur. The allocation of the allowance for loan losses as of the end of the last five fiscal years is summarized in the table above. NONPERFORMING LOANS Loans are generally placed on nonaccrual status when they are 90 days past due as to either interest or principal. At that time, any accrued but uncollected interest is reversed, and additional income is recorded on a cash basis as payments are received. However, loans that are in the process of renewal in the normal course of business, or are well-secured and in the process of collection, may not be placed on nonaccrual status, at the discretion of Management. A nonaccrual loan may be restored to an accrual basis when interest and principal payments are current and the prospects for future payments are no longer in doubt. At December 31, 1996, nonaccrual loans amounted to $846,000 or .56% of total loans as compared to $293,000 or .23% of total loans, at December 31, 1995, and $1,110,000 or .87% of total loans at December 31, 1994. The decrease in nonaccrual loans from 1994 to 1995 primarily reflects the recovering economy at that time. At December 31, 1996, the increase in nonaccrual loans included three loans totalling approximately $542,000 for development of residential property where it was necessary for the developer to change the type of housing to be built. Additionally, land values in this area decreased because of over- building. The Company is in negotiation with the borrower to restructure the loan which would include additional collateral in order to reduce the loan-to- value ratio to a more appropriate level. Other nonaccrual loans include two business loans with government guarantees, a business loan on which the Company now expects to be provided with collateral and a crop loan which is 90% guaranteed by FSA. Nonaccrual loans at December 31, 1995, consisted of three loans, two of which were real estate loans on which the Company anticipated full recovery as the remaining loan balance was below the market value of the real estate, and another loan which was a FSA guaranteed as to 90% of the loan. Loans past due 90 days or more as to principal or interest increased in 1996 to $2,202,000 as compared to $60,000 in 1995 and $50,000 in 1994. The significant increase of 357% in loans past due 90 days or more consists primarily of three loans totalling approximately $1,875,000. The Company is negotiating with the borrower regarding the largest of these loans, a $1,000,000 loan for livestock operations, to restructure the loan into a three-year term loan. The second largest loan is a $700,000 business loan, which is now accruing. The Company is negotiating with the borrower to restructure the loan into separate loans, with one loan to be secured by commercial real estate. The third loan, which is for approximately $175,000, is on nonaccrual as it is past due as to $1,700 in interest payments. In addition, there are equipment leases which are past due in the total amount of approximately $239,000 which were purchased from the two nonaffiliated leasing companies from which the Company purchases leases. These represent 1.4% of the leases purchased by the Company from these leasing companies, whereas the standard in the leasing industry is past dues equal to about 2% of leases outstanding. INVESTMENTS In 1996, the Company's investment portfolio was $34,664,000 or 13.2% of total assets, an increase from $27,428,000 or 12.78% of total assets in 1995, and from $32,809,000 or 17.0% of total assets in 1994. At December 31, 1996, 1995 and 1994, Federal Funds Sold were $41,300,000, $30,000,000 and $9,000,000 respectively. Federal Funds Sold are overnight deposits with other banks. In 1996, the increase in investment securities and Federal Funds Sold represent the investment of additional cash as growth in deposits exceeded the growth in loans. In 1995, the increase in Federal Funds Sold was due to the additional purchase of Federal Funds which were yielding a higher interest rate than 5-year U.S. Treasury securities. Under Statement of Financial Accounting Standard No. 115 (SFAS 115), investments of a bank in debt and equity securities must be classified in three different categories: "Trading", "Available-for-Sale", and "Held-to-Maturity", and there are different accounting methods for each category. The Company has classified all of its investment securities as either "Available-for-Sale" or "Held-to- Maturity". SFAS 115 requires that any unrealized gain or loss of the "Available- for-Sale" category be reported as an adjustment to the Company's equity capital, even though this gain or loss would only be realized if the investment were actually sold. If the investment is in the "Held-to-Maturity" category, no unrealized gains or losses need be reported. The following table summarizes the distribution of the Company's investment securities as of December 31, 1996 and 1995. - -------------------------------------------------------------------------------- INVESTMENTS
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ---------- ---------- ------------ December 31, 1996 Available-for-sale: U.S. Treasury securities and obligations of U.S. government agencies $11,405,179 $ 5,915 $(36,631) $11,374,463 ------------ ---------- ---------- ------------ ------------ ---------- ---------- ------------ Held-to-maturity: U.S. Treasury securities and obligations of U.S. government agencies $15,720,573 $140,302 $ (1,158) $15,859,717 Obligations of states and political subdivisions 3,576,412 92,434 (22,159) 3,646,687 Corporate obligations and other securities 3,992,185 27,109 0 4,019,294 ------------ ---------- ---------- ------------ $23,289,170 $259,845 $(23,317) $23,525,698 ------------ ---------- ---------- ------------ ------------ ---------- ---------- ------------ December 31, 1995 Available-for-sale: U.S. Treasury securities and obligations of U.S. government agencies $ 5,847,100 $ 47,652 $ (4,566) $ 5,890,186 ------------ ---------- ---------- ------------ ------------ ---------- ---------- ------------ Held-to-maturity: U.S. Treasury securities and obligations of U.S. government agencies $ 9,722,535 $352,824 $ 0 $10,075,359 Obligations of states and political subdivisions 4,905,291 154,675 (3,152) 5,056,814 Corporate obligations and other securities 6,909,942 116,710 (26,875) 6,999,777 ------------ ---------- ---------- ------------ $21,537,768 $624,209 $(30,027) $22,131,950 ------------ ---------- ---------- ------------ ------------ ---------- ---------- ------------
As of December 31, 1996, the Company's "Available-for-Sale" category adjustment reflected a net unrealized loss of $18,000 net of taxes, and the approximate market value of the Company's total investment portfolio was $34,900,000, reflecting an unrealized gain of $206,000. As of December 31, 1995, the Company's "Available-for-Sale" category adjustment of capital reflected an unrealized gain of $24,900 net of taxes, and the approximate market value of the Company's total investment portfolio was $28,022,000, reflecting an unrealized gain of $637,000. The Company had investment securities pledged as collateral for certain deposits, typically deposits of government entities of $10,375,000, $10,410,000 and $9,904,000 at December 31, 1996, 1995 and 1994, respectively. FUNDING Total deposits at December 31, 1996, 1995 and 1994 were $237,892,000, $193,296,000 and $175,112,000, an increase of $44,596,000 or 23.1% during 1996 and $18,184,000 or 10.38% during 1995. Average total deposits were $202,710,000 in 1996, $177,203,000 in 1995 and $166,366,000 in 1994. The increase in deposits in 1996 reflects both normal growth and the acquisition of deposits resulting from branch consolidations and closings in the Company's market area by large statewide banks. The increase in deposits during 1995 is partially a result of depositors shifting funds to bank deposits from other investments as interest rates on bank deposits increased significantly from the beginning of 1994 through 1995. Average deposits in time certificates increased from $32,453,000 in 1994 to $52,246,000 or 61% in 1995, and to $68,959,000 or 31.99% in 1996. The increase in 1995 reflects in part the aforementioned movement from other investments, and depositors shifting funds from other interest-bearing accounts at the Company to higher yielding time certificates, and in 1996 primarily reflects the acquisition of new deposits. The Company has been able to attract deposits by providing interest rates on deposits competitive with other financial institutions in its market area. The table below sets forth information for the last three fiscal years regarding the Company's average deposits and the average rate paid on each of the deposit categories. - -------------------------------------------------------------------------------- AVERAGE DEPOSITS
1996 1995 1994 ------------------ ----------------- ------------------ Average Average Average Balance Rate Balance Rate Balance Rate -------- ------ ------- ----- -------- ----- (Dollars in thousands) Demand, noninterest-bearing $40,128 - $35,864 - $36,912 - Demand, savings, and money market, interest-bearing 92,765 3.80% 87,893 3.65% 96,102 3.01% Time certificates 68,959 5.64% 52,246 5.82% 32,453 4.82%
- -------------------------------------------------------------------------------- The remaining maturities of the Company's certificates of deposit in amounts of $100,000 or more, including public time deposits, as of December 31, 1996, are indicated in the table below. Interest expense on these certificates of deposit totaled $1,481,000 in 1996. MATURITY OF CERTIFICATE OF DEPOSITS $100,000 OR MORE December 31, 1996 ----------------- (In thousands) Three months or less $12,928 Over three through six months 9,077 Over six through twelve months 8,514 Over twelve months 3,333 ------- Total $33,852 ------- ------- NONINTEREST INCOME Noninterest income for 1996 was $3,136,000 or an increase of 40.8%, and for 1995 was $2,227,000 or an increase of 18.6%. The table below sets forth the components of noninterest income for the years indicated: NONINTEREST INCOME 1996 1995 1994 ------ ------ ------ (Dollars in thousands) Service charges and fees $1,010 $ 943 $ 855 Loan servicing fees 487 482 306 Brokered loan fees 923 360 418 Gain on sale of OREO 240 31 29 Other 476 411 270 ------ ------ ------ Total $3,136 $2,227 $1,878 ------ ------ ------ ------ ------ ------ Service charges and fees on deposit accounts, the primary component in noninterest income, increased in 1996 to $1,010,000 or 7.1%, and in 1995 to $943,000 or 10.3%, due to increased activity in both years. Loan servicing fees in 1996 were $487,000, and in 1995 were $482,000, an increase of 57.6% over 1994 due to an increase in the number of loans it services. Brokered loan fees in 1996 were $923,000 an increase of 156% as a result of a higher volume of residential and agricultural mortgage loans sold into the secondary market, the sale of a significant portion of these loans on a servicing released basis, and EPI Leasing Brokered Commission Income. In 1996, the Company's gain on sale of OREO was $240,000 versus $31,000 in 1995. In both years, the gain on sale of OREO reflects the market value of the real estate property sold in that year. - -------------------------------------------------------------------------------- OTHER EXPENSES
1996 1995 1994 --------------------------- -------------------------- ------------------------ Percentage Percentage Percentage of Average of Average of Average Amount Earning Assets Amount Earning Assets Amount Earning Assets ---------- -------------- ---------- -------------- --------- -------------- (Dollars in thousands) Salaries and benefits $ 5,513 2.74% $ 4,673 2.67% $ 4,216 2.71% Occupancy 572 .28% 598 .34% 546 .35% Equipment 998 .50% 791 .45% 696 .45% Advertising and promotion 342 .17% 286 .16% 267 .17% Stationery and supplies 253 .13% 212 .12% 196 .13% Assessments 25 .01% 220 .13% 376 .24% Directors' fees 391 .19% 300 .17% 260 .17% Other 2,175 1.08% 1,857 1.06% 1,632 1.05% ---------- ------- ---------- ------ --------- ------- Total $ 10,269 5.10% $ 8,937 5.10% $ 8,189 5.27% ---------- ------- ---------- ------ --------- ------- ---------- ------- ---------- ------ --------- ------- Average Earning Assets $201,233 $175,020 $155,309 ---------- ---------- --------- ---------- ---------- ---------
- -------------------------------------------------------------------------------- NONINTEREST EXPENSE Noninterest expense for 1996 of $10,269,000 increased by 14.9% as compared to $8,937,000 in 1995 or an increase of 9.1%. Salaries and employee benefits of $5,513,000 in 1996, $4,673,000 in 1995, and $4,216,000 in 1994 represent increases of 17.98% and 10.8% in 1996 and 1995, respectively. The increase in 1996 reflects an increase in employment to accommodate the growth in the Company's asset size and the addition of 17 employees upon the acquisition of EPI. The increase in 1995 reflects salary increases and personnel added in connection with the Company's SBA Department at that time. The Company has closed its SBA Department due to competitive reasons, but continues to make SBA loans. Assessments in 1996 were $25,000 or a decrease of 88.64%, and were $220,000 in 1995 or a decrease of 41.5%, reflecting reductions in FDIC insurance assessments which were reduced significantly in 1995 and again in 1996. INCOME TAXES The provision for income taxes was $2,207,000 in 1996, $2,036,000 in 1995, and $1,540,000 in 1994. The Company's effective tax rate was 39.4% for 1996, 39.9% for 1995, and 38.9% for 1994. CAPITAL The Company has sustained its growth in capital through retained earnings, net of cash dividends paid out to shareholders. Shareholders' equity increased by $3,011,000 or 15.95% to $21,886,000 in 1996, and by $2,622,000 or 16.1% to $18,875,000 in 1995, after paying cash dividends of $.42 and $.41 per share in 1996 and 1995, respectively. The Company and the Bank are subject to requirements of the Federal Reserve Board and FDIC, respectively, governing capital adequacy. These guidelines are intended to reflect the degree of risk associated with both on and off-balance sheet items. Financial institutions are expected to comply with a minimum ratio of qualifying total capital to risk-weighted assets of 8% at least half of which must be in Tier 1 Capital. Federal regulatory agencies have also adopted a minimum leverage ratio of 4%, which is intended to supplement the risk-based capital requirements and to ensure that all financial institutions continue to maintain a minimum level of core capital. The risk-based and leverage capital ratios for the Company and the Bank at December 31, 1996, are set forth below. Both the Company and the Bank exceed the minimum capital requirements. - -------------------------------------------------------------------------------- CAPITAL RATIO AS OF DECEMBER 31, 1996
Company Bank -------------------- -------------------- Amount Ratio Amount Ratio ---------- ------- ---------- ------- (Dollars in thousands) RISK BASED CAPITAL RATIOS Tier 1 Capital $ 21,813 11.31% $ 21,804 11.32% Tier 1 Capital minimum requirement -7,713 -4.00% -7,708 -4.00% ---------- ------- ---------- ------- Excess $ 14,100 7.31% $ 14,096 7.32% ---------- ------- ---------- ------- ---------- ------- ---------- ------- Total Capital $ 22,918 11.89% $ 24,225 12.57% Total Capital minimum requirement -15,426 -8.00% -15,415 -8.00% ---------- ------- ---------- ------- Excess $7,492 3.89% $8,810 4.57% ---------- ------- ---------- ------- ---------- ------- ---------- ------- Risk-adjusted assets $192,825 $ 192,693 ---------- ---------- ---------- ---------- LEVERAGE CAPITAL RATIO Tier 1 Capital to quarterly average total assets $ 21,813 8.82% $ 21,804 8.82% Minimum leverage requirement -9,891 -4.00% -9,890 -4.00% ---------- ------- ---------- ------- Excess $ 11,922 4.82% $ 11,914 4.82% ---------- ------- ---------- ------- ---------- ------- ---------- ------- Total Quarterly average assets $247,274 $247,255 ---------- ---------- ---------- ----------
- -------------------------------------------------------------------------------- INFLATION It is Management's opinion that the effects of inflation on the Company's financial statements for the years ended December 31, 1996, 1995 and 1994 are not material. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Audited consolidated financial statements of the Company as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 appear on pages 40 thru 67. PAGE 22 Consolidated Financial Statements Report Of Independent Public Accountants To the Shareholders and Board of Directors of California Independent Bancorp: We have audited the accompanying consolidated balance sheets of CALIFORNIA INDEPENDENT BANCORP (a California corporation) AND SUBSIDIARIES as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of California Independent Bancorp and Subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As explained in Note 1 to the financial statements, effective January 1, 1994, the Company changed its method of accounting for certain investments in debt and equity securities as required by Statement of Financial Accounting Standards No.115. Arthur Andersen LLP Sacramento, California February 28, 1997 PAGE 23 California Independent Bancorp And Subsidiaries Consolidated Balance Sheets - December 31, 1996 And 1995 1996 1995 ------ -------- ASSETS Cash and due from banks $ 22,927,881 $ 17,962,704 Federal funds sold 41,300,000 30,000,000 ------------- -------------- Cash and cash equivalents 64,227,881 47,962,704 Investment securities held-to-maturity 23,289,170 21,537,768 Investment securities available-for-sale 11,374,463 5,890,186 ------------- -------------- Total investments 34,663,633 27,427,954 Loans 134,574,987 123,707,855 Loans held-for-sale 16,524,635 4,536,611 Less - allowance for loan losses (4,052,783) (3,910,970) ------------- -------------- Net loans 147,046,839 124,333,496 Premises and equipment, net 7,420,387 6,393,687 Interest receivable 2,213,083 1,270,868 Other real estate owned 1,081,620 965,135 Other assets 5,948,888 6,222,244 ------------- -------------- $262,602,331 $214,576,088 ------------- -------------- ------------- -------------- LIABILITY AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 55,117,230 $ 43,826,833 Interest-bearing 182,775,038 149,469,624 ------------- -------------- Total deposits 237,892,268 193,296,457 Interest payable 1,406,031 1,330,077 Other liabilities 1,417,852 1,074,185 ------------- -------------- TOTAL LIABILITIES 240,716,151 195,700,719 ------------- -------------- Commitments Shareholders' equity: Common stock, no par value- Authorized -- 20,000,000 shares Issued and outstanding -- 1,546,032 shares in 1996 and 1,518,938 shares in 1995 11,088,190 9,303,841 Retained earnings 10,935,806 9,706,538 Debt guarantee of ESOP (120,000) (160,000) Net unrealized gain (loss) on securities available-for-sale (17,816) 24,990 ------------- -------------- Total shareholders' equity 21,886,180 18,875,369 ------------- -------------- $262,602,331 $214,576,088 ------------- -------------- ------------- -------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS. PAGE 24 California Independent Bancorp And Subsidiaries Consolidated Statements Of Income For The Years Ended December 31, 1996, 1995, 1994
1996 1995 1994 -------- -------- -------- INTEREST INCOME Interest and fees on loans and leases $17,226,138 $16,160,409 $13,219,664 Interest on investments- Taxable interest income 1,591,086 1,823,710 1,146,082 Nontaxable interest income 274,808 313,293 360,830 Interest on federal funds sold 1,482,801 705,422 393,770 ---------- ---------- ---------- Total interest income 20,574,833 19,002,834 15,120,346 ---------- ---------- ---------- INTEREST EXPENSE Interest on deposits 7,415,738 6,253,291 4,458,955 Interest on other borrowings 33,160 63,303 43,112 ---------- ---------- ---------- Total interest expense 7,448,898 6,316,594 4,502,067 ---------- ---------- ----------- Net interest income 13,125,935 12,686,240 10,618,279 PROVISION FOR LOAN LOSSES 385,000 875,000 347,000 ---------- ---------- ---------- Net interest income after provision for loan losses 12,740,935 11,811,240 10,271,279 ---------- ---------- ---------- NONINTEREST INCOME Service charges on deposit accounts 917,466 859,329 768,279 Other 2,218,957 1,367,638 1,110,070 ---------- ---------- ---------- Total noninterest income 3,136,423 2,226,967 1,878,349 ---------- ---------- ---------- NONINTEREST EXPENSE Salaries and employee benefits 5,512,769 4,672,500 4,216,146 Occupancy expense 572,532 598,127 546,721 Furniture and equipment expense 998,145 791,141 695,920 Other 3,186,083 2,874,717 2,731,204 ---------- ---------- ---------- Total noninterest expense 10,269,529 8,936,485 8,189,991 ---------- ---------- ---------- Income before provision for income taxes 5,607,829 5,101,722 3,959,637 PROVISION FOR INCOME TAXES 2,206,778 2,036,000 1,540,000 ----------- ----------- ----------- NET INCOME $ 3,401,051 $ 3,065,722 $ 2,419,637 ----------- ----------- ----------- ----------- ----------- ----------- PER SHARE AMOUNTS Net income per common share and common share equivalent $2.18 $1.88 $1.52 ----------- ----------- ----------- ----------- ----------- ----------- Cash dividends per common share and common share equivalent $.42 $.41 $.36 ----------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,560,949 1,629,474 1,588,874 ----------- ----------- ----------- ----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS. PAGE 25 California Independent Bancorp and Subsidiaries Consolidated Statements Of Changes In Shareholders' Equity For The Years Ended December 31, 1996, 1995 And 1994
Net Unrealized Debt Net Gain/(Loss) Guarantee of Unrealized on Marketable Employee Gain(Loss)on Common Stock Equity Stock Securities ------------------ Retained Ownership Available Shares Amount Earnings Securities Plan For-Sale Total ------ ------ -------- ---------- ----------- ----------- ----------- Balance December 31, 1993 1,073,848 $7,694,375 $6,656,642 $(19,317) $(16,585) $ - $14,315,115 Net unrealized gain on transfer of securities to available-for-sale - - - - - 83,201 83,201 5-for-4 stock split with cash paid in lieu of fractional shares 268,618 - (8,228) - - - (8,228) Reduction of ESOP debt - - - - 16,585 - 16,585 Options exercised 18,650 70,171 - - - - 70,171 Tax benefit arising from exercise of nonqualified stock options and disqualifying dispositions - 114,701 - - - - 114,701 Cash dividends - - (534,686) - - - (534,686) Change in net unrealized loss on securities held as available-for-sale - - - - - (242,620) (242,620) Realized loss on sale of marketable equity securities - - - 19,317 - - 19,317 Net income - - 2,419,637 - - - 2,419,637 ----------- ---------- ---------- --------- -------- ---------- ---------- Balance December 31, 1994 1,361,116 7,879,247 8,533,365 - - (159,419) 16,253,193 5% stock dividend with cash paid in lieu of fractional shares 67,610 1,267,687 (1,276,762) - - - (9,075) ESOP loan - - - - (200,000) - (200,000) Reduction of ESOP debt - - - - 40,000 - 40,000 Options exercised 18,162 14,587 - - - - 14,587 Tax benefit arising from exercise of nonqualified stock options and disqualifying dispositions - 142,320 - - - - 142,320 Cash dividends - - (615,787) - - - (615,787) Change in net unrealized gain on securities held as available-for-sale - - - - - 184,409 184,409 Net income - - 3,065,722 - - - 3,065,722 ----------- ---------- ---------- --------- -------- ---------- ---------- Balance December 31, 1995 1,446,888 9,303,841 9,706,538 - (160,000) 24,990 18,875,369 5% stock dividend with cash paid in lieu of fractional shares 72,050 1,513,050 (1,523,842) (10,792) Reduction of ESOP debt 40,000 40,000 Options exercised 27,094 35,010 35,010 Tax benefit arising from exercise of nonqualified stock options and disqualifying dispositions 236,289 236,289 Cash dividends (647,941) (647,941) Change in net unrealized loss on marketable equity securities (42,806) (42,806) Net income 3,401,051 3,401,051 ----------- ---------- ---------- --------- -------- ---------- ---------- Balance December 31, 1996 1,546,032 $11,088,190 $10,935,806 - ($120,000) ($17,816) $21,886,180 ----------- ---------- ---------- --------- -------- ---------- ---------- ----------- ---------- ---------- --------- -------- ---------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS. PAGE 26 California Independent Bancorp And Subsidiaries Consolidated Statements Of Cash Flows For The Years Ended December 31, 1996, 1995, And 1994
1996 1995 1994 --------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,401,051 $ 3,065,722 $ 2,419,637 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 776,561 687,353 642,186 Provision for losses of other real estate owned 97,823 178,506 79,000 Provision for loan losses 385,000 875,000 347,000 Provision for deferred taxes (103,192) (204,521) (80,816) Investment security losses, net (3,470) 12,316 17,970 Gain on sale of loans (80,952) (142,270) - (Gain) loss on sale of real estate properties, net (240,358) 4,218 (15,556) Origination of loans held-for-sale (10,854,337) (19,818,618) (23,415,728) Proceeds from loan sales 28,297,103 20,858,358 26,629,068 (Increase) decrease in assets- Interest receivable (942,215) 751,854 (103,286) Other assets 376,548 (4,329,745) (430,302) Increase (decrease) in liabilities- Interest payable 75,954 789,561 280,973 Other liabilities 383,667 101,212 (247,082) ----------- ---------- ---------- Net cash provided by operating activities 21,569,183 2,828,946 6,123,064 CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans (6,956,353) (1,130,175) (24,473,319) Purchase of securities held-to-maturity (11,841,055) (14,561,000) (4,917,462) Purchase of securities available-for-sale (7,760,490) (3,315,591) (7,166,041) Purchase of loans held-for-sale (33,967,000) 0 0 Proceeds from maturity of securities held-to-maturity 10,326,530 6,658,000 3,777,215 Proceeds from sales and maturities of securities available-for-sale 2,000,000 16,771,301 5,647,852 Proceeds from sales of other real estate owned 489,246 1,370,253 53,044 Purchases of premises and equipment (1,803,261) (954,625) (582,593) ----------- ---------- ---------- Net cash provide by (used for) investing activities (49,512,383) 4,838,163 (27,661,304)
CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in noninterest-bearing deposits $ 11,290,397 $ 1,334,920 $ (881,497) Net increase in interest-bearing deposits 33,305,414 16,849,335 15,902,119 Cash dividends (647,941) (615,787) (534,686) Stock options exercised 271,299 156,907 184,872 Cash paid in lieu of fractional shares (10,792) (9,075) (8,228) ------------- ------------- ------------- Net cash provided by financing activities 44,208,377 17,716,300 14,662,580 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents 16,265,177 25,383,409 (6,875,660) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 47,962,704 22,579,295 29,454,955 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 64,227,881 $ 47,962,704 $ 22,579,295 ------------- ------------- ------------- ------------- ------------- ------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for- Interest expense $ 7,352,690 $ 5,463,729 $ 4,177,982 Income taxes 1,889,000 2,010,000 1,632,690 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES Debt guarantee of ESOP $ (40,000) $ 160,000 $ (16,585) Unrealized gain on transfer of securities to available-for-sale (net of taxes of $49,707) - - 83,201 Net unrealized gain on securities held as available-for-sale (net of taxes) 42,806 184,409 (242,620) Tax benefit arising from exercise of nonqualified stock options and disqualifying dispositions 236,289 142,320 114,701 Stock dividends 1,513,050 1,267,687 - Increase in other real estate owned as a result of foreclosure 463,196 939,482 723,325
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS. PAGE 27-38 California Independent Bancorp And Subsidiaries (Formerly Known As Feather River State Bank) Notes To Financial Statements December 31, 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting and reporting policies of California Independent Bancorp and Subsidiaries (the Company) conform with generally accepted accounting principles and general practice within the banking industry. The more significant of these policies applied in the preparation of the accompanying financial statements are discussed below. PRINCIPLES OF CONSOLIDATION-The accompanying financial statements include the accounts of California Independent Bancorp (CIB) and two wholly owned Subsidiaries, Feather River State Bank (the Bank) and its wholly owned subsidiaries, EPI Leasing Company, Inc. and Yuba-Sutter Financial Services Corporation. Significant intercompany transactions and balances have been eliminated in consolidation. NATURE OF OPERATIONS- A new bank holding company, California Independent Bancorp (CIB), was established in October 1994. CIB acquired all of the outstanding stock of Feather River State Bank (FRSB) through a phantom merger with FRSB Merger Company, a wholly-owned subsidiary of CIB. The shareholders exchanged their FRSB stock on a one-for-one share basis, for stock in CIB. In May 1995, FRSB became a wholly-owned subsidiary of CIB. Former shareholders of FRSB are now shareholders of CIB. There have been no changes to management or services of FRSB. CIB is a California corporation and the bank holding company for Feather River State Bank (FRSB), located in Yuba City, California. The Bank was incorporated as a California state banking corporation on December 1, 1976, and commenced operations on April 6, 1977. The Company was incorporated on October 28, 1994, and became the holding company for FRSB on May 2, 1995. The Bank engages in a broad range of financial services activities, and its primary market is located in the northern Sacramento Valley, with a total of six branches. In addition, the Bank operates two loan production offices, emphasizing Residential Mortgage lending, and one lease production office through EPI Leasing Company, Inc. The primary source of income for the Bank is from lending activities, including commercial, agricultural, real estate and consumer/installment loans. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS- The preparation of financial statements in conformity with generally accepted accounting principles may require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS- For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. INVESTMENT SECURITIES- As of January 1, 1994, the Bank adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Equity Securities. This change in accounting principle requires the Bank to classify its investments as either held-to-maturity, trading or available-for-sale. The Bank does not maintain a trading account and classifies securities as either "Held-to-Maturity" or "Available-for-Sale." Securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and accounted for at amortized cost in the Consolidated Balance Sheets. Other securities for which the Bank does not have the positive intent or ability to hold to maturity are classified under the balance sheet caption Available-for-Sale and are reported at their fair values, with unrealized gains and losses reported on a net-of-tax basis as a separate component of shareholders' equity. Fair values are based on quoted market prices or broker or dealer price quotations on a specific identification basis. Certain economic factors could cause the Bank to sell some of these securities prior to maturity. Such factors include significant movements in interest rates and significant changes in liquidity demands. Gains or losses on sale of investment securities are computed using the specific identification method. LOANS- Loans are stated at the principal amount outstanding less applicable unearned interest income. As of January 1, 1995, the Bank adopted Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended by Statement of Financial Accounting Standards No. 118. A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the recorded amount of the loan in the balance sheets is based on the present value of expected future cash flows discounted at the loan's effective interest rate or on the observable or estimated market price of the loan or the fair value of the collateral if the loan is collateral dependent. Income on impaired loans is recognized in accordance with the Bank's accounting for loans placed on a non-accrual status. Cash payments are first applied as a reduction of the principal balance until collectibility of the remaining principal and interest can be reasonably assured. Thereafter, interest income is recognized as it is collected in cash. The affect of adopting this standard did not have a material impact on the balances of the Bank's loans or allowance for loan losses. LOANS HELD-FOR-SALE- The Bank originates mortgage loans on residential and farm properties which it sells into the secondary market in order to divest itself of the interest rate risk associated with these primarily fixed interest rate products. The Bank accounts for these loans at the lower cost or net realizable value. As of January 1, 1996, the Bank adopted Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights. This statement requires, under certain circumstances, entities to recognize as a separate asset an amount related to the right to service mortgage loans. The adoption of this statement had an immaterial impact on the Bank's results of operations. SALES AND SERVICING OF SBA LOANS- The Bank originates loans to customers under the Small Business Administration (SBA) program that generally provides for SBA guarantees of 70% to 90% of each loan. The Bank generally sells the guaranteed portion of each loan to a third party and retains the unguaranteed portion in its own portfolio. The Bank may be required to refund a portion of the sales premium received, if the borrower defaults or the loan prepays within 90 days of the settlement date. At December 31, 1996, the Bank had no premiums subject to such recourse. A gain is recognized on the sale of SBA loans through collection on sale of a premium over the adjusted carrying value, through retention of an ongoing rate differential less a normal service fee (excess servicing fee) between the rate paid by the borrower to the Buyer and the rate paid by the Bank to the purchaser, or both. To calculate the gain (or loss) on sale, the Bank's investment in an SBA loan is allocated among the retained portion of the loan, the excess servicing retained and the sold portion of the loan, based on the relative fair market value of each portion. The gain (or loss) on the sold portion of the loan is recognized at the time of sale based on the difference between the sale proceeds and the allocated investment. As a result of the relative fair value allocation, the carrying value of the retained portion is discounted, with the discount accreted to interest income over the life of the loan. The excess servicing fees are reflected as an asset which is amortized over an estimated life using a method approximating the level yield method; in the event future prepayments exceed Management's estimates and future expected cash flows are inadequate to cover the unamortized excess servicing asset, additional amortization would be recognized. In its calculation of excess servicing fees, the Bank is required to estimate a "normal" servicing fee. The Bank uses the contractual rate of 100 basis points as its estimate of a normal servicing fee. ALLOWANCE FOR LOAN LOSSES- The allowance for loan losses is maintained at a level considered adequate by Management to provide for losses that can be reasonably anticipated. Accordingly, loan losses are charged to the allowance for loan losses and recoveries are credited to it. The provision for loan losses charged to operating expense is based upon past loan loss experience and estimates of potential losses which, in Management's judgment, deserve current recognition. Other factors considered by Management include growth, composition and overall quality of the loan portfolio, reviews of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. This evaluation process requires the use of current estimates which may vary from the ultimate losses experienced in the future. The estimates are reviewed periodically, and adjustments, as they become necessary, are charged to operations in the period in which they become known. OTHER REAL ESTATE OWNED- Other real estate owned consists of properties acquired by the Bank through foreclosure and is carried at the lower of cost or fair value, less estimated costs to sell. At the time the property is acquired, if the estimated fair value is less than the amount outstanding on the loan, the difference is charged against the allowance for loan losses. Subsequent declines, if any, in estimated fair value are charged to expense. INTEREST AND FEES ON LOANS AND LEASES- Origination fees and commitment fees, offset by certain direct loan origination costs, are deferred and recognized over the contractual life of the loan as yield adjustment. Interest income on loans and direct lease financing is accrued monthly as earned on all credits not classified as nonaccrual. Unearned income on loans, where applicable, is recognized as income using the effective interest method over the term of the loan. Loans are generally placed on nonaccrual status when they are 90 days past due as to either interest or principal or are otherwise determined to be impaired. At that time, any accrued but uncollected interest is reversed, and additional income is recorded on a cash basis as payments are received. However, loans that are well secured and in the process of collection may not be placed on nonaccrual status, at the discretion of Management. A nonaccrual loan may be restored to an accrual basis when interest and principal payments are current and prospects for future payments are no longer in doubt. DEPRECIATION AND AMORTIZATION- Premises and equipment are stated at cost, less accumulated depreciation. Depreciation on premises, furniture, fixtures and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 31.5 years. Leasehold improvements are amortized using the straight-line method over the asset's useful life or the term of the lease, whichever is shorter. Expenditures for major renewals and improvements of bank premises and equipment are capitalized, and those for maintenance and repairs are charged to expense as incurred. INCOME TAXES- Income taxes reported in the financial statements are computed at current tax rates, including deferred taxes resulting from temporary differences in the recognition of items for tax and financial reporting purposes. The Bank records income taxes for financial statement purposes using the liability or balance sheet method under which the net deferred tax asset or liability is determined based on the tax effects of the differences between book and tax bases of the various balance sheet assets and liabilities. Under this method, the computation of the net deferred tax asset or liability gives the current recognition to changes in tax laws and rates. RECLASSIFICATIONS- Certain reclassifications have been made to amounts previously reported to conform with current presentation methods. Such reclassifications have no effect on net income or shareholders' equity previously reported. (2) INVESTMENT SECURITIES: As of January 1, 1994, securities with an amortized cost of $7,467,595 and a fair value of $7,980,184 were classified as held-to-maturity. Securities with an amortized cost of $22,840,612 and a fair value of $22,973,521 were classified as available-for-sale. The effect of adopting SFAS 115 was to recognize an unrealized gain, net of applicable taxes, of $83,201 as a direct addition to shareholders' equity. As of December 31, 1996, 1995, and 1994, the Bank's equity capital reflected a net unrealized gain (loss), net of applicable taxes, of $ (17,816), $24,990, and $(159,419), respectively. The amortized cost and approximate fair value of investments in debt securities and other investments at December 31, 1996 and 1995, are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- --------- ----------- ---------- December 31, 1996 Available-for-sale: U.S. Treasury securities and obligations of U.S. government agencies $11,405,179 $ 5,915 $ (36,631) $11,374,463 ----------- --------- ---------- ----------- ----------- --------- ---------- ----------- Held-to-maturity: U.S. Treasury securities and obligations of U.S. government agencies 15,720,573 140,302 (1,158) 15,859,717 Obligations of states and political subdivisions 3,576,412 92,434 (22,159) 3,646,687 Corporate obligations and other securities 3,992,185 27,109 - 4,019,294 ----------- --------- ---------- ----------- Total $23,289,170 $ 259,845 $ (23,317) $23,525,698 ----------- --------- ---------- ----------- ----------- --------- ---------- ----------- December 31, 1995 Available-for-sale: U.S. Treasury securities and obligations of U.S. government agencies $ 5,847,100 $ 47,652 (4,566) $ 5,890,186 ----------- --------- ---------- ----------- ----------- --------- ---------- ----------- Held-to-maturity: U.S. Treasury securities and obligations of U.S. government agencies $ 9,722,535 $352,824 $ - $10,075,359 Obligations of states and political subdivisions 4,905,291 154,675 (3,152) 5,056,814 Corporate obligations and other securities 6,909,942 116,710 (26,875) 6,999,777 ----------- --------- ---------- ----------- Total $21,537,768 $624,209 $ (30,027) $22,131,950 ----------- --------- ---------- ----------- ----------- --------- ---------- ----------- The following table shows the amortized cost and estimated fair value of investment securities by contractual maturity at December 31, 1996 and 1995. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Held-to-Maturity Available-for-Sale ---------------- ------------------- Amortized Fair Amortized Fair Cost Gains Losses Value --------- ---------- --------- ---------- December 31, 1996 Within one year $6,833,079 $6,880,248 $1,833,086 $1,833,123 After one but within five years 16,060,091 16,214,010 6,119,299 6,111,175 After five but within ten years 396,000 431,440 3,452,794 3,430,165 ----------- --------- ---------- ----------- Total $23,289,170 $23,525,698 $11,405,179 $11,374,463 ----------- ----------- ---------- ----------- ----------- ----------- ---------- ----------- December 31, 1995 Within one year $ 4,102,714 $ 4,136,151 $ 1,999,876 $ 1,995,310 After one but within five years 15,992,053 16,487,664 401,240 406,049 After five but within ten years 1,397,001 1,457,178 3,445,984 3,488,827 After ten years 46,000 50,957 - - ----------- --------- ---------- ----------- Total $21,537,768 $22,131,950 $ 5,847,100 $ 5,890,186 ----------- --------- ---------- ----------- ----------- --------- ---------- -----------
Net gains (losses) from sales of available-for-sale investment securities during 1996, 1995, and 1994 were $3,470, $(12,316), and $(17,970), respectively. Gross gains of $3,470, $3,000, and $1,750 and gross losses of $0, $15,316, and $19,720, were realized on those sales in 1996, 1995, and 1994, respectively. Investment securities pledged as collateral for certain deposits amounted to $10,374,814 and $10,410,068 at December 31, 1996 and 1995, respectively. (3) LOANS: Loans outstanding are summarized as follows: December 31, ------------ 1996 1995 --------- ------- Real estate mortgage $ 28,564,640 $ 28,288,337 Commercial and agricultural 71,527,482 74,355,093 Real estate construction 29,916,204 18,048,005 Consumer and installment 2,983,939 2,814,717 Lease financing 15,892,783 3,216,140 Other 2,214,574 1,522,174 ------------- ------------ Totals $151,099,622 $128,244,466 ------------- ------------ ------------- ------------ Loans on which the accrual of interest has been discontinued or reduced amounted to approximately $845,832 and $292,725 at December 31, 1996 and 1995, respectively. As of December 31, 1996, the total recorded investment in impaired loans was $845,832 and $292,725 as of December 31, 1996 and 1995, respectively, and the related reserve for loan losses was $200,601 and $292,725 as of December 31, 1996 and 1995, respectively. For income reporting purposes, impaired loans are placed on a nonaccrual status. This is more fully discussed in Note 1. The average balance of impaired loans during 1996 was $569,279. Interest income recorded on those loans during 1996 was $82,344. Foregone interest on loans placed on nonaccrual status was $42,783 and $39,812 as of December 31, 1996 and 1995, respectively. Changes in the allowance for loan losses are summarized as follows:
Year Ended December 31, ------------------------------------ 1996 1995 1994 ------ ------ ------ Balance, beginning of year $3,910,970 $3,287,663 $3,086,736 Provision 385,000 875,000 347,000 Loans charged off (327,357) (554,514) (196,712) Recoveries on loans previously charged off 84,170 302,821 50,639 ----------- ---------- ---------- Balance, end of year $4,052,783 $3,910,970 $3,287,663 ----------- ---------- ---------- ----------- ---------- ----------
(4) PREMISES AND EQUIPMENT: A summary of premises and equipment follows: December 31, ------------------------- 1996 1995 ------ ----- Land $1,432,957 $1,087,889 Bank premises and improvements 5,415,175 4,911,217 Furniture, fixtures and equipment 4,555,933 3,909,030 ---------- ---------- 11,404,065 9,908,136 Less accumulated depreciation and amortization 3,983,678 3,514,449 ---------- ---------- $7,420,387 $6,393,687 ---------- ---------- ---------- ---------- Depreciation and amortization charged to expense was $776,561, $687,353, and $642,186 in 1996, 1995 and 1994, respectively. Rent under operating leases was approximately $52,487, $110,070, and $93,000 in 1996, 1995 and 1994, respectively. (5) DEPOSITS: A summary of deposit balances follows: December 31, ------------------------- 1996 1995 ------ ----- Demand $55,117,230 $ 43,826,833 Interest-bearing transaction accounts 33,659,296 27,315,360 Savings deposits 67,755,798 61,291,154 Time deposits 81,359,944 60,863,110 ------------ ------------- Total deposits $237,892,268 $193,296,457 ------------ ------------- ------------ ------------- Certificates of deposit of $100,000 or more, including public time deposits, amounted to approximately $33,851,000 and $23,937,000 at December 31, 1996 and 1995, respectively. Interest expense on certificates of deposit of $100,000 or more, including public time deposits, amounted to approximately $1,481,000, $911,000, and $354,000 in 1996, 1995 and 1994, respectively. At December 31, 1996, the scheduled maturities of all Certificates of Deposits are as follows: December 31, 1996 -------------------- (Dollars in thousands) Three months or less $29,028 Over three through six months 19,695 Over six through twelve months 22,574 Over twelve months 10,063 ------ Total $81,360 (6) OTHER NONINTEREST INCOME AND EXPENSE: The components of other operating income and expense were as follows: Year Ended December 31, --------------------------- 1996 1995 1994 ------ ------ ------ (Dollars in thousands) Loan servicing fees $ 487 $ 482 $ 306 Brokered loan fees 923 360 418 Gain on Sale of OREO 240 31 29 Other 569 495 357 ------ ------ ----- Total other noninterest income $2,219 $1,368 $1,110 ------ ------ ----- ------ ------ ----- Advertising and promotion $ 342 $ 286 $ 267 FDIC assessments 25 220 376 Stationery and supplies 253 212 196 Directors' fees 391 300 260 Other 2,175 1,857 1,632 ------ ------ ----- Total other noninterest expense $3,186 $2,875 $2,731 ------ ------ ----- ------ ------ ----- (7) INCOME TAXES: The provision for income taxes consists of the following: Year Ended December 31, --------------------------- 1996 1995 1994 ------ ------ ------ Current- Federal $1,697,811 $1,626,412 $1,171,774 State 612,159 614,109 449,042 ---------- ---------- ---------- 2,309,970 2,240,521 1,620,816 ---------- ---------- ---------- Deferred- Federal (85,574) (147,274) (89,774) State (17,618) (57,247) 8,958 ---------- ---------- ---------- (103,192) (204,521) (80,816) ---------- ---------- ---------- $2,206,778 $2,036,000 $1,540,000 ---------- ---------- ---------- ---------- ---------- ---------- The effective tax rate and statutory federal income tax rate are reconciled as follows: Year Ended December 31, --------------------------- 1996 1995 1994 ------ ------ ------ Federal statutory income tax rate 34.0% 34.0% 34.0% State franchise taxes, net of federal income tax benefit 7.4 7.2 7.6 Tax-exempt interest (2.1) (1.9) (3.3) Other (0.1) (0.6) 0.6 ----- ----- ----- 39.4% 39.9% 38.9% ----- ----- ----- ----- ----- ----- The components of the net deferred tax asset, recorded in other assets, of the Bank as of December 31, 1996 and 1995, were as follows: 1996 1995 ------ ------ Deferred tax assets- Loan losses $1,555,127 $1,492,325 California franchise tax 205,355 151,785 Other real estate owned 116,441 62,262 Unrealized loss on available-for-sale securities 12,901 - --------- ---------- Total deferred tax assets 1,889,824 1,706,372 --------- ---------- Deferred tax liabilities- Depreciation 256,938 264,527 Accretion 85,236 67,575 Unrealized gain on available-for-sale securities - 18,096 Other 182,824 125,537 --------- ---------- Total deferred tax liabilities 524,998 475,735 --------- ---------- Net deferred tax asset $1,364,826 $1,230,637 --------- ---------- --------- ---------- The components of the deferred income tax provisions are summarized as follows: YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 1994 ---------- ---------- ---------- Provisions for possible loan losses $ (62,802) $ (242,184) $ 15,163 Tax depreciation methods (7,589) 52,304 (27,569) California franchise tax (53,570) (24,447) (125,002) Other real estate owned (54,179) (37,663) 10,581 Accretion 17,661 52,959 6,892 Other 67,287 (5,490) 39,119 ---------- ---------- ---------- $ (103,192) $ (204,521) $ (80,816) (8) SHAREHOLDERS' EQUITY: At December 31, 1996, CIB was authorized to issue 20,000,000 shares of no par common stock. Of this amount, 1,546,032 and 1,518,938 shares of common stock were issued and outstanding at December 31, 1996 and 1995, respectively. One of the principal sources of cash for the Company will be dividends from its subsidiary bank. Banking regulations limit the amount of dividends that may be paid without prior approval of the Company's regulatory agencies to the lesser of retained earnings or the net income of the Company for its last three fiscal years, less any distributions during such period, subject to capital adequacy requirements. At December 31, 1996, the Company had approximately $6,792,619 available for payments of dividends which would not require the prior approval of the banking regulators under this limitation. Earnings per share are computed on the basis of the weighted average number of shares outstanding during each year, including the dilutive effect of stock options granted, adjusted retroactively to reflect stock splits and stock dividends declared. In August 1996, the Board of Directors authorized a five percent stock dividend which was distributed on September 20, 1996. The dividend was declared on August 13, 1996, to holders of record on August 30, 1996. The dividend resulted in the issuance of an additional 72,050 shares of common stock. In June 1995, the Board of Directors authorized a five percent stock dividend which was distributed on July 14, 1995. The dividend was declared on June 23, 1995, to holders of record on June 30, 1995. The dividend resulted in the issuance of an additional 67,610 shares of common stock. In April 1994, the Board of Directors authorized a five-for-four stock split which was distributed on May 26, 1994. The split was declared on April 22, 1994, to holders of record on April 29, 1994. The split resulted in the issuance of an additional 268,618 shares of common stock. (9) DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS: CASH AND CASH EQUIVALENTS- For these short-term instruments, the carrying value is a reasonable estimate of fair value. INVESTMENTS- For securities held-for-investment purposes, fair values are based on quoted market prices or dealer quotes. See Note 2 for further discussion. LOANS- The fair value of loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings for similar remaining maturities. The fair value of nonperforming loans is estimated based on allocating specific and general reserves to the various nonperforming loan classifications. DEPOSIT LIABILITIES- The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Other liabilities represent short-term instruments. The carrying amount is a reasonable estimate of fair value. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS- The carrying amounts for fees arising from commitments to extend credit, standby letters of credit and financial guarantees written and their related fair values are not material. The estimated fair values of the Bank's financial instruments at December 31, 1996 and 1995, are as follows:
December 31, 1996 December 31, 1995 --------------------------- -------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- ------- Financial assets: Cash and cash equivalents $ 64,227,881 $ 64,227,881 $ 47,962,704 $ 47,962,704 Investments 34,663,633 34,900,161 27,427,954 28,022,136 Loans 147,046,839 149,780,903 124,333,496 124,520,236 Financial liabilities: Deposits $237,892,268 $238,285,181 $193,296,457 $193,789,361 Interest Payable and other liabilities 2,823,883 2,823,883 2,404,262 2,404,262
(10) STOCK OPTIONS: During 1989, the Bank adopted the Feather River State Bank 1989 Amended and Restated Stock Option Plan. The plan is nonqualified and provides that nonemployee directors and key employees may be granted options to purchase the Company's stock at the fair market value of the shares as determined by the Board of Directors. As of May 1995, all previously granted options to purchase the Bank's stock had been retired, and exchanged for options to purchase the Company's stock, on a one-for-one option basis. All granted options must be exercised within the earlier of ten years of the date of grant or within 30 days of termination of employment or status as a director. Vesting is determined at the time of grant by the Board of Directors. Current participants vest over five years from date of employment. Federal income tax benefits relating to options exercised have been credited to shareholders' equity. During 1996, the Company adopted the California Independent Bancorp 1996 Stock Option Plan ("1996 Plan") which sets aside 149,052 shares of no par value Common Stock of the Company for which options may be granted to key, full-time salaried employees and officers of the Company, as well as non-employee directors of the Company. The exercise price of all options to be granted under the 1996 Plan must be at least 100% of the fair market value of the Company's Common Stock on the granting date and be paid in full at the time the option is exercised in cash, shares of the Company's Common Stock with a fair value equal to the purchase price or a combination thereof. Under the 1996 Plan, all options expire no more than ten years after the date of grant. Federal income tax benefits relating to options exercised under both plans have been credited to shareholders' equity. Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," is effective for transactions entered into for fiscal years beginning after December 15, 1995. This statement defines a fair-value-based method of accounting for stock-based compensation. As permitted by SFAS 123, the Bank accounts for stock options under APB Opinion No. 25, under which no compensation cost is being recognized. Pro forma amounts are not shown as the difference between SFAS 123 and APB Opinion No. 25 is immaterial. The following is a summary of stock option transactions with 1995 figures adjusted to reflect the five percent stock dividend: December 31, 1996 1995 ------- ------- Stock options authorized 427,608 427,608 --------- --------- --------- --------- Stock options granted 333,899 305,448 Stock options exercised (107,138) (72,251) Stock options expired (948) (948) --------- --------- Stock options outstanding December 31 225,813 232,249 --------- --------- --------- --------- Stock options vested December 31 225,318 231,312 --------- --------- --------- --------- Price per share - Options outstanding $ 5.43 to $ 5.47 to $24.75 $20.03 --------- --------- --------- --------- Price of options exercised $ 5.43 to $ 5.43 to $13.79 $18.62 --------- --------- --------- --------- (11) PROFIT SHARING PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN: The Bank formed a 401(k) Qualified Savings Plan (the Plan) effective August 1, 1993. All full-time employees who have reached the age of 21 are eligible to participate beginning on January 1st or July 1st following 12 months of employment. All eligible employees are 100% vested in their own contributions which may be any whole percentage of pay between 2% and 12% inclusive. Beginning January 1, 1995, the Bank began making matching contributions which were equal to 20% of each employee's elective contributions not exceeding 6% of pay. Contributions are invested with Lincoln National Life Insurance Company under employee directed investment options. The Bank formed an Employee Stock Ownership Plan (the ESOP) effective January 1, 1988. Effective January 1, 1995, the ESOP was amended to recognize CIB and all of its employees as participants. All employees who have completed one year of service and have reached the age of 21 are eligible to participate in the ESOP. The ESOP provides for annual contributions at the discretion of the Board of Directors. The contributions are allocated based on the participants' compensation for the year. Employees vest ratably in the ESOP over six years. The ESOP borrowed $200,000 from a nonprofit corporation to acquire 9,762 shares of CIB common stock in August 1995. The borrowing is payable in five equal annual installments with interest at prime minus 1/2 percent, which rate was 7.75% at December 31, 1996. The Bank made contributions to the ESOP of approximately $40,000, $40,000 and $17,000 in 1996, 1995 and 1994, respectively. (12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Bank makes commitments to extend credit in the normal course of business to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank is exposed to credit loss, in the event of nonperformance by the borrower, in the contract amount of the commitment. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments and evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, is based on Management's credit evaluation of the borrower. Collateral held varies but may include certificates of deposit, accounts receivable, inventory, property and equipment, and real property. The Bank also issues standby letters of credit which are unconditional commitments to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support construction bonds, private borrowing arrangements, and similar transactions. Most of these guarantees are short-term commitments expiring in 1997 and are not expected to be drawn upon. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral as deemed necessary, as described above. The contract amount of commitments not reflected on the balance sheet at December 31, 1996, were as follows: Loan commitments $ 72,208,282 Standby letters of credit 1,276,607 (13) RELATED PARTY TRANSACTIONS: The Bank has had loan and deposit transactions and has contracted for services with certain officers and directors and the companies with which they are associated. In the opinion of Management and the Board of Directors, all such loans, commitments to lend, and contracts for services were made under terms which are consistent with the Bank's normal policies. Loan transactions with these officers and directors for the years ended December 31, 1996 and 1995, respectively, are as follows: 1996 1995 ---------- ---------- Loan balances - beginning of year $ 6,433,373 $ 4,343,878 Additions 4,277,689 4,446,748 Collections (3,813,593) (2,357,253) ------------ ----------- end of year $ 6,897,469 $ 6,433,373 ------------ ----------- ------------ The Bank had loans outstanding to two directors of the Bank and their associates, each in excess of 5 percent of shareholders' equity. The total principal balance of the loans to one of these two directors was approximately $3,781,536 and $3,118,000 at December 31, 1996 and 1995, respectively. The total principal balance of the loans to the other director was approximately $1,057,000 and $1,524,000 at December 31, 1996 and 1995, respectively. The Bank's former data processing service bureau was partially owned by a director of the Bank. The Bank paid approximately $0, $0, and $196,000 for this service in 1996, 1995 and 1994, respectively. Remodeling work on branches and offices of the Bank was done by directors of the Bank. The Bank paid approximately $320,701, $60,000 and $31,000 for this work in 1996, 1995 and 1994, respectively. The Bank contracts its property management with a company that is partially owned by a director of the Bank. The Bank paid approximately $28,772, $244,000, and $18,000 for property management services in 1996, 1995 and 1994, respectively. The Bank leased a vehicle and purchased another from an automobile dealership of which a director of the Bank is the General Manager and President. The vehicle was purchased in 1995 for $21,000. The lease expires in May 1997 and requires monthly payments of $434. (14) CALIFORNIA INDEPENDENT BANCORP FINANCIAL STATEMENTS (PARENT ONLY): (In thousands) December 31, December 31, 1996 1995 ------------ ------------ BALANCE SHEET- Assets: Cash and due from banks $ 63 $ 29 Investment in subsidiaries 21,662 18,753 Other assets 161 93 --------- --------- Total assets $ 21,886 $ 18,875 --------- --------- --------- --------- Liabilities and shareholders' equity: Shareholders' equity Total shareholders' equity $ 21,886 $ 18,875 --------- --------- Total liabilities and shareholders' equity $ 21,886 $ 18,875 --------- --------- --------- --------- (In thousands) December 31, December 31, 1996 1995 ------------ ----------- STATEMENT OF INCOME- Administrative expense $ 222 $ 76 Other expense 104 53 ------ ----- Loss before equity in net income of subsidiaries 326 129 Equity in net income of subsidiaries: Distributed 958 516 Undistributed 2,637 2,628 Income tax benefit 132 51 ------ ----- Net income $3,401 $3,066 ------ ----- ------ ----- (In thousands) December 31, December 31, 1996 1995 ------------ ----------- STATEMENT OF CASH FLOWS- Operating activities: Net income $3,401 $3,066 Adjustments to reconcile net income to net cash provided by operating activities- Undistributed equity in subsidiaries (2,637) (2,628) Deferred income taxes (132) (51) Increase in other operating assets (68) (42) ----- ----- Net cash provided by operating activities 564 345 ----- ----- Investing activities: - - Net cash provided by investing activities - - ----- ----- Financing activities: Dividends paid (530) (316) ----- ----- Net cash used in financing activities (530) (316) ----- ----- Increase in cash and cash equivalents 34 29 Cash and cash equivalents, beginning of year 29 - ----- ----- Cash and cash equivalents, end of year $ 63 $ 29 ----- ----- ----- ----- (15) QUARTERLY STATEMENTS OF OPERATIONS: The following information is unaudited. However, in the opinion of Management, all adjustments, which include only normal recurring adjustments necessary to present fairly the results of operations for such periods, are reflected. Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further explanation of quarterly results of operations.
1996 Quarter Ended (unaudited) ------------------------------------------------------ March 31 June 30 September 30 December 31 -------- -------- ------------ ----------- (Dollar amounts in thousands, except per share data) Interest income $4,823 $4,867 $5,311 $5,574 Interest expense 1,746 1,743 1,884 2,076 ------ ------ ------ ------ Net interest income 3,077 3,124 3,427 3,498 Provision for loan losses 60 40 80 205 ------ ------ ------ ------ Net interest income (loss) after provision for loan losses 3,017 3,084 3,347 3,293 Noninterest income 638 590 677 1,232 Noninterest expense 2,346 2,360 2,583 2,980 ------ ------ ------ ------ Income (loss) before income taxes 1,309 1,313 1,441 1,545 Provision for income taxes 522 526 537 622 ------ ------ ------ ------ Net income (loss) 787 787 904 923 ------ ------ ------ ------ ------ ------ ------ ------ Net income (loss) per share $0.50 $0.51 $0.58 $0.59 ------ ------ ------ ------ ------ ------ ------ ------ Weighted average shares outstanding 1,535,447 1,535,450 1,538,713 1,560,950
1995 Quarter Ended (unaudited) ------------------------------------------------------ March 31 June 30 September 30 December 31 -------- -------- ------------ ----------- (Dollar amounts in thousands, except per share data) Interest income $4,379 $4,774 $4,939 $4,911 Interest expense 1,395 1,555 1,653 1,714 ------ ------ ------ ------ Net interest income 2,984 3,219 3,286 3,197 Provision for loan losses 245 255 275 100 ------ ------ ------ ------ Net interest income (loss) after provision for loan losses 2,739 2,964 3,011 3,097 Noninterest income 372 422 671 762 Noninterest expense 2,100 2,218 2,246 2,372 ------ ------ ------ ------ Income (loss) before income taxes 1,011 1,168 1,436 1,487 Provision for income taxes 396 462 569 609 ------ ------ ------ ------ Net income (loss) $615 $706 $867 $878 ------ ------ ------ ------ ------ ------ ------ ------ Net income (loss) per share $0.38 $0.43 $0.53 $0.54 ------ ------ ------ ------ ------ ------ ------ ------ Weighted average shares outstanding 1,621,384 1,659,075 1,628,262 1,637,397 1994 Quarter Ended (unaudited) ------------------------------------------------------ March 31 June 30 September 30 December 31 -------- -------- ------------ ----------- (Dollar amounts in thousands, except per share data) Interest income $3,220 $3,634 $4,017 $4,249 Interest expense 1,040 1,053 1,155 1,254 ------ ------ ------ ------ Net interest income 2,180 2,581 2,862 2,995 Provision for loan losses 10 115 122 100 ------ ------ ------ ------ Net interest income (loss) after provision for loan losses 2,170 2,466 2,740 2,895 Noninterest income 456 451 475 496 Noninterest expense 1,932 1,995 2,059 2,203 ------ ------ ------ ------ Income (loss) before income taxes 694 922 1,156 1,188 Provision for income taxes 246 367 454 473 ------ ------ ------ ------ Net income (loss) $448 $555 $702 $715 ------ ------ ------ ------ ------ ------ ------ ------ Net income (loss) per share $0.28 $0.35 $0.44 $0.45 ------ ------ ------ ------ ------ ------ ------ ------ Weighted average shares outstanding 1,584,394 1,584,394 1,590,565 1,599,465
(16) REGULATORY MATTERS: The Company and Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can indicate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and Bank's capital amounts and classification are also subject to qualitive judgements by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital (Total Risk-Based) and Tier I capital (Tier I Risk-Based) (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (Tier I Leverage Ratio) (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Company and Bank meets all capital adequacy requirements to which They are subject. As of December 31, 1996, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum Total Risk-Based, Tier I Risk-Based, Tier I 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. The Company's and Bank's actual capital amounts and ratios are also presented in the following table:
Actual ---------------- Amount Ratio ------ ----- (Dollar amounts in thousands, except ratio data) As of December 31, 1996: TOTAL RISK BASED CAPITAL: California Independent Bancorp $22,918 11.89% Feather River State Bank $24,225 12.57% TIER I RISK BASED CAPITAL: California Independent Bancorp $21,813 11.31% Feather River State Bank $21,804 11.32% TIER I LEVERAGE RATIO: California Independent Bancorp $21,813 8.82% Feather River State Bank $21,804 8.82% As of December 31, 1995: TOTAL RISK-BASED CAPITAL: California Independent Bancorp $22,087 13.07% Feather River State Bank $22,085 13.08% TIER I RISK-BASED CAPITAL: California Independent Bancorp $18,875 11.17% Feather River State Bank $18,753 11.10% TIER I LEVERAGE RATIO: California Independent Bancorp $18,875 9.00% Feather River State Bank $18,753 8.95%
For Capital Adequacy Purpose -------------------- Amount Ratio ------ ----- (Dollar amounts in thousands, except ratio data) As of December 31, 1996: TOTAL RISK-BASED CAPITAL: California Independent Bancorp Greater than or equal to $15,426 Greater than or equal to 8.0% Feather River State Bank Greater than or equal to $15,415 Greater than or equal to 8.0% TIER I RISK-BASED CAPITAL: California Independent Bancorp Greater than or equal to $7,713 Greater than or equal to 4.0% Feather River State Bank Greater than or equal to $7,708 Greater than or equal to 4.0% TIER I LEVERAGE RATIO: California Independent Bancorp Greater than or equal to $9,891 Greater than or equal to 4.0% Feather River State Bank Greater than or equal to $9,890 Greater than or equal to 4.0% As of December 31, 1995: TOTAL RISK-BASED CAPITAL: California Independent Bancorp Greater than or equal to $13,488 Greater than or equal to 8.0% Feather River State Bank Greater than or equal to $13,487 Greater than or equal to 8.0% TIER I RISK-BASED CAPITAL: California Independent Bancorp Greater than or equal to $6,741 Greater than or equal to 4.0% Feather River State Bank Greater than or equal to $6,758 Greater than or equal to 4.0% TIER I LEVERAGE RATIO: California Independent Bancorp Greater than or equal to $8,779 Greater than or equal to 4.0% Feather River State Bank Greater than or equal to $8,722 Greater than or equal to 4.0%
To Be Well Capitalized Under Prompt Corrective Action Provisions ----------------- Amount Ratio ------ ----- (Dollar amounts in thousands, except ratio data) As of December 31, 1996: TOTAL RISK-BASED CAPITAL: California Independent Bancorp Greater than or equal to $19,282 Greater than or equal to 10.0% Feather River State Bank Greater than or equal to $19,269 Greater than or equal to 10.0% TIER I RISK-BASED CAPITAL: California Independent Bancorp Greater than or equal to $11,569 Greater than or equal to 6.0% Feather River State Bank Greater than or equal to $11,562 Greater than or equal to 6.0% TIER I LEVERAGE RATIO: California Independent Bancorp Greater than or equal to $12,364 Greater than or equal to 5.0% Feather River State Bank Greater than or equal to $12,363 Greater than or equal to 5.0% As of December 31, 1995: TOTAL RISK-BASED CAPITAL: California Independent Bancorp Greater than or equal to $16,260 Greater than or equal to 10.0% Feather River State Bank Greater than or equal to $16,859 Greater than or equal to 10.0% TIER I RISK-BASED CAPITAL: California Independent Bancorp Greater than or equal to $10,112 Greater than or equal to 6.0% Feather River State Bank Greater than or equal to $10,137 Greater than or equal to 6.0% TIER I LEVERAGE RATIO: California Independent Bancorp Greater than or equal to $10,974 Greater than or equal to 5.0% Feather River State Bank Greater than or equal to $10,903 Greater than or equal to 5.0%
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 27 PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS For information concerning directors and executive officers of the Company, see "ELECTION OF DIRECTORS" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the definitive Proxy Statement for the Company's 1997 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (the "Proxy Statement"), which is incorporated herein by reference. ITEM 11 - EXECUTIVE COMPENSATION For information concerning executive compensation, see "EXECUTIVE COMPENSATION" in the Proxy Statement, which is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For information concerning security ownership of certain beneficial owners and management, see "Security Ownership of Certain Beneficial Owners and Management" and "Election of Directors" in the Proxy Statement, which is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information concerning certain relationships and related transactions, see "Indebtedness of Management and Other Transactions" in the Proxy Statement, which is incorporated herein by reference. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS. The consolidated financial statements of California Independent Bancorp and Subsidiaries, other financial information and the Independent Auditors' Report on Consolidated Financial Statements are contained herein under Item 8. 2. FINANCIAL STATEMENT SCHEDULES. In accordance with Regulation S-X, the financial statement schedules have been omitted because (a) they are not applicable to or required of the Company; or (b) the information required is included in the consolidated financial statements or notes thereto. 3. EXHIBITS. See Index to Exhibits of this Form 10-K. (b) REPORTS ON FORM 8-K. For the purposes of complying with the amendments to the rules governing Form S-8 under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into the registrant's Registration Statements on Form S-8 No. 333-09823 and No.333- 09813. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding as asserted by such director, officer or controlling person in 43 connection with the securities being registered the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly issued this report to be signed on its behalf by the undersigned, thereunto duly authorized. CALIFORNIA INDEPENDENT BANCORP Date: March 27, 1997 By: /s/ Robert J. Mulder -------------------------------- Robert J. Mulder, President and Chief Executive Officer 45 POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Robert J. Mulder and Annette Dier Bertolini and each of them, his or her true and lawful attorney-in-fact and agent, with full powers of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign and to file any and all amendments, including pre- and/or post-effective amendments to this Registration Statement, with the Securities and Exchange Commission, granting to said attorney-in-fact full power and authority to perform any other act on behalf of the undersigned required to be done in connection therewith. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Annette Dier Bertolini Senior Vice March 27, 1997 - -------------------------- President and Chief ANNETTE DIER BERTOLINI Financial Officer (Principal Financial and Accounting Officer) /s/ Harold M. Eastridge - -------------------------- Director March 27, 1997 HAROLD M. EASTRIDGE Chairman of the Board - -------------------------- of Directors March ___, 1997 WILLIAM H. GILBERT - -------------------------- Director March ___, 1997 DALE L. GREEN /s/ Lawrence G. Harris - -------------------------- Director March 27, 1997 LAWRENCE G. HARRIS 46 /s/ Robert J. Mulder - -------------------------- President, Chief March 27, 1997 ROBERT J. MULDER Executive Officer and Director /s/ David A. Offutt - -------------------------- Director March 26, 1997 DAVID A. OFFUTT - -------------------------- Director March ___, 1997 WILLIAM K. RETZER - -------------------------- Director March ___, 1997 ROSS D. SCOTT /s/ Louis F. Tarke - -------------------------- Director March 27, 1997 LOUIS F. TARKE /s/ Michael C. Wheeler - -------------------------- Director March 27, 1997 MICHAEL C. WHEELER 47 INDEX TO EXHIBITS Exhibit No. - ----------- 2.1 Plan of Reorganization and Merger Agreement dated January 30, 1995 by and between Feather River State Bank, FRSB Merger Company and California Independent Bancorp. 23/ * 3.1 Articles of Incorporation of California Independent Bancorp. 23/ * 3.2 Bylaws of California Independent Bancorp. 23/ * 10.1 Salary Continuation Agreements dated April 28, 1993 with Robert J. Mulder, Ronald W. Kelly and Annette Dier Bertolini. 23/ * 10.2 Agreement for the purchase of 203 Main Street, Woodland, California by and between Feather River State Bank and Bank of America, NT & SA successor to Security Pacific National Bank. 23/ * 10.3 Consolidated Agreement dated April 30, 1993 with Unisys Corporation. 23/ * 10.4 Agreements with Information Technologies, Inc. 23/ * 10.5 Lease for 6545 Sunrise Boulevard, Suite 201, Citrus Heights, California. 23/ * 10.6 Deferred Compensation Agreement dated July 19, 1994 with William H. Gilbert. 23/ * - --------------- 23/ Filed as an exhibit to the Company's General Form for Registration of Securities on Form 10 (File No. 0-26552). * Document incorporated herein by reference. 48 10.7 Feather River State Bank Employee Ownership Plan. 23/ * 10.8 Bank Affiliate Agreement between Feather River State Bank and Lexington Capital Management, Inc. 24/ * 10.9 California Independent Bancorp 1989 Amended and Restated Stock Option Plan including related Incentive and Non Statutory Stock Option Agreements. 25/ 10.10 California Independent Bancorp 1996 Stock Option Plan and related Incentive Stock Option and Nonstatutory Stock Option Agreements. 26/ * 10.11 Purchase and Sale Agreement and Joint Escrow Instructions by and between First Interstate Bank of California and Feather River State Bank for 700 "E" Street, Marysville. 24/ * 10.12 Stock Purchase Agreement dated September 16, 1996 between Feather River State Bank and Carolyn E. Roth and related Employment Agreement and Noncompetition Agreement. 27/ * 10.13 Lease by and between Metta M. Boyd and Feather River State Bank for 194 East Sixth Street, Chico, California. 10.14 Lease by and between Wells Fargo Bank, N.A. and Feather River State Bank for 995 Tharp Road, Yuba City, California. 10.15 Lease by and between Professional Executive Center, Inc. and Feather River State Bank for 2140 Professional Drive, Roseville, California. - --------------- 24/ Filed as an Exhbit to the Company's Form 10-K for December 31, 1995. 25/ Filed as an Exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-8/SEC Registration No. 333-09813. 26/ Filed as an exhibit to Amendment No. 1 to the Company's Form S-8/SEC Registration No. 333-09823. 27/ Filed as an Exhibit to the Company's Form 8-K for the month of October, 1996. 49 10.16 Executive Salary Continuation Agreement dated Februry 4, 1997 by and between Feather River State Bank and Robert J. Mulder. 10.17 Lease by and between Anderson and Associates and E.P.I. Leasing Co., Inc. for the premises at 6929 Sunrise Boulevard, Citrus Heights, California. 10.18 Lease by and between Vault Security Systems, Inc. and Feather River State Bank dated March 1, 1997 for modular bank branch located in Wheatland, California. 23 Consent of Arthur Andersen LLP for audited financial statements for the year ended December 31, 1996. 24 Power of Attorney (Incorporated herein by reference) 27 Financial Data Schedule 50 EX-10.13 2 EXHIBIT 10-13 LEASE AGREEMENT OF METTA BOYD LEASE AGREEMENT THIS LEASE AGREEMENT made and entered into this 30 day of April, 1996, by and between Metta M. Boyd, hereinafter referred to as Lessor, and FEATHER RIVER STATE BANK, a corporation, hereinafter referred to as Lessee. In consideration of the mutual promises, covenants and conditions hereinafter contained, the parties hereto contract and agree as follows: The Lessor hereby leases to the Lessee and the Lessee takes from the Lessor that certain property described as: That certain real property located in the County of Butte, State of California, described as follows: The East half of Lot 4 of Block 26 of the City of Chico, according to the Official Map thereof, recorded in the office of the Recorder of the County of Butte, State of California fronting sixty-six feet on East Sixth Street and sixty-six feet on Wall Street consisting of a business building and parking area, subject to the following terms and conditions: 1. TERM: Two (2) years commencing June 1, 1996 at a rental of Nine Hundred Dollars ($900.00) per month, first and last months' rental payable in advance. 2. Lessee shall maintain said premises including the parking area in good state of repair at all times and shall not commit waste thereon. The Lessor shall be responsible for the roof and exterior walls upon the written notice of Lessee if the same are in need of repair. 3. Lessee shall obtain insurance for plate glass in the front for any breakage regardless from whatever cause breakage may occur. 4. The Lessor shall not be responsible for any loss to the fixtures, equipment or merchandise of the Lessee caused by fire, leakage, or other cause whatsoever. 5. Lessee shall maintain the plumbing in a good state of repair both from outside and inside and pay any repairs. 6. Any repairs or additions or alterations made by the Lessee shall first be submitted to the Lessor for written approval. 7. The Lessee agrees to keep the lot, parking area and surrounding area clean and sightly at all times. 8. The Lessee shall pay for all utilities used on and about the leased premises including heat, water, garbage and electricity. 9. There shall be no permanent parking on the lot other than the regular employees and normal customers. 10. There shall be no printed matter, signs or posters placed on the leased building without Lessor's prior written consent. 11. The Lessee shall at all times have installed a fire extinguisher within the leased premises. 12. In the event the building is destroyed by fire, the Lessor shall have a period of one hundred twenty days (120) to rebuild a similar building in which event the payment of rent shall cease until construction is completed and possession restored to Lessee. If the building is partially destroyed and the Lessee can use a portion of the building, then the rental shall be prorated. If the loss by fire is through the negligence of the Lessee, then the Lessee at their own costs and expense shall rebuild the building and pay full rental during the construction period. 13. This lease is not assignable without the written consent of the Lessor first had and obtained; however, in the event the Lessee desires to vacate the premises, and produces a lessee which meets the standards of a good tenant, the Lessor will not be unreasonable in allowing Lessee to assign this lease subject to all the terms and conditions herein. 14. Any increase of property taxes over five hundred dollars ($500) per year during the terms of this lease shall be paid by the Lessee. 15. The Lessee shall hold the Lessor free and harmless from any and all property damages or personal injuries that may occur upon the leased premises by reason of the occupancy of the Lessee. 16. The Lessee complying with all of the terms and conditions of this lease shall have the option to renew the lease for three successive periods of two years each ("renewal periods", subject to the same terms and conditions by giving the Lessor 120 days written notice before the expiration of the lease term then in effect, except that the monthly rental for the renewal periods shall be renegotiated. The renegotiated rent for any renewal period shall not be less than the monthly rent in effect immediately prior to the commencement of any renewal period. 17. The Lessee shall carry general liability insurance of at least $500,000.00 and shall make a copy of such policy available to the Lessor. 18. Lessor shall maintain fire and extended coverage insurance throughout the lease term in an amount equal to at least 90% of the replacement value of the building that includes the lease premises. 19. At the end of the lease term or any extension thereof, the Lessee shall return the premises in as good a condition as received, normal wear and tear expected. 20. The Lessor reserves the right to inspect the premises either in person or through her agents at all reasonable times and hours. 21. If Lessor sells any of the leased premises, Lessor shall be and is entirely relieved of all liability under this lease, and of all covenants and obligations contained in and derived from this lease arising out of any activity, occurrence, or omission occurring after consummation of the sale; and the purchaser at the sale or any subject sale of the leased premises, shall be deemed to have assumed and agreed to carry out any of the covenants and obligations of Lessor under this lease. 22. If either Lessor or Lessee shall commence any legal proceedings against the other with respect to any of the terms and conditions of this lease, the non-prevailing party shall pay to the other all expenses of the litigation, including reasonable attorneys' fees as may be fixed by the court having jurisdiction over the matter. 23. This Agreement shall be binding on the heirs, administrators, executors and assigns of the respective parties hereto. IN WITNESS WHEREOF, we have hereunto set our hands the day and year herein written. LESSOR: /s/ Metta M. Boyd --------------------------------------- METTA M. BOYD LESSEE: FEATHER RIVER STATE BANK a Corporation By /s/ Ronald W. Kelly --------------------------------------- Title: RONALD W. KELLY, EXECUTIVE VICE PRESIDENT EX-10.14 3 EX-10.14 LEASE/WELLS FARGO BANK & FEATHER RIVER BK AGREEMENT OF PURCHASE AND SALE SELLER: WELLS FARGO BANK, N.A., a national banking association BUYER: FEATHER RIVER STATE BANK a CALIFORNIA CORPORATION PROPERTY: 995 Tharp Road, Yuba City, California (AU No. F611) PURCHASE PRICE: Six Hundred Fifty Thousand Dollars ($65O,OOO.OO) DEPOSIT: Thirty-Two Thousand Five Hundred Dollars ($32,500.00), due on execution DUE DILIGENCE PERIOD: From full execution of this Agreement until October 31, 1996 CLOSING DATE: December 2, 1996 DATED AS OF September 23, 1996 -- TABLE OF CONTENTS 1. Definitions . . . . . . . . . . . . . . . . . . 1 2. Purchase and Sale of Property . . . . . . . . . 4 3. Purchase Price; Deposit. . . . . . . . . . . . . 4 4. Remedies . . . . . . . . . . . . . . . . . . . . 5 5. Due Dilience . . . . . . . . . . . . . . . . . . 5 6. Status . . . . . . . . . . . . . . . . . . . . . 8 7. Grant Deed . . . . . . . . . . . . . . . . . . .10 8. Conditions Precedent to Close of Escrow. . . . .10 9. Closing. . . . . . . . . . . . . . . . . . . . .13 l0. Brokerage Commission . . . . . . . . . . . . . .16 11. Condemnation/Casualty. . . . . . . . . . . . . .16 12. Representations and Warranties . . . . . . . . .17 13. Miscellaneous. . . . . . . . . . . . . . . . . .18 Exhibits - -------- Exhibit A - Real Property Exhibit B - Grant Deed Exhibit C - Due Diligence Materials ii AGREEMENT OF PURCHASE AND SALE ------------------------------- THIS AGREEMENT OF PURCHASE AND SALE (this "Agreement"), dated as of September 23, 1996, is made between WELLS FARGO BANK, N.A., a national banking association ("Seller"), and FEATHER RIVER STATE BANK, a California Corporation ("Buyer"), who for valuable consideration received, agree as follows: 1. DEFINITIONS. For the purposes of this Agreement the following terms shall be defined as follows: 1.1 ACTUAL KNOWLEDGE OF SELLER. The term "Actual Knowledge of Seller" means and is limited to the actual knowledge of David Danis, Seller's Vice President of Corporate Properties Group located at 111 Sutter Street, 22nd Floor, San Francisco, California, without having conducted any independent inquiry or inspection. 1.2 BROKERS. The "Seller's Broker" is/are CB Commercial Real Estate Group, Inc. (Craig Burress) and the "Buyer's Broker" is/are Coldwell Banker/Trident Investment Corporation. Seller's Broker and Buyer's Broker are collectively referred to herein as the "Brokers." 1.3 BUYER INSPECTION. The term "Buyer Inspection" shall have the meaning given thereto in Section 5.2, below. 1.4 CLOSING; CLOSE OF ESCROW; CLOSING DATE. The "Closing" or the "Close of Escrow" shall mean the consummation of the purchase and sale of the Property in accordance with this Agreement, as evidenced by the recording of the Deed in the official records of the county in which the Property is located, Closing and Close of Escrow are terms used interchangeably in this Agreement. The "Closing Date" is December 2, 1996 and the last date on which the Closing/Close of Escrow can occur, unless extended in writing by Seller in its sole and absolute discretion. 1.5 DEED. The term "Deed" shall have the meaning given thereto in Section 7, below. 1.6 DEPOSIT. The "Deposit" is Thirty-Two Thousand Five Hundred Dollars ($32,500.00) and shall be placed into Escrow on the opening of Escrow in accordance with Section 3.1, below. 1.7 DUE DILIGENCE MATERIALS. The term "Due Diligence Materials" means the reports, surveys and other materials listed on Exhibit C, attached hereto. 1.8 DUE DILIGENCE PERIOD. The "Due Diligence Period" is the period commencing on the Effective Date and ending on 1. October 31, 1996, during which Buyer must complete its due diligence as described in Section 5, below. 1.9 EFFECTIVE DATE. The "Effective Date" is the date set forth below the signatures of the party which is the last to sign this Agreement. 1.10 ENVIRONMENTAL LAW. The term "Environmental Law" means any law, statute, ordinance or regulation pertaining to health, industrial hygiene or the environment including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the Resources Conservation and Recovery Act of 1976, as amended. 1.11 ESCROW. The term "Escrow" shall have the meaning given thereto in Section 3.1, below. 1.12 ESCROW HOLDER AND TITLE COMPANY. The "Escrow Holder" and the "Title Company" are: Fidelity National Title Insurance Company 1455 Butte House Road Yuba City, CA 95993 Telephone: (916) 673-5844 Facsimile: (916) 671-3979 Attention: Kathy Mangrum 1.13 EXHIBITS. The term "Exhibits" means the following, each of which is attached hereto and incorporated herein by this reference: Exhibit A - Legal Description of Real Property Exhibit B - Form of Deed Exhibit C - Due Diligence Materials 1.14 HAZARDOUS SUBSTANCE. The term "Hazardous Substance" means any substance, material or waste which is or becomes designated, classified or regulated as being "toxic" or "hazardous" or a "pollutant" or which is or becomes similarly designated, classified or regulated, under any Environmental Law, including asbestos, petroleum and petroleum products. 1.15 NON-FOREIGN CERTIFICATE. The term "Non-Foreign Certificate" shall have the meaning given thereto in Section 9.2.1.3, below. 1.16 NOTICES. The term "Notices" means all notices or other communications required or permitted hereunder, which Notices shall be sent as follows to: 2. Seller: Wells Fargo Bank, N.A. Corporate Properties Group 111 Sutter Street, 22nd Floor San Francisco, CA 94104 Attn: David Danis Telephone: (415) 396-3115 Facsimile: (415) 396-7659 with a copy to: Brobeck, Phleger & Harrison One Market, Spear Tower San Francisco, CA 94105 Attn: A. Bruce Gilmore, Esq. Telephone: (415) 442-0900 Facsimile: (415) 979-2912 Buyer: Feather River State Bank 1005 Stafford Way Yuba City, CA 95991 Attn: Mr. Robert J. Mulder Telephone: 916 674-4444 Facsimile: 916 674-4443 with a copy to: Feather River State Bank 1005 Stafford Way Yuba City, CA 95991 Attn: Annette Bertolini, CFO Telephone: 916 674-4444 Facsimile: 916 674-4443 1.17 PERMITTED EXCEPTIONS. The term "Permitted Exceptions" shall have the meaning given thereto in Section 8.2.1.2, below. 1.18 PROPERTY. The term "Property" shall have the meaning given thereto in Section 2, below. 1.19 PRORATION DATE. The term "Probation Date" shall have the meaning given thereto in Section 9.5.2, below. 1.20 PURCHASE PRICE. The "Purchase Price" for the Property is Six Hundred Fifty Thousand Dollars ($650,000.00). 1.21 REAL ESTATE COMPENSATION. The term "Real Estate Compensation" shall have the meaning given thereto in Section 10, below. 1.22 REAL PROPERTY. The term "Real Property" means that certain improved real property located in the City of Yuba City, County of Sutter, State of California, and commonly known as 995 Tharp Road, (AU No. F611), and more particularly described in EXHIBIT A, attached hereto. 3. 1.23 SELLER'S ACCOUNT. The term "Seller's Account" means the account to which the Purchase Price (less Seller's share of closing costs and prorations) shall be wired pursuant to written instructions to be furnished to Escrow Holder by Seller prior to Close of Escrow. 1.24 TERMINATION NOTICE The term "Termination Notice" shall have the meaning given thereto in Section 5.3, below. 1.25 TITLE POLICY. The term "Title Policy" shall have the meaning given thereto in Section 7, below. 2. PURCHASE AND SALE OF PROPERTY. Seller agrees to sell to Buyer and Buyer agrees to purchase from Seller on the terms hereinafter set forth all of Seller's right, title and interest in the Real Property, including all improvements, fixtures and vaults or vault doors located on the Real Property, but excluding any automated teller machines and signs located on the Real Property, together with all rights and appurtenances pertaining thereto (collectively, the "Property"). The term "Property" does not include, and Seller is not selling to Buyer, the furniture, equipment or other personal property located on the Real Property or any deposits, customer lists, banking business, trade or service names or marks (including WFB, Wells Fargo, Wells Fargo Bank, Wells Fargo & Company, the Wells Fargo stagecoach, the stagecoach marks, First Interstate Bank, First Interstate, FIB or any combination of the foregoing) or other proprietary property of Seller (collectively, "Proprietary Property"). 3. PURCHASE PRICE; DEPOSIT. Buyer shall pay to Seller the Purchase Price for the Property in the following manner: 3.1 DEPOSIT. Within one (1) business day after execution of this Agreement, Buyer and Seller shall open an escrow account (the "Escrow") with Escrow Holder, and Buyer shall deposit with Escrow Holder by cashier's check or immediately. available federal wire transfer cash in an amount equal to the Deposit, Escrow Holder shall place the funds received from Buyer in an interest-bearing account at an institution acceptable to Seller, to be held as a deposit on account of the Purchase Price. All interest earned on the Deposit shall be added to, and become a part of, the Deposit. Except as expressly provided otherwise in this Agreement, the Deposit shall become non-refundable on the first day following the expiration of the Due Diligence Period and immediately shall be delivered by Escrow Holder to Seller (without any further instruction by Seller or Buyer to Escrow Holder) unless Buyer terminates this Agreement by written notice to Seller and Escrow Holder as provided in this Agreement on or before the expiration of the Due Diligence Period. No interest shall accrue on the Deposit after delivery of the Deposit to Seller. 4. 3.2 CASH AT CLOSING. Not less than two (2) days prior to Close of Escrow, Buyer shall deposit with Escrow Holder by immediately available federal wire transfer or cashier's check an additional amount equal to the difference between (i) the Purchase Price and (ii) the Deposit, plus or minus the closing adjustments and prorations described in Section 9.5. 4. REMEDIES. -------- 4.1 SELLER DEFAULT. If the transaction contemplated by this Agreement does not close solely as a result of a default by Seller, Buyer's sole remedy shall be the return of the Deposit (with Buyer thereby waiving any other remedy, including specific performance, which Buyer may have against Seller). 4.2 NO SELLER DEFAULT; LIQUIDATED DAMAGES. IF THE TRANSACTION CONTEMPLATED HEREUNDER IS NOT CONSUMMATED DUE TO A DEFAULT BY BUYER, SELLER MAY IMMEDIATELY TERMINATE THIS AGREEMENT BY WRITTEN NOTICE TO BUYER AND WITHOUT FURTHER OBLIGATION TO BUYER, AND ESCROW HOLDER SHALL IMMEDIATELY DISBURSE TO SELLER ANY PORTION OF THE DEPOSIT THEN HELD BY ESCROW HOLDER. SELLER SHALL RETAIN THE DEPOSIT AS LIQUIDATED DAMAGES AND AS SELLERS SOLE REMEDY THE PARTIES AGREE THAT SELLER'S ACTUAL DAMAGES AS A RESULT OF BUYER'S DEFAULT WOULD BE DIFFICULT OR IMPOSSIBLE TO DETERMINE, AND THE DEPOSIT IS THE BEST ESTIMATE OF THE AMOUNT OF DAMAGES SELLER WOULD SUFFER AS A RESULT OF SUCH DEFAULT; PROVIDED, HOWEVER, THAT THIS PROVISION WILL NOT LIMIT BUYER'S INDEMNITY OBLIGATIONS AND SELLER'S RIGHTS TO THOSE INDEMNITY OBLIGATIONS UNDER THIS AGREEMENT. THE PAYMENT OF THE DEPOSIT AS LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR PENALTY WITHIN THE MEANING OF CALIFORNIA CIVIL CODE SECTIONS 3275 OR 3369, BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO SELLER PURSUANT TO CALIFORNIA CIVIL CODE SECTIONS 1671, 1676 AND 1677. SELLER HEREBY WAIVES THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 3389. THE PARTIES WITNESS THEIR AGREEMENT TO THIS LIQUIDATED DAMAGES PROVISION BY INITIALLING THIS SECTION: Seller: /s/illegible Buyer: /s/illegible 5. DUE DILIGENCE. 5.1 SELLER'S STUDIES. To the extent Seller has not already done so, Seller shall make available to Buyer at the office of Seller's Broker the Due Diligence Materials, for use by Buyer in connection with Buyer's investigation of the Property, Notwithstanding the foregoing, Seller shall not make available to Buyer (i) any appraisals of the Real Property, (ii) any internal budgets or financial projections relating to the Real Property, (iii) correspondence relating to routine management and maintenance matters and (iv) any reports or studies prepared or commissioned by Seller concerning the extent to which the improvements located on the Real Property are in compliance with the Americans With Disabilities Act. Seller makes no 5. representation or warranty of any kind with respect to the Due Diligence Materials, including their accuracy, completeness or suitability for reliance thereon by Buyer. 5.2 RIGHT OF ENTRY. During the Due Diligence Period, provided that Buyer is not in default hereunder, Buyer shall have the right to enter and inspect the Real Property (each, a "Buyer Inspection") pursuant to the following terms and conditions: 5.2.1 NOTICE. Buyer shall provide Seller's Broker with at least one (1) business day's prior written notice of any Buyer Inspection (describing Buyer's intended activities on the Real Property). 5.2.2 EXPENSES. Each Buyer Inspection shall be at Buyer's sole cost and expense. 5.2.3 LICENSE; INSURANCE. The persons or entities performing the Buyer Inspection shall be properly licensed and qualified, shall have obtained all of the appropriate permits for performing relevant tests and shall have delivered to Seller, prior to performing any tests or entering the Real Property, evidence of proper and adequate insurance reasonably satisfactory to Seller. In addition, if a Buyer Inspection requires more than a visual inspection of the Real Property, then before undertaking such Buyer Inspection, Buyer shall arrange for Seller to be named as an additional insured on Buyer's commercial public liability insurance policy covering liability to property or persons for Buyer's activities on or about the Real Property in an amount not less than Two Million Dollars ($2,000,000.00). 5.2.4 PHYSICAL TESTING. Buyer shall obtain Seller's advance written consent to any proposed physical testing or drilling of the Real Property by Buyer or Buyer's representatives (which consent shall not be unreasonably withheld or delayed). If Buyer, or its agents, representatives or employees, undertake any borings or other disturbance of the soil, such borings or disturbance shall be recompacted to the original condition of the Real Property before such activities and Buyer shall obtain at its expense a certification from a soils engineer that the borings or disturbance has been so recompacted. 5.2.5 SCHEDULING OF TESTS. Buyer shall schedule all tests during normal business hours unless otherwise requested by Seller. 5.2.6 REPRESENTATIVE. Seller's Broker shall accompany Buyer and Buyer's representatives, agents or designees while they are on the Real Property. 6. 5.2.7 NO INTERFERENCE. Buyer and its representatives, agents or designees shall not interfere with Seller's business operations on, or use of, the Real Property. 5.2.8 REPORTS. If requested by Seller, Buyer shall promptly deliver to Seller a copy of all reports, tests, analyses and studies of the Real Property performed by or at the request of Buyer or otherwise obtained by Buyer, and all conclusions, results, findings and recommendations pertaining thereto. 5.2.9 LIENS. Buyer shall not cause or suffer any lien or other encumbrance to be recorded against the Real Property, and shall promptly cause any lien or other encumbrance caused or suffered by Buyer (including mechanics' liens arising out of Buyer's activities under this Section 5.2) to be immediately discharged or bonded over, to Seller's satisfaction. 5.2.10 RESTORATION. If any portion of the Real Property is damaged due to Buyer's entry on the Real Property, Buyer shall, at its sole cost and expense, immediately repair and restore the Real Property to the same condition the Real Property was in immediately prior to the date the damage occurred. 5.2.11 IDEMNITY. Buyer shall indemnify, protect and defend (by counsel reasonably acceptable to Seller) and hold harmless Seller for, from and against any and all claims, damages, costs, liabilities and losses and expenses arising out of any entry, investigations, inspections, tests and other activities undertaken by Buyer or its agents, designees or representatives, including (A) reasonable attorneys' fees and expenses and other reasonable costs and expenses incurred by Seller in connection with investigating or defending any such matters, (B) any and all costs or expenses incurred by Seller resulting from or arising out of the aggravation of physical defects or conditions regarding hazardous, toxic or contaminated substances or materials and (C) any and all costs or expenses incurred by Seller in defending, discharging or bonding over any liens or encumbrances against the Property resulting from Buyer's activities with respect thereto. This indemnity provision shall survive Close of Escrow or any earlier termination of this Agreement and shall not be reduced or impaired by Seller's receipt of any sums as liquidated damages hereunder. 5.2.12 CONFIDENTIAL. Each Buyer Inspection, and the results thereof, shall remain confidential pursuant to the terms of Section 13.16. 5.3 DISAPPROVAL OF SELLER'S STUDIES OR BUYER INSPECTIONS. Buyer shall have the right, at any time during the Due Diligence Period, to reasonably disapprove the results of Buyer's review of the Due Diligence Materials or the Buyer Inspections of the Real Property by providing Seller and Escrow 7. Holder with written notice thereof (a "Termination Notice"). If Buyer delivers a Termination Notice to Seller and Escrow Holder during the Due Diligence Period, then (a) this Agreement, and all of the obligations, rights and liabilities of the parties to each other hereunder (except for Buyer's indemnification obligations under Section 5.2.11, Buyer's restoration obligations under Section 5.2.10, and the parties' confidentiality obligations under Section 13.16), shall terminate and be of no further effect, (b) Buyer shall immediately return to Seller the Due Diligence Materials and, if requested by Seller, deliver to Seller any written reports, tests or memoranda in Buyer's possession relating to the Buyer Inspections of the Real Property, and (c) upon Seller's receipt of such information, Seller shall immediately direct Escrow Holder to return the Deposit to Buyer. If Buyer fails to provide Seller and Escrow Holder with a Termination Notice prior to the expiration of the Due Diligence Period, then (i) Buyer shall be deemed to have approved the results of Buyer's review of the Due Diligence Materials and the Buyer Inspections of the Real Property and waived Buyer's right to terminate this Agreement due to a failure of the conditions precedent described in Section 8.2.1 of this Agreement and (ii) the parties shall proceed with Close of Escrow in accordance with the terms of this Agreement. If Buyer objects to any exceptions to title shown in the preliminary report referred to in Section 8.2.1.2, then unless such exception is of the type described in Section 8.2.2.1 (other than a "Permitted Exception"), Buyer may deliver a Termination Notice that is conditional on Seller's committing to Buyer, before expiration of the Due Diligence Period, to removing the exceptions objected to by Buyer at Close of Escrow, In any event, the parties' participation in Close of Escrow shall be deemed a waiver of (i) each party's ability to terminate this Agreement on the basis of any failure of any conditions precedent and (ii) each party's right to seek damages from the other party for the breach of any representations, warranty or covenant of which the non-breaching party had actual knowledge prior to Close of Escrow. 6. STATUS. 6.1 AS IS PURCHASE. Buyer shall examine, inspect and conduct its own investigation of all matters with respect to taxes, bonds, environmental condition, permissible uses, title, zoning, covenants, conditions and restrictions and all other matters which, in Buyer's judgment, bear upon the value and suitability of the Property or Buyer's purposes. Except as otherwise specifically stated in Section 12.2, Seller hereby specifically disclaims any warranty, guaranty or representation, oral or written, past, present or future, of, as to or concerning (i) the nature and condition of the Property, including the water, soil, geology, environmental conditions (including the presence or absence of any Hazardous Substance), and the suitability thereof for any and all activities and uses which Buyer may elect to conduct thereon; (ii) the nature and extent of 8. any right-of-way, lease, possession, lien, encumbrance, license, reservation, condition or otherwise; or (iii) the compliance of the Property or its operation with any laws, ordinances or regulations of any government or other body (including the Americans With Disabilities Act) The sale of the Property as provided for herein is made on an "AS IS" basis, and Buyer expressly acknowledges that, in consideration of the agreements of Seller herein, except as otherwise expressly specified in this Agreement, SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, OR ARISING BY OPERATION OF LAW, INCLUDING, BUT IN NO WAY LIMITED TO, ANY WARRANTY OF CONDITION, HABITABILITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PROPERTY. 6.2 RELEASE. Except for any breach by Seller of any representation or warranty of Seller contained in Section 12.2, Buyer, for itself and its successors and assigns, hereby releases and forever discharges Seller and its successors and assigns from, and waives any right to proceed against Seller and its successors or assigns for, any and all cost, expense, claim, liabilities and demands (including reasonable attorneys' fees) at law or in equity, whether known or unknown, arising out of the physical, environmental, economic, legal or other condition of the Property, including, without limitation, any claims for contribution pursuant to any Environmental Law (collectively referred to hereinafter as "Claims"), which Buyer or Buyer's successors or assigns has or may have in the future. Without limiting the foregoing, Buyer hereby specifically waives the provisions of Section 1542 of the California Civil Code which provide: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Buyer hereby specifically acknowledges that Buyer has carefully reviewed this Section, and discussed its import with legal counsel, is fully aware of its consequences, and that the provisions of this Section are a material part of this Agreement. Buyer /s/illegible agrees. 6.3 INDEMNITY. 6.3.1 SELLER'S INDEMNITY. Seller shall indemnify, protect and defend by counsel reasonably acceptable to Buyer and hold harmless Buyer from and against any and all claims, damages, losses, costs, expenses and liabilities (including all reasonable attorneys' fees and court costs paid or incurred by Buyer) which arise out of or are in any way connected with any misrepresentation or breach of warranty or covenant by Seller in 9. this Agreement. This indemnity does not apply, however, to any item, matter, occurrence or condition which was known to or reasonably discoverable by Buyer prior to the Closing Date. 6.3.2 BUYER'S INDEMNITY. Buyer shall indemnify, protect and defend by counsel reasonably acceptable to Seller and hold harmless Seller from and against any and all claims, damages, losses, costs, expenses and liabilities (including all reasonable attorneys' fees and court costs paid or incurred by Seller) which arise out of or are in any way connected with the ownership and/or operation of the Property after the Closing Date or any misrepresentation or breach of warranty or covenant by Buyer in this Agreement or any document delivered to Seller pursuant to this Agreement. 6.3.3 INDEMNIFIED PARTIES. For purposes of this Section 6.3, all references to "Buyer" or "Seller" shall include (A) their parent, subsidiary or affiliate corporations and (B) their directors, officers, shareholders, employees and agents. 6.3.4 SURVIVAL. The provisions of this Section 6.3 shall survive the Closing Date. 7. GRANT DEED. Seller shall convey the Real Property to Buyer by a grant deed (the "Deed"), in the form of EXHIBIT B, attached hereto. The conclusive evidence of delivery of title to the Real Property by Seller to Buyer shall be the willingness of Title Company to issue, upon payment of Title Company's regularly scheduled premium, an owner's CLTA title insurance policy (the "Title Policy") in the amount of the Purchase Price showing title to the Real Property vested of record in Buyer. 8. CONDITIONS PRECEDENT TO CLOSE OF ESCROW. In addition to the documents and funds which must be deposited into Escrow prior to Close of Escrow as detailed in Section 9.2, the following are conditions precedent to Close of Escrow: 8.1 SELLER. Seller's obligation to proceed with Close of Escrow is conditioned on the satisfaction of each of the following by not later than the Closing Date: 8.1.1 NO SUIT. As of Close of Escrow, no suit, action or other proceeding shall be pending or threatened which seeks, nor shall there exist any judgment the effect of which is, to restrain the purchase and sale of the Property. 8.l.2 BUYER'S REPRESENTATIONS. Buyer's representations and warranties set forth herein shall be true and correct as of Close of Escrow. 8.1.3 BUYER'S COVENANTS. Buyer shall have performed all of Buyer's covenants and agreements contained 10. herein which are required to be performed by Buyer on or prior to Close of Escrow. 8.1.4 RESOLUTION. To the extent requested by either Seller or Title Company, Buyer shall have provided Seller and Title Company at Close of Escrow with certified copies of corporate resolutions approving the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, together with such other certificates of incumbency and other evidences of corporate or regulatory authority, including but not limited to certificates of good standing, as Seller or Title Company may reasonably require. 8.2 BUYER. Buyer's conditions precedent to Close of Escrow are the following: 8.2.1 DUE DILIGENCE PERIOD. During the Due Diligence Period: 8.2.1.1 INSPECTION. Buyer's inspection and approval of the Buyer Inspections, the Due Diligence Materials, surveys (if any) and all other physical, environmental, legal and any other matters relating to the Property as Buyer may elect to investigate. 8.2.1.2 PRELIMINARY REPORT. Buyer's inspection and approval of a current preliminary report issued by Title Company for the Real Property and all of the exceptions contained in such report. All of the exceptions contained in the preliminary report which are approved or deemed approved by Buyer (as provided in Section 5.3) are hereinafter referred to as the "Permitted Exceptions." 8.2.2 CLOSE OF ESCROW. As of Close of Escrow: 8.2.2.1 TITLE POLICY. The willingness of Title Company to issue, upon the payment of its regularly scheduled premium, a Title Policy for the Real Property, subject only to (i) a lien for real property taxes and assessments not then delinquent; (ii) the Permitted Exceptions; (iii) matters affecting the condition of title to the Real Property created by or with the written consent of Buyer; (iv) any matters shown by any survey of the Property or by inquiry of persons in possession of the Real Property; and (v) any covenants, conditions and restrictions recorded as an interest affecting the Real Property. 8.2.2.2 NO SUIT. No suit, action or other proceeding shall be pending or threatened which seeks, nor shall there exist any judgment the effect of which is, to restrain the purchase and sale of the Property. 11. 8.2.2.3 SELLER'S REPRESENTATIONS. Seller's representations and warranties set forth herein shall be true and correct. 8.2.2.4 SELLER'S COVENANTS. Seller shall have performed all of Seller's covenants and agreements contained herein which are required to be performed by Seller on or prior to Close of Escrow. 8.3 BUYER'S PLANNING, LEASING AND DEVELOPMENT EFFORTS PRIOR TO CLOSING. If Buyer intends, prior to Close of Escrow, to seek prospective tenants for the Property, or to apply for use permits, zoning variances or other governmental approvals for new uses of prospective tenants of the Property, Buyer hereby acknowledges that Seller shall be under no obligation to render assistance to Buyer in such efforts, and all such undertakings shall be commenced and prosecuted without obligating Seller or encumbering the Property in any manner. Without limiting the generality of the foregoing, Seller shall have no obligation to submit or sign applications for use permits, zoning variances or similar governmental approvals sought by Buyer, and Buyer shall not represent itself as authorized to speak on behalf of Seller in connection with Buyer's leasing or development efforts for the Property. 8.4 PROHIBITION ON SOLICITATION OF SELLER'S CUSTOMERS. Buyer hereby acknowledges that Seller operated a branch banking operation at the Property prior to marketing the Property for sale. As material consideration for Seller entering into this Agreement, Buyer covenants and agrees that, prior to Close of Escrow, neither Buyer nor any of Buyer's employees, agents, contractors or any person claiming an interest in the Property under or through Buyer (collectively, "Buyer's Parties") shall specifically target and/or solicit any banking business from any customers of Seller or First Interstate Bank ("FIB") who conducted banking business at the Property. As it relates to the above prohibition, neither Buyer nor Buyer's Parties shall (i) use or advertise the name or address of the Property, nor (ii) use or advertise the trade or service name or marks of WFB, Wells Fargo, Wells Fargo Bank, Wells Fargo and Company, the Wells Fargo stagecoach, the stagecoach marks, First Interstate Bank, First Interstate, FIB or any combination of the foregoing. Buyer agrees that Seller will be irreparably damaged by a breach of this Section 8.4 by Buyer or any of Buyer's Parties and that upon a breach of this Section 8.4 by Buyer or any of Buyer's Parties, Seller shall be entitled to the following remedies in addition to any other remedies available to Seller at law or in equity or under any other agreement: (i) self help and an exparte temporary restraining order and preliminary and permanent injunctive relief to bar the use of any Proprietary Property or any Prohibited Conduct; (ii) terminate this Agreement and any other purchase agreement or sublease that Buyer has 12. entered into with Seller and retain the Deposit as liquidated damages pursuant to Section 4.2 of this Agreement; and (iii) recover all seller's actual attorneys' fees and court costs. 9. CLOSING. 9.1 TIME. Escrow shall close ("Close of Escrow") when all documents and funds specified in this Section 9 have been deposited into Escrow. The failure of Seller or Buyer to be in a position to close Escrow by the Closing Date shall constitute a default under this Agreement. 9.2 DOCUMENTS. Not less than two (2) days prior to Close of Escrow, which shall occur on or before the Closing Date, the parties shall deposit into Escrow the funds and the documents described below. 9.2.1 SELLER. Seller shall deposit the following: 9.2.1.1 DEED. The duly executed and acknowledged Deed, conveying the Real Property to Buyer; 9.2.1.2 NON-FOREIGN CERTIFICATE. A duly executed certificate (the "Non-Foreign Certificate") from Seller certifying that Seller is not a "foreign person" within the meaning of Section 1445(f)(3) of the Internal Revenue Code; 9.2.1.3 CALIFORNIA FORM 590. A properly executed California Form 590 or other evidence sufficient to establish that Seller is not required to withhold any portion of the Purchase Price pursuant to Sections 18805 and 26131 of the California Revenue and Taxation Code; and 9.2.1.4 ADDITIONAL DOCUMENTS. Such other documents, including escrow instructions, as may be reasonably required of Seller to close the transaction in accordance with this Agreement. 9.2.2 BUYER. Buyer shall deposit the following: 9.2.2.1 REMAINDER OF PURCHASE PRICE. The remainder of the Purchase Price; 9.2.2.2 ADDITIONAL FUNDS. Additional cash in the amount necessary to pay Buyer's share of the closing costs and prorations, as hereinafter set forth; and 9.2.2.3 ADDITIONAL DOCUMENTS. Such other documents and funds, including escrow instructions, as may be reasonably required of Buyer to close the transaction in accordance with this Agreement. 13. 9.3 PROCEDURE. Escrow Holder shall close Escrow as follows: 9.3.1 DEED. Record the Deed in the Official Records of the County in which the Real Property is located (instructing the County Recorder not to affix the amount of any documentary or transfer taxes to the Deed but to attach a separate statement to the Deed after recording) and deliver conformed copies thereof to Buyer and Seller. 9.3.2 PURCHASE PRICE. Deliver the Purchase Price to Seller (less Seller's share of the closing costs and prorations) via wire transfer of U.S. federal funds to Seller's Account, or as otherwise directed by Seller, in accordance with Seller's instructions provided to Escrow Holder prior to Close of Escrow: 9.3.3 DELIVERIES TO BUYER. Deliver to Buyer (i) the original Non-Foreign Certificate and Form 590-RE, (ii) a conformed copy of the recorded Deed and (iii) the original Title Policy. 9.3.4 DELIVERIES TO SELLER. Deliver to Seller (i) a conformed copy of the recorded Deed and (ii) Seller's closing statement, 9.4 ESCROW INSTRUCTIONS. This Agreement shall serve as escrow instructions and an executed copy of this Agreement shall be deposited by Seller and Buyer with Escrow Holder following the execution and delivery hereof. The parties agree to execute for the benefit of Escrow Holder such additional escrow instructions as are necessary to close the Escrow, provided that the additional escrow instructions do not change the terms of this Agreement but merely offer protection to Escrow Holder. Seller and Buyer hereby designate Escrow Holder as the "Reporting Person" for the transaction pursuant to Section 6045(e) of the Internal Revenue Code. 9.5 CLOSING COSTS AND PRORATIONS. 9.5.1 CLOSING COSTS. 9.5.1.1 SELLER'S RESPONSIBILITY. Seller shall be responsible for the following closing costs: (i) the CLTA portion of the title insurance premium for the Title Policy; (ii) all Escrow Fees; (iii) all county documentary transfer taxes; and (iv) Seller's attorneys' fees. In addition, Seller shall pay the Real Estate Compensation described in Section 10. 9.5.1.2 BUYER'S RESPONSIBILITY. Buyer shall be responsible for the following closing costs: (i) the ALTA portion of the title insurance premium for the Title Policy, if requested by Buyer, and any endorsements requested by Buyer; 14. (ii) the cost of any required survey; (iii) all recording costs; and (iv) Buyer's attorneys' fees. 9.5.2 PRORATIONS. The adjustments and prorations set forth below shall be made at Close of Escrow, For purposes of this Section 9.5.2, the term "Proration Date" shall be defined as 11:59 p.m. on the day preceding Close of Escrow. 9.5.2.1 REAL ESTATE TAXES. All real and personal property taxes, installments of bonds and special taxes and assessments attributable to the Property shall be prorated as of the Proration Date based on a 365-day year and the assessed value of the Property in effect at Close of Escrow. Seller shall pay all such real estate taxes which are due for the period of Seller's ownership of the Property through and including the Proration Date. 9.5.2.2 RE-PRORATION OF REAL ESTATE TAXES. If at any time after Close of Escrow additional or supplemental real estate taxes are assessed against the Real Property by reason of any event occurring prior to or including Close of Escrow, or there is any rebate of such taxes, Buyer and Seller shall promptly re-prorate such taxes, and any amounts due from one party to the other shall be paid in cash at that time. 9.5.2.3 UTILITIES. Buyer shall arrange with all utility services and companies serving the Real Property to have accounts started in the name of Buyer or its property manager beginning as of the Proration Date. Seller shall not assign to Buyer any deposits Seller has with any utility services or companies. Buyer and Seller shall cooperate to have the utility services and companies make utility readings as of the Proration Date. If readings cannot be made, utility charges shall be prorated as of the Probation Date based on estimates from the latest bills available; provided, in any event, Seller shall pay, through and including the Proration Date, all utility charges attributable to the Property. 9.5.2.4 REFUNDS OF REAL ESTATE TAXES. Buyer specifically acknowledges that Seller shall be entitled to any refund of real and personal property taxes, installments of bonds and special taxes and assessments attributable to the Property and allocable to the period prior to Close of Escrow. Any such refunds shall be paid to Seller regardless of when they are received. 9.5.2.5 Additional Costs. Buyer and Seller each shall pay their own legal, lending and other fees and expenses incurred in connection with the negotiation, documentation and closing of the transactions contemplated by this Agreement. 15. 10. BROKERAGE COMMISSION. Each party to this Agreement warrants to the other that no person or entity other than Seller's Broker and Buyer's Broker can properly claim a right to a real estate commission, finder's fee or. other real estate brokerage-type commission (collectively, "Real Estate Compensation") based upon the acts of that party with respect to the transactions contemplated with respect to this Agreement. Seller shall pay any Real Estate Compensation due to Seller's Broker pursuant to a separate agreement between Seller and Seller's Broker. Seller's Broker shall pay to Buyer's Broker a portion of the Real Estate Compensation pursuant to a separate agreement between Seller's Broker and Buyer's Broker. Each party hereby agrees to indemnify, protect and defend the other (by counsel acceptable to the party seeking indemnification) against and hold the other harmless from and against any and all damages, liabilities, loss, cost and expense, including, but not limited to, reasonable attorneys' fees and court costs, resulting from any claims for Real Estate Compensation by any person or entity other than the Brokers based upon such acts. 11. CONDEMNATION/CASUALTY. ll.l CONDEMNATION. 11.1.1 MATERIAL CONDEMNATION. If prior to Close of Escrow a taking or condemnation of a material portion of the Real Property has occurred, Buyer, at its option, may terminate this Agreement within five (5) days after notice of such event (and, if necessary, Close of Escrow shall be extended by the number of days necessary to give Buyer this full five (5) day period). For purpose of this Section 11.1.1, a taking or condemnation shall be "material" if it results in a taking of more than twenty percent (20%) of the gross square footage of the Real Property or the gross number of square feet in the building located on the Real Property. If Buyer does not deliver to Seller a termination notice within the five (5) day period, Close of Escrow shall take place as provided in this Section 11.1.1 with a credit against the Purchase Price in an amount equal to any condemnation awards actually received by Seller on account of such occurrence, If the transaction contemplated by this Agreement is not consummated due to such an event of condemnation, (i) any condemnation award received as a result thereof shall be the sole property of Seller and (ii) the Deposit shall be disbursed to Buyer. 11.1.2 NONMATERIAL CONDEMNATION. If prior to Close of Escrow a nonmaterial taking or condemnation of the Real Property has occurred, Close of Escrow shall take place as provided in this Agreement with a credit against the Purchase Price equal to any condemnation award actually received by Seller due to the taking. 16. 11.2 CASUALTY. 11.2.1 MATERIAL CASUALTY. If prior to Close of Escrow the Real Property is materially damaged or destroyed by fire or other casualty, Buyer, at its option, may terminate this Agreement within five (5) days after notice of such event (and, if necessary, Close of Escrow shall be extended by the number of days necessary to give Buyer this full five (5) day period). For purposes of this Section 11.2.1, the Real Property shall be deemed "materially" damaged or destroyed if the cost of repairing or restoring the Real Property is in excess of Sixty-Five Thousand Dollars ($65,000.00). If Buyer does not deliver to Seller a termination notice within the five (5) day period, Close of Escrow shall take place as provided in this Section 11.2.1 with a credit against the Purchase Price in an amount equal to the cost of repairing or restoring the Real Property, as reasonably determined by Seller; provided, however, in no event shall Buyer be entitled to a credit to the Purchase Price under this Section 11.2.1 in excess of Sixty-Five Thousand Dollars ($65,000.00). If the transaction contemplated by this Agreement is not consummated due to such casualty, then the Deposit shall be disbursed to Buyer. 11.2.2 NONMATERIAL CASUALTY. If prior to Close of Escrow the Real Property is damaged or destroyed by fire or other casualty which is not governed by Section 11.2.1, Close of Escrow shall take place as provided in this Agreement with a credit against the Purchase Price equal to the cost of repairing or restoring the Real Property, as reasonably determined by Seller; provided, however, in no event shall Buyer be entitled to a credit to the Purchase Price under this Section 11.2.2 in excess of Sixty-Five Thousand Dollars ($65,000.00). 12. REPRESENTATIONS AND WARRANTIES. 12.1 BUYER. Buyer represents and warrants to Seller, which representations and warranties shall survive the execution of this Agreement and Close of Escrow, the following: 12.1.1 BINDING. This Agreement constitutes a valid and legally binding obligation of Buyer, enforceable in accordance with its terms. 12.1.2 AUTHORITY. Buyer has the full power and authority to execute and deliver and fully perform its obligations under this Agreement. 12.1.3 NO BANKRUPTCY. Buyer has not made (i) a general assignment for the benefit of creditors; (ii) filed any voluntary petition in bankruptcy or suffered the filing of an involuntary petition by Buyer's creditors; (iii) suffered the appointment of a receiver to take possession of all or substantially all of Buyer's assets; (iv) suffered the attachment 17. or other judicial seizure of all, or substantially all, of Buyer's assets; (v) admitted in writing its inability to pay its debts as they become due; or (vi) made an offer of settlement, extension or composition to its creditors generally. 12.2 SELLER. Seller represents and warrants to Buyer, which representations and warranties shall survive the execution of this Agreement and Close of Escrow, the following: 12.2.1 BINDING. This Agreement constitutes a valid and legally binding obligation of Seller, enforceable in accordance with its terms. 12.2.2 AUTHORITY. Seller has the full power and authority to execute and deliver and fully perform its obligations under this Agreement. 12.2.3 ENVIRONMENTAL MATTERS. As of the Effective Date, to the Actual Knowledge of Seller and except as set forth in the Due Diligence Materials, (i) since the date of Seller's acquisition of the Real Property, no Hazardous Substances are now or have been used or stored on the Property except those Hazardous Substances which are or which have been used or stored on the Real Property in the normal course of use and operation of the Real Property and in compliance with all applicable Environmental Laws; (ii) since the date of Seller's acquisition of the Real Property, there are and have been no federal, state or local enforcement, clean-up, removal, remedial or other governmental or regulatory actions instituted or completed affecting the Real Property; and (iii) no claims have bean made by any third party against Seller relating to any Hazardous Substances on or within the Real Property. 13. MISCELLANEOUS. 13.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the heirs, executors, administrators, and successors and assigns of Seller and Buyer; provided, however, Buyer shall not assign any or all of Buyer's rights and obligations hereunder to any party without the prior written consent of Seller, which consent Seller shall have the right to withhold in its sole discretion. Any such assignment in violation of this provision shall be void. If Seller consents to an assignment, the assignment will not be effective against Seller until Buyer delivers to Seller a fully executed copy of the assignment instrument, which instrument must be satisfactory to Seller in both form and substance and pursuant to which the assignee assumes and agrees to perform for the benefit of Seller the obligations of Buyer under this Agreement, and pursuant to which the assignee makes the warranties and representations required of Buyer under this Agreement. 18. 13.2 ENTIRE AGREEMENT. This Agreement contains all of the covenants, conditions and agreements between the parties and shall supersede all prior correspondence, agreements and understandings, both oral and written. 13.3 ATTORNEYS' FEES. Should either party employ attorneys to enforce any of the provisions hereof or to protect its interest in any manner arising under this Agreement, or to recover damages for breach of this Agreement, or to enforce any judgment relating to this Agreement and the transaction contemplated hereby, the prevailing party shall be entitled to attorneys' fees and court costs. 13.4 WAIVER OF TRIAL BY JURY. Each of Seller and Buyer hereby waives its rights to a trial by jury as to any matter arising out of or concerning the subject matter of this Agreement. 13.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 13.6 FURTHER ASSURANCES. Seller or Buyer shall promptly perform, execute and deliver or cause to be performed, executed and/or delivered at or after Close of Escrow any and all acts, deeds and assurances as either party or Escrow Holder may reasonably require in order to carry out the intent and purpose of this Agreement. 13.7 SEVERABILITY. In case any one or more of the provisions contained in this Agreement for any reason is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 13.8 NOTICES. All Notices required or permitted hereunder shall be in writing, and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, national overnight courier service or facsimile to the addresses stated above. Notices and other communications shall be deemed received upon the earlier of (i) if personally delivered, the date of delivery to the address of the person to receive such notice, (ii) if mailed, three (3) business days after the posting by the United States Post office, (iii) if sent by national overnight courier service, one (1) business day after delivery to such courier service, or (iv) if given by facsimile, when sent and receipt is confirmed. Any notice, request, demand, direction or other communication sent by facsimile must be confirmed within twenty-four (24) hours by a letter mailed or delivered in accordance with the foregoing. 19. l3.9 COUNTERPARTS. This Agreement may be executed in one (1) or more counterparts, and all of the counterparts shall constitute but one and the same agreement notwithstanding that all parties hereto are not signatory to the same or original counterpart. 13.10 TIME. Time is of the essence of every provision herein contained. 13.11 NONWAIVER. Unless otherwise expressly provided herein, no waiver by a party of any provision hereof shall be deemed to have been made unless expressed in writing and signed by the party waiving the provision. No delay or omission in the exercise of any right or remedy accruing to a party upon any breach under this Agreement shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by a party of any breach of any term, covenant or condition herein stated shall not be deemed to be a waiver of any other term, covenant or condition. All rights or remedies afforded to a party hereunder or by law shall be cumulative and not alternative, and the exercise of one right or remedy shall not bar other rights or remedies allowed herein or by law. 13.12 CAPTIONS. Section titles or captions contained herein are inserted as a matter of convenience and for reference, and in no way define, limit, extend or describe the scope of this Agreement. 13.13 SURVIVAL. Except as expressly set forth in this Agreement, upon Close of Escrow, each of the terms, covenants and conditions of this Agreement shall be deemed to have merged into the Deed. 13.14 EXHIBITS. All exhibits attached hereto shall be incorporated herein by reference as if set out herein in full. 13.15 CONSTRUCTION. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendment or exhibits hereto. 13.16 CONFIDENTIALITY. Buyer and Seller agree to keep confidential, and not publicly disclose, the existence and/or terms of this Agreement and the transaction contemplated hereby or the results, contents or analysis of the Buyer Inspections of the Property; provided, however, that both Seller and Buyer may disclose the existence and terms of this Agreement and the Buyer Inspections to: (i) Buyer's and Seller's respective consultants, agents, architects, independent contractors, attorneys or surveyors associated with the purchase and sale of the Property, 20. (ii) any third party to whom the non-disclosing party to this Agreement has given its prior written consent for such a disclosure, or (iii) governmental, administrative, regulatory or judicial authorities in the investigation of the compliance of the Property with applicable legal requirements. However, Buyer expressly covenants and agrees that it will not disclose any code compliance, environmental or other regulatory matters to governmental or other authorities without the express prior written approval of Seller. The provisions of this Section 13,16 shall survive the termination of this Agreement other than by Close of Escrow. 13.17 NOT OFFER. The submission of this Agreement to Buyer shall not constitute an offer and neither Buyer nor Seller shall be obligated to purchase or sell the Property until this Agreement is executed by Buyer and Seller. Prior to execution of this Agreement by Buyer and Seller, Seller expressly reserves the right to negotiate with other prospective buyers of the Property or to decline to sell or dispose of the Property without penalty or any obligation to Buyer. 21. IN WITNESS WHEREOF, the parties hereto have executed this Agreement in one or more counterparts, on the date(s) set forth below, effective as of the Effective Date. Seller: WELLS FARGO BANK, N.A. a national banking association By: /s/ David Danis ------------------------ Name: David Danis ---------------- Its: VP ---------------- Date: 10/2 ,1996 ------ Buyer: FEATHER RIVER STATE BANK By: ------------------------ Name: Robert J, Mulder ---------------- Its: President / CEO ---------------- Date: September 23,1996 ------------ By: ------------------------ Name: ---------------- Its: ---------------- Date: ,1996 ------------ 22. EXHIBIT A ----------- Real Property [attached] EXHIBIT A --------- Order No.: 104113 Update LEGAL DESCRIPTION EXHIBIT "A" All that certain real property situate in the city of Yuba City County of Sutter, State of California, being more particularly described as follows: Parcel 1, as shown on Parcel Map No. 872 recorded May 15, 1992 in Book 5 of Parcel Maps, page 82, Sutter County Records. EXCEPTING THEREFROM 50% of all oil, mineral, geothermal and similar rights, reserved in deed from Del Monte Corporation, dated May 31, 1979 and recorded June 8, 1979 in Book 960, page 106. Said rights were deeded by Quitclaim Deed to RJR Nabisco Realty Inc., a Delaware corporation recorded January 17, 1990 in Book 1333, page 108. End of Legal Page 5 EXHIBIT B --------- RECORDING REQUESTED BY, FOR RECORDER'S USE ONLY: AND WHEN RECORDED, MAIL TO: - ------------------------------ APN: - ------------------------------ Transfer Tax: See - ------------------------------ separate statement not Attention:-------------------- for public record. - -------------------------------------------------------------------------------- GRANT DEED ---------- FOR VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, WELLS FARGO BANK, N.A., a national banking association, grants, transfers and assigns to __________________________, a ______________________________, all that certain real property located in the City of ___________________________ and County of___________________________, State of California, and which is more particularly described in SCHEDULE 1, attached hereto and incorporated herein by this reference. IN WITNESS WHEREOF, this Grant Deed has been executed this _____ day of ______ 19__ WELLS FARGO BANK, N.A. a national banking association By: ------------------------------- Its: ------------------------------ MAIL ALL TAX STATEMENTS TO: --------------------------- --------------------------- --------------------------- Attention: ----------------- EXHIBIT B --------- EXHIBIT C --------- 1. The asbestos survey prepared by Versar Inc. and dated November 1, 1990. 2. The Phase I report prepared by Krazan & Associates, Inc, and dated August 15, 1994. 3. Site Plan. 4. Floor Plan. 5. The roof report prepared by Sullivan Group Roofing Division dated March 1992. 6. The HVAC report prepared by CalAir and dated June 1995. EXHIBIT C ---------- EX-10.15 4 EXHIBIT 10.15 LEASE/PROFESSIONAL EXE CENTER MONTH TO MONTH LEASE AGREEMENT This Lease Agreement (the "Lease") is made as of OCTOBER 1, 1996, by and between PROFESSIONAL EXECUTIVE CENTER, INC., a California corporation ("Landlord") and FEATHER RIVER STATE BANK ("Tenant"), who agree as follows: PREMISES. Landlord leases to Tenant and Tenant leases from Landlord, upon the terms and conditions of the Lease, approximately 168 square feet of office space, designated as Suite 4 (the "Premises"), in the office building at 2140 Professional Drive, Suite 200, Roseville, California (the "Building"). Concurrently with the Lease, Landlord and Tenant have entered into an Executive Services Agreement (the "Services Agreement") in conjunction with Tenant's use of the Premises. 2. TERM: POSSESSION. The term of the Lease (the "Term") is from month to month commencing on October 1, 1996. This Agreement will be terminated upon thirty (30) days written notice. The term will be concurrent with the term of the Lease, and this Agreement will terminate on any termination of the Lease. 3. RENT. Tenant will pay to Landlord, without offset, deduction, prior notice or demand, the sum of $405.00 per month as rent ("Rent") for the Premises. Rent for the first month of the Lease is payable in advance upon execution of the Lease. Thereafter, Rent is payable in advance on the first day of each calendar month during the Term. Rent for any partial month at the beginning or end of the Term will be prorated on the basis of 30-day months. 4. LATE CHARGE. The parties agree that in the event Tenant fails to make any rental payment within ten days of the due date, it will be impracticable and extremely difficult to fix the actual damage to Landlord. Therefore, the parties agree that Tenant will pay to Landlord an additional amount equal to ten percent (10%) of the overdue amount if Rent is not received within ten days of the due date. These late charges will be in addition to any other remedies available to Landlord under the Lease or by Law. 5. SECURITY DEPOSIT. As additional consideration for Lease and Services Agreement execution by Landlord, Tenant has paid to Landlord the sum of $300.00 (the "Security Deposit") as security for the performance of Tenant's obligations. If Tenant defaults in the performance of any of the Tenant's obligations under the Lease of the Services Agreement, Landlord may use all or any part of the Security Deposit to compensate Landlord for any loss or damage which Landlord may suffer by reason of Tenant's default. Upon receipt of notice from Landlord that any portion of the Security Deposit has been so used, Tenant will deposit sufficient funds with Landlord to restore the Security Deposit to its original amount; Tenant's failure to do so will be a breach of the Lease and the Services Agreement. Landlord is not required to keep the Security Deposit separate from Landlord's general funds, and Tenant is not entitled to interest on the Security Deposit. At the end of the Term, any portion of the Security Deposit remaining will be returned to Tenant. 6. USE OF PREMISES. Tenant will use the Premises for general office purposes and for no other business or purpose without the prior written consent of Landlord. Tenant will comply with all existing and future laws, ordinances, rules and regulations relating to Tenant's use or occupancy of the Premises, and Tenant will observe the Building Rules defined in paragraph 17 (Rules and Regulations). Tenant will not conduct any activities or keep any materials or substances in the Premises which will impair, invalidate or increase the premiums on Landlord's insurance policies. Should Tenant, through the nature of his business, cause the Landlord's insurance rate to increase, Tenant will be responsible for that rate increase. 7. ALTERATIONS. Tenant will not make any alterations to or install any fixtures in (collectively "Alterations") the Premises without Landlord's prior written consent. Any Alterations made by Tenant with Landlord's consent will be done by contractors approved by Landlord in accordance with the written specifications of Landlord and will become the property of Landlord. 8. MAINTENANCE AND REPAIR. A. Landlord will provide janitorial services to the Premises pursuant to the Services Agreement. B. By taking possession of the Premises, Tenant agrees that the Premises are then in good and tenantable condition. During the Term, Tenant will keep the Premises in good condition, ordinary wear and tear expected. C. Landlord will keep the structural portions of the Building in good condition; provided that Tenant will pay the cost of repairs for damage caused by Tenant or Tenant's employees, agents or invitees. D. Tenant shall be responsible for glass breakage in his Suite. E. Landlord reserves the right to make repairs or alterations to any part of the Building or the Premises at any time without Landlord's action constituting a constructive eviction of Tenant. 9. TRADE FIXTURES. Subject to the provisions of paragraphs 6 (Use of Premises) and 7 (Alterations), Tenant may keep furnishings, equipment and other trade fixtures ("Trade Fixtures") in the Premises as long as the Trade Fixtures do not become an integral part of the Premises or the Building. If Tenant is not then in default under the Lease, Tenant may remove any of its Trade Fixtures at any time during the Term or upon termination of the Lease. 10. UTILITIES AND SERVICES. Landlord will provide certain utilities and services to Tenant and to the Premises pursuant to the Services Agreement. Tenant will arrange for installation of N/A separate telephone line(s) for Tenant and for connection of Tenant's telephone line(s) to Landlord's switchboard. Tenant will be responsible for all charges for installation and use of its telephone payments. 11. PERSONAL PROPERTY TAXES. Tenant will pay in a timely manner all taxes or other charges assessed against Tenant's personal property located in the Premises. On demand by Landlord, Tenant will furnish Landlord with satisfactory evidence of these payments. 12. INDEMNITY AND INSURANCE. A. Indemnity. Tenant will indemnify and hold Landlord harmless from all claims and damages arising out of Tenant's use or occupancy of the Premises. Tenant's obligation under this paragraph will be offset by any insurance proceeds received by Landlord. B. Liability Insurance. At all times during the Term, Tenant will maintain at its expense liability insurance with insurance companies approved by Landlord with single combined liability limits of not less than ONE MILLION DOLLARS ($1,000,000.00) insuring Tenant and Landlord against liability for injury to persons and property and death of any person arising out of Tenant's use or occupancy of the Premises. Landlord shall be added as a named insured under liability policy. C. Fire and Other Insurance. At all times during the Term, Tenant will maintain at its expense standard fire insurance and extended coverage insurance, with vandalism and malicious mischief endorsements, in an amount sufficient to cover all losses, insuring Tenant and Landlord for damage to or loss of Tenant's Trade Fixtures located on the Premises. Landlord will maintain fire insurance coverage on the Building, but Landlord will not obtain insurance of any kind on Tenant's Trade Fixtures. 13. DAMAGE OR DESTRUCTION. If any part of the Premises or the Building is destroyed, Landlord may; (a) terminate the Lease; or (b) continue the Lease and repair or rebuild the Premises or the Building; provided that Tenant may terminate the Lease upon giving Landlord written notice within ten days after the damage or destruction if the Premises cannot be made tenantable within sixty days. If it is necessary for Landlord to occupy the Premises in order to accomplish the repair or reconstruction, Rent will abate during the time Landlord occupies the Premises. 14. CONDEMNATION. If any part of the Premises or the Building is taken as a result of condemnation proceeds, and either Landlord or Tenant may terminate the Lease upon thirty days written notice to the other. 15. LANDLORD'S RIGHT TO ENTER PREMISES. Landlord and its authorized representatives have the right to enter the Premises at any reasonable time for any reasonable purpose. 16. ASSIGNMENT AND SUBLETTING. Tenant will not do any of the following without the prior written consent of Landlord, and any such action by Tenant will be voidable by Landlord and will constitute a default under the Lease: A. Assign or encumber Tenant's interest in the Lease or the Premises; B. Sublease all or any part of the Premises; or C. Allow any other person to occupy or use all or any part of the Premises. 17. RULES AND REGULATIONS. Tenant and Tenant's employees, agents and invitees will comply with the existing rules and regulations regarding use and occupancy of the Premises and the Building, a copy of which is attached hereto as Exhibit B, and with all reasonable rules and regulations which Landlord may adopt hereafter (collectively the "Building Rules"). Any violation of the Building Rules by Tenant or by Tenant's employees, agents or invitees will constitute a default under the Lease. 18. ABANDONMENT. Tenant will occupy the Premises continuously except for normal vacation periods. Tenant's absence from the Premises for more than one week may be deemed in abandonment of the Premises at the option of Landlord if Rent is delinquent during any part of that time. 19. TENANT'S DEFAULTS. Tenant will be in default under the Lease if any of the following occurs: A. Tenant fails to pay any sum called for by the Lease or the Services Agreement and such sum remains unpaid for more than ten days; B. Tenant denies any other Tenant of the Building, or makes it difficult for Landlord to provide to any other Tenant of the Building, the quiet enjoyment of the other Tenant's Premises; or C. Tenant fails to perform any of its other obligations under the Lease and the failure continues for fifteen days after Landlord gives written notice to Tenant specifying the particulars of the default. 20. LANDLORD'S REMEDIES. A. Landlord's Options. If Tenant is in default under the Lease, then in addition to any other rights provided by the Lease or by law, Landlord has the option to do any of the following: (1) Terminate the Lease by giving Tenant notice of termination; (2) Without terminating the Lease, relet all or any part of the Premises for Tenant's account or otherwise; (3) After reletting the Premises, elect to terminate the Lease at any time thereafter by giving Tenant notice of termination; or (4) Cure the default at Tenant's cost. B. Tenant's Duty to Vacate Premises. Upon Tenant's receipt of notice of termination, all of Tenant's rights in the Premises will terminate, and Tenant will promptly thereafter surrender and vacate the Premises. Termination under this provision will not relieve Tenant of the obligation to pay all sums then due or of liability for damages. C. Reletting by Landlord. Tenant hereby appoints Landlord as Tenant's attorney-in-fact for the purpose of reletting the Premises. Landlord is entitled to all rents from any reletting of the Premises for Tenant's account, and Tenant will pay the following amounts on the due date specified in the Lease: (1) All sums Tenant is required to pay under the Lease; plus (2) Landlord's expenses of reletting including but not limited to remodeling expenses, commissions and advertising costs; minus (3) Rents received from reletting. D. Reimbursement of Landlord. If Landlord pays any sums as a result of Tenant's default, Tenant will immediately reimburse Landlord, and any unpaid portion will bear interest at the maximum rate allowed by law from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. 21. CALCULATION OF DAMAGES. A. Termination of Lease. If Landlord terminates the Lease under paragraph 20A(1) or 20A(3), Landlord is entitled to recover from Tenant as damages: (1) The value of the unpaid rent earned at the time of termination of the Lease; (2) The value of the unpaid rent for the remainder of the Term reduced by any loss of Rent that Tenant proves could have been reasonably avoided; and (3) Any other amounts necessary to compensate Landlord for all detriment proximately caused by Tenant's default including without limitation court costs of alterations and commissions in connection with reletting. B. Interest to Time of Award. The value of the unpaid rent accrued up to the time of the award will be [text unreadable] rate allowed by law. C. Present Value of Future Rent. The present value of the future rent after the time of the award will be computed using the discount rate of the Federal Reserve Bank of San Francisco at the time of the award plus one percent (1%). 22. NONLIABILITY OF LANDLORD. A. Nonliability. Landlord is not liable to Tenant for any damage to Tenant or Tenant's property for any disruption of Tenant's business, or for any inconvenience or temporary impairment of the enjoyment of the Premises by the Tenant, resulting from any of the following: (1) Leaky plumbing, gas, water, steam, electrical, heating, cooling, ventilating or air-conditioning facilities or conduits except that Landlord agrees to take reasonable steps to correct any such condition upon receipt of written notice for Tenant; (2) Damage to or destruction of the Premises or the Building; (3) Disrepair or faulty construction of the Building; (4) Acts of Landlord or Landlord's employees, agents or invitees in repairing or remodeling any portion of the Premises or the Building; (5) Acts of other Tenants in the Building or their employees, agents or invitees; (6) Landlord's exercise of its right to enter the Premises as described in paragraph 15 (Landlord's Right to Enter Premises); or (7) Any trespass or public offense committed in or around the Premises or the Building. B. Rent Abatement. Except as described in paragraph 13 (Damage or Destruction), Rent will not abate in any of the circumstances described in paragraph 22A. 23. HOLDING OVER. If Tenant holds over after expiration of the Term with the consent of Landlord, either express or implied, such holding over will create only a month-to-month tenancy. The month-to-month tenancy will be subject to all the terms and conditions of the Lease, except that Tenant will pay Landlord as monthly rent 110% of Rent in effect upon expiration of the Term. 24. QUIET POSSESSION. Upon paying the Rent and performing its other obligation under the Lease, Tenant will have quiet possession of the Premises throughout the Term. Landlord warrants to Tenant that as of the commencement of the Term, there will be no existing tenancies on the Premises. 25. RECOVERY OF EXPENSES. In the event that any action is brought by either party for enforcement of the Lease, the prevailing party will be entitled to recover its expenses of enforcement including without limitation reasonable attorney's fees. 26. NOTICES. Any notice to be given to a party to the Lease will be in writing and will be delivered to the party personally or mailed by first class United States mail, postage prepaid, addressed to the party as follows:
LANDLORD: PROFESSIONAL EXECUTIVE CENTER, INC. TENANT: Attn: Sarah L. Ragan, Financial Officer Feather River State Bank 2140 Professional Drive, Suite 200 --------------------------------------- Roseville, CA 95661 Real Estate Loan Production Dept. --------------------------------------- 1005 Stafford Way --------------------------------------- Yuba City, CA 95991 ---------------------------------------
Either party may designate a different address for notice purposes by sending written notice to the other party. Notices will be effective when received. Any notice sent by firstclass mail will be deemed received seventy-two hours after mailing. 27. WAIVER. No waiver of any breach of any of the terms or conditions of the Lease will be construed as a waiver of any succeeding breach of the same or other terms or conditions hereof. No waiver will be binding unless executed in writing by the party making the waiver. 28. BINDING EFFECT. Subject to the restrictions on assignment and subletting, each of the terms and conditions of the Lease will be binding on and will insure to the benefit of the heirs, successors and assigns of Landlord and Tenant. 29. HEADINGS. Paragraph titles of the Lease are included for convenient reference only and will nave no affect on the Lease interpretation. 30. ENTIRE AGREEMENT. The Lease constitutes the entire agreement between the parties regarding the matters covered by the Lease, and there are no terms or representations that are not expressed here in. 31. ESTOPPEL CERTIFICATE. If no connection with any transaction contemplated by Landlord, an offset statement is required from Tenant certifying certain information in connection with the Lease, Tenant agrees to deliver such offset statement within ten days after Tenant receives written request therefore certifying all requested information that is in fact true. In the event Tenant fails to deliver such offset statement within the 10-day period, it will be presumed that the Lease is in full force and effect, that Tenant has no defenses or offsets against Landlord, and that the other information contained in the requested statement is correct. 32. LANDLORD'S RIGHT TO SELL. Landlord has the right to sell its interest in the Building and assign its interest in the Lease without limitation; provided that any sale will be subject to the Lease. Upon any sale, Landlord will automatically be relieved of any further obligation under the Lease.
CORPORATION: PROFESSIONAL EXECUTIVE CENTER, INC. EXECUTIVE: /s/ signature unreadable ------------------------------------- By: Executive Vice President ---------------------------------- ------------------------------------- SARAH L. RAGAN -------------------------------------
EXECUTIVE SERVICES MONTH TO MONTH AGREEMENT This Agreement is made as of OCTOBER 1, 1996, by and between PROFESSIONAL EXECUTIVE CENTER, INC., a California corporation ("Corporation") and FEATHER RIVER STATE BANK, ("Executive"), who agree as follows: 1. BACKGROUND. Concurrently with this Agreement, Corporation and Executive have entered into a Lease Agreement (the "Lease") with respect to space (the "Premises") within the office building at 2140 Professional Drive, Suite 200, Roseville, California (the "Building"). On the terms and conditions described in this Agreement, Corporation will provide certain services to Executive and to the Premises in conjunction with Executive's use of the Premises under the Lease. 2. TERM. The term of this Agreement (the "Term") is from month to month commencing on OCTOBER 1, 1996. This Agreement will be terminated upon thirty (30) days written notice. The term will be concurrent with the term of the Lease, and this Agreement will terminate on any termination of the Lease. 3. NORMAL BUSINESS HOURS. Corporation will provide certain services during "normal business hours." For the purposes of this Agreement "normal business hours" means Monday through Friday, 8 a.m. to 5 p.m., excluding holidays. At the beginning of each year, Corporation will provide Executive with a schedule holidays to be observed by the Corporation. 4. BASIC SERVICE. The following services will be provided to Executive and to the Premises for the Basic Fee set forth in paragraph 6: A. Receptionist service during normal business hours. B. Telephone answering service during normal business hours as follows: N/A (1) Answering and taking messages when Executive is unavailable. N/A (2) Screening all calls and taking messages as requested by Executive. C. 2 hours per WEEK of conference room use. Conference room use will be scheduled on a "first-come, firstserve" basis. Conference room use scheduled but not used will be counted as conference room use if not canceled at least two hours before scheduled time. D. Janitorial Service I. Use of waiting areas for clients or customers. E. Mail Distribution J. Use of kitchen/lounge area. F. 2 Keys to the Building K. Beverage Service to include coffee tea. G. 2 Keys to the Premises H. Utilities to include electricity, heating, air-conditioning and ventilation. 5. ADDITIONAL SERVICES. The following services will be provided to Executive for the Additional Fees set forth in paragraph 6: A. Secretarial services during normal business hours. B. Word processing services during normal business hours. C. Notary public services by appointment. D. Package Handling. E. Copy Machine use. F. Telefax machine use. G. Directory board listing. H. N/A additional keys to the Building. I. N/A additional keys to the Premises. 6. FEES. Executive will pay to Corporate, without offset, deduction, prior to notice or demand, the following: A. Basic Fee. The Basic Fee for the Services described in paragraph 4 is $235.00 per month. There is an additional monthly fee of $N/A per telephone for equipment rental and a one-time $N/A charge for installing telephone lines with telephone system. B. Additional Fees. The Additional Fees for the services described in paragraph 5 are set forth in the Fee Schedule attached as Schedule A. C. Payment of Basic Fee. The Basic Fee for the first month of this Agreement is payable in advance upon execution of this Agreement. Thereafter, the Basic Fee is payable in advance on the first day of each calendar month during the Term. The Basic Fee for any partial month at the beginning or end of the Term will be prorated on the basis of a 30-day month. D. Payment of Additional Fees. Corporation will bill Executive for any Additional Fees incurred each month and Executive will pay such Additional Fees within ten days after receiving such bill. 7. USE OF EQUIPMENT. Some services to be provided by Corporation allow Executive or Executive's employees to use equipment provided by Corporation. Executive and Executive's employees will use the equipment only in accordance with the instructions of Corporation and will promptly report any problems with the equipment to Corporation. 8. LIMITATION OF LIABILITY. As a part of the consideration to Corporation for providing the services described in this Agreement, Executive agrees that Corporation's liability for any claim by or damage to Executive or any third party claiming through Executive with respect to services provided by Corporation will be limited to the amounts paid by Executive for such services and will not include consequential damage. 9. LATE CHARGE. The parties agree that in the event Executive fails to make any payment due under this Agreement within ten days of the due date, it will be impracticable and extremely difficult to fix the actual damages to Corporation. Therefore, the parties agree that Executive will pay to Corporation and additional amount equal to ten percent (10%) of the overdue payment if the payment is not received within ten days of the due date. These late charges will be in addition to any other remedies available to Corporation under this Agreement or by law. 10. DEFAULT AND REMEDIES. If Executive is in default in the performance of Executive's obligations under this Agreement or the Lease for more than ten days, then, in addition to recovering damages from Executive and asserting any other rights and remedies provided by this Agreement or by law, Corporation may use all or any part of the Security Deposit under the Lease to compensate Corporation for any loss or damage which Corporation may suffer as a result of Executive's default, and Corporation has the option: A. Terminate this Agreement and the Lease in the manner provided in the Lease; or B. Terminate this Agreement and pursue any of Corporation's remedies under the Lease. 11. RECOVERY OF EXPENSES. In the event that any action is brought by either party for enforcement of this Agreement, the prevailing party shall be entitled to recover its expenses of enforcement including without limitation reasonable attorney's fees. 12. NOTICES. Any notice to be given to a party to this Agreement shall be in writing and shall be delivered to the party personally or mailed by first class United States mail, postage prepaid, addressed to the party as follows:
CORPORATION: PROFESSIONAL EXECUTIVE CENTER, INC., EXECUTIVE Feather River State Bank ATTN: Sarah Ragan ------------------------------------- 2140 Professional Drive, Suite 200 Real Estate Loan Production Dept. Roseville, CA 95661 ------------------------------------- 1005 Stafford Way ------------------------------------- Yuba City, CA 95991 -------------------------------------
Either party may designate a different address for notice purposes by sending written notice to the other party. Notices shall be effective when received. Any notice sent by first-class mail shall be deemed received seventy-two hours after mailing. 13. WAIVER. No waiver of any breach of any of the terms or conditions of this Agreement shall be construed as a waiver of any succeeding breach of the same or other terms or conditions hereof. No waiver shall be binding unless executed in writing by the party making the waiver. 14. HEADINGS. Paragraph titles of the Lease are included for convenient reference only and shall have no effect on the Lease interpretation. 15. ENTIRE AGREEMENT. The Lease constitutes the entire agreement between the parties regarding the matters covered by the Lease, and there are no terms or representations that are not expressed herein.
CORPORATION: PROFESSIONAL EXECUTIVE CENTER, INC., EXECUTIVE a California Corporation -------------------------- By By /s/ [illegible] ------------------------- ----------------------------- SARAH L. RAGAN, Manager By Executive Vice President -----------------------------
RULES AND REGULATIONS OF PROFESSIONAL EXECUTIVE CENTER, INC. The Rules and Regulations described below apply to Tenants leasing office space in the building located at 2140 Professional Drive, Roseville, California (The "Building"). Professional Executive Center, Inc., ("Landlord") reserves the right to rescind, altar or waive any Rule or Regulation at any time by written notice to Tenant, if in the Landlord's judgement, it is in the best interests of the Building and its Tenants. 1. SIGN AND ADVERTISING. Tenant will not display any sign, name or notice ("advertisement") on any part of the inside or outside of the Building without Landlord's prior written consent, and Landlord has the right to remove any such advertisement without notice to and at the expense of Tenant. Without Landlord's prior written consent, Tenant will not use the name of the Building in connection with Tenant's business except as Tenant's business address. 2. INGRESS AND EGRESS. Tenant will not obstruct the sidewalks, hallways, passageways, entrances or exits or use them for any purpose other than ingress and egress. Landlord has the right to prevent access to the Building by any person whose presence, in the Landlord's judgement, would prejudice the safety, character, reputation or interest of the Building and its Tenants. 3. LOCKS. Tenant will not altar any lock or bolt or install any new locks or bolts in the Premises or the Building without the prior written consent of Landlord. All keys to offices, rooms and restrooms will be obtained from Landlord, and Tenant will not duplicate or obtain keys without Landlord's consent. Upon termination of the tenancy, Tenant will return all keys to Landlord. If Tenant fails to return any key, Tenant will reimburse Landlord for the cost of replacing they key or changing the locks opened by the key if Landlord deems it advisable to make such change. 4. RESTROOMS. Tenant will use the restrooms only for those purposes for which they were constructed, and Tenant will not throw any kind of foreign substance of any kind therein. Tenant will pay the cost of any breakage, stoppage or damage resulting from violation of this Rule. 5. ALTERATION. Landlord will provide window coverings which will not be removed or replaced. Tenant will not do any of the following without Landlord's prior written consent: (a) lay linoleum or other floor coverings; (b) mark on, place nails or screws in, or drill into walls, floors or ceilings; (c) cut or string wires; or (d) deface Premises or the Building in any way. 6. FURNITURE AND EQUIPMENT. Tenant will not bring any furniture or equipment into the Building without Landlord's prior written consent, and all moving of furniture and equipment will be done at the time and in the manner that Landlord designates. Any handtrucks use in the Building must be equipped with rubber tires and side guards. Tenant will not overload the floor, and Landlord has the right to prescribe the weight, size and placement of all safes and other heavy equipment. If Landlord considers it advisable, all safes or other heavy equipment will be placed on wood strips which will properly distribute the weight. Landlord is not responsible for loss of or damage to Tenant's property from any cause. Tenant is responsible for the cost of moving, maintaining or repairing Tenant's property. 7. QUIET POSSESSION. Tenant will not disturb the occupants of the Building or neighboring buildings or persons having business with them whether by the use of any musical instrument, radio, stereo or in any other way. Tenant will not solicit or canvas any other Tenant or any persons visiting the Building. Tenant will not use the Premises in any way which is offensive or objectionable to Landlord or to other Tenant of the Building or neighboring buildings. Landlord has the right to exclude or expel any person who, in Landlord's judgement, is under the influence of alcohol or drugs, or who violates any of these Rules and Regulations. 8. ODORS; ANIMALS; BICYCLES. Tenant will not keep or create any noxious gas or inflammable substance on the premises. Smoking allowed only in the Courtyard area. Tenant will not bring any animals, bicycles or vehicles into the Premises or the Building. 9. COOKING; Portable Heaters and Fans. Tenant will not keep any food or cook or use small kitchen appliances except within the designated kitchen area. Tenant will not use or keep any portable heaters or fans on the Premises. Tenant will not use or keep any portable heaters or fans on the Premises. 10. USE OF PREMISES. Tenant will not use Premises for manufacturing or for the storage of merchandise except as such storage may be incidental to use of the Premises for general office purposes. Tenant will not use any portion of the Premises for the manufacture of sale of liquor, narcotics or tobacco in any form, or as a medical, barber or manicure office. Tenant will not advertise for laborers giving any address in the Building. Tenant will not use Premises for lodging or sleeping or for any illegal purposes. 11. LOCATION OF FIXTURES. The location of telephones, call boxes and other equipment affixed to the Premises will be subject to the prior written approval of Landlord. 12. SECURING BUILDING. Before leaving the Building after normal business hours, Tenant will ensure that the doors of the Premises and the Building are closed and securely locked and that all water faucets and electricity are shut off, so as to prevent waste or damage. If tenant fails to observe these Rules, Tenant will be responsible for any damage sustained by Landlord or other Tenants. 13. FIRE AND SECURITY REGULATIONS. Tenant will comply with all fire and security regulations that may be issued from time to time by Landlord, and Tenant will provide Landlord with the name of a designated responsible person to represent Tenant in all matters pertaining to such fire or security regulations. 14. COMPLIANCE BY OTHERS. Tenant will not permit any Tenant's employees, agents or invitees to violate any of these Rules and Regulations, and Tenant will cooperate to prevent Tenant's employees, agents and invitees from doing so. Tenant will be responsible for any damage resulting from violation of any of these Rules and Regulations by Tenant's employees, agents and invitees. Tenant acknowledges receipt of a copy of these Rules and Regulations on October 11, 1996 TENANT Feather River State Bank ----------------------------- By /s/ signature unreadable ----------------------------- By Executive Vice President ----------------------------- EX-10.16 5 EXHIBIT 10.16 EXECUTIVE SALARY CONT. EXECUTIVE SALARY CONTINUATION AGREEMENT THIS EXECUTIVE SALARY CONTINUATION AGREEMENT ("Agreement") is made and entered into this 4th day of FEBRUARY 1997, by and between FEATHER RIVER STATE BANK, a California banking corporation ("Bank"), and ROBERT J. MULDER (the "Executive") W I T N E S S E T H: WHEREAS, the Executive is employed by the Bank as its President and Chief Executive Officer; and WHEREAS, the experience of the Executive, his knowledge of the affairs of the Bank, and his reputation and contacts in the banking industry are so valuable that assurance of his continued service is essential for the future growth and profitability of the Bank and it is in the best interests of the Bank to arrange terms of continued employment for the Executive so as to reasonably assure his remaining in the Bank's employment during his lifetime or until the age of retirement; and WHEREAS, it is the desire of the Bank that the Executive's services be retained as herein provided; and WHEREAS, the Executive is willing to continue in the employ of the Bank provided the Bank agrees to pay the Executive or his beneficiaries certain benefits in accordance with the terms and conditions hereinafter set forth; 1 NOW, THEREFORE, in consideration of the services to be performed in the future as well as the mutual promises and covenants herein contained, it is hereby agreed as follows: ARTICLE l. 1.1. BENEFICIARY. The term Beneficiary shall mean the person or persons whom the Executive shall designate in writing to receive the benefits provided hereunder. 1.2. DISABILITY. The term disability shall mean the inability of the Executive to perform the duties and responsibilities of his position with the Bank in a normal and regular manner, due to mental or physical illness or injury, for a period of ninety (90) consecutive days, or for fifty percent (50%) or more of the normal working days during a period of one hundred eighty (180) consecutive days. Determination of the Executive's disability shall be made by the Bank's Board of Directors, which determination shall be made in its sole discretion and shall be final and conclusive on all parties hereto. In the event Executive is also a director of the Bank, the Executive shall be ineligible to participate in such disability determination. Executive shall, if requested by the Bank's Board of Directors, submit to a mental or physical examination to assist the Board of Directors in making its determination of disability hereunder. 1.3. NAMED FIDUCIARY AND PLAN ADMINISTRATOR. The Bank Fiduciary and Plan Administrator of this plan shall be the Bank. 2 1.4. CHANGE OF CONTROL. A "Change of Control" shall be deemed to have occurred if (i) a tender offer shall be made and consummated for the ownership of 25% or more of the outstanding voting securities of the Bank; (ii) the Bank shall be merged or consolidated with another bank or corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting bank or corporation shall be owned in the aggregate by the former shareholders of the Bank, other than affiliates (within the meaning of the Securities Exchange Act of 1934) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation; (iii) the Bank shall sell substantially all of its assets to another bank or corporation which is not a wholly-owned subsidiary; or (iv) a person, within the meaning of Section 3 (a) (9) or of Section 13 (d) (3) (as in effect on the date hereof) of the Securities Exchange Act of 1934, shall require 25% or more of the outstanding voting securities of the Bank (whether directly, indirectly, beneficially or of record) For purposes hereof, ownership of voting securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to the Securities Exchange Act of 1934. ARTICLE 2. 2.1. EMPLOYMENT. The Bank agrees to employ the Executive in such capacity as the Bank may determine from time to time. The 3 Executive shall continue in the employ of the Bank in such capacity and with such duties and responsibilities as may be assigned to him, and with such compensation as may be determined from time to time by the Board of Directors of the Bank. 2.2. FULL EFFORTS. Executive shall devote his full business time and efforts to the business and affairs of the Bank or the successor to the Bank by which Executive is then employed pursuant to this Agreement; provided, however, this provision shall not preclude Executive, with prior approval of the Bank, from serving as a director or member of a committee of any other organization involving no conflict of interests with the interests of the Bank, from engaging in charitable and community activities, and from managing his personal investments, provided that such activities do not interfere with the regular performance of his duties and responsibilities to the Bank. 2.3. FRINGE BENEFITS. The salary continuation benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of these salary continuation benefits. ARTICLE 3. 3.1. RETIREMENT. If the Executive shall continue in the employment of the Bank until he attains the age of sixty-five (65) he may retire from active daily employment as of the first day of 4 the month next following attainment of age sixty-five (65) or upon such later date as may be mutually agreed upon by the Executive and the Bank ("Retirement Date"). 3.2 PAYMENT. The Bank agrees chat upon such Retirement Date it will pay to the Executive the annual sum of FORTY THOUSAND ONE HUNDRED Dollars ($40,100.00) payable monthly on the first day of each month following such Retirement Date for a period of one hundred eighty (180) months; subject to the conditions and limitations set forth in this Agreement. The FORTY THOUSAND ONE HUNDRED Dollars ($40,100,00) annual payment amount may be adjusted as of the first year in which it is to be paid to reflect changes in the federally determined cost-of-living index and may be adjusted annually for each payment year hereafter to reflect further changes in said federally determined cost-of- living index. However, the Bank is not obligated hereunder to make any such adjustment. 3.3. DEATH AFTER RETIREMENT. The Bank agrees that if the Executive dies after the Retirement Date but shall die before receiving the full amount of monthly payments to which he is entitled under this Agreement, the Bank will continue to make such monthly payments to the Executive's designated Beneficiary for the remaining period. If a valid Beneficiary Designation is not in effect, the payments shall be made to the Executive's surviving spouse or, if none, said payments shall be made to the duly qualified personal representative, executor or administrator of Executive's estate. 5 ARTICLE 4. 4.1. DEATH PRIOR TO RETIREMENT. In the event the Executive should die while employed by the Bank at any time after the date of this Agreement but prior to his Retirement Date, the Bank shall pay a sum equal to the Net Insurance Coverage for the appropriate Plan Year set forth in Schedule A (Participant Balance Sheet and Policy Data) to the Executive's designated Beneficiary in equal monthly installments for a period of one hundred eighty (180) months. If a valid Beneficiary Designation is not in effect, the payments shall be made to the Executive's surviving spouse or, if none, said payments shall be made to the duly qualified personal representative, executor or administrator of Executive's estate. The said monthly payments shall begin the first day of the month following the month of the death of the Executive. Provided, however, that anything hereinabove to the contrary notwithstanding, no death benefit shall be payable hereunder if it is determined that the Executive's death was caused by suicide. 4.2. DISABILITY PRIOR TO RETIREMENT. In the event the Executive should become disabled while actively employed by the Bank at any time after the date of this Agreement but prior to his Retirement Date, the Executive shall be considered to be one hundred percent (100%) vested in the amount set forth in Schedule A attached hereto and made a part hereof, under Accrued Salary Continuation Liability for the appropriate Plan Year. Said amount shall be paid to the Executive in a lump sum within three (3) months of the determination of disability. Said payment shall be 6 in lieu of any other retirement or death benefit under this Agreement. ARTICLE 5. 5.1 TERMINATION OF EMPLOYMENT. The Bank reserves the right to terminate the employment of the Executive at any time prior to retirement. In the event that the employment of the Executive shall terminate prior to the Executive's Retirement Date, other than by reasons of Executive's disability or death, then this Agreement shall terminate upon the date of such termination of employment. Provided, however, that the Executive shall be entitled to the benefits described below under the following circumstances: a. If the Executive has been employed by the Bank for a period of at least four (4) continuous years from and after the date this Agreement was entered into, the Executive will be considered to be vested in thirty percent (30%) of the amount set out in Schedule A attached hereto and made a part hereof under Accrued Salary Continuation Liability for the appropriate Plan Year and shall become vested in an additional ten percent (10%) of said amount for each succeeding year thereafter until Executive becomes one hundred percent (100) vested. If the Executive has been employed by the Bank for a period of less than four (4) continuous years from and after the date of this Agreement, the Executive shall not be considered to be vested in any benefit hereunder and shall be 7 entitled to no benefits under this Agreement. If the Executive's employment is terminated under the provisions of this Section 5.1., the Bank will pay the Executive's vested amount upon such terms and conditions and upon Executive's attainment of age sixty-five (65). b. Anything hereinabove to the contrary notwithstanding, if the Executive is not fully vested in the amount set forth in Schedule A under Accrued Salary Continuation Liability, he will become fully vested in said amount in the event of a Change of Control-of the Bank and Executive shall be entitled to the full amount set forth in Schedule A, for the appropriate Plan Year, upon the terms and conditions hereof, if termination of employment thereafter occurs under this Section 5.1. ARTICLE 6. 6.1. TERMINATION OF AGREEMENT BY REASON OF CHANGE IN LAW. The Bank is entering into this Agreement upon the assumption that certain existing tax laws will continue in effect in substantially their current form. In the event of any changes in such federal laws which materially affect this Agreement, the Bank shall have an option to terminate or modify this Agreement. Provided, however, that the Executive shall be entitled to at least the same amount as he would have been entitled to under Section 4.2. relating to disability. The payment of said amount shall be made upon such terms and conditions and at such time as the Corporation shall 8 determine, but in no event commencing later than the Executive's Retirement Date. ARTICLE 7. 7.1. NONASSIGNABLE. Neither the Executive, his spouse, nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify, or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance, owed by the Executive or his beneficiary or any of them, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. ARTICLE 8. 8.1. CLAIMS PROCEDURE. The Bank shall make all determinations as to rights to benefits under this Agreement. Any decision by the Bank denying a claim by the Executive or his beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed to the Executive or such beneficiary. Such decision shall set forth the specific reasons for the denial, written to the best of the Bank's ability in a manner calculated to be understood without legal or actuarial counsel. In addition, the Bank shall provide a reasonable opportunity to the Executive or such beneficiary for full and fair review of the decision denying such claim. 9 ARTICLE 9. 9.l. UNSECURED GENERAL CREDITOR. The Executive's rights are limited to the right to receive payments as provided in this Agreement and the Executive's position with respect thereto is that of a general unsecured creditor of the Bank. ARTICLE 10. 10.l. REORGANIZATION. The Bank shall not voluntarily engage in a Change of Control of the Bank unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Bank under this Agreement. Upon the occurrence of such event, the term "Bank" as used in this Agreement shall be deemed to refer to such successor or survivor corporation, firm or person. ARTICLE l1. 11.1. NOT A CONTRACT OF EMPLOYMENT. This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Bank to discharge the Executive, or restrict the right of the Executive to terminate his employment. ARTICLE 12. 12.1. LIQUIDATED DAMAGES. The parties hereto, before entering into this Agreement, have been concerned with the fact that substantial damages will be suffered by Executive in the event 10 that the Bank shall fail to perform according to this Agreement. In the event of nonperformance by the Bank, Executive shall be entitled to liquidated damages of $5,000.00 for each payment due hereunder which is not made by the Bank within thirty (30) days of the date such payment was scheduled to have been made. This provision shall not be applicable in the event that such nonpayment is the result of prohibition of such payment by law, regulation or order of a banking regulatory agency. ARTICLE 13. 13.1. SUCCESSORS AND ASSIGNS; ASSIGNMENT. The rights and obligations of this Agreement shall be binding upon and inure to the benefit of the successors, assigns, heirs and personal representatives of the parties hereto. Executive may not assign this Agreement or any of Executive's rights hereunder except with the prior written consent of the Bank. 13.2. SEVERABILITY. If any provision of this Agreement, as applied to either party or to any circumstances, is judged by a court to be void or unenforceable, in whole or in part, the same shall in no way affect any other provision of this Agreement, the application of such provision in any other circumstances, or the validity or enforceability of this Agreement. 13.3. APPLICABLE LAW; JURISDICTION AND VENUE. This Agreement and all matters or issues collateral hereto shall be governed by the laws of the State of California applicable to contracts performed entirely therein. Executive and Bank each consent to the 11 jurisdiction of, and any action concerning this Agreement shall be brought and tried in, the United States District Court for the Eastern District of California or the Superior or Municipal Court for the County of Sutter. 13.4. WAIVER. A waiver by either party of any of the terms or conditions of this Agreement in any one instance shall not be deemed or construed to be a waiver of such terms or conditions for the future, or of any subsequent breach thereof. All remedies, rights, undertakings, obligations, and agreements contained in this Agreement shall be cumulative, and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either party. 13.5. ATTORNEYS' FEES. If any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default, or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled. 13.6. HEADINGS. The headings in this Agreement are for convenience only and shall not in any manner affect the interpretation or construction of the Agreement or any of its provisions. 13.7 NOTICE. Any notice or other communication to be given under this Agreement shall be in writing and shall be deemed to 12 have been duly given on the date of service if personally served, or if mailed, upon deposit in the United States mail, first class postage prepaid, express or certified, return receipt requested, and properly addressed to the parties as follows: if to Executive at his last address shown in the Bank's records; if to Bank Feather River State Bank P.O. Box 1575 Yuba City, CA 95992 Attention: President Either party may designate a new address for purpose of this Section 13.7. by giving the other notice of the new address as provided herein. IN WITNESS WHEREOF, the Bank has caused this Agreement to be duly executed by its proper officer and the Executive has hereunto set his hand at Yuba City, California, the day and year first above written. FEATHER RIVER STATE BANK By:/s/ William H. Gilbert -------------------------------- WILLIAM H. GILBERT Its: Chairman ------------------------------- EXECUTIVE: /s/ Robert J. Mulder ----------------------------------- Robert J. Mulder 13 EX-10.17 6 EXHIBIT 10.17 LEASE/ANDERSON AND ASSOC. [LOGO] EPI Leasing #200/205 STONEWOOD OFFICE PLAZA OFFICE LEASE TABLE OF CONTENTS PAGE Article 1 LEASE OF PREMISES. . . . . . . . . . . . . . . . . . . 1 Article 2 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . 1 Article 3 EXHIBITS AND ADDENDA . . . . . . . . . . . . . . . . . 2 Article 4 DELIVERY OF POSSESSION . . . . . . . . . . . . . . . . 2 Article 5 RENT . . . . . . . . . . . . . . . . . . . . . . . . . 2 Article 6 INTEREST AND LATE CHARGES. . . . . . . . . . . . . . . 4 Article 7 SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . 4 Article 8 TENANT'S USE OF THE PREMISES . . . . . . . . . . . . . 4 Article 9 SERVICES AND UTILITIES . . . . . . . . . . . . . . . . 5 Article 10 CONDITION OF THE PREMISES. . . . . . . . . . . . . . . 5 Article 11 CONSTRUCTION, REPAIRS AND MAINTENANCE. . . . . . . . . 5 Article 12 ALTERATIONS AND ADDITIONS. . . . . . . . . . . . . . . 6 Article 13 LEASEHOLD IMPROVEMENTS; TENANT'S PROPERTY. . . . . . . 6 Article 14 RULES AND REGULATIONS. . . . . . . . . . . . . . . . . 7 Article 15 CERTAIN RIGHTS RESERVED BY LANDLORD. . . . . . . . . . 7 Article 16 ASSIGNMENT AND SUBLETTING. . . . . . . . . . . . . . . 7 Article 17 HOLDING OVER . . . . . . . . . . . . . . . . . . . . . 8 Article 18 SURRENDER OF PREMISES. . . . . . . . . . . . . . . . . 8 Article 19 DESTRUCTION OR DAMAGE. . . . . . . . . . . . . . . . . 8 Article 20 EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . . 8 Article 21 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . 9 Article 22 TENANT'S INSURANCE . . . . . . . . . . . . . . . . . . 9 Article 23 WAIVER OF SUBROGATION. . . . . . . . . . . . . . . . . 10 Article 24 SUBORDINATION AND ATTORNMENT . . . . . . . . . . . . . 10 Article 25 TENANT ESTOPPEL CERTIFICATES . . . . . . . . . . . . . 10 Article 26 TRANSFER OF LANDLORD'S INTEREST. . . . . . . . . . . . 10 Article 27 DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . 10 Article 28 BROKERAGE FEES . . . . . . . . . . . . . . . . . . . . 11 Article 29 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . 11 Article 30 GOVERNMENT ENERGY OR UTILITY CONTROLS. . . . . . . . . 11 Article 31 RELOCATION OF PREMISES . . . . . . . . . . . . . . . . 11 Article 32 QUIET ENJOYMENT. . . . . . . . . . . . . . . . . . . . 12 Article 33 OBSERVANCE OF LAW. . . . . . . . . . . . . . . . . . . 12 Article 34 FORCE MAJEURE. . . . . . . . . . . . . . . . . . . . . 12 Article 35 CURING TENANT'S DEFAULTS . . . . . . . . . . . . . . . 12 Article 36 SIGN CONTROL . . . . . . . . . . . . . . . . . . . . . 12 Article 37 MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . 12/13 Article 38 SPECIAL CONDITIONS . . . . . . . . . . . . . . . . . . 14 This Lease between Stonewood Office Plaza, a co tenancy ("Landlord"), and EPI Leasing Co., a corporation, ("Tenant"), is dated 6/27/96,19___. 1. LEASE OF PREMISES. In consideration of the Rent (as defined at Section 5.4) and the provisions of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the Premises shown by diagonal lines on the floor plan attached hereto as Exhibit "A," and further described at Section 21. The Premises are located within the Building and Project described in Section 2m. Tenant shall have the non-exclusive right (unless otherwise provided herein) in common with Landlord, other tenants, subtenants and invitees, to use of the Common Areas (as defined at Section 2e). 2. DEFINITIONS As used in this Lease, the following terms shall have the following meanings: a. BASE RENT (INITIAL):$ see schedule 5.2 per year. b. BASE YEAR. The calendar year of 1996. c. BROKER(S) Landlord's: n/a. Tenant's: n/a. d. COMMENCEMENT DATE: 8/1/96. e. COMMON AREAS: the building lobbies, common corridors and hallways, restrooms, garage and parking areas, stairways, elevators and other generally understood public or common areas. Landlord shall have the right to regulate or restrict the use of the Common Areas. f. EXPENSE STOP: (fill in if applicable): $ n/a. g. EXPIRATION DATE: 12/31/97, unless otherwise sooner terminated in accordance with the provisions of this Lease. h. INDEX (SECTION 5.2): United States Department of Labor, Bureau of Labor Statistics Consumer Price Index for All Urban Consumers, n/a Average, Subgroup "All Items" (1967 = 100). i. LANDLORD'S MAILING ADDRESS: c/o Anderson and Assoc. 7777 Greenback Lane #107 Citrus Heights, CA. 95610 TENANT'S MAILING ADDRESS: 6929 Sunrise Blvd. #205 Citrus Heights, CA. 95610 J. MONTHLY INSTALLMENTS OF BASE RENT (INITIAL): $3,321.50 per month. K. PARKING: RESERVED STALLS #53,54,6,28,29 l. PREMISES: that portion of the Building containing approximately 2,555 square feet of Rentable Area, shown by diagonal lines on Exhibit "A" located on the second floor of the Building and known as Suite 200/205. M. PROJECT: the building, of which the Premises are a part (the "Building") and any other buildings or improvements on the real property (the "Property") located at 6929 Sunrise Blvd., Citrus Heights, CA. 95610 n. RENTABLE AREA: as to both the Premises and the Project, the respective measurements of floor area as may from time to time be subject to lease by Tenant and all tenants of the Project, respectively, as determined by Landlord and applied on a consistent basis throughout the Project. (1) o. SECURITY DEPOSIT (SECTION 7):$ 3,193.75 on deposit. p. STATE: the State of California. TENANT'S PROPORTIONATE SHARE: 6.77%. Such share is a fraction, the numerator of which is the Rentable Area of the Premises, and the denominator of which is the Rentable Area of the Project, as determined by Landlord from time to time. The Project consists of one building(s) containing a total Rentable Area of 37,759 square feet. TENANT'S USE CLAUSE (ARTICLE 8): general office. t. TERM: the period commencing on the Commencement Date and expiring at midnight on the Expiration Date. 3. EXHIBITS AND ADDENDA. The exhibits and addenda listed below (unless lined out) are incorporated by reference in this Lease: a. Exhibit "A"-- Floor Plan showing the Premises. b. Exhibit "B"-- parking c. Exhibit "C"-- house rules d. Exhibit "D"-- e. Exhibit "E"-- 4. DELIVERY OF POSSESSION. If for any reason Landlord does not deliver possession of the Premises to Tenant on the Commencement Date, Landlord shall not be subject to any liability for such failure, the Expiration Date shall not change and the validity of this Lease shall not be impaired, but Rent shall be abated until delivery of possession. "Delivery of possession" shall be deemed to occur on the date Landlord completes Landlord's Work as defined in Exhibit "C." If Landlord permits Tenant to enter into possession of the Premises before the Commencement Date, such possession shall be subject to the provisions of this Lease, including, without limitation, the payment of Rent. 5. RENT. 5.1 PAYMENT OF BASE RENT. Tenant agrees to pay the Base Rent for the Premises. Monthly Installments of Base Rent shall be payable in advance on the first day of each calendar month of the Term. If the Term begins (or ends) on other than the first (or last) day of a calendar month, the Base Rent for the partial month shall be prorated on a per diem basis. Tenant shall pay Landlord the first Monthly Installment of Base Rent when Tenant executes the Lease. 5.2 BASE RENT ADJUSTMENTS. 11/1/96-12/31/97 - $3,449.25/mo. 5.3 PROJECT OPERATING COSTS. a. In order that the Rent payable during the Term reflect any increase in Project Operating Costs, Tenant agrees to pay to Landlord as Rent, Tenant's Proportionate Share of all increases in costs, expenses and obligations attributable to the Project and its operation, all as provided below. b. If, during any calendar year during the Term, Project Operating Costs exceed the Project Operating Costs for the Base Year, Tenant shall pay to Landlord, in addition to the Base Rent and all other payments due under this Lease, an amount equal to Tenant's Proportionate Share of such excess Project Operating Costs in accordance with the provisions of this Section 5.3b. (2) (1) The term "Project Operating Costs" shall include all those items described in the following subparagraphs (a) and (b). (a) All taxes, assessments, water and sewer charges and other similar governmental charges levied on or attributable to the Building or Project or their operation, including without limitation, (i) real property taxes or assessments levied or assessed against the Building or Project, (ii) assessments or charges levied or assessed against the Building or Project by any redevelopment agency, (iii) any tax measured by gross rentals received from the leasing of the Premises, Building or Project, excluding any net income, franchise, capital stock, estate or inheritance taxes imposed by the State or federal government or their agencies, branches or departments; provided that if at any time during the Term any governmental entity levies, assesses or imposes on Landlord any (1) general or special, ad valorem or specific, excise, capital levy or other tax, assessment, levy or charge directly on the Rent received under this Lease or on the rent received under any other leases of space in the Building or Project, or (2) any license fee, excise or franchise tax, assessment, levy or charge measured by or based, in whole or in part, upon such rent, or (3) any transfer, transaction, or similar tax, assessment, levy or charge based directly or indirectly upon the transaction represented by this Lease or such other leases, or (4) any occupancy, use, per capita or other tax, assessment, levy or charge based directly or indirectly upon the use or occupancy of the Premises or other premises within the Building or Project, then any such taxes, assessments, levies and charges shall be deemed to be included in the term Project Operating Costs. If at any time during the Term the assessed valuation of, or taxes on, the Project are not based on a completed Project having at least eighty-five percent (85%) of the Rentable Area occupied, then the "taxes" component of Project Operating Costs shall be adjusted by Landlord to reasonably approximate the taxes which would have been payable if the Project were completed and at least eighty-five percent (85%) occupied. (b) Operating costs incurred by Landlord in maintaining and operating the Building and Project, including without limitation the following: costs of (1) utilities; (2) supplies; (3) insurance (including public liability, property damage, earthquake, and fire and extended coverage insurance for the full replacement cost of the Building and Project as required by Landlord or its lenders for the Project; (4) services of independent contractors; (5) compensation (including employment taxes and fringe benefits) of all persons who perform duties connected with the operation, maintenance, repair or overhaul of the Building or Project, and equipment, improvements and facilities located within the Project, including without limitation engineers, janitors, painters, floor waxers, window washers, security and parking personnel and gardeners (but excluding persons performing services not uniformly available to or performed for substantially all Building or Project tenants); (6) operation and maintenance of a room for delivery and distribution of mail to tenants of the Building or Project as required by the U.S. Postal Service (including, without limitation, an amount equal to the fair market rental value of the mail room premises); (7) management of the Building or Project, whether managed by Landlord or an independent contractor (including, without limitation, an amount equal to the fair market value of any on-site manager's office); (8) rental expenses for (or a reasonable depreciation allowance on) personal property used in the maintenance, operation or repair of the Building or Project; (9) costs, expenditures or charges (whether capitalized or not) required by any governmental or quasi-governmental authority; (10) amortization of capital expenses (including financing costs) (i) required by a governmental entity for energy conservation or life safety purposes, or (ii) made by Landlord to reduce Project Operating Costs; and (11) any other costs or expenses incurred by Landlord under this Lease and not otherwise reimbursed by tenants of the Project. If at any time during the Term, less than eighty-five percent (85%) of the Rentable Area of the Project is occupied, the "operating costs" component of Project Operating Costs shall be adjusted by Landlord to reasonably approximate the operating costs which would have been incurred if the Project had been at least eighty-five percent (85%) occupied. (2) Tenant's Proportionate Share of Project Operating Costs shall be payable by Tenant to Landlord as follows: (a) Beginning with the calendar year following the Base Year and for each calendar year thereafter ("Comparison Year"), Tenant shall pay Landlord an amount equal to Tenant's Proportionate Share of the Project Operating Costs incurred by Landlord in the Comparison Year which exceeds the total amount of Project Operating Costs payable by Landlord for the Base Year. This excess is referred to as the "Excess Expenses." (b) To provide for current payments of Excess Expenses, Tenant shall, at Landlord's request, pay as additional rent during each Comparison Year, an amount equal to Tenant's Proportionate Share of the Excess Expenses payable during such Comparison Year, as estimated by Landlord from time to time. Such payments shall be made in monthly installments, commencing on the first day of the month following the month in which Landlord notifies Tenant of the amount it is to pay hereunder and continuing until the first day of the month following the month in which Landlord gives Tenant a new notice of estimated Excess Expenses. It is the intention hereunder to estimate from time to time the amount of the Excess Expenses for each Comparison Year and Tenant's Proportionate Share thereof, and then to make an adjustment in the following year based on the actual Excess Expenses incurred for that Comparison Year. (c) On or before April 1 of each Comparison Year after the first Comparison Year (or as soon thereafter as is practical), Landlord shall deliver to Tenant a statement setting forth Tenant's Proportionate Share of the Excess Expenses for the preceding Comparison Year. If Tenant's Proportionate Share of the actual Excess Expenses for the previous Comparison Year exceeds the total of the estimated monthly payments made by Tenant for such year, Tenant shall pay Landlord the amount of the deficiency within ten (10) days of the receipt of the statement. If such total exceeds Tenant's Proportionate Share of the actual Excess Expenses for such Comparison Year, then Landlord shall credit against Tenant's next ensuing monthly installment(s) of additional rent an amount equal to the difference until the credit is exhausted. If a credit is due from Landlord on the Expiration Date, Landlord shall pay Tenant the amount of the credit. The obligations of Tenant and Landlord to make payments required under this Section 5.3 shall survive the Expiration Date. (d) Tenant's Proportionate Share of Excess Expenses in any Comparison Year having less than 365 days shall be appropriately prorated. (e) If any dispute arises as to the amount of any additional rent due hereunder, Tenant shall have the right after reasonable notice and at reasonable times to inspect Landlord's accounting records at Landlord's accounting office and, if after such inspection Tenant still disputes the amount of additional rent owed, a certification as to the proper amount shall be made by Landlord's certified public accountant, which certification shall be final and conclusive. Tenant agrees to pay the cost of such certification unless it is determined that Landlord's original statement overstated Project Operating Costs by more than five percent (5%). (3) (f) If this Lease sets forth an Expense Stop at Section 2f, then during the Term Tenant shall be liable for Tenant's Proportionate Share of any actual Project Operating Costs which exceed the amount of the Expense Stop. Tenant shall make current payments of such excess costs during the Term in the same manner as is provided for payment of Excess Expenses under the applicable provisions of Section 5.3b(2)(b) and (c) above. 5.4 DEFINITION OF RENT. All costs and expenses which Tenant assumes or agrees to pay to Landlord under this Lease shall be deemed additional rent (which, together with the Base Rent is sometimes referred to as the "Rent"). The Rent shall be paid to the Building manager (or other person) and at such place, as Landlord may from time to time designate in writing, without any prior demand therefor and without deduction or offset, in lawful money of the United States of America. 5.5 RENT CONTROL. If the amount of Rent or any other payment due under this Lease violates the terms of any governmental restrictions on such Rent or payment, then the Rent or payment due during the period of such restrictions shall be the maximum amount allowable under those restrictions. Upon termination of the restrictions, Landlord shall, to the extent it is legally permitted, recover from Tenant the difference between the amounts received during the period of the restrictions and the amounts Landlord would have received had there been no restrictions. 5.6 TAXES PAYABLE BY TENANT. In addition to the Rent and any other charges to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand for any and all taxes payable by Landlord (other than net income taxes) which are not otherwise reimbursable under this Lease, whether or not now customary or within the contemplation of the parties, where such taxes are upon, measured by or reasonably attributable to (a) the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises, or the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, other than Building Standard Work made by Landlord, regardless of whether title to such improvements is held by Tenant or Landlord; (b) the gross or net Rent payable under this Lease, including, without limitation, any rental or gross receipts tax levied by any taxing authority with respect to the receipt of the Rent hereunder; (c) the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; or (d) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. If it becomes unlawful for Tenant to reimburse Landlord for any costs as required under this Lease, the Base Rent shall be revised to net Landlord the same net Rent after imposition of any tax or other charge upon Landlord as would have been payable to Landlord but for the reimbursement being unlawful. 6. INTEREST AND LATE CHARGES. If Tenant fails to pay when due any Rent or other amounts or charges which Tenant is obligated to pay under the terms of this Lease, the unpaid amounts shall bear interest at the maximum rate then allowed by law. Tenant acknowledges that the late payment of any Monthly Installment of Base Rent will cause Landlord to lose the use of that money and incur costs and expenses not contemplated under this Lease, including without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, in addition to interest, if any such installment is not received by Landlord within ten (10) days from the date it is due, Tenant shall pay Landlord a late charge equal to ten percent (10%) of such installment. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. Acceptance of any interest or late charge shall not constitute a waiver of Tenant's default with respect to such nonpayment by Tenant nor prevent Landlord from exercising any other rights or remedies available to Landlord under this Lease. 7. SECURITY DEPOSIT. Tenant agrees to deposit with Landlord the Security Deposit set forth at Section 2.0 upon execution of this Lease, as security for Tenant's faithful performance of its obligations under this Lease. Landlord and Tenant agree that the Security Deposit may be commingled with funds of Landlord and Landlord shall have no obligation or liability for payment of interest on such deposit. Tenant shall not mortgage, assign, transfer or encumber the Security Deposit without the prior written consent of Landlord and any attempt by Tenant to do so shall be void, without force or effect and shall not be binding upon Landlord. If Tenant falls to pay any Rent or other amount when due and payable under this Lease, or fails to perform any of the terms hereof, Landlord may appropriate and apply or use all or any portion of the Security Deposit for Rent payments or any other amount then due and unpaid, for payment of any amount for which Landlord has become obligated as a result of Tenant's default or breach, and for any loss or damage sustained by Landlord as a result of Tenant's default or breach, and Landlord may so apply or use this deposit without prejudice to any other remedy Landlord may have by reason of Tenant's default or breach. If Landlord so uses any of the Security Deposit, Tenant shall, within ten (10) days after written demand therefor, restore the Security Deposit to the full amount originally deposited; Tenant's failure to do so shall constitute an act of default hereunder and Landlord shall have the right to exercise any remedy provided for at Article 27 hereof. Within fifteen (15) days after the Term (or any extension thereof) has expired or Tenant has vacated the Premises, whichever shall last occur, and provided Tenant is not then in default on any of its obligations hereunder, Landlord shall return the Security Deposit to Tenant, or, if Tenant has assigned its interest under this Lease, to the last assignee of Tenant. If Landlord sells its interest in the Premises, Landlord may deliver this deposit to the purchaser of Landlord's interest and thereupon be relieved of any further liability or obligation with respect to the Security Deposit. 8. TENANT'S USE OF THE PREMISES. Tenant shall use the Premises solely for the purposes set forth in Tenant's Use Clause. Tenant shall not use or occupy the Premises in violation of law or any covenant, condition or restriction affecting the Building or Project or the certificate of occupancy issued for the Building or Project, and shall, upon notice from Landlord, immediately discontinue any use of the Premises which is declared by any governmental authority having jurisdiction to be a violation of law or the certificate of occupancy. Tenant, at Tenant's own cost and expense, shall comply with all laws, ordinances, regulations, rules and/or any directions of any governmental agencies or authorities having jurisdiction which shall, by reason of the nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or its use or occupation. A judgment of any court of competent jurisdiction or the admission by Tenant in any action or proceeding against Tenant that Tenant has violated any such laws, ordinances, regulations, rules and/or directions in the use of the Premises shall be deemed to be a conclusive determination of that fact as between Landlord and Tenant. Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any fire, extended coverage or other insurance policy covering the Building or Project and/or property located therein, and shall comply with all rules, orders, regulations, requirements and recommendations of the Insurance Services Office or any other organization performing a similar function. Tenant shall (4) promptly upon demand reimburse Landlord for any additional premium charged for such policy by reason of Tenant's failure to comply with the provisions of this Article. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or Project, or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. 9. SERVICES AND UTILITIES. Provided that Tenant is not in default hereunder, Landlord agrees to furnish to the Premises during generally recognized business days, and during hours determined by Landlord in its sole discretion, and subject to the Rules and Regulations of the Building or Project, electricity for normal desk top office equipment and normal copying equipment, and heating, ventilation and air conditioning ("HVAC") as required in Landlord's judgment for the comfortable use and occupancy of the Premises. If Tenant desires HVAC at any other time, Landlord shall use reasonable efforts to furnish such service upon reasonable notice from Tenant; Landlord shall also maintain and keep lighted the common stairs, common entries and restrooms in the Building. Landlord shall not be in default hereunder or be liable for any damages directly or indirectly resulting from, nor shall the Rent be abated by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing services, (ii) failure to furnish or delay in furnishing any such services where such failure or delay is caused by accident or any condition or event beyond the reasonable control of Landlord, or by the making of necessary repairs or improvements to the Premises, Building or Project, or (iii) the limitation, curtailment or rationing of, or restrictions on, use of water, electricity, gas or any other form of energy serving the Premises, Building or Project. Landlord shall not be liable under any circumstances for a loss of or injury to property or business, however occurring, through or in connection with or incidental to failure to furnish any such services. If Tenant uses heat generating machines or equipment in the Premises which affect the temperature otherwise maintained by the HVAC system, Tenant shall not, without the written consent of Landlord, use any apparatus or device in the Premises, including without limitation, electronic data processing machines, punch card machines or machines using in excess of 120 volts, which consumes more electricity than is usually furnished or supplied for the use of premises as general office space, as determined by Landlord. Tenant shall not connect any apparatus with electric current except through existing electrical outlets in the Premises. Tenant shall not consume water or electric current in excess of that usually furnished or supplied for the use of premises as general office space (as determined by Landlord), without first procuring the written consent of Landlord, which Landlord may refuse, and in the event of consent, Landlord may have installed a water meter or electrical current meter in the Premises to measure the amount of water or electric current consumed. The cost of any such meter and of its installation, maintenance and repair shall be paid for by the Tenant and Tenant agrees to pay to Landlord promptly upon demand for all such water and electric current consumed as shown by said meters, at the rates charged for such services by the local public utility plus any additional expense incurred in keeping account of the water and electric current so consumed. If a separate meter is not installed, the excess cost for such water and electric current shall be established by an estimate made by a utility company or electrical engineer hired by Landlord at Tenant's expense. Landlord shall furnish electric service, lighting replacement for building standard lights, restroom supplies, window washing and janitor services in a manner that such services are customarily furnished to comparable office buildings in the area. 10. CONDITION OF THE PREMISES. Tenant's taking possession of the Premises shall be deemed conclusive evidence that as of the date of taking possession the Premises are in good order and satisfactory condition, except for such matters as to which Tenant gave Landlord notice on or before the Commencement Date. No promise of Landlord to alter, remodel, repair or improve the Premises, the Building or the Project and no representation, express or implied, respecting any matter or thing relating to the Premises, Building, Project or this Lease (including, without limitation, the condition of the Premises, the Building or the Project) have been made to Tenant by Landlord or its Broker or Sales Agent, other than as may be contained herein or in a separate exhibit or addendum signed by Landlord and Tenant. 11. CONSTRUCTION, REPAIRS AND MAINTENANCE. a. LANDLORD'S OBLIGATIONS. Landlord shall perform Landlord's Work to the Premises as described in Exhibit "C." Landlord shall maintain in good order, condition and repair the Building and all other portions of the Premises not the obligation of Tenant or of any other tenant in the Building. b. TENANT'S OBLIGATIONS. (1) Tenant at Tenant's sole expense shall, except for services furnished by Landlord pursuant to Article 9 hereof, maintain the Premises in good order. (2) Tenant shall be responsible for all repairs and alterations in and to the Premises, Building and Project and the facilities and systems thereof, the need for which arises out of (i) Tenant's use or occupancy of the Premises, (ii) the installation, removal, use or operation of Tenant's Property (as defined in Article 13) in the Premises, (iii) the moving of Tenant's Property into or out of the Building, or (iv) the act, omission, misuse or negligence of Tenant, its agents, contractors, employees or invitees. (5) (3) If Tenant fails to maintain the Premises in good order, condition and repair, Landlord shall give Tenant notice to do such acts as are reasonably required to so maintain the Premises. If Tenant fails to promptly commence such work and diligently prosecute it to completion, then Landlord shall have the right to do such acts and expend such funds at the expense of Tenant as are reasonably required to perform such work. Any amount so expended by Landlord shall be paid by Tenant promptly after demand with interest at the prime commercial rate then being charged by Bank of America NT & SA plus two percent (2%) per annum, from the date of such work, but not to exceed the maximum rate then allowed by law. Landlord shall have no liability to Tenant for any damage, inconvenience, or interference with the use of the Premises by Tenant as a result of performing any such work. c. COMPLIANCE WITH LAW. Landlord and Tenant shall each do all acts required to comply with all applicable laws, ordinances, and rules of any public authority relating to their respective maintenance obligations as set forth herein. d. AMERICANS WITH DISABILITIES ACT. Any and all costs incurred by Landlord in providing auxiliary aids or services, or in undertaking barrier removal efforts, as required by the Americans with Disability Act of 1990 and, any rules and regulations promulgated thereunder, as the same shall be amended or supplemented from time to time, or in accordance with any similar Federal, State or local laws or ordinance, which are directly attributable to, or arise primarily from, Tenants use or occupancy of the Premises, shall be deemed additional rent, and shall be due and payable in full by Tenant within thirty (30) days after written notice from Landlord. e. LOAD AND EQUIPMENT LIMITS. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry, as determined by Landlord or Landlord's structural engineer. The cost of any such determination made by Landlord's structural engineer shall be paid for by Tenant upon demand. Tenant shall not install business machines or mechanical equipment which cause noise or vibration to such a degree as to be objectionable to Landlord or other Building tenants. f. Except as otherwise expressly provided in this Lease, Landlord shall have no liability to Tenant nor shall Tenant's obligations under this Lease be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's making any repairs or changes which Landlord is required or permitted by this Lease or by any other tenant's lease or required by law to make in or to any portion of the Project, Building or the Premises. Landlord shall nevertheless use reasonable efforts to minimize any interference with Tenant's business in the Premises. g. Tenant shall give Landlord prompt notice of any damage to or defective condition in any part or appurtenance of the Building's mechanical, electrical, plumbing, HVAC or other systems serving, located in, or passing through the Premises. h. Upon the expiration or earlier termination of this Lease, Tenant shall return the Premises to Landlord clean and in the same condition as on the date Tenant took possession, except for normal wear and tear. Any damage to the Premises, including any structural damage, resulting from Tenant's use or from the removal of Tenant's fixtures, furnishings and equipment pursuant to Section 13b shall be repaired by Tenant at Tenant's expense. 12. ALTERATIONS AND ADDITIONS. a. Tenant shall not make any additions, alterations or improvements to the Premises without obtaining the prior written consent of Landlord. Landlord's consent may be conditioned on Tenant's removing any such additions, alterations or improvements upon the expiration of the Term and restoring the Premises to the same condition as on the date Tenant took possession. All work with respect to any addition, alteration or improvement shall be done in a good and workmanlike manner by properly qualified and licensed personnel approved by Landlord, and such work shall be diligently prosecuted to completion. b. Tenant shall pay the costs of any work done on the Premises pursuant to Section 12a, and shall keep the Premises, Building and Project free and clear of liens of any kind. Tenant shall indemnify, defend against and keep Landlord free and harmless from all liability, loss, damage, costs, attorneys' fees and any other expense incurred on account of claims by any person performing work or furnishing materials or supplies for Tenant or any person claiming under Tenant. Tenant shall keep Tenant's leasehold interest, and any additions or improvements which are or become the property of Landlord under this Lease, free and clear of all attachment or judgment liens. Before the actual commencement of any work for which a claim or lien may be filed, Tenant shall give Landlord notice of the intended commencement date a sufficient time before that date to enable Landlord to post notices of non-responsibility or any other notices which Landlord deems necessary for the proper protection of Landlord's interest in the Premises, Building or the Project, and Landlord shall have the right to enter the Premises and post such notices at any reasonable time. c. Landlord may require, at Landlord's sole option, that Tenant provide to Landlord, at Tenant's expense, a lien and completion bond in an amount equal to at least one and one-half (1 1/2) times the total estimated cost of any additions, alterations or improvements to be made in or to the Premises, to protect Landlord against any liability for mechanic's and materialmen's liens and to insure timely completion of the work. Nothing contained in this Section 12c shall relieve Tenant of its obligation under Section 12b to keep the Premises, Building and Project free of all liens. d. Unless their removal is required by Landlord as provided in Section 12a, all additions, alterations and improvements made to the Premises shall become the property of Landlord and be surrendered with the Premises upon the expiration of the Term; provided, however, Tenant's equipment, machinery and trade fixtures which can be removed without damage to the Premises shall remain the property of Tenant and may be removed, subject to the provisions of Section 13b. 13. LEASEHOLD IMPROVEMENTS; TENANT'S PROPERTY. a. All fixtures, equipment, improvements and appurtenances attached to or built into the Premises at the commencement of or during the Term, whether or not by or at the expense of Tenant ("Leasehold Improvements"), shall be and remain a part of the Premises, shall be the property of Landlord and shall not be removed by Tenant, except as expressly provided in Section 13b. (6) h. All movable partitions, business and trade fixtures, machinery and equipment, communications equipment and office equipment located in the Premises and acquired by or for the account of Tenant, without expense to Landlord, which can be removed without structural damage to the Building, and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Premises (collectively "Tenant's Property") shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term; provided that if any of Tenant's Property is removed, Tenant shall promptly repair any damage to the Premises or to the Building resulting from such removal. 14. RULES AND REGULATIONS. Tenant agrees to comply with (and cause its agents, contractors, employees and invitees to comply with) the rules and regulations attached hereto Ex. C and with such reasonable modifications thereof and additions thereto as Landlord may from time to time make. Landlord shall not be responsible for any violation of said rules and regulations by other tenants or occupants of the Building or Project. 15. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord reserves, the following rights, exercisable without liability to Tenant for (a) damage or injury to property, person or business, (b) causing an actual or constructive eviction from the Premises, or (c) disturbing Tenant's use or possession of the Premises: a. To name the Building and Project and to change the name or street address of the Building or Project; b. To install and maintain all signs on the exterior and interior of the Building and Project; c. To have pass keys to the Premises and all doors within the Premises, excluding Tenant's vaults and safes; d. At any time during the Term, and on reasonable prior notice to Tenant, to inspect the Premises, and to show the Premises to any prospective purchaser or mortgagee of the Project, or to any assignee of any mortgage on the Project, or to others having an interest in the Project or Landlord, and during the last six months of the Term, to show the Premises to prospective tenants thereof; and e. To enter the Premises for the purpose of making inspections, repairs, alterations, additions or improvements to the Premises or the Building (including, without limitation, checking, calibrating, adjusting or balancing controls and other parts of the HVAC system), and to take all steps as may be necessary or desirable for the safety, protection, maintenance or preservation of the Premises or the Building or Landlord's interest therein, or as may be necessary or desirable for the operation or improvement of the Building or in order to comply with laws, orders or requirements of governmental or other authority. Landlord agrees to use its best efforts (except in an emergency) to minimize interference with Tenant's business in the Premises in the course of any such entry. 16. ASSIGNMENT AND SUBLETTING. No assignment of this Lease or sublease of all or any part of the Premises shall be permitted, except as provided in this Article 16. a. Tenant shall not, without the prior written consent of Landlord, assign or hypothecate this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use of the Premises by any party other than Tenant. Any of the foregoing acts without such consent shall be void and shall, at the option of Landlord, terminate this Lease. This Lease shall not, nor shall any interest of Tenant herein, be assignable by operation of law without the written consent of Landlord. b. If at any time or from time to time during the Term Tenant desires to assign this Lease or sublet all or any part of the Premises, Tenant shall give notice to Landlord setting forth the terms and provisions of the proposed assignment or sublease, and the identity of the proposed assignee or subtenant. Tenant shall promptly supply Landlord with such information concerning the business background and financial condition of such proposed assignee or subtenant as Landlord may reasonably request. Landlord shall have the option, exercisable by notice given to Tenant within twenty (20) days after Tenant's notice is given, either to sublet such space from Tenant at the rental and on the other terms set forth in this Lease for the term set forth in Tenant's notice, or, in the case of an assignment, to terminate this Lease. If Landlord does not exercise such option, Tenant may assign the Lease or sublet such space to such proposed assignee or subtenant on the following further conditions: (1) Landlord shall have the right to approve such proposed assignee or subtenant, which approval shall not be unreasonably withheld; (2) The assignment or sublease shall be on the same terms set forth in the notice given to Landlord; (3) No assignment or sublease shall be valid and no assignee or sublessee shall take possession of the Premises until an executed counterpart of such assignment or sublease has been delivered to Landlord; (4) No assignee or sublessee shall have a further right to assign or sublet except on the terms herein contained; c. Notwithstanding the provisions of paragraphs a and b above, Tenant may assign this Lease or sublet the Premises or any portion thereof, without Landlord's consent and without extending any recapture or termination option to Landlord, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant's business as a going concern, provided that (i) the assignee or sublessee assumes, in full, the obligations of Tenant under this Lease, (ii) Tenant remains fully liable under this Lease, and (iii) the use of the Premises under Article 8 remains unchanged. (7) d. No subletting or assignment shall release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the Rent and to perform all other obligations to be performed by Tenant hereunder. The acceptance of Rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by an assignee or subtenant of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee, subtenant or successor. Landlord may consent to subsequent assignments of the Lease or sublettings or amendments or modifications to the Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto and any such actions shall not relieve Tenant of liability under this Lease. e. If Tenant assigns the Lease or sublets the Premises or requests the consent of Landlord to any assignment or subletting or if Tenant requests the consent of Landlord for any act that Tenant proposes to do, then Tenant shall, upon demand, pay Landlord an administrative fee of One Hundred Fifty and No/100ths Dollars ($150.00) plus any attorneys' fees reasonably incurred by Landlord in connection with such act or request. 17. HOLDING OVER. If after expiration of the Term, Tenant remains in possession of the Premises with Landlord's permission (express or implied), Tenant shall become a tenant from month to month only, upon all the provisions of this Lease (except as to term and Base Rent), but the "Monthly Installments of Base Rent" payable by Tenant shall be mutually agreed upon by Landlord and tenant prior to the holdover period begins. Such monthly rent shall be payable in advance on or before the first day of each month. If either party desires to terminate such month to month tenancy, it shall give the other party not less than thirty (30) days advance written notice of the date of termination. 18. SURRENDER OF PREMISES. a. Tenant shall peaceably surrender the Premises to Landlord on the Expiration Date, in broom-clean condition and in as good condition as when Tenant took possession, except for (i) reasonable wear and tear, (ii) loss by fire or other casualty, and (iii) loss by condemnation. Tenant shall, on Landlord's request, remove Tenant's Property on or before the Expiration Date and promptly repair all damage to the Premises or Building caused by such removal. b. If Tenant abandons or surrenders the Premises, or is dispossessed by process of law or otherwise, any of Tenant's Property left on the Premises shall be deemed to be abandoned, and, at Landlord's option, title shall pass to Landlord under this Lease as by a bill of sale. If Landlord elects to remove all or any part of such Tenant's Property, the cost of removal, including repairing any damage to the Premises or Building caused by such removal, shall be paid by Tenant. On the Expiration Date Tenant shall surrender all keys to the Premises. 19. DESTRUCTION OR DAMAGE. a. If the Premises or the portion of the Building necessary for Tenant's occupancy is damaged by fire, earthquake, act of God, the elements of other casualty, Landlord shall, subject to the provisions of this Article, promptly repair the damage, if such repairs can, in Landlord's opinion, be completed within (90) ninety days. If Landlord determines that repairs can be completed within ninety (90) days, this Lease shall remain in full force and effect, except that if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's agents, employees, contractors, licensees or invitees, the Base Rent shall be abated to the extent Tenant's use of the Premises is impaired, commencing with the date of damage and continuing until completion of the repairs required of Landlord under Section 19d. b. If in Landlord's opinion, such repairs to the Premises or portion of the Building necessary for Tenant's occupancy cannot be completed within ninety (90) days, Landlord may elect, upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease should continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not so elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. c. If any other portion of the Building or Project is totally destroyed or damaged to the extent that in Landlord's opinion repair thereof cannot be completed within ninety (90) days, Landlord may elect upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. d. If the Premises are to be repaired under this Article, Landlord shall repair at its cost any injury or damage to the Building and Building Standard Work in the Premises. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. Landlord shall not be liable for any loss of business, inconvenience or annoyance arising from any repair or restoration of any portion of the Premises, Building or Project as a result of any damage from fire or other casualty. e. This Lease shall be considered an express agreement governing any case of damage to or destruction of the Premises, Building or Project by fire or other casualty, and any present or future law which purports to govern the rights of Landlord and Tenant in such circumstances in the absence of express agreement, shall have no application. 20. EMINENT DOMAIN. a. If the whole of the Building or Premises is lawfully taken by condemnation or in any other manner for any public or quasi-public purpose, this Lease shall terminate as of the date of such taking, and Rent shall be prorated to such date. If less than the whole of the Building or Premises is so taken, this Lease shall be unaffected by such taking, provided that (i) Tenant shall have the right to terminate this Lease by notice to Landlord given within ninety (90) days of the date of such taking if twenty percent (20%) or more of the Premises is taken and the remaining area of the Premises is not reasonably sufficient for Tenant to continue operation of its business, and (ii) Landlord shall have the right to terminate this Lease by notice to Tenant given within ninety (90) days after the date of such taking. If either Landlord or Tenant so elects to terminate this Lease, the Lease shall terminate on the thirtieth (30th) day after either such notice. The Rent shall be prorated to the date of termination. If this Lease continues in force upon such partial taking, the Base Rent and Tenant's Proportionate Share shall be equitably adjusted according to the remaining Rentable Area of the Premises and Project. (8) b. In the event of any taking, partial or whole, all of the proceeds of any award, judgment or settlement payable by the condemning authority shall be the exclusive property of Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any award, judgment or settlement from the condemning authority. Tenant, however, shall have the right, to the extent that Landlord's award is not reduced or prejudiced, to claim from the condemning authority (but not from Landlord) such compensation as may be recoverable by Tenant in its own right for relocation expenses and damage to Tenant's personal property. c. In the event of a partial taking of the Premises which does not result in a termination of this Lease, Landlord shall restore the remaining portion of the Premises as nearly as practicable to its condition prior to the condemnation or taking, but only to the extent of Building Standard Work. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. 21. INDEMNIFICATION. a. Tenant shall indemnify and hold Landlord harmless against and from liability and claims of any kind for loss or damage to property of Tenant or any other person, or for any injury to or death of any person, arising out of: (1) Tenant's use and occupancy of the Premises, or any work, activity or other things allowed or suffered by Tenant to be done in, on or about the Premises; (2) any breach or default by Tenant of any of Tenant's obligations under this Lease; or (3) any negligent or otherwise tortious act or omission of Tenant, its agents, employees, invitees or contractors. Tenant shall at Tenant's expense, and by counsel satisfactory to Landlord, defend Landlord in any action or proceeding arising from any such claim and shall indemnify Landlord against all costs, attorneys' fees, expert witness fees and any other expenses incurred in such action or proceeding. As a material part of the consideration for Landlord's execution of this Lease, Tenant hereby assumes all risk of damage or injury to any person or property in, on or about the Premises from any cause. b. Landlord shall not be liable for injury or damage which may be sustained by the person or property of Tenant, its employees, invitees or customers, or any other person in or about the Premises, caused by or resulting from fire, steam, electricity, gas, water or rain which may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, whether such damage or injury results from conditions arising upon the Premises or upon other portions of the Building or Project or from other sources. Landlord shall not be liable for any damages arising from any act or omission of any other tenant of the Building or Project. 22. TENANT'S INSURANCE. a. All insurance required to be carried by Tenant hereunder shall be issued by responsible insurance companies acceptable to Landlord and Landlord's lender and qualified to do business in the State. Each policy shall name Landlord, and at Landlord's request any mortgagee of Landlord, as an additional insured, as their respective interests may appear. Each policy shall contain (i) a cross-liability endorsement, (ii) a provision that such policy and the coverage evidenced thereby shall be primary and non-contributing with respect to any policies carried by Landlord and that any coverage carried by Landlord shall be excess insurance, and (iii) a waiver by the insurer of any right of subrogation against Landlord, its agents, employees and representatives, which arises or might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its agents, employees or representatives. A copy of each paid up policy (authenticated by the insurer) or certificate of the insurer evidencing the existence and amount of each insurance policy required hereunder shall be delivered to Landlord before the date Tenant is first given the right of possession of the Premises, and thereafter within thirty (30) days after any demand by Landlord therefor. Landlord may, at any time and from time to time, inspect and/or copy any insurance policies required to be maintained by Tenant hereunder. No such policy shall be cancellable except after twenty (20) days written notice to Landlord and Landlord's lender. Tenant shall furnish Landlord with renewals or "binders" of any such policy at least ten (10) days prior to the expiration thereof. Tenant agrees that if Tenant does not take out and maintain such insurance, Landlord may (but shall not be required to) procure said insurance on Tenant's behalf and charge the Tenant the premiums together with a twenty-five percent (25%) handling charge, payable upon demand. Tenant shall have the right to provide such insurance coverage pursuant to blanket policies obtained by the Tenant, provided such blanket policies expressly afford coverage to the Premises, Landlord, Landlord's mortgagee and Tenant as required by this Lease. b. Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term, Tenant shall procure, pay for and maintain in effect policies of casualty insurance covering (i) all Leasehold Improvements (including any alterations, additions or improvements as may be made by Tenant pursuant to the provisions of Article 12 hereof), and (ii) trade fixtures, merchandise and other personal property from time to time in, on or about the Premises, in an amount not less than one hundred percent (100%) of their actual replacement cost from time to time, providing protection against any peril included within the classification "Fire and Extended Coverage" together with insurance against sprinkler damage, vandalism and malicious mischief. The proceeds of such insurance shall be used for the repair or replacement of the property so insured. Upon termination of this Lease following a casualty as set forth herein, the proceeds under (i) shall be paid to Landlord, and the proceeds under (ii) above shall be paid to Tenant. c. Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term, Tenant shall procure, pay for and maintain in effect workers' compensation insurance as required by law and comprehensive public liability and property damage insurance with respect to the construction of Improvements on the Premises, the use, operation or condition of the Premises and the operations of Tenant in, on or about the Premises, providing personal injury and broad form property damage coverage for not less than One Million Dollars ($1,000,000.00) combined single limit for bodily injury, death and property damage liability. d. Not less than every three (3) years during the Term, Landlord and Tenant shall mutually agree to increases in all of Tenant's insurance policy limits for all insurance to be carried by Tenant as set forth in this Article. In the event Landlord and Tenant cannot mutually agree upon the amounts of said increases, then Tenant agrees that all insurance policy limits as set forth in this Article shall be adjusted for increases in the cost of living in the same manner as is set forth in Section 5.2 hereof for the adjustment of the Base Rent. (9) 23. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive all rights of recovery against the other and against the officers, employees, agents and representatives of the other, on account of loss by or damage to the waiving party of its property or the property of others under its control, to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy which either may have in force at the time of the loss or damage. Tenant shall, upon obtaining the policies of insurance required under this Lease, give notice to its insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 24. SUBORDINATION AND ATTORNMENT Upon written request of Landlord, or any first mortgagee or first deed of trust beneficiary of Landlord, or ground lessor of Landlord, Tenant shall, in writing, subordinate its rights under this Lease to the lien of any first mortgage or first deed of trust, or to the interest of any lease in which Landlord is lessee, and to all advances made or hereafter to be made thereunder. However, before signing any subordination agreement, Tenant shall have the right to obtain from any lender or lessor or Landlord requesting such subordination, an agreement in writing providing that, as long as Tenant is not in default hereunder, this Lease shall remain in effect for the full Term. The holder of any security interest may, upon written notice to Tenant, elect to have this Lease prior to its security interest regardless of the time of the granting or recording of such security interest. In the event of any foreclosure sale, transfer in lieu of foreclosure or termination of the lease in which Landlord is lessee, Tenant shall attorn to the purchaser, transferee or lessor as the case may be, and recognize that party as Landlord under this Lease, provided such party acquires and accepts the Premises subject to this Lease. 25. TENANT ESTOPPEL CERTIFICATES. Within ten (10) days after written request from Landlord, Tenant shall execute and deliver to Landlord or Landlord's designee, a written statement certifying (a) that this Lease is unmodified and in full force and effect, or is in full force and effect as modified and stating the modifications; (b) the amount of Base Rent and the date to which Base Rent and additional rent have been paid in advance; (c) the amount of any security deposited with Landlord; and (d) that Landlord is not in default hereunder or, if Landlord is claimed to be in default, stating the nature of any claimed default. Any such statement may be relied upon by a purchaser, assignee or lender. Tenant's failure to execute and deliver such statement within the time required shall at Landlord's election be a default under this Lease and shall also be conclusive upon Tenant that: (1) this Lease is in full force and effect and has not been modified except as represented by Landlord; (2) there are no uncured defaults in Landlord's performance and that Tenant has no right of offset, counter-claim or deduction against Rent; and (3) not more than one month's Rent has been paid in advance. 26. TRANSFER OF LANDLORD'S INTEREST. In the event of any sale or transfer by Landlord of the Premises, Building or Project, and assignment of this Lease by Landlord, Landlord shall be and is hereby entirely freed and relieved of any and all liability and obligations contained in or derived from this Lease arising out of any act, occurrence or omission relating to the Premises, Building, Project or Lease occurring after the consummation of such sale or transfer, providing the purchaser shall expressly assume all of the covenants and obligations of Landlord under this Lease. If any security deposit or prepaid Rent has been paid by Tenant, Landlord may transfer the security deposit or prepaid Rent to Landlord's successor and upon such transfer, Landlord shall be relieved of any and all further liability with respect thereto. 27. DEFAULT. 27.1. TENANT'S DEFAULT. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: a. If Tenant abandons or vacates the Premises; or b. If Tenant fails to pay any Rent or any other charges required to be paid by Tenant under this Lease and such failure continues for five (5) days after such payment is due and payable; or c. If Tenant fails to promptly and fully perform any other covenant, condition or agreement contained in this Lease and such failure continues for thirty (30) days after written notice thereof from Landlord to Tenant; or d. If a writ of attachment or execution is levied on this Lease or on any of Tenant's Property; or e. If Tenant makes a general assignment for the benefit of creditors, or provides for an arrangement, composition, extension or adjustment with its creditors; or f. If Tenant files a voluntary petition for relief or if a petition against Tenant in a proceeding under the federal bankruptcy laws or other insolvency laws is filed and not withdrawn or dismissed within forty-five (45) days thereafter, of if under the provisions of any law providing for reorganization or winding up of corporations, any court of competent jurisdiction assumes jurisdiction, custody or control of Tenant or any substantial part of its property and such jurisdiction, custody or control remains in force unrelinquished, unstayed or unterminated for a period of forty-five (45) days; or g. If in any proceeding or action in which Tenant is a party, a trustee, receiver, agent or custodian is appointed to take charge of the Premises or Tenant's Property (or has the authority to do so) for the purpose of enforcing a lien against the Premises or Tenant's Property; or h. If Tenant is a partnership or consists of more than one (1) person or entity, if any partner of the partnership or other person or entity is involved in any of the acts or events described in subparagraphs d through g above. 27.2. REMEDIES. In the event of Tenant's default hereunder, then in addition to any other rights or remedies Landlord may have under any law, Landlord shall have the right, at Landlord's option, without further notice or demand of any kind to do the following: a. Terminate this Lease and Tenant's right to possession of the Premises and reenter the Premises and take possession thereof, and Tenant shall have no further claim to the Premises or under this Lease; or b. Continue this Lease in effect, reenter and occupy the Premises for the account of Tenant, and collect any unpaid Rent or other charges which have or thereafter become due and payable; or c. Reenter the Premises under the provisions of subparagraph b, and thereafter elect to terminate this Lease and Tenant's right to possession of the Premises. (10) If Landlord reenters the Premises under the provisions of subparagraphs b or c above, Landlord shall not be deemed to have terminated this Lease or the obligation of Tenant to pay any Rent or other charges thereafter accruing, unless Landlord notifies Tenant in writing of Landlord's election to terminate this Lease. In the event of any reentry or retaking of possession by Landlord, Landlord shall have the right, but not the obligation, to remove all or any part of Tenant's Property in the Premises and to place such property in storage at a public warehouse at the expense and risk of Tenant. If Landlord elects to relet the Premises for the account of Tenant, the rent received by Landlord from such reletting shall be applied as follows: first, to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such reletting; third, to the payment of the cost of any alterations or repairs to the Premises; fourth to the payment of Rent due and unpaid hereunder; and the balance, if any, shall be held by Landlord and applied in payment of future Rent as it becomes due. If that portion of rent received from the reletting which is applied against the Rent due hereunder is less than the amount of the Rent due, Tenant shall pay the deficiency to Landlord promptly upon demand by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as determined, any costs and expenses incurred by Landlord in connection with such reletting or in making alterations and repairs to the Premises, which are not covered by the rent received from the reletting. Should Landlord elect to terminate this Lease under the provisions of subparagraph a or c above, Landlord may recover as damages from Tenant the following: 1. PAST RENT. The worth at the time of the award of any unpaid Rent which had been earned at the time of termination; plus 2. RENT PRIOR TO AWARD. The worth at the time of the award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental losses that Tenant proves could have been reasonably avoided; plus 3. RENT AFTER AWARD. The worth at the time of the award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of the rental loss that Tenant proves could be reasonably avoided; plus 4. PROXIMATELY CAUSED DAMAGES. Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses (including attorneys' fees), incurred by Landlord in (a) retaking possession of the Premises, (b) maintaining the Premises after Tenant's default, (c) preparing the Premises for reletting to a new tenant, including any repairs or alterations, and (d) reletting the Premises, including broker's commissions. "The worth at the time of the award" as used in subparagraphs 1 and 2 above, is to be computed by allowing interest at the rate of ten percent (10%) per annum. "The worth at the time of the award" as used in subparagraph 3 above, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank situated nearest to the Premises at the time of the award plus one percent (1 %). The waiver by Landlord of any breach of any term, covenant or condition of this Lease shall not be deemed a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition. Acceptance of Rent by Landlord subsequent to any breach hereof shall not be deemed a waiver of any preceding breach other than the failure to pay the particular Rent so accepted, regardless of Landlord's knowledge of any breach at the time of such acceptance of Rent. Landlord shall not be deemed to have waived any term, covenant or condition unless Landlord gives Tenant written notice of such waiver. 27.3 LANDLORD'S DEFAULT. If Landlord fails to perform any covenant, condition or agreement contained in this Lease within thirty (30) days after receipt of written notice from Tenant specifying such default, or if such default cannot reasonably be cured within thirty (30) days, if Landlord fails to commence to cure within that thirty (30) day period, then Landlord shall be liable to Tenant for any damages sustained by Tenant as a result of Landlord's breach; provided, however, it is expressly understood and agreed that if Tenant obtains a money judgment against Landlord resulting from any default or other claim arising under this Lease, that judgment shall be satisfied only out of the rents, issues, profits, and other income actually received on account of Landlord's right, title and interest in the Premises, Building or Project, and no other real, personal or mixed property of Landlord (or of any of the partners which comprise Landlord, if any) wherever situated, shall be subject to levy to satisfy such judgment. If, after notice to Landlord of default, Landlord (or any first mortgagee or first deed of trust beneficiary of Landlord) fails to cure the default as provided herein, then Tenant shall have the right to cure that default at Landlord's expense. Tenant shall not have the right to terminate this Lease or to withhold, reduce or offset any amount against any payments of Rent or any other charges due and payable under this Lease except as otherwise specifically provided herein. 28. BROKERAGE FEES. Tenant warrants and represents that it has not dealt with any real estate broker or agent in connection with this Lease or its negotiation except those noted in Section 2.c. Tenant shall indemnify and hold Landlord harmless from any cost, expense or liability (including costs of suit and reasonable attorneys' fees) for any compensation, commission or fees claimed by any other real estate broker or agent in connection with this Lease or its negotiation by reason of any act of Tenant. 29. NOTICES. All notices, approvals and demands permitted or required to be given under this Lease shall be in writing and deemed duly served or given if personally delivered or sent by certified or registered U.S. mail, postage prepaid, and addressed as follows: (a) if to Landlord, to Landlord's Mailing Address and to the Building manager, and (b) if to Tenant, to Tenant's Mailing Address; provided, however, notices to Tenant shall be deemed duly served or given if delivered or mailed to Tenant at the Premises. Landlord and Tenant may from time to time by notice to the other designate another place for receipt of future notices. 30. GOVERNMENT ENERGY OR UTILITY CONTROLS. In the event of imposition of federal, state or local government controls, rules, regulations, or restrictions on the use or consumption of energy or other utilities during the Term, both Landlord and Tenant shall be bound thereby. In the event of a difference in interpretation by Landlord and Tenant of any such controls, the interpretation of Landlord shall prevail, and Landlord shall have the right to enforce compliance therewith, including the right of entry into the Premises to effect compliance. 31. PARAGRAPH OMMITTED (11) 32. QUIET ENJOYMENT. Tenant, upon paying the Rent and performing all of its obligations under this Lease, shall peaceably and quietly enjoy the Premises, subject to the terms of this Lease and to any mortgage, lease, or other agreement to which this Lease may be subordinate. 33. OBSERVANCE OF LAW. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, and with the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to, or affecting the condition, use or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements or acts. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any law, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between Landlord and Tenant. 34. FORCE MAJEURE. Any prevention, delay or stoppage of work to be performed by Landlord or Tenant which is due to strikes, labor disputes, inability to obtain labor, materials, equipment or reasonable substitutes therefor, acts of God, governmental restrictions or regulations or controls, judicial orders, enemy or hostile government actions, civil commotion, fire or other casualty, or other causes beyond the reasonable control of the party obligated to perform hereunder, shall excuse performance of the work by that party for a period equal to the duration of that prevention, delay or stoppage. Nothing in this Article 34 shall excuse or delay Tenant's obligation to pay Rent or other charges under this Lease. 35. CURING TENANT'S DEFAULTS. If Tenant defaults in the performance of any of its obligations under this Lease, Landlord may (but shall not be obligated to) without waiving such default, perform the same for the account at the expense of Tenant. Tenant shall pay Landlord all costs of such performance promptly upon receipt of a bill therefor. 36. SIGN CONTROL. Tenant shall not affix, paint, erect or inscribe any sign, projection, awning, signal or advertisement of any kind to any part of the Premises, Building or Project, including without limitation, the inside or outside of windows or doors, without the written consent of Landlord. Landlord shall have the right to remove any signs or other matter, installed without Landlord's permission, without being liable to Tenant by reason of such removal, and to charge the cost of removal to Tenant as additional rent hereunder, payable within ten (10) days of written demand by Landlord. 37. MISCELLANEOUS. a. ACCORD AND SATISFACTION; ALLOCATION OF PAYMENTS. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent provided for in this Lease shall be deemed to be other than on account of the earliest due Rent, nor shall any endorsement or statement on any check or letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of the Rent or pursue any other remedy provided for in this Lease. In connection with the foregoing, Landlord shall have the absolute right in its sole discretion to apply any payment received from Tenant to any account or other payment of Tenant then not current and due or delinquent. b. ADDENDA. If any provision contained in an addendum to this Lease is inconsistent with any other provision herein, the provision contained in the addendum shall control, unless otherwise provided in the addendum. c. ATTORNEYS' FEES. It any action or proceeding is brought by either party against the other pertaining to or arising out of this Lease, the finally prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' fees, incurred on account of such action or proceeding. d. CAPTIONS, ARTICLES AND SECTION NUMBERS. The captions appearing within the body of this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease. All references to Article and Section numbers refer to Articles and Sections in this Lease. e. CHANGES REQUESTED BY LENDER. Neither Landlord or Tenant shall unreasonably withhold its consent to changes or amendments to this Lease requested by the lender on Landlord's Interest, so long as these changes do not alter the basic business terms of this Lease or otherwise materially diminish any rights or materially increase any obligations of the party from whom consent to such charge or amendment is requested. (12) f. CHOICE OF LAW. This Lease shall be construed and enforced in accordance with the laws of the State. g. CONSENT. Notwithstanding anything contained in this Lease to the contrary, Tenant shall have no claim, and hereby waives the right to any claim against Landlord for money damages by reason of any refusal, withholding or delaying by Landlord of any consent, approval or statement of satisfaction, and in such event, Tenant's only remedies therefor shall be an action for specific performance, injunction or declaratory judgment to enforce any right to such consent, etc. h. CORPORATE AUTHORITY. If Tenant is a corporation, each individual signing this Lease on behalf of Tenant represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of the corporation, and that this Lease is binding on Tenant in accordance with its terms. Tenant shall, at Landlord's request, deliver a certified copy of a resolution of its board of directors authorizing such execution. i. COUNTERPARTS. This Lease may be executed in multiple counterparts, all of which shall constitute one and the same Lease. j. EXECUTION OF LEASE; NO OPTION. The submission of this Lease to Tenant shall be for examination purposes only, and does not and shall not constitute a reservation of or option for Tenant to lease, or otherwise create any interest of Tenant in the Premises or any other premises within the Building or Project. Execution of this Lease by Tenant and its return to Landlord shall not be binding on Landlord notwithstanding any time interval, until Landlord has in fact signed and delivered this Lease to Tenant. k. FURNISHING OF FINANCIAL STATEMENTS; TENANT'S REPRESENTATIONS. In order to induce Landlord to enter into this Lease Tenant agrees that it shall promptly furnish Landlord, from time to time, upon Landlord's written request, with financial statements reflecting Tenant's current financial condition. Tenant represents and warrants that all financial statements, records and information furnished by Tenant to Landlord in connection with this Lease are true, correct and complete in all respects. l. FURTHER ASSURANCES. The parties agree to promptly sign all documents reasonably requested to give effect to the provisions of this Lease. m. MORTGAGEE PROTECTION. Tenant agrees to send by certified or registered mail to any first mortgagee or first deed of trust beneficiary of Landlord whose address has been furnished to Tenant, a copy of any notice of default served by Tenant on Landlord. If Landlord fails to cure such default within the time provided for in this Lease, such mortgagee or beneficiary shall have an additional thirty (30) days to cure such default; provided that if such default cannot reasonably be cured within that thirty (30) day period, then such mortgagee or beneficiary shall have such additional time to cure the default as is reasonably necessary under the circumstances. n. PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all of the agreements of the parties with respect to any matter-covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties or their respective successors in interest. o. RECORDING. Tenant shall not record this Lease without the prior written consent of Landlord. Tenant, upon the request of Landlord, shall execute and acknowledge a "short form" memorandum of this Lease for recording purposes. p. SEVERABILITY. A final determination by a court of competent jurisdiction that any provision of this Lease is invalid shall not affect the validity of any other provision, and any provision so determined to be invalid shall, to the extent possible, be construed to accomplish its intended effect. q. SUCCESSORS AND ASSIGNS. This Lease shall apply to and bind the heirs, personal representatives, and permitted successors and assigns of the parties. r. TIME OF THE ESSENCE. Time is of the essence of this Lease. s. WAIVER. No delay or omission in the exercise of any right or remedy of Landlord upon any default by Tenant shall impair such right or remedy or be construed as a waiver of such default. The receipt and acceptance by Landlord of delinquent Rent shall not constitute a waiver of any other default; it shall constitute only a waiver of timely payment for the particular Rent payment involved. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the Term. Only a written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish a termination of the Lease. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of the Lease. (13) EXHIBIT 'A' [FLOOR PLAN] [FLOOR PLAN] Exhibit C 1. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed, or printed or affixed on or to any part of the outside or include of the Building, without first obtaining the written consent of Landlord otherwise Landlord shall have the right to remove any of the foregoing without notice to and at the expense of Tenant. All approved signs or lettering on doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord. 2. Tenant shall not place anything or allow anything to be placed near any window, door, partition or wall which may appear unsightly from outside the Premises. Landlord may, but is not obligated to, furnish and install a Building standard window-covering at all exterior windows. Tenant shall not without prior written consent of Landlord cause or otherwise sunscreen any window. 3. The sidewalk, halls, passages, exits, entrances, elevators and stairways shall not be obstructed by Tenant or used by Tenant for any purpose other than for getting to and from the Premises. 4. Tenant shall not alter any lock or install any new additional locks or any bolt on any doors or windows of the Premises without Landlord's prior written consent. 5. The toilet room, urinals, wash bowls and other apparatus shall not be used for any purpose other than that of which they were constructed and no foreign substance of any kind whatsoever shall be placed therein. The cost and expense of repair and/or replacement for any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Tenant, and Tenant shall bear the responsibility for its employees or invitees of Tenant, who shall have caused such breakage, stoppage or damage. 6. Tenant shall not overload the floor of the Premises or in any way deface any part of the Premises. 7. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy objects brought into the Building and also the times and manner of moving the same in and out of the Building. Safes or other heavy objects shall, if considered necessary by Landlord, stand on supports of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such safe or heavy object from any cause and all damage done to the Building by moving or maintaining any such safe or heavy object shall be repaired at the expense of Tenant. 8. Tenant shall not use, keep, or permit to be used or kept, any foul, noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in any manner offensive to the Landlord or other tenants or occupants of the Building, by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein, nor shall any animals or birds be brought in or kept in or about the Premises or the Building. 9. No cooking shall be done or permitted by Tenant on the Premises, nor shall the Premises be used for storage of merchandise, washing clothes, lodging, or for any improper, objectionable or immoral purposes as Landlord may determine in its sole and absolute discretion. Tenant may use a microwave oven and a refrigerator on the Premises for the convenience of Tenant's employees. 10. Tenant shall not use or keep in the Premises or the Building any kerosene, gasoline or other inflammable material, or use any method of heating or air-conditioning other than that supplied by Landlord. 11. Landlord will direct electricians as to where and how telephone and telegraph wires are to be introduced. No boring or cutting for wires will be allowed without the prior written consent of the Landlord. The location of telephones, call boxes and other office equipment affixed to the Premises shall be subject to the prior written approval of Landlord. 12. On Saturdays, Sundays and legal holidays, and on other days between the hours of 6:00 p.m. and 8:00 a.m. the following day, access to the Building, or to the halls, corridors, elevators or stairways in the Building, or to the Premises may be refused unless the person seeking access is known to the person or employee of the Building then in charge and has a pass or is properly identified. The Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In case of invasion, mob, riot, public excitement, or other commotion, the Landlord reserves the right to prevent access to the Building or Property during the continuance of the same by closing of doors or otherwise for the safety of the tenants and protection of the Building and property in the Building. 13. Landlord reserves the right to exclude or expel from the Building or Property any person who, in the judgement of Landlord, is intoxicated or under the influence of liquor or drugs, or whole shall in any manner do any act in violation of any of the Rules and Regulations of the Building. 14. No vending machine or machines of any description shall be installed, maintained or operated upon the Premises without the prior written consent of the Landlord. 15. Landlord shall have the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building of which the Premises are a part. 16. Tenant shall not disturb, solicit, or canvass any occupant of the Building and shall cooperate with Landlord and other tenants to prevent same. 17. Without the prior written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 18. Landlord shall have the right to control and operate the common areas of the Building and the Property, and the public facilities, heating and air-conditioning, as well as facilities furnished for the common use of the tenants, in such a manner as it deems best for the benefit of all tenants generally. 19. All entrance doors to the Premises shall be locked when the Premises are not in use, and all doors opening to public corridors shall be kept closed while the Premises are being used pursuant to the terms of the Lease. EX-10.18 7 EXHIBIT 10.18 LEASE/VAULT SECURITY LEASE AGREEMENT LESSEE: DELIVERY ADDRESS: FEATHER RIVER STATE BANK FEATHER RIVER STATE BANK 1005 STAFFORD WAY 114 "D" STREET YUBA CITY, CA 95991 YUBA CITY, CA 95993 EQUIPMENT SPECIFICATIONS
MODEL SERIAL NUMBER DELIVERY DATE VALUE MINIMUM LEASE TERM RATE PER MONTH ----- ------------- ------------- ----- ------------------ -------------- 64 X 24 CPX-04249 3/1/97 $100,000.00 6 MONTHS $2,255.00 + tax (or $1.56 per sq. ft.)
*CONSISTS OF: SMC-02001-454 SMC-02001-455 This agreement is made as of by Vault Security Systems, Inc., a California corporation trading as one of the above entities (hereinafter referred to as Lessor) and the Lessee named above. Lessor hereby agrees to Lease to Lessees and Lessee hereby agrees to lease and rent from Lessor the trailer(s) and/or relocatable, modular and/or pre-fabricated structure(s) described below together with stairs, railings, furniture and other items attached or appurtenant-thereto (hereinafter referred to collectively as the "Equipment"). NOTICE: LESSEE IS RESPONSIBLE FOR DAMAGE TO THE EQUIPMENT IN ACCORDANCE WITH ARTICLE 11 OF THE LEASE TERMS AND CONDITIONS ON REVERSE SIDE. 1. LIABILITY WAIVER: LESSEE / /ACCEPTS / /DECLINES to pay an additional $.25 per day per trailer in consideration for the agreement on the part of the Lessor contained in Paragraph 13(a) of the Terms and Conditions (reverse side). 2. PHYSICAL DAMAGE WAIVER: LESSEE / /ACCEPTS / /DECLINES to pay additional $2.75 per $1,000 value of equipment each month in consideration for the agreement on the part of the Lessor contained in Paragraph 13(b) of the Terms and Conditions (reverse side). FAILURE TO PROVIDE A VALID INSURANCE CERTIFICATE WITHIN 30 DAYS OF DELIVERY WILL CONSTITUTE AN AUTOMATIC ACCEPTANCE AS CONTAINED IN 12(C). BILLING INFORMATION I. MONTHLY: RENT MULTI-SECTIONAL WITH THE FOLLOWING INTERIOR CONTENTS: $2,255.00 + TAX PER MONTH a) 32 ft. of Ramp & Deck & Rear Steps (OR $1.56 PER SQ. FT.) b) Telephone System c) (4) Storage Cabinets d) Staff Lounge Table & (4) Chairs e) Signature Card Trays f) (1) 2-Drawer Firefile
LESSEE: ACCEPTED LESSOR: VAULT SECURITY SYSTEMS, INC. BY: /s/ Illegible BY: /s/ Illegible ---------------------------- --------------------------- TITLE: Pres/CEO TITLE: G.M. ---------------------------- --------------------------- PAGE 1 OF 3 LEASE AGREEMENT CONTINUED... BILLING INFORMATION CONTINUED... g) (1) Microwave Unit h) TL-15 Porta Vaults i) 14 c.f. Refrigerator (white) j) (2) #16073066 L-SP "DECO"Desks (gray) (see V.S.S. catalog) k) (6) #F-5901 Swivel Chairs, "HON" (black) (see V.S.S. catalog) l) (6) #D-4003 Guest Arm Chairs, "HON" (gray) (see V.S.S. catalog) m) (6) Refuse Containers n) (4) Sit-down Teller Pedestals o) (4) Teller Cashtrays with Lids p) (2) Rolled Coin Trays q) Complete Hold-up and Burglary Alarm System r) Complete Video Surveillance System (including ATM camera) s) (1) Safe Deposit Customer Pedestal (TP-Unit) t) (1) Night Depository and (25) customer keys u) (1) Dual Control Key Cabinet v) (6) Interior Cash Tray Lockers w) Currency & Coin Storage Lockers with dual access II. INITIAL PAYMENT: Delivery Freight to Wheatland (includes pilots & permits) $ 1,046.00 Block & Level 1,070.00 New 16oz. Carpet 520.00 Tie Downs 840.00 168 ft. Skirting 1,680.00 Tenant Improvements 2,095.00 Ramp Delivery & Set-up 1,150.00 Engineering Plans 300.00 Licensing Fee 15.00 Phone System 600.00 Teller Security and Operatons Equipment Installed 3,000.00 ---------- $ 12,316.00 AFTER INITIAL PAYMENT HAS BEEN MADE, A MONTHLY RENTAL OF $2,255.00 PLUS ALL APPLICABLE TAXES AND FEES ARE PAYABLE ON THE 1ST OF EACH MONTH. LESSEE: ACCEPTED LESSOR: VAULT SECURITY SYSTEMS, INC. BY: /s/ Illegible BY: /s/ Illegible ---------------------------- --------------------------- TITLE: Pres/CEO TITLE: G.M. ---------------------------- --------------------------- PAGE 2 OF 3 LEASE AGREEMENT CONTINUED... BILLING INFORMATION CONTINUED... III. ADDITIONAL OPTIONS CHOSEN: Bottled Water (TO BILLED SEPARATELY) SEPARATE BILLING NCR 5085 ATM and Facia (TO BILLED SEPARATELY) SEPARATE BILLING (2) Module Safe Deposit Boxes $ 2,180.00 + tax Expand Tellerline to (4) Stations 500.00 (2) 4-Drawer Verticle Firefiles 1,988.00 + tax Installation of Tharp Road Night Depository 500.00 Installation of Kitchen Coffee Bar 300.00 --------- $ 5,468.00 IV. LEASE TERMINATION BILLING: Ramp Dismantle & Retrieval $ 795.00 Knockdown, Skirt & Tiedown Removal $ 1,070.00 Return Freight, Pilots & Permits $ 1,046.00 Interior Dismantle & Removal of Security and Operations Equipment $ 2,500.00 ATM & Night Depository Wall Repair $ 975.00 --------- $ 6,386.00 LESSEE: ACCEPTED LESSOR: VAULT SECURITY SYSTEMS, INC. BY: /s/ Illegible BY: /s/ Illegible ---------------------------- --------------------------- TITLE: Pres/CEO TITLE: G.M. ---------------------------- --------------------------- PAGE 3 OF 3 EX-23 8 EXHIBIT 23 CONSENT OF ARTHUR ANDERSEN Exhibit 23 ARTHUR ANDERSEN LLP Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements File No. 333-09813 and No. 333-09823. Arthur Andersen LLP Sacramento, California March 27, 1997 EX-27 9 EXHIBIT 27
9 YEAR DEC-31-1996 DEC-31-1996 22,928 182,775 41,300 0 11,374 23,289 7,980 151,100 4,053 262,602 237,892 0 1,418 0 0 0 11,088 10,936 262,602 17,226 1,866 1,483 20,575 7,416 7,449 13,126 385 (18) 10,270 5,608 5,608 0 0 3,401 2.18 2.18 056 846 2,202 0 0 3,911 328 84 4,053 4,053 0 0
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