SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2003, or
[ ] Transition report pursuant to Section 13 or 15 (d) of Securities Exchange
Act of 1934
Commission File No. 000-49693
California 92-2115369
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(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
|
Securities registered pursuant to Section 12(g) of the Act: __________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [x]
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: $58,126,136
Number of shares outstanding of each of the registrant's classes of common stock, as of March 26, 2004
No par value Common Stock - 2,514,060 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K: Part III, Items 10 through 14 from Registrant's definitive proxy statement for the 2004 annual meeting of shareholders.
Page 1 of 105 pages
The Index to the Exhibits is located at Page 83
PART I
Forward-Looking Statements: Certain matters discussed or incorporated
by reference in this Annual Report on Form 10-K including, but not limited to,
matters described in "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations," are forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Forward-looking statements are certain written
and oral statements made or incorporated by reference from time to time by FNB
Bancorp or its representatives in this document or other documents filed with
the Securities and Exchange Commission, press releases, conferences, or
otherwise that are not historical facts, or are preceded by, followed by or that
include words such as "anticipate," "believe," "plan," "estimate," "seek," and
"intend," and words of similar import are intended to identify forward-looking
statements. Changes to such risks and uncertainties, which could impact future
financial performance, include, among others, (1) competitive pressures in the
banking industry; (2) changes in the interest rate environment; (3) general
economic conditions, nationally, regionally and in operating market areas; (4)
changes in the regulatory environment; (5) changes in business conditions and
inflation; (6) changes in securities markets; (7) data processing problems; and
(8) the U. S. "war on terrorism" and any U.S. military action in the Middle
East. Therefore, the information set forth therein should be carefully
considered when evaluating the business prospects of FNB Bancorp and its
subsidiary, First National Bank of Northern California.
All forward-looking statements of FNB Bancorp are qualified by and should be read in conjunction with such risk disclosure. FNB Bancorp undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
FNB Bancorp (sometimes referred to herein as the "Company") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California on February 28, 2001. As a bank holding company, the Company is authorized to engage in the activities permitted under the Bank Holding Company Act of 1956, as amended, and regulations thereunder. Its principal office is located at 975 El Camino Real, South San Francisco, California 94080, and its telephone number is (650) 588-6800.
The Company owns all of the issued and outstanding shares of common stock of First National Bank of Northern California, a national banking association ("First National Bank" or the "Bank"). The Company has no other subsidiary.
The Bank was organized in 1963 as "First National Bank of Daly City." In 1995, the shareholders approved a change in the name to "First National Bank of Northern California." The administrative headquarters of the Bank is located at 975 El Camino Real, South San Francisco, California. The Bank is locally owned and presently operates eleven full service banking offices within its
primary service area of San Mateo County, in the cities of Colma, Daly City, South San Francisco, Millbrae, Pacifica, Half Moon Bay, San Mateo, Redwood City and Pescadero. The Bank also provides reduced services since August 2003 for the City and County of San Francisco through its Flower Mart facility in San Francisco These are limited to a night drop and an ATM machine. The Bank's primary business is servicing the business or commercial banking needs of individuals and small to mid-sized businesses within San Mateo and San Francisco Counties.
The Bank is chartered under the laws of the United States and is governed by the National Bank Act, and is a member of the Federal Reserve System. The Federal Deposit Insurance Corporation insures the deposits of the Bank up to the applicable legal limits. The Bank is subject to regulation, supervision and regular examination by the Office of the Comptroller of the Currency. The regulations of the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency govern many aspects of the Bank's business and activities, including investments, loans, borrowings, branching, mergers and acquisitions, reporting and numerous other areas. The Bank is also subject to applicable provisions of California law to the extent those provisions are not in conflict with or preempted by federal banking law. See "Supervision and Regulation" below.
First National Bank offers a broad range of services to individuals and businesses in its primary service area with an emphasis upon efficiency and personalized attention. First National Bank provides a full line of business financial products with specialized services such as courier, appointment banking, and business internet banking. The Bank offers personal and business checking and savings accounts, including individual interest-bearing negotiable orders of withdrawal ("NOW"), money market accounts and/or accounts combining checking and savings accounts with automatic transfer capabilities, IRA accounts, time certificates of deposit and direct deposit of social security, pension and payroll checks and computer cash management with access through the internet. First National Bank also makes available commercial, standby letters of credit, construction, accounts receivable, inventory, automobile, home improvement, residential real estate, commercial real estate, single family mortgage, Small Business Administration, office equipment, leasehold improvement and consumer loans as well as overdraft protection lines of credit. In addition, the Bank sells travelers checks and cashiers checks, offers automated teller machine (ATM) services tied in with major statewide and national networks and offers other customary commercial banking services. During 2003, the Bank added Debit Card and Online Banking, while the Bill Payment product will be introduced in 2004.
Most of First National Bank's deposits are obtained from commercial businesses, professionals and individuals. As of December 31, 2003, First National Bank had a total of 23,441 accounts. On occasion, the Bank has obtained deposits through deposit brokers for which it pays a broker fee. As of December 31, 2003, First National Bank had no such deposits. There is no concentration of deposits or any customer with 5% or more of First National Bank's deposits.
At December 31, 2003, the Company had total assets of $429,448,000, total net loans of $312,929,000, deposits of $374,214,000 and shareholders' equity of $51,987,000. The Company competes with approximately 23 other banking or savings institutions in its service areas. The Company's market share of Federal Deposit Insurance Corporation insured deposits in the service area of San Mateo County is approximately 2.26% (based upon the most recent information available by the Federal Deposit Insurance Corporation through June 30, 2003). See "Competitive Data" below.
At December 31, 2003, The Company employed 163 persons on a full-time basis. The Company believes its employee relations are good. The Company is not a party to any collective bargaining agreement.
FNB Bancorp and First National Bank maintain an Internet website at http://www.FNBNORCAL.com. The Company's annual report on form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are made available free of charge on or through such website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Information on such website is not incorporated by reference into this report.
SUPERVISION AND REGULATION
FNB Bancorp. The common stock of FNB Bancorp is subject to the registration requirements of the Securities Act of 1933, as amended, and the qualification requirements of the California Corporate Securities Law of 1968, as amended. FNB Bancorp has registered its common stock under Section 12 (g) of the Securities Exchange Act of 1934, as amended, which include, but are not limited to, annual, quarterly and other current reports with the Securities and Exchange Commission.
FNB Bancorp is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is registered as such with, and subject to the supervision of, the Board of Governors of the Federal Reserve System (the "Board of Governors"). FNB Bancorp is required to obtain the approval of the Board of Governors before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, FNB Bancorp would own or control more than 5% of the voting shares of such bank. The Bank Holding Company Act prohibits FNB Bancorp
from acquiring any voting shares of, or interest in, all or substantially all of the assets of, a bank located outside the State of California unless such an acquisition is specifically authorized by the laws of the state in which such bank is located. Any such interstate acquisition is also subject to the provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
FNB Bancorp, and any subsidiaries, which it may acquire or organize, are deemed to be "affiliates" of the Company within the meaning of that term as defined in the Federal Reserve Act. This means, for example, that there are limitations (a) on loans by First National Bank to its affiliates, and (b) on investments by First National Bank in affiliates' stock as collateral for loans to any borrower. FNB Bancorp and First National Bank are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities.
In addition, regulations of the Board of Governors under the Federal Reserve Act require that reserves be maintained by First National Bank in conjunction with any liability of FNB Bancorp under any obligation (promissory note, acknowledgment of advance, banker's acceptance or similar obligation) with a weighted average maturity of less than seven (7) years to the extent that the proceeds of such obligations are used for the purpose of supplying funds to First National Bank for use in its banking business, or to maintain the availability of such funds.
First National Bank of Northern California. As a national banking association licensed under the national banking laws of the United States, First National Bank is regularly examined by the Office of the Comptroller of the Currency and is subject to the supervision of the Federal Deposit Insurance Corporation, the Board of Governors, and the Office of the Comptroller of the Currency. The supervision and regulation includes comprehensive reviews of all major aspects of First National Bank's business and condition, including its capital ratios, allowance for possible loan losses and other factors. However, no inference should be drawn that such authorities have approved any such factors. First National Bank is required to file reports with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. First National Bank's deposits are insured by the Federal Deposit Insurance Corporation up to the applicable legal limits.
The Board of Governors, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have adopted risk-based guidelines for evaluating the capital adequacy of bank holding companies and banks. The guidelines are designed to make capital requirements sensitive to differences in risk profiles among banking organizations, to take into account off-balance sheet exposures and to aid in making the definition of bank capital uniform internationally. Under the guidelines, First National Bank is required to maintain (and FNB Bancorp and First National Bank will be required to maintain) capital equal to at least 8.0% of its assets and commitments to extend credit, weighted by risk, of which at least 4.0% must consist primarily of common equity (including retained earnings) and the remainder may consist of subordinated debt, cumulative preferred stock, or a limited amount of loan loss allowance.
Assets, commitments to extend credit, and off-balance sheet items are categorized according to risk and certain assets considered to present less risk than others permit maintenance of capital at less than the 8% ratio. For example, most home mortgage loans are placed in a 50% risk category and therefore require maintenance of capital equal to 4% of those loans, while commercial loans are placed in a 100% risk category and therefore require maintenance of capital equal to 8% of those loans.
Under the risk-based capital guidelines, assets reported on an institution's balance sheet and certain off-balance sheet items are assigned to risk categories, each of which has an assigned risk weight. Capital ratios are calculated by dividing the institution's qualifying capital by its period-end risk-weighted assets. The guidelines establish two categories of qualifying capital: Tier 1 capital (defined to include common shareholders' equity and noncumulative perpetual preferred stock) and Tier 2 capital which includes, among other items, limited life (and in the case of banks, cumulative) preferred stock, mandatory convertible securities, subordinated debt and a limited amount of reserve for credit losses. Tier 2 capital may also include up to 45% of the pretax unrealized gains on certain available-for-sale equity securities having readily determinable fair values (i.e. the excess, if any, of fair market value over the book value or historical cost of the investment security). The federal regulatory agencies reserve the right to exclude all or a portion of the unrealized gains upon a determination that the equity securities are not prudently valued. Unrealized gains and losses on other types of assets, such as bank premises and available-for-sale debt securities, are not included in Tier 2 capital, but may be taken into account in the evaluation of overall capital adequacy and net unrealized losses on available-for-sale equity securities will continue to be deducted from Tier 1 capital as a cushion against risk. Each institution is required to maintain a minimum risk-based capital ratio (including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier 1 capital.
A leverage capital standard was adopted as a supplement to the risk-weighted capital guidelines. Under the leverage capital standard, an institution is required to maintain a minimum ratio of Tier 1 capital to the sum of its quarterly average total assets and quarterly average reserve for loan losses, less intangibles not included in Tier 1 capital. Period-end assets may be used in place of quarterly average total assets on a case-by-case basis. The Board of Governors and the Federal Deposit Insurance Corporation have also adopted a minimum leverage ratio for bank holding companies as a supplement to the risk-weighted capital guidelines. The leverage ratio establishes a minimum Tier 1 ratio of 3% (Tier 1 capital to total assets) for the highest rated bank holding companies or those that have implemented the risk-based capital market risk measure. All other bank holding companies must maintain a minimum Tier 1 leverage ratio of 4% with higher leverage capital ratios required for bank holding companies that have significant financial and/or operational weakness, a high risk profile, or are undergoing or anticipating rapid growth.
At December 31, 2003, the Company was in compliance with the risk-weighted capital and leverage ratios. See "Capital" under Item 7 below.
The Board of Governors, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency have adopted regulations implementing a system of prompt corrective action pursuant to Section 38 of the Federal Deposit Insurance Act and Section 131 of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The regulations establish five capital categories with the following characteristics: (1) "Well capitalized" - consisting of institutions with a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive; (2) "Adequately capitalized" - consisting of institutions with a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater, and the institution does not meet the definition of a "well capitalized" institution; (3) "Undercapitalized" - consisting of institutions with a total risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of les than 4%, or a leverage ratio of less than 4%; (4) "Significantly undercapitalized" - consisting of institutions with a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%; (5) "Critically undercapitalized" - consisting of an institution with a ratio of tangible equity to total assets that is equal to or less than 2%.
The regulations established procedures for classification of financial institutions within the capital categories, filing and reviewing capital restoration plans required under the regulations and procedures for issuance of directives by the appropriate regulatory agency, among other matters. The regulations impose restrictions upon all institutions to refrain from certain actions which would cause an institution to be classified within any one of the three "undercapitalized" categories, such as declaration of dividends or other capital distributions or payment of management fees, if following the distribution or payment the institution would be classified within one of the "undercapitalized" categories. In addition, institutions that are classified in one of the three "undercapitalized" categories are subject to certain mandatory and discretionary supervisory actions. Mandatory supervisory actions include (1) increased monitoring and review by the appropriate federal banking agency; (2) implementation of a capital restoration plan; (3) total asset growth restrictions; and (4) limitation upon acquisitions, branch expansion, and new business activities without prior approval of the appropriate federal banking agency. Discretionary supervisory actions may include (1) requirements to augment capital; (2) restrictions upon affiliate transactions; (3) restrictions upon deposit gathering activities and interest rates paid; (4) replacement of senior executive officers and directors; (5) restrictions upon activities of the institution and its affiliates; (6) requiring divestiture or sale of the institution; and (7) any other supervisory action that the appropriate federal banking agency determines is necessary to further the purposes of the regulations. Further, the federal banking agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company under the guaranty is limited to the lesser of (i) an amount equal to 5 percent of the depository institution's total assets at the time it became undercapitalized, and (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were "significantly undercapitalized". FDICIA also restricts the solicitation and acceptance of and interest rates payable on brokered deposits by insured depository institutions that are not "well capitalized." An "undercapitalized" institution is not allowed to solicit deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on insured deposits in the particular institution's normal market areas or in the market areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other course
of action would better serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making (but not accruing)
any payment of principal or interest on subordinated debt without prior
regulatory approval and regulators must prohibit a critically undercapitalized
institution from taking certain other actions without prior approval, including
(1) entering into any material transaction other than in the usual course of
business, including investment expansion, acquisition, sale of assets or other
similar actions; (2) extending credit for any highly leveraged transaction; (3)
amending articles or bylaws unless required to do so to comply with any law,
regulation or order; (4) making any material change in accounting methods; (5)
engaging in certain affiliate transactions; (6) paying excessive compensation or
bonuses; and (7) paying interest on new or renewed liabilities at rates which
would increase the weighted average costs of funds beyond prevailing rates in
the institution's normal market areas.
Under the FDICIA, the federal financial institution agencies have adopted regulations which require institutions to establish and maintain comprehensive written real estate policies which address certain lending considerations, including loan-to-value limits, loan administrative policies, portfolio diversification standards, and documentation, approval and reporting requirements. The FDICIA further generally prohibits an insured bank from engaging as a principal in any activity that is impermissible for a national bank, absent Federal Deposit Insurance Corporation determination that the activity would not pose a significant risk to the Bank Insurance Fund, and that such bank is, and will continue to be, within applicable capital standards.
The Federal Financial Institutions Examination Council ("FFIEC") on December 16, 1996, approved an updated Uniform Financial Institutions Rating System ("UFIRS"). In addition to the five components traditionally included in the so-called "CAMEL" rating system which has been used by bank examiners for a number of years to classify and evaluate the soundness of financial institutions (including capital adequacy, asset quality, management, earnings and liquidity), UFIRS includes for all bank regulatory examinations conducted on or after January 1, 1997, a new rating for a sixth category identified as sensitivity to market risk. Ratings in this category are intended to reflect the degree to which changes in interest rates, foreign exchange rates, commodity prices or equity prices may adversely affect an institution's earnings and capital. The revised rating system is identified as the "CAMELS" system.
The federal financial institution agencies have established bases for analysis and standards for assessing financial institution's capital adequacy in conjunction with the risk-based capital guidelines including analysis of interest rate risk, concentrations of credit risk, risk posed by non-traditional activities, and factors affecting overall safety and soundness. The safety and soundness standards for insured financial institutions include analysis of (1) internal controls, information systems and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; (6) compensation, fees and benefits; and (7) excessive compensation for executive officers, directors or principal shareholders which could lead to material financial loss. If an agency determines that an institution fails to meet any standard, the agency may require the financial institution to submit to the agency an acceptable plan to achieve compliance with the standard. If the agency requires submission of a compliance plan and the institution fails to timely submit an acceptable plan or to implement an accepted plan, the agency must require the institution to correct the deficiency. The agencies may elect to initiate enforcement action in certain cases rather than rely on an existing plan particularly where failure to meet one or more of the standards could threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending to low and moderate income individuals and businesses across a four-point scale from "outstanding" to "substantial noncompliance," and are a factor in regulatory review of applications to merge, establish new branches or form bank holding companies. In addition, any bank rated in "substantial noncompliance" with the CRA regulations may be subject to enforcement proceedings. First National Bank has a current rating of "satisfactory" for CRA compliance.
The Company's ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law. Funds for payment of any cash dividends by the Company would be obtained from its investments as well as dividends and/or management fees from First National Bank. First National Bank's ability to pay cash dividends is subject to restrictions imposed under the National Bank Act and regulations promulgated by the Office of the Comptroller of the Currency.
FNB Bancorp. FNB Bancorp has declared and paid cash dividends for eight consecutive quarters, commencing with the second quarter of 2002. Future dividends will continue to be determined after consideration of FNB Bancorp's earnings, financial condition, future capital funds, regulatory requirements and other factors such as the board of directors may deem relevant. It is the intention of FNB Bancorp to pay cash dividends, subject to legal restrictions on the payment of cash dividends and depending upon the level of earnings, management's assessment of future capital needs and other factors to be considered by the FNB Bancorp board of directors.
The California General Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The California General Corporation Law further provides that, in the event sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless
make a distribution to its shareholders if, after giving effect to the
distribution, it meets two conditions, which generally stated are as follows:
(i) the corporation's assets must equal at least 125% of its liabilities; and
(ii) the corporation's current assets must equal at least its current
liabilities or, if the average of the corporation's earnings before taxes on
income and before interest expense for the two preceding fiscal years was less
than the average of the corporation's interest expense for those fiscal years,
then the corporation's current assets must equal at least 125% of its current
liabilities.
The Board of Governors of the Federal Reserve System 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 Federal Reserve Board 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.
First National Bank of Northern California. FNB Bancorp, as First National Bank's sole shareholder is entitled to receive dividends when and as declared by its board of directors, out of funds legally available therefore, subject to the restrictions set forth in the National Bank Act.
The payment of cash dividends by First National Bank may be subject to the approval of the Office of the Comptroller of the Currency, as well as restrictions established by federal banking law and the Federal Deposit Insurance Corporation. Approval of the Office of the Comptroller of the Currency is required if the total of all dividends declared by First National Bank's board of directors in any calendar year will exceed First National Bank's net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus or to a fund for the retirement of preferred stock. Additionally, the Federal Deposit Insurance Corporation and/or the Office of the Comptroller of the Currency, might, under some circumstances, place restrictions on the ability of a bank to pay dividends based upon peer group averages and the performance and maturity of that bank.
COMPETITION
Larger banks may have a competitive advantage over First National Bank because of higher lending limits and major advertising and marketing campaigns. They also perform services, such as trust services, international banking, discount brokerage and insurance services, which First National Bank is not authorized nor prepared to offer currently. First National Bank has made arrangements with its correspondent banks and with others to provide some of these services for its customers. For borrowers requiring loans in excess of First National Bank's legal lending limits, First National Bank has offered, and intends to offer in the future, such loans on a participating basis with its correspondent banks and with other independent banks, retaining the portion of such loans which is within its lending limits. As of December 31, 2003, First
National Bank's aggregate legal lending limits to a single borrower and such borrower's related parties were $8,271,000 on an unsecured basis and $13,785,000 on a fully secured basis, based on regulatory capital of $55,141,000.
First National Bank's business is concentrated in its service area, which primarily encompasses San Mateo County. The economy of First National Bank's service area is dependent upon government, manufacturing, tourism, retail sales, population growth and smaller service oriented businesses.
Based upon the June 2003 Deposit and Market Share Report prepared by California Banksite Corporation, there were 147 commercial and savings banking offices in San Mateo County with a total of $15,508,900,000 in deposits at June 30, 2003. First National Bank had a total of 11 offices with total deposits of $354,430,000 at the same date, or 2.29% of the San Mateo County totals. At December 31, 2002, there were 152 commercial and savings banking offices in San Mateo County with total deposits of $15,008,680,000, while First National Bank had $347,820,000, or 2.32% of the San Mateo County totals.
In 1996, pursuant to Congressional mandate, the Federal Deposit Insurance Corporation reduced bank deposit insurance assessment rates to a range from $0 to $0.27 per $100 of deposits, dependent upon a bank's risk. Based upon the risk-based assessment rate schedule, First National Bank's current capital ratios and level of deposits, First National Bank anticipates no change in the assessment rate applicable to it during 2004 from that in 2003.
In order to compete with the financial institutions in their primary service areas, community banks such as First National Bank use to the fullest extent possible, the flexibility which is accorded by their independent status. This includes an emphasis on specialized services, local promotional activity, and personal contacts by their respective officers, directors and employees. They also seek to provide special services and programs for individuals in their primary service area who are employed in the agricultural, professional and business fields, such as loans for equipment, furniture and tools of the trade or expansion of practices or businesses. In the event there are customers whose loan demands exceed their respective lending limits, they seek to arrange for such loans on a participation basis with other financial institutions. They also assist those customers requiring services not offered by the bank to obtain such services from correspondent banks.
Banking is a business that depends on interest rate differentials. In general, the difference between the interest rate paid by a bank to obtain deposits and other borrowings and the interest rate received by a bank on loans extended to customers and on securities held in a bank's portfolio comprise the major portion of a bank's earnings.
Commercial banks compete with savings and loan associations, credit unions, other financial institutions and other entities for funds. For instance, yields on corporate and government debt securities and other commercial paper affect the ability of commercial banks to attract and hold deposits. Commercial
banks also compete for loans with savings and loan associations, credit unions, consumer finance companies, mortgage companies and other lending institutions.
The interest rate differentials of a bank, and therefore its earnings, are affected not only by general economic conditions, both domestic and foreign, but also by statutes and as implemented by federal agencies, particularly the Federal Reserve Board. The Federal Reserve Board can and does implement national monetary policy, such as seeking to curb inflation and combat recession, by its open market operations in United States government securities, adjustments in the amount of interest free reserves that banks and other financial institutions are required to maintain, and adjustments to the discount rates applicable to borrowing by banks from the Federal Reserve Board. These activities influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and timing of any future changes in monetary policies and their impact on First National Bank are not predictable.
Since 1996, California law implementing certain provisions of prior federal law has (1) permitted interstate merger transactions; (2) prohibited interstate branching through the acquisition of a branch business unit located in California without acquisition of the whole business unit of the California bank; and (3) prohibited interstate branching through de novo establishment of California branch offices. Initial entry into California by an out-of-state institution must be accomplished by acquisition or merger with an existing whole bank, which has been in existence for at least five years.
The federal financial institution agencies, especially the Office of the Comptroller of the Currency and the Board of Governors, have taken steps to increase the types of activities in which national banks and bank holding companies can engage, and to make it easier to engage in such activities. The Office of the Comptroller of the Currency has issued regulations permitting national banks to engage in a wider range of activities through subsidiaries. "Eligible institutions" (those national banks that are well capitalized, have a high overall rating and a satisfactory CRA rating, and are not subject to an enforcement order) may engage in activities related to banking through operating subsidiaries subject to an expedited application process. In addition, a national bank may apply to the Office of the Comptroller of the Currency to engage in an activity through a subsidiary in which First National Bank itself may not engage.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (the "Act"), which is potentially the most significant banking legislation in many years. The Act eliminates most of the remaining depression-era "firewalls" between banks, securities firms and insurance companies which was established by the Banking Act of 1933, also known as the Glass-Steagall Act ("Glass-Steagall"). Glass-Steagall sought to insulate banks as depository institutions from the perceived risks of securities dealing and underwriting, and related activities. The Act repeals Section 20 of Glass-Steagall, which prohibited banks from affiliating with securities firms. Bank holding companies that can qualify as "financial holding companies" can now, among other matters, acquire securities firms or create them as subsidiaries, and securities firms can now acquire banks or start banking activities through a financial holding company. The Act includes provisions
which permit national banks to conduct financial activities through a subsidiary that are permissible for a national bank to engage in directly, as well as certain activities authorized by statute, or that are financial in nature or incidental to financial activities to the same extent as permitted to a "financial holding company" or its affiliates. This liberalization of United States banking and financial services regulation applies both to domestic institutions and foreign institutions conducting business in the United States. Consequently, the common ownership of banks, securities firms and insurance is now possible, as is the conduct of commercial banking, merchant banking, investment management, securities underwriting and insurance within a single financial institution using a "financial holding company" structure authorized by the Act.
Prior to the Act, significant restrictions existed on the affiliation of banks with securities firms and related securities activities. Banks were also (with minor exceptions) prohibited from engaging in insurance activities or affiliating with insurers. The Act removes these restrictions and substantially eliminates the prohibitions under the Bank Holding Company Act on affiliations between banks and insurance companies. Bank holding companies which qualify as financial holding companies can now, among other matters, insure, guarantee, or indemnify against loss, harm, damage, illness, disability, or death; issue annuities; and act as a principal, agent, or broker regarding such insurance services.
In order for a commercial bank to affiliate with a securities firm or an insurance company pursuant to the Act, its bank holding company must qualify as a financial holding company. A bank holding company will qualify if (i) its banking subsidiaries are "well capitalized" and "well managed" and (ii) it files with the Board of Governors a certification to such an effect and a declaration that it elects to become a financial holding company. The amendment of the Bank Holding Company Act now permits financial holding companies to engage in activities, and acquire companies engaged in activities, that are financial in nature or incidental to such financial activities. Financial holding companies are also permitted to engage in activities that are complementary to financial activities if the Board of Governors determines that the activity does not pose a substantial risk to the safety or soundness of depository institutions or the financial system in general. These standards expand upon the list of activities "closely related to banking" which have to date defined the permissible activities of bank holding companies under the Bank Holding Company Act.
One further effect of the Act is to require that federal financial institution and securities regulatory agencies prescribe regulation to implement the policy that financial institutions must respect the privacy of their customers and protect the security and confidentiality of customers' non-public personal information. These regulations require, in general, that financial institutions (1) may not disclose non-public information of customers to non-affiliated third parties without notice to their customers, who must have an opportunity to direct that such information not be disclosed; (2) may not disclose customer account numbers except to consumer reporting agencies; and (3) must give prior disclosure of their privacy policies before establishing new customer relationships.
Neither FNB Bancorp nor First National Bank has determined whether or when they may seek to acquire and exercise new powers or activities under the Act, and the extent to which competition will change among financial institutions affected by the Act has not yet become clear.
RECENT LEGISLATION
On October 26, 2001, President Bush signed the USA Patriot Act (the "Patriot Act"), which includes provisions pertaining to domestic security, surveillance procedures, border protection, and terrorism laws to be administered by the Secretary of the Treasury. Title III of the Patriot Act entitled "International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001" includes amendments to the Bank Secrecy Act which expand the responsibilities of financial institutions in regard to anti-money laundering activities with particular emphasis upon international money laundering and terrorism financing activities through designated correspondent and private banking accounts.
Effective December 25, 2001, Section 313 (a) of the Patriot Act prohibits any insured financial institution such as the Bank, from providing correspondent accounts to foreign banks which do not have a physical presence in any country (designated as "shell banks"), subject to certain exceptions for regulated affiliates of foreign banks. Section 313 (a) also requires financial institutions to take reasonable steps to ensure that foreign bank correspondent accounts are not being used to indirectly provide banking services to foreign shell banks, and Section 319 (b) requires financial institutions to maintain records of the owners and agent for service of process of any such foreign banks with whom correspondent accounts have been established.
Effective July 23, 2002, Section 312 of the Patriot Act creates a requirement for special due diligence for correspondent accounts and private banking accounts. Under Section 312, each financial institution that establishes, maintains, administers, or manages a private banking account or a correspondent account in the United States for a non-United States person, including a foreign individual visiting the United States, or a representative of a non-United States person shall establish appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and record instances of money laundering through those accounts.
The Company and the Bank are not currently aware of any account relationships between the Bank and any foreign bank or other person or entity as described above under Sections 313 (a) or 312 of the Patriot Act. The terrorist attacks on September 11, 2001 have realigned national security priorities of the United States and it is reasonable to anticipate that the United States Congress may enact additional legislation in the future to combat terrorism including modifications to existing laws such as the Patriot Act to expand powers as deemed necessary. The effects which the Patriot Act and any additional legislation enacted by Congress may have upon financial institutions is uncertain; however, such legislation would likely increase compliance costs and thereby potentially have an adverse effect upon the Company's results of operations.
President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the "Act") on July 30, 2002, which responds to recent issues in corporate governance and accountability. Among other matters, key provisions of the Act and rules promulgated by the Securities and Exchange Commission pursuant to the Act include the following:
o Expanded oversight of the accounting profession by creating a new independent public company oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of non-audit services provided to audit clients and to require such services to be pre-approved by the audit committee.
o Improved corporate responsibility through mandatory listing standards relating to audit committees, certifications of periodic reports by the CEO and CFO and making issuer interference with an audit a crime.
o Enhanced financial disclosures, including periodic reviews for largest issuers and real time disclosure of material company information.
o Enhanced criminal penalties for a broad array of white collar crimes and increases in the statute of limitations for securities fraud lawsuits.
o Disclosure of whether a company has adopted a code of ethics that applies to the company's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and disclosure of any amendments or waivers to such code of ethics. The disclosure obligation became effective for fiscal years ending on or after July 15, 2003. The ethics code must contain written standards that are reasonably designed to deter wrongdoing and to promote:
o Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
o Full, fair, accurate, timely, and understandable disclosure in reports and documents that a registrant files with, or submits to, the Securities and Exchange Commission and in other public communications made by the registrant;
o Compliance with applicable governmental laws, rules and regulations;
o The prompt internal reporting to an appropriate person or persons identified in the code of violations of the code; and
o Accountability for adherence to the code.
o The Board of Directors of FNB Bancorp has adopted a Code of Ethics to address the foregoing standards, and a copy of such Code of Ethics is being filed as an exhibit to this report.
o Disclosure of whether a company's audit committee of its board of directors has a member of the audit committee who qualifies as an "audit committee financial expert." The disclosure obligation becomes effective for fiscal years ending on or after July 15, 2003. To qualify as an "audit committee financial expert," a person must have:
o An understanding of generally accepted accounting principles and financial statements;
o The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;
o Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant's financial statements, or experience actively supervising one or more persons engaged in such activities;
o An understanding of internal controls and procedures for financial reporting; and
o An understanding of audit committee functions.
A person must have acquired the above listed attributes to be deemed to qualify as an "audit committee financial expert" through any one or more of the following:
o Education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions;
o Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions;
o Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or
o Other relevant experience.
The rule contains a specific safe harbor provision to clarify that the designation of a person as an "audit committee financial expert" does not cause that person to be deemed to be an "expert" for any purpose under Section 11 of the Securities Act of 1933, as amended, or impose on such person any duties, obligations or liability greater that the duties, obligations and liability imposed on such person as a member of the audit committee and the board of directors, absent such designation. Such a designation also does not affect the duties, obligations or liability of any other member of the audit committee or board of directors.
o A prohibition on insider trading during pension plan black-out periods.
o Disclosure of off-balance sheet transactions.
o A prohibition on personal loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting principles) financial measures.
o Standards on professional conduct for attorneys requiring attorneys having an attorney-client relationship with a company, among other matters, to report "up the ladder" to the audit committee, another board committee or the entire board of directors certain material violations.
o Expedited filing requirements for Form 4 reports of changes in beneficial ownership of securities reducing the filing deadline to within 2 business days of the date a transaction triggers an obligation to report.
o Accelerated filing requirements for Forms 10-K and 10-Q by public companies which qualify as "accelerated filers" to be phased-in over a four year period reducing the filing deadline for Form 10-K reports from 90 days after the fiscal year end to 60 days and Form 10-Q reports from 45 days after the fiscal quarter end to 35 days.
o Disclosure concerning website access to reports on Forms 10-K, 10-Q and 8-K, and any amendments to those reports, by "accelerated filers" as soon as reasonably practicable after such reports and material are filed with or furnished to the Securities and Exchange Commission.
o Rules requiring national securities exchanges and national securities associations to prohibit the listing of any security whose issuer does not meet audit committee standards established pursuant to the Act, including:
o Independence standards for members;
o Responsibility for selecting and overseeing the issuer's independent accountant;
o Responsibility for handling complaints regarding the issuer's accounting practices;
o Authority to engage advisers; and
o Funding requirements for the independent auditor and outside advisers engaged by the audit committee.
On November 4, 2003, the Securities and Exchange Commission adopted changes to the standards for the listing of issuer securities by the New York Stock Exchange and the Nasdaq Stock Market. The revised standards for listing conform to and supplement Rule 10A-3 under the Securities Exchange Act of 1934, as amended, which the Securities and Exchange Commission adopted in April 2003 pursuant to the Act. In the future, if the Company's common stock is listed on the Nasdaq Stock Market, the Company would be required to comply with these listing standards, as revised, in addition to the rules promulgated by the Securities and Exchange Commission pursuant to the Act.
The effect of the Act upon the Company is uncertain; however, it is likely that the Company will incur increased costs to comply with the Act and the rules and regulations promulgated pursuant to the Act by the Securities and Exchange Commission and other regulatory agencies having jurisdiction over the Company. The Company does not currently anticipate, however, that compliance with the Act and such rules and regulations will have a material adverse effect upon its financial position or results of its operations or its cash flows.
On September 28, 2002, California former Governor Gray Davis signed into law the California Corporate Disclosure Act (the "CCD Act"), which became effective January 1, 2003. The CCD Act requires publicly traded corporations incorporated or qualified to do business in California to disclose information about their past history, auditors, directors and officers. The CCD Act requires the Company to disclose:
o The name of the company's independent auditor and a description of services, if any, performed for the company during the previous 24 months;
o The annual compensation paid to each director and executive officer, including stock or stock options not otherwise available to other company employees;
o A description of any loans made to a director at a "preferential" loan rate during the previous 24 months, including the amount and terms of the loans;
o Whether any bankruptcy was filed by a company or any of its directors or executive officers within the previous 10 years;
o Whether any director or executive officer of a company has been convicted of fraud during the previous 10 years; and
o Whether a company violated any federal securities laws or any securities or banking provisions of California law during the previous 10 years for which the company was found liable or fined more than $10,000.
The Company does not currently anticipate that compliance with the CCD Act will have a material adverse effect upon its financial position or results of its operations or its cash flows.
Certain legislative and regulatory proposals that could affect FNB Bancorp, First National Bank, and the banking business in general are periodically introduced before the United States Congress, the California State Legislature and Federal and state government agencies. It is not known to what extent, if any, legislative proposals will be enacted and what effect such legislation would have on the structure, regulation and competitive relationships of financial institutions. It is likely, however, that such legislation could subject FNB Bancorp and First National Bank to increased
regulation, disclosure and reporting requirements, competition, and costs of doing business.
In addition to legislative changes, the various Federal and state financial institution regulatory agencies frequently propose rules and regulations to implement and enforce already existing legislation. It cannot be predicted whether or in what form any such rules or regulations will be enacted or the effect that such regulations may have on FNB Bancorp and First National Bank.
FNB Bancorp does not own any real property. Since its incorporation on February 28, 2001, FNB Bancorp has conducted its operations at the administrative offices of First National Bank, located at 975 El Camino Real, South San Francisco, California 94080.
First National Bank owns the land and building at 975 El Camino Real, South San Francisco, California 94080. The premises consist of a modern, three-story building of approximately 20,000 square feet and off-street parking for employees and customers of approximately 45 vehicles. The Buri Buri Branch Office of First National Bank is located on the ground floor of this three-story building and administrative offices, including the offices of senior management, occupy the second and third floors.
First National Bank owns the land and two-story building occupied by the Daly City Branch Office (6600 Mission Street, Daly City, CA 94014); the land and two-story building occupied by the Colma Branch Office (1300 El Camino Real, Colma, CA 94014); the land and two-story building occupied by the South San Francisco Branch Office (211 Airport Boulevard, South San Francisco, CA 94080); the land and two-story building occupied by the Redwood City Branch Office (700 El Camino Real, Redwood City, CA 94063); the land and two-story building occupied by the Millbrae Branch Office (1551 El Camino Real, Millbrae, CA 94030); the land and single-story building occupied by the Half Moon Bay Branch Office (756 Main Street, Half Moon Bay, CA 94019); and the land and two-story building occupied by the Pescadero Branch Office (239 Stage Road, Pescadero, CA 94060). All properties include adequate vehicle parking for customers and employees.
First National Bank leases premises at 1450 Linda Mar Shopping Center, Pacifica, California 94044, for its Linda Mar Branch Office. This ground floor space of approximately 4,100 square feet is leased from Fifty Associates and Demartini/Linda Mar, LLC. The lease term is 10 years and expires on September 1, 2009.
First National Bank leases premises at 210 Eureka Square, Pacifica, California 94044, for its Eureka Square Branch Office. This ground floor space of approximately 3,000 square feet is leased from Joseph A. Sorci and Eldiva Sorci. The lease term is for 5 years, commencing January 1, 1995, with two 5-year options to extend the lease term, the first of which has been exercised and expires on December 31, 2004.
First National Bank leases premises at 640 Brannan Street, Suite 102, San Francisco, California, 94107, for its Flower Mart facility. This ground floor space of approximately 300 square feet is leased from California Flower Market, Inc. The lease term is for 5 years, commencing September 1, 1996, with two 5-year options to extend the lease term, the first of which has been exercised and expires on September 1, 2006. This facility currently offers ATM machine and night drop services.
First National Bank leased premises at 491 El Camino Real, Suite B, San Mateo, California 94402, for its San Mateo Branch Office. The branch has relocated to 150 East Third Avenue, San Mateo, California 94401, and the Bank has entered into a new 5-year lease for this property with Song Development Company, a California corporation, which will expire July 31, 2008. The new location consists of approximately 4,000 square feet of ground floor usable commercial space. Leasehold improvements to permit its use as a full service bank have been made, including an after-hours depository and ATM service.
First National Bank leased approximately 2,242 square feet of office space in a building located at 520 South El Camino Real, San Mateo, California. The Business Banking Division occupied Suite 430 at that address. The lease expired June 15, 2003, and was not renewed. The staff was relocated to the Redwood City Branch.
The foregoing summary descriptions of leased premises are qualified in their entirety by reference to the full text of the lease agreements listed as exhibits to this report.
There are no material legal proceedings adverse to the Company or First National Bank to which any director, officer, affiliate of the Company, or 5% shareholder of the Company, or any associate of any such director, officer, affiliate or 5% shareholder of the Company are a party, and none of the foregoing persons has a material interest adverse to the Company or First National Bank.
From time to time, the Company and/or First National Bank is a party to claims and legal proceedings arising in the ordinary course of business. The Company's management is not aware of any material pending legal proceedings to which either it or First National Bank may be a party or has recently been a party, which will have a material adverse effect on the financial condition or results of operations of the Company and First National Bank, taken as a whole.
Not applicable.
PART II
The Plan of Reorganization between FNB Bancorp and the Bank was consummated on March 15, 2002. At the close of business on March 15, 2002, all shares of the common stock of the Bank became owned by FNB Bancorp and ceased to be quoted on the OTC Bulletin Board. Commencing at the opening of business on March 18, 2002, and to the present, the common stock of FNB Bancorp has been quoted on the OTC Bulletin Board under the trading symbol "FNBG.OB." On March 18, 2002, FNB Bancorp had approximately 465 shareholders of common stock of record.
There has been limited trading in the shares of common stock of FNB Bancorp.
The following table summarizes sales of the common stock of First National Bank and FNB Bancorp during the periods indicated of which management of the Bank has knowledge, including the approximate high and low bid prices during such periods and the per share cash dividends declared for the periods indicated. All information has been adjusted to reflect stock dividends effected December 15, 2003. The prices indicated below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Common Stock (1) Cash
--------------------- Dividends
2002 High Low Declared (2)
--------------- -------- -------- ------------
First Quarter $28.4762 $24.0476 $0.12
Bid Price of FNB Bancorp
--------------------------------------
Common Stock (1) Cash
--------------------- Dividends
2002 High Low Declared (2)
--------------- -------- -------- ------------
Second Quarter $29.5714 $26.1905 $0.12
Third Quarter 26.6667 26.1905 0.12
Fourth Quarter 26.1905 21.9048 0.12
0.12 Special
Dividend
|
Bid Price of FNB Bancorp
--------------------------------------
Common Stock (1) Cash
--------------------- Dividends
2003 High Low Declared (2)
--------------- -------- -------- ------------
First Quarter $23.9048 $23.3333 $0.12
Second Quarter 25.2381 23.4762 0.12
Third Quarter 28.0952 25.0000 0.12
Fourth Quarter 29.0476 27.6190 0.12
0.12 Special
Dividend
|
(1) As estimated by First National Bank of Northern California, based upon trades of which First National Bank of Northern California was aware.
(2) See Item 1, "Limitations on Dividends," for a discussion of the limitations applicable to the payment of dividends by First National Bank and FNB Bancorp.
ISSUER PURCHASES OF EQUITY SECURITIES
------------------------------------------------------------------------------------------------------------------------------
Period (a) (b) (c) (d) (e)
Total Number Average Identity of Number of Shares Maximum Number (or
Of Shares (or Price Paid Broker-dealer(s) (or Units) Purchased Approximate Dollar Value)
Units) Per Shared Used to Effect As Part of Publicly Of Shares (or Units) that
Purchased Purchases Announced Plans or May Yet Be Purchased
Programs Under the Plans or
Programs
------------------------------------------------------------------------------------------------------------------------------
Month #1
October 1 3,218 $27.71 Wedbush, 3,218 88,729
Through Morgan
October 31, 2003
------------------------------------------------------------------------------------------------------------------------------
Month #2
November 1 None N/a N/a None 88,729
Through
November 30, 2003
------------------------------------------------------------------------------------------------------------------------------
Month #3
December 1 3,444 $28.95 The Seidler 3,444 85,285
Through Companies
December 31, 2003
------------------------------------------------------------------------------------------------------------------------------
Total 6,662 6,662
------------------------------------------------------------------------------------------------------------------------------
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Footnote: on July 25, 2003 the Board of Directors of the Company authorized a stock repurchase program which calls for the repurchase of up to five percent (5%) of the Company's then outstanding shares of common stock, or approximately 121,852 shares. The repurchases are to be made from time to time in the open market as conditions allow and will be structured to comply with Commission Rule 10b-18. All repurchased shares reflected in the table above were made in open market transactions and then retired. The Board of Directors has reserved the
right to suspend, terminate, modify or cancel this repurchase program at any time for any reason. On January 23, 2004 the Board of Directors of the registrant authorized an extension of the FNB Bancorp stock repurchase program previously adopted on July 25, 2003. On December 31, 2003, a total of 42,660 shares, or approximately 1.69% of the shares outstanding on that date (adjusted for the stock dividend paid by the registrant on December 15, 2003, to shareholders of record on November 28, 2003) had been repurchased pursuant to the program. The program (as extended) calls for the further purchase of an additional 85,285 shares, subject to an aggregate limit of five percent (5%) of the registrant's outstanding shares of common stock. All such transactions, including any block purchases, will be structured to comply with Commission Rule 10b-18 and all shares that are purchased under this program will be retired. The Board of Directors has reserved the right to suspend, terminate, modify or cancel the program at any time for any reason. The transactions in the above table have been adjusted for the 5% stock dividend mentioned above.
The following table presents a summary of selected financial information that should be read in conjunction with the Company's financial statements and notes thereto included under Item 8 - "FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA."
Dollars in thousands, except per
share amounts and ratios 2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
STATEMENT OF INCOME DATA
Total interest income $ 22,867 $ 26,159 $ 30,844 $ 30,862 $ 27,586
Total interest expense 2,658 4,288 7,935 8,192 6,998
---------- ---------- ---------- ---------- ----------
Net interest income 20,209 21,871 22,909 22,670 20,588
Provision for loan losses 780 150 300 425 750
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 19,429 21,721 22,609 22,245 19,838
Total non interest income 4,021 3,308 3,007 3,781 2,785
Total non interest expenses 17,913 18,705 17,911 15,977 14,519
---------- ---------- ---------- ---------- ----------
Earnings before taxes 5,537 6,324 7,705 10,049 8,104
Income tax expense 1,396 1,510 2,468 2,921 2,887
---------- ---------- ---------- ---------- ----------
Net earnings $ 4,141 $ 4,814 $ 5,237 $ 7,128 $ 5,217
========== ========== ========== ========== ==========
PER SHARE DATA
Net earnings per share:
Basic $ 1.63 $ 1.88 $ 2.05 $ 2.79 $ 2.13
Diluted $ 1.61 $ 1.88 $ 2.05 $ 2.79 $ 2.13
Cash dividends per share $ 0.60 $ 0.60 $ 1.00 $ 1.23 $ 1.00
Weighted average shares outstanding:
Basic 2,545,000 2,556,000 2,554,000 2,554,000 2,454,000
Diluted 2,572,000 2,565,000 2,560,000 2,560,000 2,454,000
Shares outstanding at period end 2,518,559 2,437,043 2,318,849 2,208,658 2,103,694
Book value per share $ 20.64 $ 21.01 $ 20.06 $ 19.52 $ 17.83
BALANCE SHEET DATA
Investment securities 63,692 75,963 65,311 87,241 70,658
Net loans 312,929 284,889 288,067 229,669 237,062
Allowance for loan losses 3,284 3,396 3,543 3,332 2,920
Total assets 429,448 401,834 397,388 379,102 348,054
Total deposits 374,214 347,406 344,079 330,457 305,361
Shareholders' equity 51,987 51,203 46,523 43,128 37,507
SELECTED PERFORMANCE DATA
Return on average assets 1.00% 1.17% 1.30% 1.97% 1.53%
Return on average equity 8.00% 9.87% 11.43% 17.42% 13.96%
Net interest margin 5.33% 5.83% 6.34% 6.97% 6.73%
Average loans as a percentage of
average deposits 82.93% 80.79% 77.67% 75.42% 77.02%
Average total stockholder's equity as
a percentage of average total assets 12.49% 11.86% 11.41% 11.31% 10.96%
Dividend payout ratio 35.63% 29.35% 43.38% 37.50% 38.55%
SELECTED ASSET QUALITY RATIOS
Net loan charge-offs to average loans 0.30% 0.10% 0.03% 0.01% 0.02%
Allowance for loan losses/Total Loans 1.04% 1.18% 1.21% 1.43% 1.22%
CAPITAL RATIOS
Tier 1 risk-based 13.29% 13.92% 12.98% 14.54% 13.18%
Total risk-based 14.15% 14.87% 13.98% 15.67% 14.18%
Leverage 12.06% 12.16% 11.41% 11.28% 11.00%
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Note: Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to matters described in this section are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected.
Management's discussion and analysis of its financial condition and results of operations are based upon the Company's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to its loans and allowance for loan losses. The Company bases its estimates on current market conditions, historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policy requires significant judgments and estimates used in the preparation of its consolidated financial statements.
Allowance for Loan Losses. The allowance for loan losses is periodically evaluated for adequacy by management. Factors considered include the Company's loan loss experience, known and inherent risks in the portfolio, current economic conditions, known adverse situations that may affect the borrower's ability to repay, regulatory policies, and the estimated value of underlying collateral. The evaluation of the adequacy of the allowance is based on the above factors along with prevailing and anticipated economic conditions that may impact borrowers' ability to repay loans. Determination of the allowance is in part objective and in part a subjective judgment by management given the information it currently has in its possession. Adverse changes in any of these factors or the discovery of new adverse information could result in higher charge-offs and loan loss provisions.
FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The provisions of this Statement are effective for exit and disposal activities that are initiated after December 31, 2002. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The Company does not currently have plans to exit or dispose of activities.
FASB Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation addresses consolidation by business enterprises of variable interest entities, which have one or both of the following
characteristics: 1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support from other parties, or 2) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: a) the direct or indirect ability to make decisions about the entity's activities through voting or similar rights, b) the obligation to absorb the expected losses of the entity if they occur, or c) the right to receive the expected residual returns of the entity if they occur. The Interpretation requires existing variable interest entities to be consolidated if those entities do not effectively disburse risks among parties involved. The Company has determined that it has no ownership in variable interest entities which would require consolidation.
Net earnings in 2003 were $4,141,000, a 14.0% decrease from 2002 earnings of $4,814,000. Earnings for the year 2002 decreased $423,000 or 8.1% from year 2001 earnings of $5,237,000. The principal source of earnings is interest income on loans. The period from 2001 through 2003 saw a series of decreases in the prime lending rate. At the beginning of 2001, the rate was 9.50%, and the year ended at 4.75%. In 2002, the rate started at 4.75%, and ended at 4.25%. The year 2003 started at 4.25% and ended at 4.00%. The sharpest decline was during 2001,when the rate ended at half of the starting rate. The impact of the decreasing interest rates was that both interest income and net interest income have been steadily decreasing for the past two years. Net interest income in 2003 was $20,209,000, a decrease of $1,662,000 or 7.6% from 2002. In 2002, net interest income was $21,871,000, a decrease of $1,038,000 or 4.5% from 2001. Interest income itself was $22,867,000 in 2003, a decrease of $3,292,000 or 12.6% from 2002. Interest income was $26,159,000 in 2002, a decrease of$4,685,000 or 15.2% from 2001.
Basic earnings per share were $1.63 in 2003; $1.88 in 2002 and $2.05 in 2001. Diluted earnings per share were $1.61 in 2003; $1.88 in 2002; and $2.05 in 2001.
The provision for loan losses was $780,000 in 2003, $150,000 in 2002 and $300,000 in 2001. At the end of 2003, the allowance was 1.04% of gross loans outstanding; at the end of 2002, it was 1.18% of gross loans outstanding; and at the end of 2001, it was1.21%.The provision for loan losses was increased in 2003 principally as a result of a $739,000 loss in connection with loans secured by two office buildings included in nonperforming assets.
Net interest income is the difference between interest yield generated by earning assets and the interest expense associated with the funding of those assets. Net interest income is affected by the interest rate earned or paid and by volume changes in loans, investment securities, deposits and borrowed funds.
TABLE 1 Net Interest Income and Average Balances
-------------------------------------------------------------------------------------------
(In thousands)
Year ended December 31,
2003 2002 2001
----------------------------- ---------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average Income Yield Average Income Yield Average Income Yield
Balance (Expense) (Cost) Balance (Expense) (Cost) Balance (Expense) (Cost)
------- --------- ------ ------- --------- ------ ------- --------- ------
INTEREST EARNING ASSETS
Loans, gross $296,327 $ 19,990 6.75% $288,633 $ 22,664 7.85% $271,449 $ 26,024 9.59%
Taxable Securities 40,221 1,446 3.60% 42,088 1,944 4.62% 45,650 2,630 5.76%
Nontaxable Securities 36,012 1,358 3.77% 29,526 1,311 4.44% 31,129 1,579 5.07%
Federal funds sold 6,709 73 1.09% 15,041 240 1.60% 13,389 611 4.56%
-------- -------- -------- -------- -------- --------
Total interest earning assets $379,269 $ 22,867 6.03% $375,288 $ 26,159 6.97% $361,617 $ 30,844 8.53%
-------- -------- -------- -------- -------- --------
NONINTEREST EARNING ASSETS
Cash and due from banks $ 18,069 $ 18,303 $ 22,654
Premises and equipment 10,916 11,573 11,728
Other assets 6,155 5,933 5,413
-------- -------- --------
Total noninterest
earning assets $ 35,140 $ 35,809 $ 39,795
-------- -------- --------
TOTAL ASSETS $414,409 $411,097 $401,412
======== ======== ========
INTEREST BEARING LIABILITIES
Deposits:
Demand, interest bearing $ 51,981 $ (105) (0.20%) $ 52,240 $ (229) (0.44%) $ 54,539 $ (653) (1.20%)
Money Market 66,189 (571) (0.86%) 69,701 (1,096) (1.57%) 55,670 (1,490) (2.68%)
Savings 56,281 (183) (0.33%) 52,282 (295) (0.56%) 46,312 (727) (1.57%)
Time deposits 90,280 (1,797) (1.99%) 95,286 (2,653) (2.78%) 105,224 (5,054) (4.80%)
Fed funds purchased and other
borrowings 174 (2) (1.15%) 257 (15) (5.84%) 274 (11) (4.01%)
-------- -------- -------- -------- -------- --------
Total interest bearing
liabilities $264,905 $ (2,658) (1.00%) $269,766 $ (4,288) (1.59%) $262,019 $ (7,935) (3.03%)
-------- -------- -------- -------- -------- --------
NONINTEREST BEARING LIABILITIES:
Demand deposits 92,609 87,768 87,726
Other liabilities 5,148 4,792 5,859
-------- -------- --------
Total noninterest bearing
liabilities $ 97,757 $ 92,560 $ 93,585
-------- -------- --------
Total liabilities $362,662 $362,326 $355,604
Stockholders' equity $ 51,747 $ 48,771 $ 45,808
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $414,409 $411,097 $401,412
======== ======== ========
NET INTEREST INCOME AND
MARGIN ON TOTAL EARNING
ASSETS $ 20,209 5.33% $21,871 5.83% $ 22,909 6.34%
======== ======= ========
|
Interest income is reflected on an actual basis, not on a fully taxable equivalent basis. Yields on gross loans were not adjusted for nonaccrual loans, as these were considered not material for this calculation.
The following table analyzes the dollar amount of change in interest income and expense and the changes in dollar amounts attributable to (a) changes in volume (changes in volume at the current year rate), (b) changes in rate (changes in rate times the prior year's volume) and (c) changes in rate/volume (changes in rate times changes in volume). In this table, the dollar change in rate/volume is prorated to volume and rate proportionately.
TABLE 2 Rate/Volume Variance Analysis
-----------------------------------------------------------------------------
(In thousands)
Year Ended December 31,
-----------------------------------------------------------------------------
2003 Compared To 2002 2002 Compared to 2001
Increase (decrease) Increase (decrease)
----------------------------------- -----------------------------------
Interest Variance Interest Variance
Income/ Attributable to Income/ Attributable to
Expense --------------------- Expense ---------------------
Variance Rate Volume Variance Rate Volume
------- ------- ------- ------- ------- -------
INTEREST EARNING ASSETS:
Loans $(2,674) $(3,193) $ 519 $(3,360) $(4,709) $ 1,349
Taxable Securities (498) (412) (86) (686) (481) (205)
Nontaxable Securities 47 (241) 288 (268) (187) (81)
Federal Funds sold (167) (76) (91) (371) (397) 26
------- ------- ------- ------- ------- -------
Total $(3,292) $(3,922) $ 630 $(4,685) $(5,774) $ 1,089
------- ------- ------- ------- ------- -------
INTEREST BEARING LIABILITIES:
Demand deposits $ (124) $ (123) $ (1) $ (424) $ (396) $ (28)
Money market (525) (495) (30) (394) (615) 221
Savings deposits (112) (125) 13 (432) (466) 34
Time deposits (856) (717) (139) (2,401) (1,924) (477)
Federal funds purchased and other
Borrowings (13) (12) (1) 4 5 (1)
------- ------- ------- ------- ------- -------
Total $(1,630) $(1,472) $ (158) $(3,647) $(3,396) $ (251)
------- ------- ------- ------- ------- -------
NET INTEREST INCOME $(1,662) $(2,450) $ 788 $(1,038) $(2,378) $ 1,340
======= ======= ======= ======= ======= =======
|
In 2003, net interest income represented 83.39% of net revenue (net interest income plus non-interest income), compared to 86.86% in 2002 and 88.40% in 2001. This reduction displays the bank's increased emphasis on non-interest income and the effects of decreasing interest rates. The net yield on average earning assets was 5.33% in 2003 compared to 5.83% in 2002 and 6.34% in 2001. The average rate earned on interest earning
assets was 6.03% in 2003, down from 6.97% in 2002, and from 8.53% in 2001. The average cost for interest-bearing liabilities was 1.00% in 2003, compared to 1.59% in 2002 and 3.03% in 2001.
The Bank has the responsibility of assessing the overall risks in its loan portfolio, assessing the specific loss expectancy, and determining the adequacy of the loan loss allowance. The level of the allowance is determined by internally generating credit quality ratings, reviewing economic conditions in the Bank's market area, and considering the Bank's historical loan loss experience. The Bank is committed to maintaining adequate allowance for loan losses, identifying credit weaknesses by consistent review of loans, and maintaining the ratings and changing those ratings in a timely manner as circumstances change.
In addition to the $739,000 charged to the allowance for loan losses for the two loans secured by two office buildings described under the heading "Nonperforming Loans" (below), the Company maintains specific allowances for these loans. These allowances are based on the value of the related collateral, which was obtained from the sales price in the case of the San Francisco property and a recent appraisal in the case of the Mountain View property, less all estimated selling costs associated with the sale. Further, the company provided for the unsecured portions of each of these loans.
Real estate loans outstanding increased by $3,114,000 in 2003 but declined about $6,176,000 in 2002 compared to 2001. The proportion of the Allowance for Loan Losses attributable to real estate loans was $1,428,000 in 2003 compared to $2,008,000 in 2002 and $1,912,000 in 2001. As a percentage of total loans, the amount allocated to these loans was 67.5% in 2003, 72.9% in 2002 and 74.1% in 2001. The decline in the amount allocated to Real estate loans was the result of the $739,000 charged off on the loans secured by the two office buildings mentioned earlier.
The allowance for loan losses totaled $3,284,000, $3,396,000, and $3,543,000 at December 31, 2003, 2002 and 2001, respectively. This represented 1.04%, 1.18% and 1.21% of outstanding loans on those respective dates. The balances reflect an amount that, in management's judgment, is adequate to provide for potential loan losses based on the considerations noted above. During 2003, the provision for loan losses was $780,000, while write-offs totaled $896,000, compared to a provision of $150,000 and total write-offs of $305,000 in 2002, and a provision of $300,000 and total write-offs of $94,000 in 2001. The allowance is considered adequate after writing off the unsecured portion of the two loans that are well secured by office buildings.
TABLE 3 Allocation of the Allowance for Loan Losses
-----------------------------------------------------------------------------------------------------------------
(In thousands)
2003 2002 2001 2000 1999
--------------------- ---------------------- ------------------- ------------------ ------------------
Percent Percent Percent Percent Percent
in each in each in each in each In each
category category category Category category
to total to total to total to total To total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Real Estate $1,428 67.5% $2,008 72.9% $1,912 74.1% $ 955 62.8% $1,024 63.0%
Construction 1,087 15.3% 989 11.4% 504 11.6% 1,196 18.9% 566 18.3%
Commercial 158 16.4% 221 14.7% 387 13.4% 264 16.7% 415 17.1%
Consumer 22 0.8% 43 1.0% 226 0.9% 352 1.6% 526 1.6%
Unfunded
Commitments 129 -- 135 -- 514 -- 565 -- 389 --
Unallocated 460 -- -- -- -- -- -- -- -- --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $3,284 100.0% $3,396 100.0% $3,543 100.0% $3,332 100.0% $2,920 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
|
Table 4 summarizes transactions in the allowance for loan losses and details the charge-offs, recoveries and net loan losses by loan category for each of the last five fiscal years ended December 31, 2003. The amount added to the provision and charged to operating expenses for each period is based on the risk profile of the loan portfolio.
Net loan charge-offs from 1999 through 2002 had been very low, and are only nominal when compared to total loans. Because of the 2003 charge-offs, the provision was increased significantly.
Due to the continued downturn in the local economy, and increasing vacancy rate in commercial buildings, it was considered prudent to have an unallocated portion of $460,000 in addition to the specific allocated amounts.
TABLE 4 Allowance for Loan Losses
Historical Analysis
-------------------------------------------------------------------
(In thousands)
For the year ended December 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Balance at Beginning of Year $ 3,396 $ 3,543 $ 3,332 $ 2,920 $ 2,224
Provision for Loan Losses 780 150 300 425 750
Charge-offs:
Real Estate (739) (59) -- -- --
Commercial (110) (216) (22) -- (51)
Consumer (47) (30) (72) (23) (19)
------- ------- ------- ------- -------
Total (896) (305) (94) (23) (70)
------- ------- ------- ------- -------
|
TABLE 4 (continued) Allowance for Loan Losses
Historical Analysis
-------------------------------------------------------------------
(In thousands)
For the year ended December 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Recoveries:
Commercial 2 2 -- 1 10
Consumer 2 6 5 9 6
------- ------- ------- ------- -------
Total 4 8 5 10 16
Net Charge-offs (892) (297) (89) (13) (54)
------- ------- ------- ------- -------
Balance at End of Year $ 3,284 $ 3,396 $ 3,543 $ 3,332 $ 2,920
======= ======= ======= ======= =======
Percentages
Allowance for Loan Losses/Total Loans 1.04% 1.18% 1.21% 1.43% 1.22%
Net charge-offs/Real Estate Loans 1.52% 0.18% -- -- --
Net charge-offs/Commercial Loans 0.21% 0.50% 0.06% -- 0.10%
Net charge-offs/Consumer Loans 1.76% 0.81% 2.58% 0.36% 0.33%
Net charge-offs/Total Loans 0.28% 0.10% 0.03% 0.01% 0.02%
Allowance for Loan Losses/Non-Performing Loans 36.15% 157.15% 180.86% 273.56% 146.07%
|
Non-performing loans consist of nonaccrual loans, foreclosed assets, and loans that are 90 days or more past due but are still accruing interest. The accrual of interest on non-accrual loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they became due. For the year ended December 31, 2003 had non-accrual loans performed as agreed, approximately $757,000 in interest would have been accrued. Allowance for Loan Losses as a percentage of Non-performing loans has decreased significantly in 2003 because if a non-performing loan is well secured by Real Estate or other readily marketable collateral, no provision is made, as in the case of the loans secured by the two office buildings. If there is a portion not considered well secured, a provision is made accordingly. These loans increased the non-performing loans balance by $8,955,000, but as they are so well secured, are only minimally reserved for, and as such coverage of non-performing loans overall appears to have decreased. Excluding these loans, Allowance to Non-performing loans was 2,526.15%.
Table 5 provides a summary of contractually past due loans for the most recent five years. Nonperforming loans were 2.9% of total loans at the end of 2003. Nonperforming loans were 0.7% of total loans at the end of 2002, and 0.7% of total loans at the end of 2001. Management believes the current list of past due loans are collectible and does not anticipate any losses. There were no foreclosed assets as of the periods indicated.
Although the Allowance for possible loan losses appears as a smaller percent of nonperforming loans in 2003, the loans are well secured Real Estate supported by current appraisals. In the first quarter of 2004, one of the loans was foreclosed and became Other Real Estate Owned for $5,827,000, and is currently for sale.
TABLE 5 Analysis of Nonperforming Loans
------------------------------------------
(In thousands)
Year ended December 31,
------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Accruing loans 90 days or more $ -- $ -- $ -- $ -- $ --
Nonaccrual loans 9,085 2,161 1,959 1,218 1,999
------ ------ ------ ------ ------
Total $9,085 $2,161 $1,959 $1,218 $1,999
====== ====== ====== ====== ======
|
There were no commitments to lend additional funds to any customer whose loan was classified nonperforming at December 31, 2003, 2002 and 2001.
The following table sets forth the principal components of noninterest income:
TABLE 6 Noninterest Income
--------------------------------
(Dollars in thousands)
Years Ended December 31,
--------------------------------
2003 2002 2001
------ ------ ------
Service charges $2,662 $1,989 $1,657
Credit card fees 946 921 913
Gain on sales of securities 165 121 58
Other income 248 277 379
------ ------ ------
Total noninterest income $4,021 $3,308 $3,007
====== ====== ======
|
Service charges and credit card fees represented the major portion of noninterest income. In October of 2002, service charges per transaction, in general, were increased, including charges for insufficient funds. The first full year to benefit from this increase was 2003.
The following table sets forth the various components of noninterest expense:
TABLE 7 Noninterest Expenses
---------------------------------
(Dollars in thousands)
Years Ended December 31,
---------------------------------
2003 2002 2001
------- ------- -------
Salaries and employee benefits $10,576 $10,604 $10,532
Occupancy expense 1,240 1,246 1,290
Equipment expense 1,577 2,008 1,736
Advertising expense 218 324 384
Data processing expense 394 385 330
|
TABLE 7 (continued) Noninterest Expenses
---------------------------------
(Dollars in thousands)
Years Ended December 31,
---------------------------------
2003 2002 2001
------- ------- -------
Professional fees 914 1,126 731
Director expense 152 150 150
Surety insurance 493 400 303
Telephone, postage, supplies 898 1,073 1,014
Bankcard expenses 818 787 735
Other 633 602 706
------- ------- -------
Total noninterest expense $17,913 $18,705 $17,911
======= ======= =======
|
During 2001, the Bank purchased computer hardware and software equipment to convert its accounting system and related application systems. This resulted in increased costs arising from overtime and additional staff working on the conversion of software systems. Because of difficulties encountered upon conversion and lack of functionality of the new software, the Bank evaluated these assets for impairment. No impairment loss was recognized. However, the Bank revised the estimated useful life of the software. Depreciation expense on the software with an original purchase price of approximately $675,000 came to $336,000 for the year ended December 31, 2001. The Bank converted back to its previous accounting and related application systems by March 2002. An important part of the increase in professional fees for 2001 and 2002 was related to consultants hired to help with the data conversion process. Part of the additional increase in professional fees in 2002 over 2001 had to do with expenses related to the activation of FNB Bancorp. Most of the $792,000 decrease in noninterest expense in 2003 compared to 2002 had to do with a drop of $431,000 in equipment expense, a decrease of $212,000 in professional fees and a decrease of $175,000 in telephone, postage and supplies as conversion-related expenses ended, as did professional fees associated with the activation of FNB Bancorp.
Total assets were $429,448,000 at December 31, 2003, an increase of 6.9% over 2002. Total assets were $401,834,000 at December 31, 2002, an increase of 1.1% over 2001. Assets averaged $414.4 in 2003, compared to $411.1 million in 2002 and $401.4 million in 2001. Average earning assets increased from $361.6 million in 2001 to $375.3 million in 2002 and $379.3 million in 2003. Average earning assets represented 90.1% of total average assets in 2001, 91.3% in 2002 and 91.5% in 2003.. Interest-bearing liabilities averaged $262.0 million in 2001, $269.8 million in 2002, and $264.9 million in 2003.
The loan portfolio is the principal earning asset of the Bank. Loans outstanding at December 31, 2003 increased by $27.9 million or 9.7% compared to December 31, 2002, while loans outstanding at December 31, 2002 decreased by $3.3 million or 1.1% compared to 2001.
Real Estate loans increased by $3.1 million or 1.5% in 2003 compared to 2002, and decreased by $6.2 or 2.8% in 2002 compared to 2001. Construction loans increased by $15.7 million or 47.5% in 2003 compared to 2002, but decreased by $1.1 million or 3.1% in 2002 compared to 2001. Commercial loans increased by $9.7 million or 22.8% in 2003 compared to 2002, and increased by $3.4 million or 8.6% in 2002 over 2001. Consumer loans represent a nominal portion of total
loans. They decreased by $0.4 million or 13.7% in 2003 compared to 2002, but had increased by $0.4 million or 13.7% in 2002 compared to 2001.
Table 8 presents a detailed analysis of loans outstanding at December 31, 1999 through December 31, 2003.
TABLE 8 Loan Portfolio
-------------------------------------------------------------
(In thousands)
December 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Real Estate loans $ 214,588 $ 211,473 $ 217,650 $ 147,121 $ 152,320
Construction loans 48,610 32,947 34,016 44,245 44,208
Commercial loans 52,248 42,549 39,195 39,010 41,295
Consumer loans 2,551 2,956 2,600 3,861 3,911
--------- --------- --------- --------- ---------
Sub total 317,997 289,925 293,461 234,237 241,734
Net deferred loan fees (1,784) (1,640) (1,851) (1,236) (1,752)
--------- --------- --------- --------- ---------
Total $ 316,213 $ 288,285 $ 291,610 $ 233,001 $ 239,982
========= ========= ========= ========= =========
|
The following table shows the Bank's loan maturities and sensitivities to changes in interest rates as of December 31, 2003.
Maturing
Maturing After One Maturing
Within One But Within After Five
Year Five Years Years Total
--------- --------- ---------- ---------
Real Estate loans $ 193,585 $ 4,622 $ 16,381 $ 214,588
Construction loans 43,852 1,047 3,711 48,610
Commercial loans 47,135 1,125 3,988 52,248
Consumer loans 2,301 56 194 2,551
--------- --------- --------- ---------
Sub total 286,873 6,850 24,274 317,997
Net deferred loan fees (1,609) (39) (136) (1,784)
--------- --------- --------- ---------
Total $ 285,264 $ 6,811 $ 24,138 $ 316,213
========= ========= ========= =========
With predetermined interest rates $ 27,854 $ 665 $ 2,357 $ 30,876
With floating interest rates $ 257,410 $ 6,146 $ 21,781 $ 285,337
--------- --------- --------- ---------
Total $ 285,264 $ 6,811 $ 24,138 $ 316,213
========= ========= ========= =========
|
Investments at December 31, 2003 were $63,692,000, a decrease of $12,271,000 or 16.2% over 2002. Investments at December 31, 2002 were $75,963,000, an increase of $10,652,000 or 16.3% over 2001.
Available funds are first used for Loans, then Investments, and the remainder is sold as Federal Funds. The primary source of funds is the deposit base. If more liquidity is needed, Investment Portfolio maturities may be used, as well as sales and calls, which accounts for volume variances in Investments. The Bank's investment portfolio is concentrated in U. S. Government Agencies and in obligations of States and their political subdivisions. The Bank believes this provides for an appropriate liquidity level.
The following table sets forth the maturity distribution and interest rate sensitivity of investment securities at December 31, 2003.
After After
One Five
Due Year Years Due Average
In One Through Through After Maturity
Year Five Ten Ten Fair In Average
Or Less Yield Years Yield Years Yield Years Yield Value Years Yield
------- ----- ------- ----- ------- ----- ------ ----- ------- -------- -------
(Dollars in thousands)
U.S. Government
Agencies $ 4,036 4.13% $11,129 3.02% $ 8,690 2.27% $ -- --% $23,855 3.41 2.94%
States & Political
Subdivisions 1,185 4.36% 22,195 3.62% 10,189 4.28% 339 4.37% 33,908 4.22 3.85%
Corporate debt 4,031 5.57% -- --% -- --% -- --% 4,031 0.19 5.57%
Other Securities -- -- -- --% -- --% 1,898 6.35% 1,898 12.69 6.35%
------- ---- ------- ---- ------- ---- ------- ---- -------
Total $ 9,252 4.79% $33,324 3.42% $18,879 3.33% $ 2,237 6.06% $63,692 3.91 3.69%
|
The following table shows the securities portfolio mix at December 31, 2003, 2002 and 2001.
Years Ended December 31,
-----------------------------------------------------------------------------
2003 2002 2001
---------------------- ---------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- ------
(Dollars in thousands)
U.S. Treasury $ -- $ -- $ -- $ -- $ 1,000 $ 1,029
U.S. Government Agencies 23,688 23,855 31,759 32,150 26,994 27,381
States & Political Subdivisions 32,340 33,908 29,595 31,392 29,119 29,461
Corporate Debt 4,003 4,031 10,078 10,296 5,049 5,144
Other Securities 1,897 1,898 2,125 2,125 2,296 2,296
------- ------- ------- ------- ------- -------
Total $61,928 $63,692 $73,557 $75,963 $64,458 $65,311
------- ------- ------- ------- ------- -------
|
The increase in earning assets in 2003 was funded by the increase in the deposit base. During 2003, average deposits were $357,340,000, a nominal increase of $63,000 over 2002. During 2002, average deposits were $357,277,000, an increase of $7,806,000 or 2.2% over 2001. In 2003, average interest-bearing deposits were $264,731,000, a decrease of $4,778,000 or 1.8% compared to 2002. In 2002, average interest-bearing deposits were $269,509,000, an increase of $7,764,000 or 3.0% compared to 2001.
The series of declines in the prime rate during 2001 through 2003 without any increases in the same period resulted in decreased costs of all types of interest-bearing deposits. Time deposits lagged the prime rate changes because their rates changed only as certificates matured or new certificates were issued. Thus, interest-bearing demand costs averaged 0.2% in 2003, 0.4% in 2002, and 1.2% in 2001. Money market deposit costs averaged 0.9% in 2003, 1.6% in 2002, and 2.7% in 2001. Savings rates averaged 0.3% in 2003, 0.6% in 2002, and 1.6% in 2001. Finally, average interest on time certificates of deposit of $100,000 or more was 1.7% in 2003, 3.0% in 2002, and 4.8% in 2001. On certificates under $100,000, average rates were 2.2% in 2003, 2.5% in 2002, and 4.8% in 2001.
The following table summarizes the distribution of average deposits and the average rates paid for them in the periods indicated:
Average Deposits and Average Rates paid for the period ending December 31,
-------------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------- ------------------------------- ------------------------------
% of % of % of
Average Average Total Average Average Total Average Average Total
Balance Rate Deposits Balance Rate Deposits Balance Rate Deposits
-------- ------- -------- -------- ------- -------- ------- ------- --------
(Dollars in thousands)
Deposits:
Interest-bearing demand $ 51,981 0.2% 14.6% $ 52,240 0.4% 14.6% $ 54,539 1.2% 15.6%
Money market 66,189 0.9% 18.5 69,701 1.6% 19.5 55,670 2.7% 15.9
Savings 56,281 0.3% 15.7 52,282 0.6% 14.6 46,312 1.6% 13.3
Time deposits $100,000 or more 38,593 1.7% 10.8 54,388 3.0% 15.2 47,261 4.8% 13.5
Time deposits under $100,000 51,687 2.2% 14.5 40,898 2.5% 11.5 57,963 4.8% 16.6
-------- ----- ----- -------- ----- ----- -------- ----- -----
Total interest bearing deposits $264,731 1.0% 74.1 $269,509 1.6% 75.4 261,745 3.0% 74.9
Demand deposits 92,609 0.0% 25.9 87,768 0.0% 24.6 87,726 0.0% 25.1
-------- ----- ----- -------- ----- ----- -------- ----- -----
Total deposits $357,340 1.2% 100.0% $357,277 1.2% 100.0% $349,471 2.3% 100.0%
======== ===== ===== ======== ===== ===== ======== ===== =====
|
The following table indicates the maturity schedule of time deposits of $100,000 or more:
Analysis of Time Deposits of $100,000 or more at December 31, 2003
(In thousands)
Over Three Over Six Over
Total Deposits Three Months To Six To Twelve Twelve
$100,000 or More Or Less Months Months Months
----------------------------- --------------------- ------------------- ---------------- ----------------
$41,995 $18,800 $13,446 $6,119 $3,630
|
At December 31, 2003 shareholders' equity was $51,987,000, an increase of $784,000 or 1.5% over 2002. Shareholders' equity was $51,203,000 in 2002, an increase of $4,680,000 or 10.1% over 2001. The increases were primarily attributable to retention of net income after payment of cash dividends of $1,476,000 in 2003, $1,413,000 in 2002, and $2,272,000 in 2001.
In 1989, the Federal Deposit Insurance Corporation (FDIC) established risk-based capital guidelines requiring banks to maintain certain ratios of "qualifying capital" to "risk-weighted assets". Under the guidelines, qualifying capital is classified into two tiers, referred to as Tier 1 (core) and Tier 2 (supplementary) capital. Currently, the Company's Tier 1 capital consists of common shareholders' equity, though other instruments such as certain types of preferred stock can also be included in Tier 1 capital. Tier 2 capital consists of eligible reserves for possible loan losses and qualifying subordinated notes and debentures. Total capital is the sum of Tier 1 plus Tier 2 capital. Risk-weighted assets are calculated by applying risk percentages specified by the FDIC to categories of both balance sheet assets and off-balance sheet obligations.
At year-end 1990, the FDIC also adopted a leverage ratio requirement. This ratio supplements the risk-based capital ratios and is defined as Tier 1 capital divided by quarterly average assets during the reporting period. The requirement established a minimum leverage ratio of 3.0% for the highest rated banks and ratios of 100 to 200 basis points higher for most banks. Furthermore, in 1993, the FDIC began assessing risk-based deposit insurance assessments based on financial institutions' capital resources and "management strength", as mandated by the FDIC Improvement Act of 1991. To qualify for the lowest insurance premiums as indicated in the following table, "well-capitalized" financial institutions must maintain risk-based Tier 1 and total capital ratios of at least 6.0% and 10.0% respectively. "Well-capitalized financial institutions must also maintain a leverage ratio equal to or exceeding 5.0%.
The following table shows the risk-based capital ratios and the leverage ratios at December 31, 2003, 2002 and 2001.
Minimum "Well
Capitalized"
Risk-Based Capital Ratios 2003 2002 2001 Requirements
------------------------- ------ ------ ------ -------------
Tier 1 Capital 13.29% 13.92% 12.98% > 6.00%
-
Total Capital 14.15% 14.87% 13.98% > 10.00%
-
Leverage Ratios 12.06% 12.16% 11.41% > 5.00%
-
|
The Company's primary source of liquidity on a stand-alone basis is dividends from the Bank. The payment of dividends by the Bank is subject to regulatory restrictions.
Liquidity is a measure of the Company's ability to convert assets into cash with minimum loss. Liquidity consists of cash and due from other banks accounts, including time deposits, Federal Funds sold, Securities Available-for-Sale and Securities Held-to-Maturity. Securities Held-to-Maturity
are only included if they are within three months of maturity or most likely call date. The Company's policy is to maintain a liquidity ratio of 20% or greater of total assets. As of December 31, 2003, the Company's primary liquidity was 21.97%, compared to 23.93% in 2002. The ratio decreased primarily from a $27,614,000 increase in Total Assets, which is the divisor in this ratio. Total Liquid Assets themselves decreased only $1,826,000. The objective of liquidity management is to ensure that the Company has funds available to meet all present and future financial obligations and to take advantage of business opportunities as they occur. Financial obligations arise from withdrawals of deposits, repayment on maturity of purchased funds, extension of loans or other forms of credit, payment of operating expenses and payments of dividends.
Core deposits, which consist of all deposits other than time deposits, have provided the Company with a sizable source of relatively stable low-cost funds. The Company's average core deposits funded 64.4% of average total assets of $414,409,000 for the year ended December 31, 2003, compared to 63.7% of average total assets of $411,097,000 for the year ended December 31, 2002.
As of December 31, 2003, the Company had contractual obligations and other commercial commitments totaling approximately $58,049,000. The following table sets forth the Company's contractual obligations and other commercial commitments as of December 31, 2003. These obligations and commitments will be funded primarily by loan repayments and the Company's liquidity sources, such as cash and due from other banks, federal funds sold, securities available for sale, as well as time deposits.
Payments Due by Period
(In thousands) --------------------------------------------------
1 year Over 1 to Over 3 to Over
Contractual Obligations Total or less 3 years 5 years 5 years
---------------------------------- ------ ------- --------- --------- -------
Operating Leases $1,161 $ 273 $ 428 $ 385 $ 75
Other Long-Term Obligations -- -- -- -- --
------ ------ ------ ------ ------
Total Contractual Cash Obligations $1,161 $ 273 $ 428 $ 385 $ 75
====== ====== ====== ====== ======
|
Amounts of Commitments Expiration Per Period
(In thousands) -------------------------------------------------------------
Total
Amounts 1 year Over 1 to Over 3 to Over
Other Commercial Commitments Committed or less 3 years 5 years 5 years
---------------------------- --------- ------- --------- --------- -------
Lines of Credit $25,510 $21,484 $1,364 $1,252 $1,410
Standby Letters of Credit 2,518 2,418 -- 100 --
Guarantees -- -- -- -- --
Other Commercial Commitments 28,860 28,860 -- -- --
------- ------- ------ ------ ------
Total Commercial Commitments $56,888 $52,762 $1,364 $1,352 $1,410
======= ======= ====== ====== ======
|
Ongoing management of the Company's interest rate sensitivity limits interest rate risk by controlling the mix and maturity of assets and liabilities. Management regularly reviews the Company's position and evaluates alternative sources and uses of funds as well as changes in external factors. Various methods are used to achieve and maintain the desired rate sensitivity position including the sale or purchase of assets and product pricing.
In order to ensure that sufficient funds are available for loan growth and deposit withdrawals, as well as to provide for general needs, the Company must maintain an adequate level of liquidity. Asset liquidity comes from the Company's ability to convert short-term investments into cash and from the maturity and repayment of loans and investment securities. Liability liquidity is provided by the Company's ability to attract deposits. The primary source of liability liquidity is the Bank's customer base, which provides core deposit growth. The overall liquidity position of the Company is closely monitored and evaluated regularly. Management believes the Company's liquidity sources at December 31, 2002 were adequate to meet its operating needs in 2003 and ongoing forward into the foreseeable future.
The results of operations and financial conditions presented in this report are based on historical cost information and are not adjusted for the effects of inflation.
Since the assets and liabilities of banks are primarily monetary in nature (payable in fixed, determinable amounts), the performance of the Company is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same.
The effect of inflation on banks is normally not as significant as its influence on those businesses that have large investments in plant and inventories. During periods of high inflation, there are normally corresponding increases in the money supply, and banks will normally experience above average growth in assets, loans and deposits. Also, increases in the price of goods and services will result in increased operating expenses.
The following table includes key ratios, including returns on average assets and equity, which show the effect of the significant series of interest rate adjustments throughout 2001, and the further adjustment in 2002 and 2003.
Return on Equity and Assets
(Key financial ratios are
computed on average balances)
------------------------------
Year Ended December 31,
------------------------------
2003 2002 2001
----- ----- -----
Return on average assets 1.00% 1.17% 1.30%
Return on average equity 8.00% 9.87% 11.43%
Dividend payout ratio 35.63% 29.35% 43.38%
Average equity to assets ratio 12.49% 11.86% 11.41%
|
Interest rate sensitivity is often measured by the extent to which mismatches or "gaps" occur in the repricing of assets and liabilities within a given time period. Gap analysis is used to quantify such mismatches. A "positive" gap results when the amount of earning assets repricing within a given time period exceeds the amount of interest-bearing liabilities repricing within that time period. A "negative" gap results when the amount of interest-bearing liabilities repricing within a given time period exceeds the amount of earning assets repricing within such time period.
In general, a financial institution with a positive gap in relevant time periods will benefit from an increase in market interest rates and will experience erosion in net interest income if such rates fall. Likewise, a financial institution with a negative gap in relevant time periods will normally benefit from a decrease in market interest rates and will be adversely affected by an increase in rates. By maintaining a balanced interest rate sensitivity position, where interest rate sensitive assets roughly equal interest sensitive liabilities in relevant time periods, interest rate risk can be limited.
As a financial institution, the Company's potential interest rate volatility is a primary component of its market risk. Fluctuations in interest rates will ultimately impact the level of income and expense recorded on a large portion of the Company's assets and liabilities, and the market value of all interest-earning assets, other than those that possess a short-term maturity. Volatile markets can impact the Company's need for liquidity and alternate funding sources. Based upon the nature of the Company's operations, the Company is not subject to foreign currency or commodity price risk. The Company does not own any trading assets and does not have any hedging transactions in place, such as interest rate swaps and caps.
The Company's Board of Directors has adopted an Asset/Liability policy designed to stabilize net interest income and preserve capital over a broad range of interest rate movements. This policy outlines guidelines and ratios dealing with, among others, liquidity, volatile liability dependence, investment portfolio composition, loan portfolio composition, loan-to-deposit ratio and gap analysis ratio. The Board of Directors monitors the Company's performance as compared to Asset/Liability Policy. In addition, to effectively administer the Asset/Liability Policy and to monitor exposure to fluctuations in interest rates, the Company maintains an Asset/Liability Committee, consisting of the Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Branch Administrator, and Controller. This committee meets monthly to review the Company's lending and deposit-gathering activities, to review competitive interest rates, to develop strategies to implement the Asset/Liability Policy and to respond to market conditions.
The Company monitors and controls interest rate risk through a variety of techniques, including use of traditional interest rate sensitivity analysis (also known as "gap analysis") and an interest rate risk management model. With the interest rate risk management model, the Company projects future net interest income, and then estimates the effect of various changes in interest rates and balance sheet growth rates on that projected net interest income. The Company also uses the interest rate risk management model to calculate the change in net portfolio value over a range of interest rate change scenarios. Traditional gap analysis involves arranging the Company's interest-earning assets and interest-bearing liabilities by repricing periods and then computing the difference (or "interest rate sensitivity gap") between the assets and liabilities that are estimated to reprice during each time period and cumulatively through the end of each time period.
Both interest rate sensitivity modeling and gap analysis are done at a specific point in time and involve a variety of significant estimates and assumptions. Interest rate sensitivity modeling requires, among other things, estimates of how much and when yields and costs on individual categories of interest-earning assets and interest-bearing liabilities will respond to general changes in market rates, future cash flows and discount rates.
Gap analysis requires estimates as to when individual categories of interest-sensitive assets and liabilities will reprice, and assumes that assets and liabilities assigned to the same repricing period will reprice at the same time and in the same amount. Gap analysis does not account for the fact that repricing of assets and liabilities is discretionary and subject to competitive and other pressures.
The following table sets forth the estimated maturity/repricing structure of the Company's interest-bearing assets and interest-bearing liabilities at December 31, 2003. Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability. The majority of interest-bearing demand deposits and savings deposits are assumed to be "core" deposits, or deposits that will remain at the Company regardless of market interest rates. The table does not assume any prepayment of fixed-rate loans.
RATE SENSITIVE GAP ANALYSIS
As of December 31, 2003
------------------------------------------------------------------
Maturing or repricing
------------------------------------------------------------------
Three Over Three Over One Over Not
Months To Twelve Year Through Five Rate-
Or Less Months Five Years Years Sensitive Total
--------- ---------- ------------ --------- --------- ---------
(Dollars in thousands)
Interest earning assets:
Federal funds sold $ 7,880 $ -- $ -- $ -- $ -- $ 7,880
Securities 6,487 2,765 33,324 19,218 1,898 63,692
Loans 263,613 13,280 6,654 23,581 9,085 316,213
--------- --------- --------- --------- --------- ---------
Total interest earning assets 277,980 16,045 39,978 44,697 10,983 387,785
--------- --------- --------- --------- --------- ---------
Cash and due from banks -- -- -- -- 22,764 22,764
Allowance for loan losses -- -- -- -- (3,284) (3,284)
Other assets -- -- -- -- 22,183 22,183
--------- --------- --------- --------- --------- ---------
Total assets $ 277,980 $ 16,045 $ 39,978 $ 42,799 $ 52,646 $ 429,448
========= ========= ========= ========= ========= =========
Interest bearing liabilities:
Demand, interest bearing $ 62,974 $ -- $ -- $ -- $ -- $ 62,974
Savings and money market 122,705 -- -- -- -- 122,705
Time deposits 38,934 39,948 13,086 -- -- 91,968
--------- --------- --------- --------- --------- ---------
Total interest bearing liabilities 224,613 39,948 13,086 -- -- 277,647
--------- --------- --------- --------- --------- ---------
Noninterest demand deposits -- -- -- -- 96,567 96,567
Other liabilities -- -- -- -- 3,247 3,247
Stockholders' equity -- -- -- -- 51,987 51,987
--------- --------- --------- --------- --------- ---------
Total liabilities and
Stockholders' equity $ 224,613 $ 39,948 $ 13,086 $ -- $ 151,801 $ 429,448
========= ========= ========= ========= ========= =========
Interest rate sensitivity GAP $ 53,367 (23,903) $ 26,892 $ 42,799 ($ 99,155) $ --
========= ========= ========= ========= ========= =========
Cumulative interest rate
sensitivity GAP $ 53,367 $ 29,464 $ 56,356 $ 99,155 $ -- $ --
Cumulative interest rate
sensitivity GAP ratio 19.20% 10.02% 16.87% 26.31% -- --
|
Changes in estimates and assumptions made for interest rate sensitivity modeling and gap analysis could have a significant impact on projected results and conclusions. Therefore, these techniques may not accurately reflect the impact of general interest rate movements on the Company's net interest income or net portfolio value.
Because of the limitations in the gap analysis discussed above, members of the Company's Asset/Liability Management Committee believe that the interest sensitivity modeling more accurately reflects the effects and exposure to changes in interest rates. Net interest income simulation considers the relative sensitivities of the balance sheet, including the effect of interest rate caps on adjustable rate mortgages and the relatively stable aspects of core deposits. As such, net interest income simulation is designed to address the probability of interest rate changes and behavioral response of the balance sheet to those changes. Market Value of Portfolio Equity represents the fair value of the net present value of assets, liabilities and off-balance sheet items. The starting point (or "base case") for the following table is an estimate of the Company's net portfolio at December 31, 2003, using current discount rates, and an estimate of net interest income for 2003 assuming that both interest rates and the Company's interest-sensitive assets and liabilities remain at December 31, 2003 levels. The "rate shock" information in the table shows estimates of net
portfolio value at December 31, 2003 and net interest income for 2003 assuming fluctuations or "rate shocks" of minus 50 and 100 basis points and plus 100 and 200 basis points. Minus 200 basis points not used because it would be greater than the Federal Funds rate. Rate shocks assume that current interest rates change immediately. The information set forth in the following table is based on significant estimates and assumptions, and constitutes a forward-looking statement within the meaning of that term set forth in Rule 173 of the Securities Act of 1933 and Rule 3-6 of the Securities Exchange Act of 1934.
Market Risk in Securities
(Amount in thousands) Interest Rate Shock
At December 31, 2003
Available for Sale securities -------------------------------------------------------
Rates Decline Rates Increase
--------------------- --------------------
Rate change (0.5%) (1%) Current +1% +2%
Unrealized gain (loss) $ 2,430 $ 2,955 $ 1,763 $ (152) $(1,460)
Change from current $ 667 $ 1,192 $(1,611) $(3,223)
Market Risk on Net Interest Income
(Amounts in thousands) At December 31, 2003
-------------------------------------------------------
Rates Decline Rates Increase
--------------------- --------------------
Rate change (0.5%) (1%) Current +1% +2%
Change in net interest income $19,456 $18,687 $20,209 $21,591 $22,973
Change from current $ (753) $(1,522) $ 1,382 $2,764
|
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report................................................ 46
Consolidated Balance Sheets, December 31, 2003 and 2002..................... 48
Consolidated Statements of Earnings for the years ended December 31, 2003,
2002 and 2001............................................................. 49
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the years ended December 31, 2003, 2002 and 2001...................... 50
Consolidated Statements of Cash Flows for the years ended December 31, 2003,
2002 and 2001............................................................. 51
Notes to Consolidated Financial Statements.................................. 52
All schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule or
because the information required is included in the Financial Statements or
|
notes thereto.
Independent Auditors' Report
Board of Directors
FNB Bancorp:
We have audited the accompanying consolidated balance sheets of FNB Bancorp and subsidiary (the Company) as of December 31, 2003 and 2002 and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for the years in then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FNB Bancorp and subsidiary as of December 31, 2003 and 2002 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP San Francisco, California February 28, 2004 |
Board of Directors
FNB Bancorp and Subsidiary
We have audited the accompanying statements of earnings, stockholders' equity and comprehensive income and cash flows for the year ended December 31, 2001 of FNB Bancorp and Subsidiary (formerly First National Bank of Northern California). These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows for the year ended December 31, 2001 of FNB Bancorp and Subsidiary, in conformity with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP San Francisco, California January 31, 2002 |
FNB BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2003 and 2002
Assets 2003 2002
------------ ------------
Cash and due from banks $ 22,764,000 17,804,000
Federal funds sold 7,880,000 2,395,000
------------ ------------
Cash and cash equivalents 30,644,000 20,199,000
Securities available-for-sale 63,692,000 75,963,000
Loans, net 312,929,000 284,889,000
Bank premises, equipment, and leasehold improvements 10,904,000 11,280,000
Accrued interest receivable and other assets 11,279,000 9,503,000
------------ ------------
$429,448,000 401,834,000
============ ============
Liabilities and Stockholders' Equity
Deposits:
Demand, noninterest bearing $ 96,567,000 88,495,000
Demand, interest bearing 62,974,000 52,480,000
Savings 122,705,000 116,879,000
Time 91,968,000 89,552,000
------------ ------------
Total deposits 374,214,000 347,406,000
Accrued expenses and other liabilities 3,247,000 3,225,000
------------ ------------
Total liabilities 377,461,000 350,631,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding 2,519,000 and 2,437,000 shares 28,903,000 26,492,000
on December 31, 2003 and 2002, respectively
Additional paid-in capital 3,000 --
Retained earnings 22,041,000 22,907,000
Accumulated other comprehensive income 1,040,000 1,804,000
------------ ------------
Total stockholders' equity 51,987,000 51,203,000
------------ ------------
$429,448,000 401,834,000
============ ============
|
See accompanying notes to consolidated financial statements
FNB BANCORP AND SUBSIDIARY
Consolidated Statements of Earnings
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- -----------
Interest income:
Interest and fees on loans $19,990,000 22,664,000 26,024,000
Interest and dividends on securities 1,446,000 1,794,000 2,760,000
Interest on tax-exempt securities 1,358,000 1,461,000 1,449,000
Federal funds sold 73,000 240,000 611,000
----------- ----------- -----------
Total interest income 22,867,000 26,159,000 30,844,000
----------- ----------- -----------
Interest expense:
Interest on deposits and other 2,656,000 4,273,000 7,924,000
Interest expense on other borrowings 2,000 15,000 11,000
----------- ----------- -----------
Total interest expense 2,658,000 4,288,000 7,935,000
----------- ----------- -----------
Net interest income 20,209,000 21,871,000 22,909,000
Provision for loan losses 780,000 150,000 300,000
----------- ----------- -----------
Net interest income after provision
for loan losses 19,429,000 21,721,000 22,609,000
----------- ----------- -----------
Noninterest income:
Service charges 2,662,000 1,989,000 1,657,000
Credit card fees 946,000 921,000 913,000
Gain (loss) on sale of bank premises, equipment, and
leasehold improvements -- 14,000 --
Gain on sales of securities 165,000 121,000 58,000
Other 248,000 263,000 379,000
----------- ----------- -----------
Total noninterest income 4,021,000 3,308,000 3,007,000
----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 10,576,000 10,604,000 10,532,000
Occupancy expense 1,240,000 1,246,000 1,290,000
Equipment expense 1,577,000 2,008,000 1,736,000
Advertising expense 218,000 324,000 384,000
Data processing expense 394,000 385,000 330,000
Professional fees 914,000 1,126,000 731,000
Director expense 152,000 150,000 150,000
Surety insurance 493,000 400,000 303,000
Telephone, postage, supplies 898,000 1,073,000 1,014,000
Bankcard expenses 818,000 787,000 735,000
Other 633,000 602,000 706,000
----------- ----------- -----------
Total noninterest expense 17,913,000 18,705,000 17,911,000
----------- ----------- -----------
Earnings before income tax expense 5,537,000 6,324,000 7,705,000
Income tax expense 1,396,000 1,510,000 2,468,000
----------- ----------- -----------
Net earnings $ 4,141,000 4,814,000 5,237,000
=========== =========== ===========
Earnings per share data:
Basic $ 1.63 1.88 2.05
Diluted 1.61 1.88 2.05
Weighted average shares outstanding:
Basic weighted average shares outstanding 2,545,000 2,556,000 2,554,000
Diluted weighted average shares outstanding 2,572,000 2,565,000 2,560,000
|
See accompanying notes to consolidated financial statements
FNB BANCORP AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 2003, 2002 and 2001
Accumulated
Common stock Additional other
--------------------------- paid-in Retained comprehensive Comprehensive
Shares Amount capital earnings income income Total
------------ ------------ ------------ ------------ ------------ ------------- ------------
Balance at
December 31, 2000 2,209,000 $ 2,761,000 17,811,000 22,405,000 151,000 43,128,000
Net earnings -- -- -- 5,237,000 -- 5,237,000 5,237,000
Other comprehensive
income:
Unrealized gain
on securities, net
of tax of $166,000 -- -- -- -- 430,000 430,000 430,000
------------
Comprehensive income $ 5,667,000
============
Cash dividends of $0.12
per share quarterly -- -- -- (1,060,000) -- (1,060,000)
Cash dividends of $0.52
per share -- -- -- (1,206,000) -- (1,206,000)
Stock dividend of 5% 110,000 138,000 2,686,000 (2,824,000) -- --
Cash on fractional shares
related to stock
dividend -- -- -- (6,000) -- (6,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2001 2,319,000 2,899,000 20,497,000 22,546,000 581,000 46,523,000
FNB Bancorp, 1-for-1
exchange of Bank
stock -- 20,497,000 (20,497,000) -- -- --
Net earnings -- -- -- 4,814,000 -- 4,814,000 4,814,000
Other comprehensive
income:
Unrealized gain
on securities, net
of tax of $328,000 -- -- -- -- 1,223,000 1,223,000 1,223,000
------------
Comprehensive income $ 6,037,000
============
Cash dividends of $0.12
per share quarterly -- -- -- (1,114,000) -- (1,114,000)
Cash dividends of $0.12
per share -- -- -- (292,000) -- (292,000)
Stock dividend of 5% 116,000 3,040,000 -- (3,040,000) -- --
Cash on fractional
shares related to
stock dividend -- -- -- (7,000) -- (7,000)
Stock options exercised 2,000 56,000 -- -- -- 56,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2002 2,437,000 26,492,000 -- 22,907,000 1,804,000 51,203,000
FNB Bancorp, 1-for-1
exchange of Bank stock --
Net earnings -- -- -- 4,141,000 -- 4,141,000 4,141,000
Other comprehensive
income:
Unrealized gain
on securities, net
of tax of $121,000 -- -- -- -- (764,000) (764,000) (764,000)
------------
Comprehensive income $ 3,377,000
============
Cash dividends of $0.12
per share quarterly -- -- -- (1,166,000) -- (1,166,000)
Cash dividends of $0.12
per share (302,000) (302,000)
Stock dividend of 5% 120,000 3,532,000 (3,532,000) --
Cash on fractional
shares related to
stock dividend -- -- -- (7,000) -- (7,000)
Stock-based compensation
expense -- -- 3,000 -- -- 3,000
Stock repurchased (41,000) (1,177,000) -- -- -- (1,177,000)
Stock options exercised 3,000 56,000 -- -- -- 56,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2003 2,519,000 $ 28,903,000 3,000 22,041,000 1,040,000 51,987,000
============ ============ ============ ============ ============ ============
|
See accompanying notes to consolidated financial statements.
FNB BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net earnings $ 4,141,000 4,814,000 5,237,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,971,000 1,735,000 1,557,000
Gain (loss) on sale of securities (165,000) (121,000) (58,000)
Stock-based compensation expense 3,000 -- --
Gain on sale of bank premises, equipment,
and leasehold improvements 5,000 (14,000) --
Provision for loan losses 780,000 150,000 300,000
Deferred taxes (862,000) 183,000 432,000
Changes in assets and liabilities:
Accrued interest receivable and other assets (1,776,000) 176,000 (1,144,000)
Accrued expenses and other liabilities (834,000) (1,766,000) (683,000)
------------ ------------ ------------
Net cash provided by operating activities 4,931,000 5,157,000 5,641,000
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from matured securities available-for-sale 30,099,000 29,682,000 22,140,000
Purchases of securities available-for-sale (28,059,000) (40,895,000) (23,784,000)
Proceeds from sale of securities available-for-sale 9,080,000 2,078,000 24,236,000
Net decrease (increase) in loans (28,820,000) 3,028,000 (58,699,000)
Proceeds from sales of bank premises, equipment, and
leasehold improvements 7,000 14,000 8,000
Purchases of bank premises, equipment, and leasehold
improvements (927,000) (1,153,000) (2,181,000)
------------ ------------ ------------
Net cash used in investing activities (18,620,000) (7,246,000) (38,280,000)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand and savings deposits 24,392,000 15,624,000 15,215,000
Net increase (decrease) in time deposits 2,416,000 (12,297,000) (1,593,000)
Net increase (decrease) in federal funds purchased -- (2,100,000) 2,100,000
Cash dividends paid (1,475,000) (1,413,000) (2,272,000)
Repurchases of common stock (1,177,000) -- --
Issuance of common stock 56,000 56,000 --
Payments on capital note payable (78,000) (75,000) (71,000)
------------ ------------ ------------
Net cash provided by (used in)
financing activities 24,134,000 (205,000) 13,379,000
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 10,445,000 (2,294,000) (19,260,000)
Cash and cash equivalents at beginning of year 20,199,000 22,493,000 41,753,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 30,644,000 20,199,000 22,493,000
============ ============ ============
Additional cash flow information:
Interest paid $ 2,785,000 4,763,000 8,099,000
Income taxes paid 872,000 530,000 2,932,000
Noncash - stock dividend 3,532,000 3,040,000 2,824,000
|
See accompanying notes to consolidated financial statements
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(1) The Company and Summary of Significant Accounting Policies
FNB Bancorp (the Company) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California on February 28, 2001. The consolidated financial statements include the accounts of FNB Bancorp and its wholly owned subsidiary, First National Bank of Northern California (the Bank). The Bank provides traditional banking services in San Mateo and San Francisco counties.
The Bank and the Company entered into an Agreement and Plan of Reorganization dated November 1, 2001 (the Plan of Reorganization), and the shareholders of the Bank approved the Plan of Reorganization at a Special Meeting of the Shareholders of the Bank held on February 27, 2002. The Plan of Reorganization was consummated on March 15, 2002. Each outstanding share of the common stock, par value $1.25 per share, of the Bank (other than any shares as to which dissenters' rights of appraisal have been properly exercised) was converted into one share of the no par common stock of the Company, and the former holders of Bank common stock became the holders of all of the Company common stock. The change in capital structure has been included for all periods presented.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates. For the Bank, the significant accounting estimate is the allowance for loan losses (note 1(f)). A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.
(a) Basis of Presentation
The accounting and reporting policies of the Company and its wholly owned subsidiary are in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated.
(b) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are sold for one-day periods. The cash equivalents are readily convertible to known amounts of cash and present insignificant risk of changes in value due to original maturity dates of 90 days or less. Included in cash and cash equivalents are amounts restricted for the Federal Reserve requirement of approximately $400,000 and $539,000 at December 31, 2003 and 2002, respectively.
(c) Investment Securities
Investment securities consist of U.S. Treasury securities, U.S. agency securities, obligations of states and political subdivisions, obligations of U.S. corporations, mortgage-backed securities and other securities. At the time of purchase of a security, the Company designates the security as held-to-maturity or available-for-sale, based on its investment objectives, operational needs, and intent to hold. The Company does not purchase securities with the intent to engage in trading activity.
52 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Held-to-maturity securities are recorded at amortized cost, adjusted for amortization of premiums or accretion of discounts. The Company did not have any investments in the held-to-maturity portfolio at December 31, 2003 or 2002. Available-for-sale securities are recorded at fair value with unrealized holding gains and losses, net of the related tax effect, reported as a separate component of stockholders' equity until realized.
A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security. Amortization of premiums and accretion of discounts on debt securities are included in interest income over the life of the related held-to-maturity or available-for-sale security using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
(d) Derivatives
All derivatives are recognized as either assets or liabilities in the balance sheet and measured at fair value. The Company does not hold any derivatives at December 31, 2003 and 2002.
(e) Loans
Loans are reported at the principal amount outstanding, net of deferred loan fees and the allowance for loan losses. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement. An impaired loan is measured based upon the present value of future cash flows discounted at the loan's effective rate, the loan's observable market price, or the fair value of collateral if the loan is collateral dependent. Interest on impaired loans is recognized on a cash basis. If the measurement of the impaired loan is less than the recorded investment in the loan, an impairment is recognized by a charge to the allowance for loan losses.
Unearned discount on installment loans is recognized as income over the terms of the loans by the interest method. Interest on other loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding.
Loan fees net of certain direct costs of origination, which represent an adjustment to interest yield, are deferred and amortized over the contractual term of the loan using the interest method.
Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as
53 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
to both principal and interest. Restructured loans are loans on which concessions in terms have been granted because of the borrowers' financial difficulties. Interest is generally accrued on such loans in accordance with the new terms.
(f) Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged off against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans, standby letters of credit, overdrafts and commitments to extend credit based on evaluations of collectibility and prior loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, commitments, and current and anticipated economic conditions that may affect the borrowers' ability to pay. While management uses these evaluations to determine the level of the allowance for loan losses, future provisions may be necessary based on changes in the factors used in the evaluations.
Material estimates relating to the determination of the allowance for loan losses are particularly susceptible to significant change in the near term. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, the banking regulators, as an integral part of its examination process, periodically review the Bank's allowance for loan losses. The banking regulators may require the Bank to recognize additions to the allowance based on their judgment about information available to them at the time of their examination.
(g) Premises and Equipment
Premises and equipment are reported at cost less accumulated depreciation using the straight-line method over the estimated service lives of related assets ranging from 2 to 25 years. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
(h) Cash Dividends
The Company's ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law. Funds for payment of any cash dividends by the Company would be obtained from its investments as well as dividends and/or management fees from First National Bank. First National Bank's ability to pay cash dividends is subject to restrictions imposed under the National Bank Act and regulations promulgated by the Office of the Comptroller of the Currency.
54 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(i) Income Taxes
Deferred income taxes are determined using the assets and liabilities method. Under this method, the net deferred tax asset or liability is recognized for tax consequences of temporary differences by applying current tax rates to differences between the financial reporting and the tax basis of existing assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
(j) Stock Option Plan
The Company had elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations, in accounting for its employee stock options rather than the alternative fair value accounting allowed by SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. APB No. 25 provides that the compensation expense relative to the Company's employee stock options is measured based on the intrinsic value of the stock option. SFAS No. 123 as amended by SFAS No. 148 requires companies that continue to follow APB No. 25 to provide a pro-forma disclosure of the impact of applying the fair value method of SFAS No. 123.
Beginning in fiscal 2003, the Company has elected to adopt the fair value method of accounting for stock-based compensation. Historically, the Company applied the intrinsic value method permitted under SFAS 123, as defined in APB 25 and related interpretations, in accounting for its stock-based compensation plans. Accordingly, no compensation cost was recognized for its stock incentive plans in the past. The Company has evaluated the alternative methods of transition and has elected the prospective method. All future employee stock option grants and other stock-based compensation will be expensed over the vesting period, based on the fair value at the time the stock-based compensation is granted.
55 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Had compensation cost related to the Company's stock option awards to employees and directors been determined under the fair value method prescribed under SFAS No. 123, the Company's net income, basic earnings per share, and diluted earnings per share would have been the pro-forma amounts below, for 2003, 2002, and 2001:
2003 2002 2001
------------ ------------ ------------
Net earnings As reported $ 4,141,000 4,814,000 5,237,000
Add stock-based employee
compensation expense
included in reported net
income, net of related
tax effects 3,000 -- --
Deduct total stock-based
employee compensation
expense determined
under the fair value
based method for all
awards, net of related
tax effects (10,000) (10,000) (7,000)
------------ ------------ ------------
Net earnings Pro forma $ 4,134,000 4,804,000 5,230,000
============ ============ ============
Basic earnings per share As reported 1.63 1.88 2.05
Pro forma 1.61 1.88 2.05
Diluted earnings per share As reported 1.61 1.88 2.05
Pro forma 1.61 1.87 2.04
|
(k) Earnings Per Share
Earnings per common share (EPS) is computed based on the weighted average number of common shares outstanding during the period. Basic EPS excludes dilution and is computed by dividing net earnings by the weighted average of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Retroactive recognition has been given for all periods presented for the issuance of stock dividends.
56 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Earnings per share have been computed based on the following:
Year ended December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Net earnings $4,141,000 4,814,000 5,237,000
Weighted average number of shares
outstanding 2,545,000 2,556,000 2,554,000
Effect of dilutive options 27,000 9,000 6,000
---------- ---------- ----------
Weighted average
number of shares
outstanding used to
calculate diluted
earnings per share $2,572,000 2,565,000 2,560,000
========== ========== ==========
|
Options to purchase 18,811 shares of common stock were not included in the 2002 computation of diluted EPS because the options' exercise price was greater than the average market price of the common share. The options, which expire on May 13, 2008, were still outstanding at December 31, 2003. All outstanding options were included in the 2003 and 2001 computations.
(l) Fair Values of Financial Instruments
The notes to financial statements include various estimated fair value information as of December 31, 2003 and 2002. Such information, which pertains to the Company's financial instruments, does not purport to represent the aggregate net fair value of the Company. Further, the fair value estimates are based on various assumptions, methodologies and subjective considerations, which vary widely among different financial institutions and which are subject to change.
57 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(m) Income Tax Credits
At December 31, 2003, the Bank had a $1,898,000 equity investment in three partnerships, which own low-income affordable housing projects that generate tax benefits in the form of federal and state housing tax credits. As a limited partner investor in these partnerships, the Company receives tax benefits in the form of tax deductions from partnership operating losses and federal and state income tax credits. The federal and state income tax credits are earned over a 10-year period as a result of the investment properties meeting certain criteria and are subject to recapture for noncompliance with such criteria over a 15-year period. The expected benefit resulting from the low-income housing tax credits is recognized in the period for which the tax benefit is recognized in the Company's consolidated tax returns. These investments are accounted for using the effective yield method and are recorded in other assets on the balance sheet. Under the effective yield method, the Company recognizes tax credits as they are allocated and amortizes the initial cost of the investments to provide a constant effective yield over the period that tax credits are allocated to the Company. The effective yield is the internal rate of return on the investment, based on the cost of the investment and the guaranteed tax credits allocated to the Company. Any expected residual value of the investment was excluded from the effective yield calculation. Cash received from operations of the limited partnership or sale of the properties, if any, will be included in earnings when realized or realizable. These investments are included in other securities in securities available-for-sale.
(n) Reclassifications
Certain prior year information has been reclassified to conform to current year presentation.
(o) Bank Owned Life Insurance
The Corporation purchased insurance on the lives of certain employees. The policies accumulate asset values to meet future liabilities including the payment of employee benefits such as the deferred compensation plan. Increases in the cash surrender value are recorded as other noninterest income in the consolidated statements of income. The cash surrender value of bank owned life insurance is reflected in other assets on the consolidated balance sheets in the amount of $2,975,000 and $2,864,000 at December 31, 2003 and 2002, respectively.
(2) Restricted Cash Balance
Cash and due from banks includes balances with the Federal Reserve Bank (the FRB). The Bank is required to maintain specified minimum average balances with the FRB, based primarily upon the Bank's deposit balances. As of December 31, 2003 and 2002, the Bank maintained deposits in excess of the FRB reserve requirement.
58 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(3) Securities Available-for-Sale
The amortized cost and carrying value of securities available-for-sale
are as follows:
Amortized Unrealized Unrealized Carrying
cost gains losses value
----------- ----------- ----------- -----------
December 31, 2003:
Obligations of U.S.
Government agencies $23,688,000 167,000 -- 23,855,000
Obligations of states
and political subdivisions 32,340,000 1,570,000 (2,000) 33,908,000
Corporate debt 4,003,000 28,000 -- 4,031,000
Other securities 1,898,000 -- -- 1,898,000
----------- ----------- ----------- -----------
$61,929,000 1,765,000 (2,000) 63,692,000
=========== =========== =========== ===========
December 31, 2002:
Obligations of U.S.
Government agencies $31,759,000 391,000 -- 32,150,000
Obligations of states
and political subdivisions 29,595,000 1,799,000 (2,000) 31,392,000
Corporate debt 10,078,000 223,000 (5,000) 10,296,000
Other securities 2,125,000 -- -- 2,125,000
----------- ----------- ----------- -----------
$73,557,000 2,413,000 (7,000) 75,963,000
=========== =========== =========== ===========
|
The amortized cost and carrying value of debt securities at December 31, 2003, by contractual maturity, are shown below. 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.
Amortized Carrying
cost value
----------- -----------
Available-for-sale:
Due in one year or less $ 9,181,000 9,252,000
Due after one year through five years 32,338,000 33,324,000
Due after five years through ten years 18,188,000 18,879,000
Due after ten years 2,222,000 2,237,000
----------- -----------
$61,929,000 63,692,000
=========== ===========
|
For the years ended December 31, 2003, 2002, and 2001, gross realized gains amounted to $238,000, $121,000 and $284,000, respectively. For the years ended December 31, 2003, 2002, and 2001, gross realized losses amounted to $73,000, $0, and $226,000, respectively.
At December 31, 2003 and 2002, securities with an amortized cost and fair value of $35,340,000 and $36,966,000 and $30,576,000 and $32,274,000, respectively, were pledged as collateral for public deposits and for other purposes as required by law.
59 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
As of December 31, 2003 and 2002, the Bank had investments in Federal Reserve Bank stock classified as other assets in the accompanying balance sheets of $702,000. These investments in Federal Reserve Bank stock are carried at cost, and evaluated periodically for impairment.
(4) Loans, Net
Loans are summarized as follows at December 31:
2003 2002
------------- -------------
Real estate $ 214,588,000 211,473,000
Construction 48,610,000 32,947,000
Commercial 52,248,000 42,549,000
Consumer & other 2,551,000 2,956,000
------------- -------------
317,997,000 289,925,000
Allowance for loan losses (3,284,000) (3,396,000)
Net deferred loan fees (1,784,000) (1,640,000)
------------- -------------
$ 312,929,000 284,889,000
============= =============
|
The Bank had total impaired loans of $9,085,000 and $2,161,000 at December 31, 2003 and 2002, respectively. The allowance for loan losses related to the impaired loans was $1,314,000 and $2,114,000 as of December 31, 2003 and 2002 respectively. The amount of the recorded investment in impaired loans for which there is no related allowance is $7,771,000 and $47,000 as of December 31, 2003 and 2002. During 2003 and 2002, nonaccrual loans represented all impaired loans. The average recorded investment in impaired loans during 2003, 2002, and 2001 was $8,552,000, $2,063,000, and $1,963,000, respectively. Interest income on impaired loans of $0, $379,000, and $32,000, was recognized for cash payments received in 2003, 2002, and 2001, respectively. The newly impaired loans are well secured by Real Estate and do not warrant a direct increase in the allowance.
(5) Allowance for Loan Losses
Changes in the allowance for loan losses are summarized as follows for the years ended December 31:
2003 2002 2001
----------- ----------- -----------
Balance, beginning of year $ 3,396,000 3,543,000 3,332,000
Loans charged off (896,000) (305,000) (94,000)
Recoveries 4,000 8,000 5,000
----------- ----------- -----------
Net loans charged off (892,000) (297,000) (89,000)
Provision for loan losses 780,000 150,000 300,000
----------- ----------- -----------
Balance, end of year $ 3,284,000 3,396,000 3,543,000
=========== =========== ===========
|
60 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(6) Related Party Transactions
In the ordinary course of business, the Bank made loans and advances under lines of credit to directors, officers, and their related interests. The Bank's policies require that all such loans be made at substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties and do not involve more than normal risk or unfavorable features. The following summarizes activities of loans to such parties in 2003:
Balance, beginning of year $ 1,735,000
Additions 5,980,000
Repayments (513,000)
-----------
Balance, end of year $ 7,202,000
===========
|
(7) Bank Premises, Equipment, and Leasehold Improvements
Bank premises, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization, and are summarized as follows at December 31:
2003 2002
------------ ------------
Buildings $ 6,839,000 6,830,000
Equipment 7,526,000 6,809,000
Leasehold improvements 510,000 505,000
------------ ------------
14,875,000 14,144,000
Accumulated depreciation and amortization (7,971,000) (6,853,000)
------------ ------------
6,904,000 7,291,000
Land 4,000,000 3,989,000
------------ ------------
$ 10,904,000 11,280,000
============ ============
|
Depreciation expense for the years ended December 31, 2003, 2002, and 2001 was $1,290,000, $1,354,000, and $1,227,000, respectively.
61 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(8) Deposits
The aggregate amount of jumbo time certificates, each with a minimum denomination of $100,000 or more, was $41,995,000 and $37,676,000 at December 31, 2003 and 2002, respectively.
At December 31, 2003, the scheduled maturities of time certificates of $100,000 and over are as follows:
Year ending December 31:
2004 $38,364,000
2005 1,864,000
2006 1,767,000
-----------
$41,995,000
===========
(9) Commitments and Contingencies
|
The Bank leases a portion of its facilities and equipment under noncancelable operating leases expiring at various dates through 2009. Some of these operating leases provide that the Bank pay taxes, maintenance, insurance, and other occupancy expense applicable to leased premises. Generally, the leases provide for renewal for various periods at stipulated rates.
The minimum rental commitments under the operating leases as of December 31, 2003 are as follows:
Year ending December 31:
2004 $ 273,000
2005 213,000
2006 215,000
2007 214,000
2008 171,000
Thereafter 75,000
-----------
$ 1,161,000
===========
|
Total rent expense for operating leases was $361,000, $373,000, and $414,000, in 2003, 2002, and 2001, respectively.
The Bank is engaged in various lawsuits either as plaintiff or defendant in the ordinary course of business and in the opinion of management, based upon the advice of counsel, the ultimate outcome of these lawsuits will not have a material effect of the Bank's financial statements.
(10) Bank Savings Plan
The Bank maintains a salary deferral 401(k) plan covering substantially all employees known as the First National Bank Savings Plan (the Plan). The Plan allows employees to make contributions to the Plan up to a maximum allowed by law and the Bank's contribution is discretionary. The Plan expense for the years ended December 31, 2003, 2002, and 2001 was $475,000, $480,000, and $524,000, respectively.
62 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(11) Salary Continuation and Deferred Compensation Plans
The Bank maintains a Salary Continuation Plan for certain Bank officers. Officers participating in the Salary Continuation Plan are entitled to receive a monthly payment for a period of fifteen to twenty years upon retirement. The Company accrues such post-retirement benefits over the individual's employment period. The Salary Continuation Plan expense for the years ended December 31, 2003, 2002, and 2001 was $137,000, $131,000, and $216,000, respectively. Accrued compensation payable under the salary continuation plan totaled $1,271,000 and $1,194,000 at December 31, 2003 and 2002, respectively.
The Deferred Compensation Plan allows eligible officers to defer annually their compensation up to a maximum 80% of their base salary and 100% of their cash bonus. The officer will be entitled to receive distribution upon reaching a specified age, passage of at least five years or termination of employment. As of December 31, 2003 and 2002, the related liability included in accrued expenses and other liabilities was $1,143,000 and $1,093,000, respectively.
(12) Income Taxes
The provision for income taxes for the years ended December 31, consists of the following:
2003 2002 2001
---------- ---------- ----------
Current:
Federal $1,473,000 1,210,000 1,640,000
State 785,000 117,000 396,000
Deferred:
Federal (615,000) 175,000 352,000
state (247,000) 8,000 80,000
---------- ---------- ----------
$1,396,000 1,510,000 2,468,000
========== ========== ==========
|
The reasons for the differences between the statutory federal income tax rate and the effective tax rates for the years ended December 31, are summarized as follows:
2003 2002 2001
---------- ---------- ----------
Statutory rates 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax-exempt income (8.7)% (11.5)% (6.1)%
State income taxes, net of federal
benefit 6.4% 1.3% 4.4%
Allowable credits against taxes on income (5.8)% 0.0% 0.0%
Other, net (0.7)% (0.1)% (0.3)%
---------- ---------- ----------
Effective rate 25.2% 23.7% 32.0%
========== ========== ==========
|
63 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
The tax effect of temporary differences giving rise to the Bank's net deferred tax asset is as follows:
December 31,
--------------------------
2003 2002
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 1,299,000 1,373,000
Capitalized interest on buildings 33,000 36,000
Various accruals not currently deductible 1,883,000 1,256,000
Depreciation 74,000 --
----------- -----------
Total deferred tax assets 3,289,000 2,665,000
----------- -----------
Deferred tax liabilities:
State income taxes 293,000 400,000
Unrealized appreciation of available-for-sale securities 726,000 602,000
Depreciation -- 306,000
Other deferred tax liabilities 32,000 --
----------- -----------
Total deferred tax liabilities 1,051,000 1,308,000
----------- -----------
Net deferred tax asset before valuation
allowance 2,238,000 1,357,000
Valuation allowance (143,000) --
----------- -----------
Net deferred tax asset $ 2,095,000 1,357,000
=========== ===========
|
As of December 31, 2003, the Bank had state tax credit carryforwards for income tax purposes of $143,000. If not utilized, the credits will expire in 2003. Management believes that valuation allowance of $143,000 and $0 for deferred tax assets as of December 31, 2003 and 2002 are adequate to reduce the deferred tax assets to an amount that will more likely than not be realized. The increase in the valuation allowance was $143,000 and $0 for the years ended December 31, 2003 and 2002, respectively. The Company relies on California Enterprise Zone tax benefits that are subject to audit and adjustment. The valuation allowance takes this tax obligation uncertainty into account.
(13) Financial Instruments
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheet.
64 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
The Bank's exposure to credit loss is represented by the contractual amount of those instruments and is usually limited to amounts funded or drawn. The contract or notional amounts of these agreements, which are not included in the balance sheets, are an indicator of the Bank's credit exposure. Commitments to extend credit generally carry variable interest rates and are subject to the same credit standards used in the lending process for on-balance-sheet instruments. Additionally, the Bank periodically reassesses the customer's creditworthiness through ongoing credit reviews. The Bank generally requires collateral or other security to support commitments to extend credit. The following table provides summary information on financial institutions whose contract amounts represent credit risk as of December 31:
2003 2002
----------- -----------
Financial instruments whose contract amounts represent
credit risk:
Undisbursed loan commitments $28,860,000 27,947,000
Lines of credit 22,072,000 28,348,000
MasterCard lines 3,438,000 2,618,000
Standby letters of credit 2,518,000 2,557,000
----------- -----------
$56,888,000 61,470,000
=========== ===========
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial and residential properties.
Equity reserve and unused credit card lines are additional commitments to extend credit. Many of these customers are not expected to draw down their total lines of credit, and therefore, the total contract amount of these lines does not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The Bank issues both financial and performance standby letters of credit. The financial standby letters of credit are primarily to guarantee payment to third parties. As of December 31, 2003, there were $2,251,000 issued in financial standby letters of credit and the Bank carried no liability. The performance standby letters of credit are typically issued to municipalities as specific performance bonds. As of December 31, 2003 there were $267,000 issued in performance standby letters of credit and the Banks carried no liability. The terms of the guarantees will expire primarily in 2004. The Banks have experienced no draws on these letters of credit, and do not expect to in the future; however, should a triggering event occur, the Banks either have collateral in excess of the letter of credit or imbedded agreements of recourse from the customer.
65 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
The following methods and assumptions were used by the Company.
(a) Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets' fair values.
(b) Securities
Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
(c) Loans
Fair values for variable-rate loans that reprice frequently and have no significant change in credit risk are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
(d) Off-Balance-Sheet Instruments
Fair values for the Company's off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the counterparties.
(e) Deposit Liabilities
The fair values estimated for demand deposits (interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of the aggregate expected monthly maturities on time deposits.
(f) Federal Funds Sold/Purchased
The carrying amount of federal funds sold/purchased approximates their fair values.
(g) Bank Owned Life Insurance
The carrying amount is the cash surrender value for all policies.
66 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
The following table provides summary information on the estimated fair value of financial instruments at December 31, 2003:
Carrying Fair
amount value
------------ ------------
Financial assets:
Cash and cash equivalents $ 30,644,000 30,644,000
Securities available for sale 63,692,000 63,692,000
Loans, net 312,929,000 316,702,000
Bank owned life insurance 2,975,000 2,975,000
Financial liabilities:
Deposits 374,214,000 374,591,000
Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, Mastercard
line, and standby letters of credit -- 774,000
|
The following table provides summary information on the estimated fair value of financial instruments at December 31, 2002:
Carrying Fair
amount value
------------ ------------
Financial assets:
Cash and cash equivalents $ 20,199,000 20,199,000
Securities available for sale 75,963,000 75,963,000
Loans, net 284,889,000 288,346,000
Bank owned life insurance 2,864,000 2,864,000
Financial liabilities:
Deposits 347,406,000 348,315,000
Off-balance-sheet liabilities:
Undisbursed loan commitments, lines of credit, Mastercard
line, and standby letters of credit -- 750,000
|
67 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
The carrying amounts include $9,085,000 and $2,161,000 of nonaccrual loans (loans that are not accruing interest) at December 31, 2003 and 2002, respectively. Management has determined that primarily because of the uncertainty of predicting an observable market interest rate excessive amounts of time and money would be incurred to estimate the fair values of nonperforming assets. As such, these assets are recorded at their carrying amount in the estimated fair value columns. The following aggregate information is provided at December 31, about the contractual provisions of these assets:
2003 2002
------------ ------------
Aggregate carrying amount $ 9,085,000 2,161,000
Effective rate 8.60% 6.67%
Average term to maturity 1 month 18 months
|
(14) Significant Group Concentrations of Credit Risk
Most of the Bank's business activity is with customers located within San Mateo and San Francisco counties. Generally, the loans are secured by assets of the borrowers. The loans are expected to be repaid from cash flows or proceeds from the sale of selected assets of the borrowers. The Bank does not have significant concentrations of loans to any one industry.
The distribution of commitments to extend credit approximates the distribution of loans outstanding. Commercial and standby letters of credit were granted primarily to commercial borrowers.
The contractual amounts of credit-related financial instruments such as commitments to extend credit, credit-card arrangements, and letters of credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless.
(15) Regulatory Matters
The Company, as a bank holding company, is subject to regulation by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
68 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2002, that the Company and the Bank have met all capital adequacy requirements to which they are subject.
As of December 31, 2003, the most recent notification from the regulatory agencies categorized the Company and each of the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company and the Banks must maintain minimum total risk-based, Tier I risk-based, and 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 Company's or any of the Banks' categories.
The Company's actual capital amounts and ratios are also presented in the following table:
To be well capitalized under
For capital prompt corrective action
Actual adequacy purposes provisions
------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- -----------
December 31, 2003:
Total risk-based capital
(to risk weighted assets) $54,231,000 14.15% 30,669,000 > 8.00% 38,337,000 > 10.00%
- -
Tier I capital (to risk
weighted assets) 50,947,000 13.29 15,335,000 4.00 23,002,000 6.00
Tier I capital (to average
assets) 50,947,000 12.06 16,899,000 4.00 21,124,000 5.00
To be well capitalized under
For capital prompt corrective action
Actual adequacy purposes provisions
------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- -----------
December 31, 2002:
Total risk-based capital
(to risk weighted Assets) $52,787,000 14.87% $28,391,000 > 8.0% 35,489,000 > 10.0%
- -
Tier I capital (to risk
weighted assets) 49,391,000 13.92 14,195,000 4.0 21,293,000 6.0
Tier I capital (to average
assets) 49,391,000 12.16 16,247,000 4.0 20,309,000 5.0
|
(16) Stock Option Plan
In 1997, the Company adopted an incentive employee stock option plan, known as the 1997 FNB Bancorp Plan. In 2002, the Company adopted an incentive employee option plan, known as the 2002 FNB Bancorp Plan. The plans allow the Company to grant options to employees of up to 314,594 shares, which includes effect of stock dividends, of common stock. Options currently outstanding become exercisable in one to five years from the grant date, based on a vesting schedule of 20% per year and expire 10 years after the grant date. The options exercise price is the fair value of the options at the grant date.
69 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
The fair value of each option granted is estimated on the date of grant using the fair value method with the following weighted average assumptions used for grants in 2003; dividend yield of 7% for the year; risk-free interest rate of 4.2%; expected volatility of 12%; expected life of 9.7 years; and weighted average fair value of $2.15. The assumptions used for grants in 2002; dividend yield of 7.4% for the year; risk-free interest rate of 3.8%; expected volatility of 12%; expected life of 10 years; and weighted average fair value of $0.40. The assumptions used for grants in 2001; dividend yield of 9% for the year; risk-free interest rate of 5.4%; expected volatility of 6.8%; expected life of 10 years; and weighted average fair value of $0.49.
Weighted
average
exercise
Shares price
---------- ----------
2002 FNB Bancorp plan:
Outstanding at January 1, 2002 -- $ 24.94
Granted 33,754 --
Expired/forfeited (374) 24.94
---------- ----------
Outstanding at December 31, 2002 33,380 24.94
Granted 41,954 23.81
Exercised (220) 24.94
Expired/forfeited (1,509) 24.43
---------- ----------
Outstanding at December 31, 2003 73,605 $ 24.31
========== ==========
Options exercisable at December 31, 2003 9,560 $ 24.72
Options exercisable at December 31, 2002 1,651 22.15
|
The following information applies to options outstanding at December 31, 2003:
Range of exercise prices $ 20.67-23.88
Options outstanding 82,841
Weighted average remaining contractual life (years) 6.2
70 (Continued)
|
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
A summary of the status of the Company's fixed stock option plans as of December 31, 2003, 2002, 2001 is presented below:
Weighted
average
exercise
Shares price
---------- ----------
1997 FNB Bancorp Plan:
Outstanding at January 1, 2001 77,407 $ 21.85
Granted 36,136 21.64
Expired/forfeited (3,687) 22.38
---------- ----------
Outstanding at December 31, 2001 109,856 21.82
Exercised (2,655) 21.39
Expired/forfeited (19,053) 22.07
---------- ----------
Outstanding at December 31, 2002 88,148 21.82
Exercised (2,313) 22.17
Expired/forfeited (2,994) 21.46
---------- ----------
Outstanding at December 31, 2003 82,841 $ 21.82
========== ==========
Options exercisable at December 31, 2003 54,464 22.07
Options exercisable at December 31, 2002 42,569 22.15
Options exercisable at December 31, 2001 30,659 22.42
|
The following information applies to options outstanding at December 31, 2002:
Range of exercise prices $ 20.67 - 23.88
Options outstanding 82,841
Weighted average remaining contractual life (years) 6.2
71 (Continued)
|
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(17) Quarterly Data (Unaudited)
Quarterly
-------------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
2003:
Interest income $5,812,000 5,685,000 5,695,000 5,675,000
Interest expense 750,000 712,000 627,000 569,000
---------- ---------- ---------- ----------
Net interest income 5,062,000 4,973,000 5,068,000 5,106,000
Provision for loan losses 620,000 120,000 40,000 --
---------- ---------- ---------- ----------
Net interest income, after
provision for loan
losses 4,442,000 4,853,000 5,028,000 5,106,000
Non-interest income 979,000 959,000 1,004,000 1,084,000
Non-interest expense 4,596,000 4,639,000 4,368,000 4,315,000
---------- ---------- ---------- ----------
Income before income taxes 825,000 1,173,000 1,664,000 1,875,000
Provision for income taxes 207,000 294,000 404,000 491,000
---------- ---------- ---------- ----------
Net earnings $ 618,000 879,000 1,260,000 1,384,000
========== ========== ========== ==========
Basic earnings per share $ 0.24 0.34 0.49 0.55
Diluted earnings per share 0.24 0.34 0.49 0.54
|
72 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
Quarterly
-------------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
2002:
Interest income $6,528,000 6,555,000 6,516,000 6,560,000
Interest expense 1,167,000 1,143,000 1,090,000 888,000
---------- ---------- ---------- ----------
Net interest income 5,361,000 5,412,000 5,426,000 5,672,000
Provision for loan losses 75,000 75,000 -- --
---------- ---------- ---------- ----------
Net interest income, after
provision for loan
losses 5,286,000 5,337,000 5,426,000 5,672,000
Non-interest income 686,000 790,000 905,000 927,000
Non-interest expense 4,870,000 4,804,000 4,514,000 4,517,000
---------- ---------- ---------- ----------
Income before income taxes 1,102,000 1,323,000 1,817,000 2,082,000
Provision for income taxes 336,000 308,000 457,000 409,000
---------- ---------- ---------- ----------
Net earnings $ 766,000 1,015,000 1,360,000 1,673,000
========== ========== ========== ==========
Basic earnings per share $ 0.30 0.40 0.53 0.65
Diluted earnings per share 0.30 0.40 0.53 0.65
|
(18) Recent Accounting Pronouncements
(a) In December 2003, the FASB issued a revised FIN No. 46, FIN 46R, which in part specifically addresses limited purpose trusts formed to issue trust preferred securities. In July 2003, the Board of Governors of the Federal Reserve issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier I capital for regulatory capital purposes until notice is given to the contrary. The Federal Reserve intends to review the regulatory implications of any accounting treatment changes and, if necessary or warranted, provide further appropriate guidance. There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier I capital for regulatory capital purposes. The Company does not believe the adoption of this interpretation will have a material impact on the Company s financial position or results of operations.
(b) SFAS No. 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities. In April 2003, the FASB issued SFAS No. 149, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, resulting in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively. Implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. The Company adopted this Statement on July 1, 2003. There was no material impact on the Company s financial position or results of operations.
73 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(c) SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. In May 2003, the FASB issued SFAS No. 150, which establishes standards for how certain financial instruments with characteristics of both liabilities and equity should be measured and classified. Certain financial instruments with characteristics of both liabilities and equity will be required to be classified as a liability. This statement is effective for financial instruments entered into or modified after May 31, 2003, and July 1, 2003 for all other financial instruments with the exception of existing mandatorily redeemable financial instruments issued by limited life subsidiaries which have been indefinitely deferred from the scope of the statement. The Company does not believe the adoption of SFAS 150 will have a material impact on the Company's financial position or results of operations.
(d) Statement of Position 03-3 ( SOP 03-3 ): Accounting for Certain Loans or Debt Securities Acquired in a Transfer. In December 2003, the American Institute of Certified Public Accountants (AICPA) issued SOP 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality be recognized at their fair value. The excess of contractual cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation allowance. Valuation allowances can not be created nor carried over in the initial accounting for loans acquired in a transfer on loans subject to SFAS 114, accounting by Creditors for Impairment of a Loan. This SOP is effective for loans acquired after December 31, 2004, with early adoption encouraged. The Company does not believe the adoption of SOP 03-3 will have a material impact on the Company's financial position or results of operations.
(19) Condensed Financial Information of Parent Company
The parent company-only condensed balance sheets, condensed statements of income, and condensed statements of cash flows information are presented as of and for the year ended December 31, as follows:
FNB Bancorp
Condensed balance sheet 2003 2002
-------------------------------------------------------- ----------- -----------
Assets:
Cash and due from banks $ 65,000 117,000
Investments in subsidiary 51,857,000 51,295,000
Other assets 403,000 392,000
----------- -----------
Total assets $52,325,000 51,804,000
=========== ===========
Liabilities:
Other liabilities $ 303,000 601,000
Stockholders' equity 52,022,000 51,203,000
----------- -----------
Total liabilities and stockholders' equity $52,325,000 51,804,000
=========== ===========
|
74 (Continued)
FNB BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
FNB Bancorp
Condensed statement of income 2003 2002
--------------------------------------------------------------- ----------- -----------
Income:
Dividend income from subsidiary $ 2,509,000 1,478,000
----------- -----------
Total income 2,509,000 1,478,000
----------- -----------
Expense:
Interest expense -- 6,000
Other expense 4,000 177,000
----------- -----------
Total expense 4,000 183,000
----------- -----------
Income before income taxes and equity in
undistributed earnings of Subsidiary 2,505,000 1,295,000
Income tax expense (36,000) 309,000
----------- -----------
Income before equity in undistributed earnings of
subsidiary 2,541,000 986,000
Equity in undistributed earnings of subsidiary 1,635,000 3,828,000
----------- -----------
Net earnings $ 4,176,000 4,814,000
=========== ===========
|
FNB Bancorp
Condensed statement of cash flows 2003 2002
--------------------------------------------------------- ----------- -----------
Net earnings $ 4,176,000 4,814,000
Change in other assets (11,000) (292,000)
Change in other liabilities (298,000) 601,000
Undistributed earnings of subsidiary (1,635,000) (3,828,000)
----------- -----------
Cash flows provided by operating activities 2,232,000 1,295,000
----------- -----------
Increase in investment to subsidiary 309,000 (13,000)
Capital expenditures -- (100,000)
----------- -----------
Cash flows used in investing activities 309,000 (113,000)
----------- -----------
Proceeds from exercise of common stock options 57,000 56,000
APIC 3,000 --
Dividends paid (1,476,000) (1,121,000)
Repurchases of common stock (1,177,000) --
----------- -----------
Cash flows provided by financing activities (2,593,000) (1,065,000)
----------- -----------
Net increase in cash (52,000) 117,000
Cash, beginning of period 117,000 --
----------- -----------
Cash, end of period $ 65,000 117,000
=========== ===========
|
Not Applicable.
As previously reported by the Company, the Board of Directors of the Company, on September 27, 2002, approved the recommendation of the Audit Committee of the Board of Directors to change the Company's independent auditors. The firm of Grant Thornton LLP served the Company as independent auditors for the 2001 fiscal year. On September 27, 2002, the Company notified Grant Thornton LLP of their dismissal and termination as independent auditors for the Company, effective September 30, 2002. Also as previously reported, the Company engaged KPMG LLP as the Company's independent auditors for the 2002 fiscal year, effective as of September 30, 2002, and have engaged them for the 2003 fiscal year as well.
Disclosure Controls and Procedures. Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in reports filed by the Company under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures and Internal Control Over Financial Reporting. The Company's management, including the Chief executive Officer and the Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2003. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There was no change in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART III
The information required by Item 10 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 2004 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 2004 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 2004 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 2004 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
The information required by Item 14 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 2004 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
PART IV
Listed and included in Part II, Item 8.
Not applicable.
Exhibit
Number Document Description
------------ ----------------------------------------------------------------
**2.1 Agreement and Plan of Reorganization between the Registrant and
First National Bank of Northern California, dated as of November
1, 2001 (included as Annex A to the proxy statement/prospectus).
**3.1 Articles of Incorporation of FNB Bancorp.
**3.2 Bylaws of FNB Bancorp.
**4.1 Specimen of the Registrant's common stock certificate.
**10.1 Lease agreement dated April 24, 1995, as amended, for Eureka
Square Branch Office of First National Bank of Northern
California at Eureka Square Shopping Center, Pacifica,
California.
**10.2 Lease agreement dated June 8, 1999, as amended, for Linda Mar
Branch Office of First National Bank of Northern California at
Linda Mar Shopping Center, Pacifica, California.
**10.3 Lease agreement dated August 21, 1996, as amended, for Flower
Mart Branch Office of First National Bank of Northern California
at 640 Brannon Street, Suite 102, San Francisco, California.
**10.4 Sublease agreement dated February 10, 1997, for San Mateo Branch
Office of First National Bank of Northern California at 491 El
Camino Real, Suite B, San Mateo, California (terminated).
**10.5 Lease Agreement dated April 13, 2000, for the Business Banking
Division of First National Bank of Northern California at 520
South El Camino Real, Suite 430, San Mateo, California
(terminated).
**10.6 First National Bank of Northern California 1997 Stock Option
Plan.*
**10.7 Form of Nonstatutory Stock Option Agreement under the First
National Bank of Northern California 1997 Stock Option Plan.*
**10.8(a) Form of Incentive Stock Option Agreement under the First
National Bank of Northern California 1997 Stock Option Plan.*
**10.8(b) Form of Incentive Stock Option Agreement (Standard Provisions
Under the First National Bank of Northern California 1997 Stock
Option Plan.*
**10.9 First National Bank Profit Sharing and 401(k) Plan dated August
26, 1969.*
**10.10 First National Bank Deferred Compensation Plan dated November 1,
1997.*
**10.11 Salary Continuation Agreement between First National Bank of
Northern California and Michael R. Wyman, dated December 20,
1996.*
**10.12 Salary Continuation Agreement between First National Bank of
Northern California and Paul B. Hogan, dated December 20, 1996.*
**10.13 Salary Continuation Agreement between First National Bank of
Northern California and James B. Ramsey, dated December 23,
1999.*
78
|
**10.14 Form of Management Continuity Agreement signed on July 20, 2000,
between First National Bank of Northern California and Jim D.
Black, Charles R. Key and Anthony J. Clifford.*
**10.15 Business Loan Agreement, dated August 15, 2001, between FNB
Bancorp, as Borrower, and Pacific Coast Bankers' Bank, as
Lender, with Promissory Note and related Loan Documents.
**10.16 Communications Site Lease Agreement as amended dated March 30,
1999, between First National Bank of Northern California, as
Lessor and Nextel of California, Inc. as Lessee, with respect to
Redwood City Branch Office.
**10.17 Note secured by Deed of Trust dated November 26, 1991, and
Modification Agreement dated September 1, 1999, between First
National Bank of Northern California, as borrower, and Bertha
Donati and Julio Donati, as lenders, with respect to the Colma
Branch Office of First National Bank of Northern California.
**10.18 Separation Agreement between First National Bank of Northern
California and Paul B. Hogan, dated December 5, 2001.*
***10.19 First Amendment to Separation Agreement between First National
Bank of Northern California and Paul B. Hogan, dated March 22,
2002.*
****10.20 FNB Bancorp Stock Option Plan (effective March 15, 2002)*
****10.21 FNB Bancorp Stock Option Plan, Form of Incentive Stock Option
Agreement*
****10.22 FNB Bancorp Stock Option Plan, Form of Nonstatutory Stock Option
Agreement*
*****10.23 FNB Bancorp 2002 Stock Option Plan (adopted June 28, 2002)*
*****10.24 FNB Bancorp 2002 Stock Option Plan, Form of Incentive Stock
Option Agreement*
*****10.25 FNB Bancorp 2002 Stock Option Plan, Form of Nonstatutory Stock
Option Agreement*
10.26 Lease agreement dated August 13, 2003, for San Mateo Branch
Office of First National Bank of Northern California, located at
150 East Third Avenue, San Mateo, CA 94401
14.0 Code of Ethics
21.1 The Registrant has one subsidiary, First National Bank of
Northern California.
23.1 Consent of KPMG LLP
23.2 Consent of Grant Thornton LLP
31.1 Rule 13a-14(a)/15d-14(a) Certification
(principal executive officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification
(principal financial officer)
32.0 Section 1350 Certifications
-----------------------
|
* Denotes management contracts, compensatory plans or arrangements.
** Incorporated by reference to registrant's Registration Statement on Form S-4 (No. 333-74954) filed with the Commission on December 12, 2001.
*** Incorporated by reference to registrant's Annual Report on Form 10-K filed with the Commission on March 31, 2002.
**** Incorporated by reference to registrant's Registration Statement on Form S-8 (No. 333-91596) filed with the Commission on July 1, 2002.
***** Incorporated by reference to registrant's Registration Statement on Form S-8 (No. 333-98293) filed with the Commission on August 16, 2002.
The following reports on Form 8-K were filed by the Company during the last quarter of 2003:
Date of Report Date Filed Subject of Report ----------------- ---------------- -------------------------------- November 28, 2003 December 2, 2003 Declared cash and stock dividend |
An Annual Report for the fiscal year ended December 31, 2003, and Notice of Annual Meeting and Proxy Statement for the Company's 2004 Annual Meeting will be mailed to security holders subsequent to the date of filing this Report. Copies of said materials will be furnished to the Commission in accordance with the Commission's Rules and Regulations.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FNB BANCORP
Dated: March 26, 2004 By: /s/ Thomas C. McGraw
------------------------------------------
Thomas C. McGraw
Chief Executive Officer
(Principal Executive Officer)
|
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date
----------------------- ---------------------------------- --------------
/s/ Michael R. Wyman Chairman of the Board of Directors March 26, 2004
-----------------------
Michael R. Wyman
/s/ Thomas C. McGraw Director, Chief Executive Officer March 26, 2004
----------------------- (principal executive officer) and
Thomas C. McGraw Secretary
/s/ James B. Ramsey Senior Vice President and Chief March 26, 2004
----------------------- Financial Officer (principal
James B. Ramsey financial officer and principal
accounting officer)
/s/ Neil J. Vannucci Director March 26, 2004
-----------------------
Neil J. Vannucci
/s/ Edward J. Watson Director March 26, 2004
-----------------------
Edward J. Watson
81
|
Signature Title Date
----------------------- ---------------------------------- --------------
/s/ Daniel J. Modena Director March 26, 2004
-----------------------
Daniel J. Modena
/s/ Lisa Angelot Director March 26, 2004
-----------------------
Lisa Angelot
/s/ Jim D. Black Director and President March 26, 2004
-----------------------
Jim D. Black
/s/ Anthony J. Clifford Director and Executive Vice March 26, 2004
----------------------- President and Chief
Anthony J. Clifford Operating Officer
/s/ R. Albert Roensch Director March 26, 2004
-----------------------
R. Albert Roensch
|
(FNB BANCORP Form 10-K for Year Ended December 31, 2003)
Exhibit Page
------- ----
10.26 Lease Agreement dated August 13, 2003, 84
for San Mateo Branch Office of First
National Bank of Northern California
14.0 Code of Ethics 99
23.1 Consent of KPMG LLP 101
23.2 Consent of Grant Thornton LLP 102
31.1 Rule 13a-14(a)/15d-14(a) Certification 103
(principal executive officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification 104
(principal financial officer)
32.0 Section 1350 Certifications 105
|
[GRAPHIC OMITTED] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
August 13, 2003 is made by and between Song Development Inc., a California
corporation ("Lessor") and First National Bank of Northern California, a
California corporation ("Lessee") (collectively the "Parties," or individually a
"Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease and commonly
known as 150 East Third Avenue, San Mateo located in the County of San Mateo
state of California, and generally described as (describe briefly the nature of
the Property and, if applicable, the "Project", if the property is located
within a Project) approximately 4,000 usable square feet of commercial space on
ground level ("Premises"). (See also Paragraph 2)
1.3 Term: Five (5) years and no extra months ("Original Term")
commencing upon execution of Lease ("Commencement Date") and ending 60 months
following Commencement Date ("Expiration Date"). (See also Paragraph 3)
1.4 Early Possession: Lessee may have possession upon Commencement
Date ("Early Possession Date") (See also Paragraphs 3.2 and 3.3)
1.5 Base Rent: $9,000.00 per month ("Base Rent"), payable on the
first day of each month commencing See "Rent Schedule" paragraph 56 (See also
Paragraph 4)
[X] If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.
1.6 Bare Rent and Other Monies Paid Upon Execution:
(a) Base Rent: $9,000.00 for the period of first month's rent
(b) Security Deposit: $15,000.00 ("Security Deposit"). (See also
Paragraph 5)
(c) Association Fees: $not applicable; none for the period (not
applicable)
(d) Other: $O.00 for n/a
(e) Total Due Upon Execution of this Lease: $24,000.00.
1.7 Agreed Use: Financial Institution and related products and
services (See also Paragraph 6)
1.8 Insuring Party: Lessor is the "Insuring Party" unless otherwise
stated herein (See also Paragraph 8)
1.9 Real Estate Brokers: (See also Paragraph 15)
(a) Representation: The following real estate brokers (the
"Brokers") and brokerage relationships exist in this transaction (check
applicable boxes):
[ ] _______________ represents Lessor exclusively ("Lessor's Broker");
[ ] _______________ represents Lessee exclusively ("Lessee's Broker"); or
[X] Michael Berube represents both Lessor and Lessee ("Dual Agency").
(b) Payment to Brokers: Upon execution and delivery of this
Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in their
separate written agreement (or if there is no such agreement, the sum of________
or ________% of the total Base Rent) for the brokerage services rendered by the
Brokers.
1.10 Guarantor. The obligations of the Lessee under this Lease are to
be guaranteed by _____________________________________ ("Guarantor"). (See also
Paragraph 37)
1.11 Attachments. Attached hereto are the following, all of which
constitute a part of this Lease:
[X] an Addendum consisting of Paragraphs 57 through 57;
[ ] a plot plan depicting the Premises;
[ ] a current set of the Rules and Regulations;
[ ] a Work Letter;
[ ] other (specify): options to Extend
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental and upon all of the
terms, covenants and conditions set forth in this Lease Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may
have been used in calculating Rent ,an approximation which the Parties agree is
reasonable and any payments based thereon are not subject to revision whether
or not the actual size is more or less Note: Lessee is advised to verify the
actual size prior to executing this Lease.
2.2 Condition. Lessor shall deliver the Premises to Lessee broom
clean and free of debris on the Commencement Date or the Early Possession Date
whichever first occurs ("Start Date"), and warrants that the existing
electrical, plumbing, fire sprinkler lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, sump pumps, if any, and al other
such elements in the Premises, other than those constructed by Lessee, shall be
in good operating condition on said date and that the structural elements of the
roof, bearing walls and foundation of any buildings on the Premises (the
"Building") shall be free of material defects. If a non-compliance with said
warranty exists as of the Start Date, or if one of such systems or elements
should malfunction or fail within the appropriate warranty period, Lessor shall,
as Lessor's sole obligation with respect to such matter. except as otherwise
provided in this Lease, promptly after receipt of written notice from Lessee
setting forth with specificity the nature and extent of such non-compliance,
malfunction or failure, rectify same at Lessor's expense. The warranty periods
shall be as follows: (i) 6 months as to the HVAC systems, and (ii) 30 days as to
the remaining systems and other elements of the Building. If Lessee does not
give Lessor the required notice within the appropriate warranty period.
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correction at any such non-compliance, malfunction or failure shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance, Lessee is accepting the premises in its "as is"
condition, and Lessor makes no representation or warranty warrants that the
improvements on the Premises comply with the building codes, applicable laws,
covenants or restrictions of record, regulations, and ordinances ("Applicable
Requirements") that were in effect at the time that each improvement, or portion
thereof, was constructed. NOTE: Lessee is responsible for determining whether or
not the Applicable Requirements, and especially the zoning, are appropriate for
Lessee's intended use, and acknowledge that past uses of the Premises may no
longer be allowed. If the Applicable Requirements are hereafter changed so as to
require during the term of this Lease the construction of an addition to or an
alteration of the premises and/or Building, the remediation of any Hazardous
Substance, or the reinforcement or other physical modification of the Unit
Premises and/or Building ("Capital Expenditure"), Lessor and Lessee shall
allocate the cost of such work as follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Lessee as compared with uses by tenants in general, Lessee shall be
fully responsible for the cost thereof, provided however that if such Capital
Expenditure is required during the last 2 years of this Lease and the cost
thereof exceeds 6 months Base Rent, Lessee may instead terminate this Lease
unless Lessor notifies Lessee in writing, within 10 days after receipt of
Lessee's termination not ice that Lessor has elected to pay the difference
between the actual cost thereof and an amount equal to 6 months' Base Rent. If
Lessee elects termination, Lessee shall immediately cease the use al the
premises which requires such Capital Expenditure and deliver to Lessor written
notice specifying a termination date at least 90 days thereafter. Such
termination date Shall, however, in no event be earlier than the last day that
Lessee could legally utilize the Premises without commencing such Capital
Expenditure.
(b) If such Capital Expenditure is not the result of the specific
and unique use of the Premises by Lessee (such as, governmentally mandated
seismic modifications) then Lessor and Lessee shall allocate the obligation to
pay for such costs pursuant to the provisions of Paragraph 7.1(d); provided,
however, that if such Capital Expenditure is required during the last 2 years of
this Lease or if Lessor reasonably determines that the cost of such compliance
exceeds $100,000.00 and Lessor does not intend to perform the capital
expenditures the Lessor shall have the option to terminate this Lease upon 90
days prior written notice to Lessee unless Lessee notifies Lessor, in writing,
within 10 days after receipt at Lessor's termination notice that Lessee will pay
for such Capital Expenditure, If Lessor does not elect to terminate, and fails
to tender its share of any such Capital Expenditure, Lessee may advance such
funds and deduct same, with interest, from Rent until Lessor's share of such
costs have been fully paid. If Lessee is unable to finance Lessor's share, or if
the balance of the Rent due and payable for the remainder of this Lease is not
sufficient to fully reimburse Lessee on an offset basis, lessee shall have the
right to terminate this Lease upon 30 days written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use, or modification to the Premises then, and in that event, Lessee shall
either: (i) immediately cease such changed use or intensity of use and/or take
such other steps as may be necessary to eliminate the requirement for such
Capital Expenditure, or (ii) complete such Capital Expenditure at its own
expense. Lessee shall not, however, have any right to terminate this Lease, if a
capital expenditure is triggered by Lessee as a result of an actual or proposed
change in use, change in intensity of use, or modification to the premises.
2.4 Acknowledgements. Lessee acknowledges that: (a) it has been
advised by Lessor and/or Brokers to satisfy itself with respect to the condition
of the Premises (including but not limited to the electrical, HVAC and fire
sprinkler systems, security, environmental aspects, and compliance with
Applicable Requirements and the Americans with Disabilities Act), and their
suitability for Lessees intended use, (b) Lessee has made such investigation as
it deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to its occupancy of the Premises, and (c) neither
Lesser, Lessors agents, nor Brokers have made any oral or written
representations or warranties with respect to said matters other than as set
forth in this Lease in addition, Lessor acknowledges that: (i) Brokers have made
no representations, promises or warranties concerning Lessee's ability to honor
the Lease or suitability to occupy the Premises, and (ii) it is Lessor's sole
responsibility to investigate the financial capability and/or suitability of all
proposed Tenants.
2.5 Lessee as Prior Owner/Occupant: The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises in such event, Lessee
shall be responsible for any necessary corrective work.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3
3.2 Early Possession. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this Lease
(including but not limited to the obligations to pay Real Property taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.
3.3 Delay in Possession. Lessor agrees to use its best commercially
reasonable efforts to deliver possess on of the Premises to Lessee by
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession by such date, Lessor shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Lease. Lessee shall not,
however, be obligated to pay Rent or perform its other obligations until Lessor
delivers possession of the Premises and any period of rent abatement that Lessee
would otherwise have enjoyed shall run from the date of delivery of possession
and continue for a period equal to what Lessee would otherwise have enjoyed
under the terms hereof, but minus any days of delay caused by the acts or
missions of Lessee. If possession is not delivered within 60 days after the
Commencement Date, Lessee may at its option, by notice in writing within 10 fter
the end of such 60 day period, cancel this Lease, in which event the Parties
shall be discharged from all obligations hereunder. If such written notice is
not received by Lessor within said 10 day period, Lessees right to Cancel shall
terminate. If possession of the Premises is not delivered within 120 days after
the Commencement Date, this Lease shall terminate unless other agreements are
reached between Lessor and Lessee, in writing.
3.4 Lessee Compliance. Lessor shall not be required to deliver
possession of the Premises to Lessee until Lessee complies with its obligation
to provide evidence of insurance (Paragraph 8.5). Pending delivery of such
evidence, Lessee shall be required to perform all of its obligations under this
Lease from and after the Start Date, including the payment of Rent,
notwithstanding Lessor's election to withhold possession pending receipt of such
evidence of insurance.
4. Rent.
4.1 Rent Defined. All monetary obligations of Lessee to Lessor under
the terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").
4.2 Payment. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States on or before the day on which it is
due, without offset or deduction (except as specifically permitted in this
Lease). Rent for any period during the term hereof which is for less than one
full calendar month shall be prorated based upon the actual number of days of
said month. Payment of Rent shall be made to Lessor at its address stated herein
or to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount due shall not be
a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's
endorsement of any check so stating. In the event that any check, draft, or
other instrument of payment given by Lessee to Lessor is dishonored for any
reason, Lessee agrees to pay to Lessor the sum of $25.00 in addition to any Late
Charge and Lessor, at its option, may require all future payments to be made by
Lessee to be by cashier's check. Payments will be applied first to accrued late
charges and attorney's fees, second to accrued interest, then to Base Rent and
Operating Expense Increase, and any remaining amount to any other outstanding
charges or costs.
4.3 Association Fees.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss of damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefor deposit monies with Lessor sufficient to restore said security Deposit to the full amount required by this Lease. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 14 days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within 30 days after the Premises have bee vacated pursuant to Paragraph 7.4 (c) below, Lessor shall return that portion of the Security Deposit
/s/ JIM BLACK /s/ WILLIAM SONG
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not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment fur any monies to be paid by Lessee under this Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the Agreed
Use, or any other legal use which is reasonably comparable thereto, and for no
other purpose. Lessee shall not use or permit the use of the Premises in a
manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
occupants of or causes damage to neighboring premises or properties. Lessor
shall not unreasonably withhold or delay its consent to any written request for
a modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, and/or is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within 7 days after
such request give written notification of same, which notice shall include an
explanation of Lessors objections to the change in the Agreed Use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous
Substance" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation or release, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the express prior
written consent of Lessor and timely compliance (at Lessees expense) with all
Applicable Requirements. "Reportable Use" shall mean (i) the installation or use
of any above or below ground storage tank. (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, ordinary office
supplies (copier toner, liquid paper, glue, etc.) and common household cleaning
materials, so long as such use is in compliance with all Applicable
Requirements, is not a Reportable Use, and does not expose the Premises or
neighboring property to any meaningful risk of contamination or damage or expose
Lessor to any liability therefor. In addition, Lessor may condition its consent
to any Reportable Use upon receiving such additional assurances as Lessor
reasonably deems necessary to protect itself, the public the Premises and/or the
environment against damage, contamination, injury and/or liability including,
but not limited to, the installation (and removal on or before Lease expiration
or termination) of protective modifications (such as concrete encasements)
and/or increasing the Security Deposit.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under, or about the Premises, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of such fact to Lessor, and provide
Lessor with a copy of any report, notice, claim or other documentation which it
has concerning the presence of such Hazardous Substance.
(c) Lessee Remediation. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee s expense, comply with all Applicable Requirements and take
all investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required, for the cleanup of any contamination and for the
maintenance, security and/or monitoring of the Premises or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance brought onto the Premises
during the term of this Lease, by or for Lessee.
(d) Lessee Indemnification. Lessee shall indemnify, defend and
hold Lessor, its agents, employees, lenders and ground lessor if any, harmless
from and against any and all loss of rents and/or damages liabilities,
judgments, claims. expenses, penalties, and attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto the Premises by
or for Lessee (provided, however that Lessee shall have no liability under this
Lease with respect to underground migration of any Hazardous Substance under the
Premises from adjacent properties not caused or contributed to by Lessee).
Lessee's obligations shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation, removal, remediation,
restoration and/or abatement, and shall survive the expiration or termination of
this Lease. No termination, cancellation or release agreement entered into by
Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances, unless specifically so agreed by Lessor in
writing at the time of such agreement.
(e) Lessor Indemnification. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and lenders.
harmless from and against any and all environmental damages, including the cost
of remediation which result from Hazardous Substances. which existed on the
Premises prior to Lessee' occupancy or which are caused by the gross negligence
or willful misconduct of Lessor, its agents or employees or by any person other
than Lessee,. Lessor's obligations, as and when required by the Applicable
Requirements, shall include, but not be limited to, the cost of investigation,
removal, remediation, restoration and/or abatement, and shall survive the
expiration or termination of this Lease.
(f) Investigations and Remediations. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to Lessee's occupancy, unless such
remediation measure is required as a result of Lessee's use (including
"Alterations"' as defined in paragraph 7.3 (a) below) of the Premises, in which
event Lessee shall be responsible for such payment. Lessee shall cooperate fully
in any such activities at the request of Lessor, including allowing Lessor and
Lessor's agents to have reasonable access to the Premises at reasonable times in
order to carry out Lessor's investigative and remedial responsibilities, without
unreasonably interfering with the conduct of Lessee's business on the premises.
6.3 Lessee's Compliance with Applicable Requirements. Except as
otherwise provided in this Lease, Lessee shall at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, which relate in any manner to the such Requirements, without
regard to whether such Requirements are now in effect or become effective after
the Start Date. Lessee shall, within 10 days after receipt of Lessor's written
request, provide Lessor with copies of all permits and other documents and other
information evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediate y upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
the failure of Lessee or the Premises to comply with any Applicable Requirements
6.4 Inspection; Compliance. Lessor and Lessor's "Lender" (as defined
in Paragraph 30) and consultants shall have the right to enter into Premises at
any time, in the case of an emergency, and otherwise at reasonable timer after
reasonable notice, for the purpose of inspecting the condition of the Premises
and for ver tying compliance by Lessee with this Lease The cost of any such
inspections shall be paid by Lessor, unless a violation of Applicable
Requirements, or a Hazardous Substance Condition (see paragraph 9.1) is found to
exist or be imminent, or the inspection is requested or ordered by a
governmental authority and the contamination is Lessee's responsibility as
described above. In such case, Lessee shall upon request reimburse Lessor for
the cost of such inspection so long as such inspection is reasonably related to
the violation or contamination . In addition, Lessee shall provide copies of all
relevant material safety data sheets (MSDS) to Lessor within 10 days of the
receipt of a written request therefor.
7. Maintenance: Repairs, Utility Installations; Trade Fixtures and
Alterations
7.1 Lessee's Obligations.
(a) In General. Subject to the provisions of Paragraph 22
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises
Utility Installations (intended for Lessee's exclusive use, no matter where
located), and Alterations in good order, condition and repair (whether or riot
the portion of the Premises requiring repairs, or the means of repairing the
same, are reasonably or readily accessible to Lessee, and whether or not the
need for such repairs occurs as a result of Lessee's use, any prior use, the
elements or the age of such portion of the Premises), including, but not limited
to, all equipment or facilities, such as plumbing, HVAC equipment, electrical,
lighting facilities, boilers, pressure vessels, fire protection system,
fixtures, walls (interior and exterior), foundations, ceilings, roofs. roof
drainage systems , floors, windows, doors, plate glass, skylights, landscaping,
driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways
located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in
good order, condition and repair, shall exercise and perform good maintenance
practices, specifically including the procurement and maintenance of the service
contracts required.
/s/ JIM BLACK /s/ WILLIAM SONG
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by Paragraph 7.1 (b) below. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or part thereof, in good order, condition and state of
repair. Lessor shall during the term of this Lease, keep the exterior appearance
of the Building in a first-class condition( including, e.g. graffiti removal)
consistent with the exterior appearance of other similar facilities of
comparable age and size in the vicinity, including, when necessary, the exterior
repainting of the Building.
(b) Service Contracts. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels. (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) drains, (vi) clarifiers,
(vii) basic utility feed to the perimeter of the Building and (viii) any other
equipment, if reasonably required by Lessor. However, Lessor reserves the right,
upon notice to Lessee, to procure and maintain any or all of such service
contracts, and if Lessor so elects, Lessee shall reimburse Lessor upon demand,
for the cost thereof.
(c) Failure to Perform. If Lessee fails to perform Lessee `s
obligations under this Paragraph 7.1, Lessor may enter upon the Premises after
10 days' prior written notice to Lessee (except in the case of an emergency, in
which case no notice shall be required), perform such obligations on Lessee's
behalf and put the Premises in good order, condition and repair, and Lesser
shall promptly pay to Lessor a sum equal to 115% of the cast thereof.
(d) Replacement. Subject to Lessee's indemnification of Lessor as
set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if an item described in Paragraph 7.1(b) cannot be repaired other
than at a cost which is in excess of 50% of the cost of replacing such item,
then such item shall be replaced by Lessor, and the cost thereof shall be
prorated between the Parties and Lessee shall only be obligated to pay, each
month during the remainder of the term of this Lease, on the date on which Base
Rent is due, an amount equal to the product of multiplying the cost of such
replacement by a fraction, the numerator of which is one, and the denominator of
which is 144 (i.e. 1/144th of the cost per month). Lessee shall pay interest on
the unamortized balance at a rate that is commercially reasonable in the
judgment of Lessor's accountants. Lessee may, however, prepay its obligation at
any time.
7.2 Lessor's Obligation. Subject to the provisions of Paragraphs
2.2(Condition), 2.3(Compliance), 9 (Damage or Destruction) and 14
(Condemnation), it is intended by the Parties hereto that Lessor have no
obligation in any manner whatsoever, to repair and maintain the Premises, or the
equipment therein, all of which obligations are intended to be that of the
Lessee. It is the intention of the Parties that the terms of this Lease govern
the respective obligations of the Parties as to maintenance and repair of the
Premises, and they expressly waive the benefit of any statute now or hereafter
effect to the extent it is inconsistent with the terms of this Lease. Lessor
shall be responsible for maintenance, repair, and replacement of all structural
components of the building, exterior walls, storefront, roof, and the building
foundation. Lessor shall not be responsible for shoring up the foundation to
accommodate the Lessee's new vault..
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions. The term "Utility Installation" refers to all
door and window coverings, air and/or vacuum lines, power panels, electrical
distribution, security and fire protection systems, communication cabling,
lighting fixtures, HVAC equipment, plumbing and fencing in or on the Premises.
The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can
be removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the improvements, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned
Alterations and/or Utility Installation" are defined as Alterations and/or
Utility installations made by Lessee that are not yet owned by Lessor pursuant
to Paragraph 7.4 (a).
(b) Consent. Lessee shall not make any alterations or Utility
installations to the Premises without Lessor's prior written consent. Lessee may
however, make nonstructural Utility installations to the interior of the
Premises (excluding the roof) without such consent but upon notice to Lessor, as
long as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, will not affect the
electrical, plumbing, HVAC and/or the safety systems. Notwithstanding the
foregoing, Lessee shall not make or permit any roof penetrations and/or install
anything on the roof without the prior written approval of Lessor. Lessor may as
a precondition to granting such approval, require Lessee to utilize a contractor
chosen and/or approved by Lessor, Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with the detailed plans. Consent shall be
deemed conditioned upon Lessee's: (i) acquiring all applicable governmental
permits, (ii) furnishing Lessor with copies of both the permits and the plans
and specifications prior to commencement of the work, and (iii) compliance with
all conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner . Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount n excess. of one month's Base Rent, Lessor may
condition its consent upon Lessee providing a lien and completion bond in an
amount equal to 150% of the estimated cost of such Alterations or Utility
Installation and/or upon Lessee's posting an additional Security Deposit with
Lessor.
(c) Liens; Bonds. Lessee shall pay, when due, al claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than 10 days notice prior to the commencement of any work
in, on or about the Premises, and Lessor shall have the right to post notices of
non-responsibility. If Lessee shall contest the validity of any such lien, claim
or demand, then Lessee shall at its sole expense defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon before the enforcement thereof. If
Lessor shall require, Lessee shall furnish a surety bond in an amount equal to
150% of the amount of such contented lien, claim or demand, indemnifying Lessor
against liability for the same. If Lessor elects to participate in any such
action, Lessee shall pay Lessor's attorneys' fees and costs.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessors right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Unless otherwise instructed per paragraph 7.4 (b) hereof,
all Lessee Owned Alterations and Utility installations shall, at the expiration
or termination of this Lease, become the property of Lessor and be surrendered
by Lessee with the Premises.
(b) Removal. By delivery to Lessee of written notice from Lessor
not earlier than 90 and not later than 30 days prior to the end of this term of
this Lease, Lessor may require that any or all Lessee Owned Alterations or
Utility installations be removed by the expiration or termination of this Lease.
Lessor may require the remove at any time of all or any part of any lessee Owned
Alterations or Utility Installations made without the required consent.
(c) Surrender; Restoration. Lessee shall surrender the Premises
by the Expiration Date or any earlier termination date with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice. Notwithstanding the
foregoing, if this Lease is for 12 months or less, then Lessee shall surrender
the Premises in the same condition as delivered to Lessee on the Start Date with
NO allowance for ordinary wear and tear. Lessee shall repair any damage
occasioned by the installation maintenance or removal of Trade Fixtures, Lessee
owned Alterations and/or Utility Installations, furnishings, and equipment as
well as the removal of any storage tank installed by or for Lessee. Lessee shall
completely remove from the Premises any and all Hazardous Substances brought
onto the Premises by or for Lessee (except Hazardous Substances which were
deposited via underground migration from areas outside of the Premises, or if
applicable, the Project) even if such removal would require Lessee to perform or
pay for work that exceeds statutory requirements. Trade Fixtures shall remain
the property of Lessee and shall be removed by Lessee. Any personal property of
Lessee not removed on or before the Expiration Date or any earlier termination
date shall be deemed to have been abandoned by Lessee and may be disposed of or
retained by Lessor as Lessor may desire. The failure by Lessee to timely vacate
the Premises pursuant to this Paragraph 7.4 (c) without the express written
consent of Lessor shall constitute a holdover ender the provisions of Paragraph
26 below.
8. insurance; Indemnity.
8.1 Payment For Insurance. Lessee shall pay for all Insurance
required under Paragraph 8 except to the extent of the cost attributable to
liability insurance carried by Lessor under Paragraph 8.2(b) in excess of
$2,000,000 per occurrence. Premiums for policy periods commencing prior to or
extending beyond the Lease term shall be prorated to correspond to the Lease
term Payment shall be made by Lessee to Lessor within 30 10 days following
receipt of an invoice.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force a
Commercial General Liability policy of insurance protecting Lessee and Lessor as
an additional insured against claims for bodily injury, personal injury and
property damage based upon or arising out of the ownership, use, occupancy or
maintenance al the Premises and all areas appurtenant thereto. Such insurance
shall be on an occurrence basis providing single limit coverage in an amount not
less than $1,000,000 per occurrence with an annual aggregate of not less than
$2,000,000, an "Additional Insured-Managers or Lessors of Premises Endorsement,
and contain the "Amendment of the Pollution Exclusion Endorsement" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not contain
any intra-insured exclusions as between insured persons or organizations, but
shall include coverage for liability assumed under this Lease as an "insured
contract" 'for the performance of Lessee's indemnity obligations under this
Lease The limits of said insurance shall not, however, limit the liability of
Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by
Lessee shall be primary to and not contributory with any similar insurance
carried by Lessor, whose insurance shall be considered excess insurance only.
(b) Carried by Lessor. Lessor shall maintain liability insurance
as described in Paragraph 8.2 (a), in addition to and not in lieu of, the .
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insurance required to he maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and improvements. The insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss payable
to Lessor, any ground-lessor and to any Lender insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lender, but in no event more than the commercially reasonable
and available insurable value thereof. If Lessor is the insuring Party, however,
Lessee Owned Alterations and Utility Installations Trade Fixtures, and Lessee's
personal property shall be insured by Lessee under Paragraph 8.4 rather than by
Lessor. If the coverage is available and commercially appropriate such policy or
policies shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a Lender),
including coverage for debris removal and the enforcement of any Applicable
Requirements requiring the upgrading, demolition, reconstruction or replacement
of any portion of the Premises as the result of a covered loss. Said policy or
policies shall also contain an agreed valuation provision in lieu of any
coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted US. Department of Labor Consumer Price Index for
all Urban Consumers for the city nearest to where the Premises are located if
such insurance coverage has a deductible clause., the deductible amount shall
not exceed $1 000 per occurrence, and Lessee shall be Iiable for such deductible
amount in the event of an Insured Loss.
(b) Rental Value. The insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor with loss payable to Lessor and
any lender, insuring the loss of the full Rent for one year with an extended
period of indemnity for an additional 180 days ("Rental Value Insurance"). Said
insurance shall contain an agreed valuation provision in lieu of any coinsurance
clause, and the amount of coverage shall be adjusted annually to reflect the
projected Rent otherwise payable by Lessee, for the next 12 month period. Lessee
shall be liable for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to the
Premises, the Lessee shall pay for any increase in the premiums for the property
insurance of such building or buildings if said increase is caused by Lessee's
acts, omissions use or occupancy of the Premises.
8.4 Lessee's Property; Business Interruption Insurance.
(a) Property Damage. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $10,000.00 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) Business Interruption. Lessee shall obtain and maintain loss
of income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c) No Representation of Adequate Coverage. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business, operations or
obligations under this Lease.
8.5 Insurance Policies. Insurance required herein shall I be by
companies duly licensed or admitted to transact business in the state where the
Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, as set forth in the mast current issue
of "Best Insurance Guide", or such other rating as may be required by a Lender.
Lessee shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after 30 days prior written notice
to Lessor. Lessee shall, at east 30 days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand. Such policies shall I be for a term of at least one year, or the length
of the remaining term of this Lease whichever is less. If either Party shall
fail to procure and maintain the insurance required to be carried by it, the
other Party may but shall not be required to, procure and maintain the same.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages against the other, for loss of or damage
to its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.
8.7 Indemnity. Except for Lessor's gross negligence or willful
misconduct, or breach under this Lease, Lessee shall indemnify, protect, defend
and hold harmless the Premises, Lessor and its agents, Lessor's master or ground
lessor, partners and Lender, from and against any and all claims, loss of rents
and/or damages, liens, judgments penalties, attorneys, and consultants' fees,
expenses and/or liabilities arising out of, involving, or in connection with the
use and/or occupancy of the Premises by Lessee. If any act on or proceeding is
brought against Lessor by reason of any of the foregoing matters, Lessee shall,
upon notice defend the same at Lessee's expense by counsel reasonably
satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense.
Lessor need not have first paid any such claim in order to be defended or
indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or any
other person in or about the Premises, whether such damage or injury is caused
by or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage result s from conditions arising upon the
Premises or upon other portions of the building at which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor nor from
the failure of Lessor to enforce the provisions of any other lease in the
Project. Not Withstanding Lessor's negligence or breach of this Lease, Lessor
shall under no circumstances be liable for injury to Lessee's business or for
any loss of income or profit therefrom. Lessor shall remain liable for claims
arising out of Lessor's gross negligence, willful misconduct r breach under the
Lease.
8.9 Failure to Provide Insurance. Lessee acknowledges that any
failure on its part to obtain or maintain the insurance required herein will
expose Lessor to risks and potentially cause Lessor to incur costs not
contemplated by this Lease, the extent of which will be extremely difficult to
ascertain. Accordingly, for any month or portion thereof that Lessee does not
maintain the required insurance and/or does not provide Lessor with the required
binders or certificates evidencing the existence of the required insurance, the
Base Rent shall be automatically increased, without any requirement for notice
to Lessee by an amount equal to 10% of the then existing Base Rent or $100,
whichever is greater. The parties agree that such increase in Base Rent
represents fair and reasonable compensation for the additional risk/ costs that
Lessor will incur by reason of Lessee's failure to maintain the required
insurance. Such increase in Base Rent shall in no event constitute a waiver of
Lessee's Default or Breach with respect to the failure to maintain such
insurance, prevent the exercise of any of the other rights and remedies granted
hereunder, nor relieve Lessee of its obligation to maintain the insurance
specified in this Lease.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in 6 months or less from
the date of the damage or destruction. Lessor shall notify Lessee in writing
within 30 days from the date of the damage or destruction as to whether or not
the damage is Partial or Total.
(b) "Premises Total Destruction" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility Installations
and Trade Fixtures, which cannot reasonably be repaired in 6 months or less from
the date of the damage or destruction. Lessor shall notify Lessee in writing
within 30 days from the date of the damage or destruction as to whether or not
the damage is Partial or Total.
(c) "Insured Loss" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition debris
removal and upgrading required by the operation of Applicable Requirements, and
without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by a
Hazardous Substance as defined in Paragraph6.2 (a), in, on, or under the
Premises which requires repair, remediation, or restoration.
9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that
is an insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee s Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as scan as reasonably possible and this Lease shall continue in
full force and effect; Notwithstanding the foregoing, if the required insurance
was not in force or the insurance proceeds are not sufficient to effect such
repair, the Insuring Party shall Promptly contribute the shortage in proceeds
(except as to the deductible which is Lessee's responsibility) as and when
required to complete said repairs. In the event, however, such shortage was due
to the fact that, by reason of the unique nature of the improvements, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within 10 days following receipt of written notice of such shortage and request
therefor. If Lessor receives said funds or adequate assurance thereof within
said 10 day period, the party responsible far making the repairs shall complete
them as soon as reasonably possible and this Lease shall remain in full force
and effect. If
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such funds or assurance are not received, Lessor may nevertheless elect by
written notice to Lessee within 10 days thereafter to: (i) make such restoration
and repair as is commercially reasonable with Lessor paying any shortage in
proceeds, in which case this Lease shall remain in full force and effect or (ii)
have this Lease terminate 30 days thereafter. Lessee shall not be entitled to
reimbursement of any funds contributed by Lessee to repair any such damage or
destruction. Premises Partial Damage due to flood or earthquake shall be subject
to Paragraph 9.3, not withstanding that there may be some insurance coverage,
but the net proceeds of any such insurance shall be made available for the
repairs if made by either Party.
9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a gross negligent or
willful act of Lessee (in which event Lessee shall make the repairs at Lessee's
expense), Lessor may either: (i) repair such damage as soon as reasonably
possible at Lessor's expense, in which event this Lease shall Continue in full
force and effect, or (ii) terminate this Lease by giving written notice to
Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of
such damage that exceeds $100,000 and limited to circumstances in which Lessor
does not intended to rebuild the Premises. Such termination shall be effective
60 days following the date of such notice. In the event Lessor elects to
terminate this Lease, Lessee shall have the right within 10 days after receipt
of the termination notice to give written notice to Lessor of Lessee s
commitment to pay for the repair of such damage without reimbursement from
Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance
thereof within 30 days after making such commitment. In such event this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
repairs as soon as reasonably possible after the required funds are available.
If Lessee does not make the required commitment, this Lease shall terminate as
of the date specified in the termination notice
9.4 Total Destruction. Notwithstanding any other provision hereof, if
a Premises Total Destruction occurs, this Lease shall terminate 60 days
following such Destruction and if Lessor does not rebuild the premises. If the
damage or destruction was caused by the gross negligence or willful misconduct
of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee,
except as provided in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last 6 months
of this Lease there is damage for which the cost to repair exceeds one month's
Base Rent, whether or not an insured Loss, Lessor and/or Lessee may terminate
this Lease effective 60 days following the date of occurrence of such damage by
giving a written termination notice to Lessee within 30 days after the date of
occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time
has an exercisable option to extend this Lease or to purchase the Premises, then
Lessee may preserve this Lease by, (a) exercising such option and (b) providing
Lessor with any shortage in insurance proceeds (or adequate assurance thereof)
needed to make the repairs on or before the earlier of (i) the date which a 10
days after Lessee's receipt of Lessors written notice purporting to terminate
this Lease, or (ii) the day prior to the date upon which such option expires. If
Lessee duly exercises such option during such period and provides Lessor with
funds (or adequate assurance thereof) to cover any shortage in insurance
proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such
damage as soon as reasonably possible and this Lease shall continue in full
force end effect. If Lessee fails to exercise such option and provide such funds
or assurance during such period, then this Lease shall terminate on the date
specified in the termination notice and Lessee's option shall be extinguished.
9.6 Abatement of Rent; Lessee's Remedies.
(a) Abatement. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which Lessee
is riot responsible under this Lease, the Rent payable by Lessee for the period
required for the repair, remediation or restoration of such damage shall be
abated in proportion to the degree to which Lessee s use of the Premises is
impaired but not to exceed the proceeds received from the Rental Value
insurance. All other obligations of Lessee hereunder shall be performed by
Lessee, and Lessor shall have no liability for any such damage, destruction,
remediation, repair or restoration except as provided herein. Rent abatement
begins on the date of the occurrence.
(b) Remedies. If Lessor shall be obligated to repair or restore
the Premises and does not commence, in a substantial and meaningful way, such
repair or restoration within 90 days alter such obligation shall accrue. Lessee
may, at any time prior to the commencement of such repair or restoration, give
written notice to Lessor and to any Lenders of which Lessee has actual notice,
of Lessee's election to terminate this Lease on a date not less than 60 days
following the giving of such notice. If Lessee gives such notice and such repair
or restoration is not commenced within 30 days thereafter, this Lease shall
terminate as of the date specified in said notice. If the repair or restoration
is commenced within such 30 days, this Lease shall continue in full force and
effect. "Commence" shall mean either the unconditional authorization of the
preparation of the required plans or the beginning of the actual work on the
Premises, whichever first occurs.
9.7 Termination; Advance Payments. Upon termination of this Lease
pursuant to Paragraph 6.2 (g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by Lessee
to Lessor. Lessor shall in addition return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by Lessor.
9.8 Waive Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 Definition. As used herein, the term "Real Property Taxes" shall
include any form of assessment; real estate, general, special, ordinary or
extraordinary, or rental levy or tax (other than inheritance, personal income or
estate taxes); improvement bond and/or license fee imposed upon or levied
against any legal or equitable interest of Lessor in the Premises or the
Project, Lessor's right to other income therefrom and/or Lessor's business of
leasing, by any authority having the direct or indirect power to tax and where
the funds are generated with reference to the Building address and where the
proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. Real
Property Taxes shall also include any tax, fee, Levy, assessment or charge, or
any increase therein: (i) imposed by reason of events occurring during the term
of this Lease, including but not limited to, a change in the ownership of the
Premises, and (ii) levied or assessed on machinery or equipment provided by
Lessor to Lessee pursuant to this Lease.
10.2 Payment of Taxes. In addition to Base Rent, Lessee shall pay to
Lessor an amount equal to the Real Property Tax installment due at least 20 days
prior to the applicable delinquency date. If any such installment shall cover
any period of time prior to or after the expiration or termination of this
Lease, Lessee's share of such installment shall be prorated. In the event Lessee
incurs a late charge on any Rent payment, Lessor may estimate the current Real
Property Taxes, and require that such taxes be paid in advance to lessor by
Lessee monthly in advance with the payment of the Base Rent. Such monthly
payments shall be an amount equal to the amount of the estimated installment of
taxes divided by the number of months remaining before the month in which said
installment becomes delinquent. When the actual amount of the applicable tax
bill is known, the amount of such equal monthly advance payments shall be
adjusted as required to provide the funds needed to pay the applicable taxes. If
the amount collected by Lessor is insufficient to pay such Real Property Taxes
when due, Lessee shall pay Lessor upon demand, such additional sum as is
necessary. Advance payments may be intermingled with other moneys of Lessor and
shall not bear interest. In the event of a Breach by Lessee in the performance
of its obligations under this Lease, then any such advance payments may be
treated by Lessor as an additional Security Deposit.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's ability shall be an equitable proportion of the Real Property Taxes for
all of the land and Improvements included within the tax parcel assessed, such
proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.
10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency,
all taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause its Lessee Owned Alterations and
Utility Installations, Trade Fixtures, furnishings, equipment and all other
persona property to be assessed and billed separately from the real property of
Lessor. If any of Lessee's said property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee's property
within 10 days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. Utilities and Services. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered or billed to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered or billed. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "assign or assignment" ) or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.
(b) Unless Lessee is a corporation and its stock is publicly
traded on a national stock exchange, a change n the control of Lessee shall
constitute an assignment requiring consent. The transfer, on a cumulative basis,
of 50% or more of the voting control of Lessee shall constitute a change in
control for this purpose.
(c) The involvement of Lessee or its assets on any transaction,
or series of transactions (by way of merger, sale, acquisition, financing,
transfer, leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount greater than 25%
of such Net Worth as it exists immediately prior to said transaction or
transactions constituting such reduction shall be considered an assignment of
this Lease to which Lessor may withhold its consent. "Net Worth of Lessee" shall
mean the net worth of Lessee (excluding any guarantors) established under
generally accepted accounting principles.
(d) An assignment or subletting without consent shall, at
Lessor's Option, be a Default curable after notice per Paragraph 13.1 (c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a noncurable
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Breach. Lessor may either: (i) terminate this Lease, or (ii) upon 30 days
written notice, increase the monthly Base Rent to 110% of the Base Rent then in
effect. Further, in the event of such Breach and rental adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to 110% of the price previously in effect, and
(ii) all fixed and non-fixed rental adjustments scheduled during the remainder
of the Lease term shall be increased to 110% of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages, and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, no assignment or subletting
shall: (i) be effective without the express written assumption by such assignee
of the obligations of Lessee under this Lease, (ii) release Lessee of any
obligations hereunder, or (iii) alter the primary liability of Lessee for the
payment of Rent or for the performance of any other obligations to be performed
by Lessee.
(b) Lessor may accept Rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or Subletting shall not
constitute a consent to any subsequent assignment or subletting,
(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee without first exhausting Lessor's remedies against any other person
or entity responsible therefor to Lessor, or any security held by Lessor.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises if any, together with a fee of $500
as consideration for Lessor's considering and processing said request. Lessee
agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested (See also Paragraph 36)
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed to
have assumed and agreed to conform and comply with each and every term,
covenant, condition and obligation herein to be observed or performed by Lessee
during the term of said assignment or sublease, other than such obligations as
are contrary to or inconsistent with provisions of an assignment or sublease to
which Lessor has specifically consented to in writing.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessees
interest in of Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease; provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. In the event that the amount collected by Lessor
exceeds Lessee's obligations any such excess shall be refunded to Lessee. Lessor
shall not, by reason of the foregoing or any assignment of such sublease, nor by
reason of the collection of Rent be deemed liable to the sublessee for any
failure of Lessee to perform and comply with any of Lessee's obligations to such
sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee,
upon receipt of a written notice from Lessor stating that a Breach exists in the
performance of Lessee's obligations under this Lease, to pay to Lessor all Rent
due and to become due under this sublease. Sublessee shall rely upon any such
notice from Lessor and shall pay all Rents to Lessor without any obligation or
right to inquire as to whether such Breach exists, notwithstanding any claim
from Lessee to the contrary.
(b) In the event of a Breach by Lessee. Lessor may, at its
option, require sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of the sublessor under such sublease from the time of
the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or far any prior Defaults or Breaches
of such sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
12.4 Additional Terms applicable to Subletting (see page page 11)
13 Default; Breach; Remedies.
13.1 Default; Breach. A "Default" is defined as failure by the Lessee
to comply with or perform any of the terms, covenants, conditions or Rules and
Regulations under this Lease. A "Breach" is defined as the occurrence of one or
more of the following Defaults, and the failure of Lessee to cure such Default
within any applicable grace period:
(a) The abandonment of the Premises;' or the vacating of the
Premises without providing a commercially reasonable level of security or where
the coverage of the property insurance described in Paragraph 8.3 is jeopardized
as a result thereof, or without providing reasonable assurances to minimize
potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder whether to Lessor or to
a third party, when due to provide reasonable evidence of Insurance or surety
bond, or to fulfill any obligation under this Lease which endangers or threatens
life or property, where such failure continues for a period of 5 (3) business
days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service contracts,
(iii) the rescission of an unauthorized assignment or subletting, (iv) an
Estoppel Certificate, (v) a requested subordination, (vi) evidence concerning
any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42;
(viii) material safety data sheets (MSDS), or (ix) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of 20 (10) days
following written notice to Lessee.
(d) A Default by Lessee as to the terms covenants, conditions or
provisions of this Lease or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1 (a), (b) or (c), above, where
such Default continues for a period of 30 days after written notice provided,
however, that the nature of Lessee's Default is such that more than 30 days are
reasonably required for its cure, then it shall not be deemed to be a Breach if
Lessee commences such cure within said 30 day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: ( i) the
making of any general arrangement or assignment for the benefit of creditors;
(ii) becoming a "Debtor"' as defined in 11 U.S.C. ss.101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within 60 days), (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located of
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within 30 days: or (iv) the attachment, execution or other
judicial seizure of substantially all of Lessee's assets located at the Premises
or of Lessee's interest in this Lease, where such seizure is not discharged
within 30 days; provided, however, in the event that any provision of this
subparagraph (e) is contrary to any applicable law, such provision shall be of
no force or effect, and not affect the validity of the remaining provisions.
(f) The discovery that any financial statement of Lessee or of
any Guarantor given to Lessor was materially false.
(g) The performance of Lessee's obligations under this Lease is
guaranteed: (I) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory basis, and
Lessee's failure, within 60 days following written notice of any such event, to
provide written alternative assurance or security, which, when coupled with the
then existing resources of Lessee, equals or exceeds the combined financial
resources of Lessee and the Guarantors that existed of the time of execution of
this Lease.
13.2 Remedies. If Lessee fails to perform any of its affirmative
duties or Obligations, within 10 days after written notice (or in case of an
emergency, without notice), Lessor may, of its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. Lessee shall pay to Lessor an amount equal to 115% of the costs
and expenses incurred by Lessor in such performance upon receipt of an invoice
therefor. In the event of a Breach, Lessor may with or without further notice or
demand and without limiting Lessor in the exercise of any right or remedy which
Lessor may have by reason of such Breach.
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination: (ii) the worth at the time of award of the amount by
Which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided: (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee'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 the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connect on with this Lease
applicable to the unexpired term of this Lease The worth at the time of award of
the amount referred to in provision (iii) of the immediately preceding sentence
shall be computed by discounting such amount of the discount rate of the Federal
/s/ JIM BLACK /s/ WILLIAM SONG
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Reserve Bank of the District within which the Premises are located at the time
of award plus one percent. Efforts by Lessor to mitigate damages caused by
Lessee's Breach of this Lease shall not waive Lessors right to recover damages
under Paragraph 12. If termination of this Lease is obtained through the
provisional remedy of unlawful detainer, Lessor shall have the right to recover
in such proceeding any unpaid Rent and darnages as are recoverable therein, or
Lessor may reserve the right to recover all or any part thereof in a separate
suit. If a notice and grace period required under Paragraph 13.1 was not
previously given, a notice to pay rent or quit, or to perform or quit given to
Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1 in such case, the applicable grace period required by
Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the
failure of Lessee to cure the Default within the greater of the two such grace
periods shall constitute both an unlawful detainer and a Breach of this Lease
entitling Lessor to the remedies provided for in thin Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due in which event Lessee may sublet or assign,
subject only to reasonable limitations. Acts of maintenance efforts to relet,
and/or the appointment of a receiver to protect the Lessor's interests shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under the
laws or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possess on shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee s occupancy of the Premises.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within 5 days after such amount shall be due,
then, without any requirement for notice to Lessee, Lessee shall immediately pay
to Lessor a one lime late charge equal to 10% of each such overdue amount or
$100, whichever is greater. The Parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of such late payment. Acceptance of such late charge by Lessor shall in
no event constitute a waiver of Lessee's Default or Breach with respect to such
overdue amount, nor prevent the exercise of any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder, whether
or not collected, for 3 consecutive installments of Base Rent, then
notwithstanding any provision, of this Lease to the contrary, Base Rent shall ,
at Lessors option, become due and payable quarterly in advance.
13.5 Interest. Any monetary payment due Lessor hereunder, other than
late charges not received by Lessor, when due as to scheduled payments (such as
Base Rent) or within 30 days following the date on which it was due for
nonscheduled payment, shall bear interest from the date when due, as to
scheduled payments, or the 31st day after it was due as to non-scheduled
payments the interest ("Interest") charged shall he computed at the rate of 10%
per annum but shall not exceed the maximum rate allowed by law. Interest is
payable in addition to the potential late charge provided for in Paragraph 13.4.
13.6 Breach by Lessor.
(a) Notice of Breach. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than 30 days after receipt by Lessor, and any
Lender whose name and address shall have been furnished Lessee in writing for
such purpose, of written notice specifying wherein such obligation of Lessor has
not been performed; provided, however, that if the nature of Lessor's obligation
is such that more than 30 days are reasonably required for its performance, then
Lessor shall not be in breach if performance s commenced within such 30 day
period and thereafter diligently pursued to completion.
(b) Performance by Lessee on Behalf of Lessor. In the event that
neither Lessor nor Lender cures said breach within 30 days after receipt of said
notice, or if having commenced said cure they do not diligently pursue it to
completion, then Lessee may elect to cure said breach of Lessee's expense and
offset from Rent the actual and reasonable cost to perform such cure, reserving
Lessee's right to seek reimbursement from Lessor. Lessee shall document the cost
of said cure and supply said documentation to Lessor.
14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of Said power (collectively "Condemnation"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the Building, or more than 25% of that portion of the premises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within 10 days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the part on of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether of not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and a compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation.
15. Brokerage Fees.
15.1 Additional Commission. In addition to the payments owed pursuant
to Paragraph 1.9 above, and unless Lessor and the Brokers otherwise agree in
writing, Lessor agrees that, (a) if Lessee exercises any Option, (b) if Lessee
acquires any rights to the Premises or other premises owned by Lessor and
located within the same Project, if any, within which the Premises is located,
(c) if Lessee remains in possession of the Premises, with the consent of Lessor,
after the expiration of this Lease, or (d) if Base Rent is increased, whether by
agreement or operation of an escalation clause herein, then, Lessor shall pay
Brokers a fee in accordance with the schedule of the Brokers in effect at the
time of the execution of this Lease.
15.2 Assumption of Obligation. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Brokers shall be third party beneficiaries of the provisions of
Paragraphs 1.9, 15, 22 and 31. If Lessor fails to pay to Brokers any amounts due
as and for brokerage fees pertaining to this Lease when due, then such amounts
shall accrue interest in addition, if Lessor fails to pay any amounts to
Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and
Lessee of such failure and if Lessor fails to pay such amounts within 10 days
after said notice, Lessee shall pay said monies to its Broker and offset such
amounts against Rent. In addition, Lessee's Broker shall be deemed to be a third
party beneficiary of any commission agreement entered into by and/or between
Lessor and Lessors Broker for the limited purpose of collecting any brokerage
fee owed.
15.3 Representations and Indemnities of Broker Relationships. Lessee
and Lessor each represent and warrant to the other that it has had no dealings
with any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finders fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.
16. Estoppel Certificates.
(a) Each Party (as "Responding Party") shall within 10 days after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and de ver to the Requesting Party a statement in writing in form
similar to the then most current "Estoppel Certificate" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
(b) If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such 10 day period the Requesting Party may execute
an Estoppel Certificate stating that: (i) the Lease is in full force and effect
without modification except as may be represented by the Requesting Party, (ii)
there are no uncured defaults in the Requesting Party's performance and (iii) if
Lessor is the Requesting Party, not more than one month's rent has been paid in
advance. Prospective purchasers and encumbrancers may rely upon the Requesting
Party's Estoppel Certificate, and the Responding Party shall be estopped from
denying the truth of the facts contained in said Certificate.
(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past 3 years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used on y for the purposes herein set forth.
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17. Definition of Lessor. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.
19. Days. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days.
20. Limitation on Liability. The obligations of Lessor under this Lease shall not constitute personal obligations of Lessor or its partners, members, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against Lessor's partners, members, directors, officers or shareholders, or any of their personal assets for such satisfaction.
21. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or absolved by the Parties under this Lease.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that if has made, and is relying solely upon, it's own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the use, nature quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this
Lease or applicable law shall be in writing and may he delivered in person (by
hand or by courier) or may be sent by regular, certified or registered mail or
U.S. Postal Service Express Mail, with postage prepaid and shall be deemed
sufficiently given if served in a manner specified in this Paragraph 23. The
addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties of such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 Date of Notice. Any notice sent by registered or certified mail ,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date s shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given 48 hours after the same is
addressed as required herein and mailed with postage prepaid. Notice delivered
by United States Express Mail or overnight courier that guarantee next day
delivery shall be deemed given 24 hours after delivery of the same to the Postal
Service or courier. Notices transmitted by facsimile transmission or similar
means shall be deemed delivered upon telephone confirmation of receipt
(confirmation report from fax machine is sufficient), provided a copy is also
delivered via delivery or mail. If notice is received on a Saturday, Sunday or
Legal holiday it shall be deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee Any payment try Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or Conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.
25. Disclosures Regarding the Nature of a Real Estate Agency Relationship.
(a) When entering into a discussion with a real estate agent
regarding a real estate transaction a Lessor or Lessee should from the outset
understand what type of agency relationship or representation it has with the
agent or agents in the transaction. Lessor and Lessee acknowledge being advised
by the Brokers in this transaction, as follows:
(i) Lessor's Agent: A Lessor's agent under a listing
agreement with the Lessor acts us the agent far the Lessor only. A Lessor s
agent or subagent has the following affirmative obligations: To the Lessor: A
fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with
the Lessor. To the Lessee and the Lessor: a. Diligent exercise of reasonable
skills and care in performance of the agent's duties. b. A duty of honest and
fair dealing and good faith. c. A duty to disclose all facts known to the agent
materially affecting the value or desirability of the property that are not
known to, or within the diligent attention and observation of, the Parties. An
agent is not obligated to reveal to either Party any confidential information
obtained from the other Party which does not involve the affirmative duties set
forth above.
(ii) Lessee's Agent An agent can agree to act an agent for
the Lessee only. In these situations the agent is not the Lessors agent, even if
by agreement the agent may receive compensation for services rendered, either in
full or in part from the Lessor. An gent acting only for a Lessee has the
following affirmative obligations. To the Lessee A fiduciary duty of utmost
care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee
and the Lessor: a. Diligent exercise of reasonable skills and care in
performance of the agent's duties. b. A duty of honest and fair dealing and good
faith. c. A duty to disclose all facts known to the agent materially affecting
the value or desirability of the properly that are not known to, or within the
diligent attention and observation of, the Parties. An agent is not obligated to
reveal to either Party any confidential information obtained from the other
Party which does not involve the affirmative duties set forth above.
(iii) Agent Representing Both Lessor and Lessee. A real
estate agent, either acting directly or through one or more associate licenses,
can legally be the agent of both the Lessor and the Lessee in a transaction, but
only with the knowledge and consent of both the Lessor and the Lessee. In a dual
agency situation, the agent has the following affirmative obligations to both
the Lessor and the Lessee: a. A fiduciary duty of utmost care, integrity,
honesty and loyalty in the dealings with ether Lessor or the Lessee. b. Other
duties to the Lessor and the Lessee as stated above in subparagraphs (i) or
(ii). In representing both Lessor and Lessee, the agent may not without the
express permission of the respective Party, disclose to the other Party that the
Lessor will accept rent in an amount less than that indicated in the listing or
that the Lessee is willing to pay a higher rent than that offered. The above
duties of the agent in a real estate transaction do not relieve a Lessor or
Lessee from the responsibility to protect their own interests. Lessor and Lessee
should carefully read all agreements to assure that they adequately express
their understanding of the transaction. A real estate agent is a person
qualified to advise about real estate. If legal or tax advice is desired,
consult a competent professional.
(b) Brokers have no responsibility with respect to any default or
breach hereof by either Party. The liability (including court costs and
attorneys' fees), of any Broker with respect to any breach of duty, error or
omission relating to this Lease shall not exceed the fee received by such Broker
pursuant to this Lease; provided, however, that the foregoing limitation on each
Broker's liability shall not be applicable to any gross negligence or willful
misconduct of such Broker.
(c) Lessor and Lessee agree to identify to Brokers as
"Confidential" any communication or information given Brokers that is considered
by such Party to be confidential.
26. No Right To Holdover. Lessee has no right to retain possess on of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to 125% of the Base Rent applicable immediately preceding the expiration or termination. Nothing contained herein shall be construed as Consent by Lessor to any holding over by Lessee. The 2nd and 3rd month's of holdover shall be 125% of the Base Rent, and then increase to150% for subsequent months during the holdover.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.
28. Covenants and Conditions. Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it.
/s/ JIM BLACK /s/ WILLIAM SONG
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29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their persona representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed upon the Premises, to any and all advances made the security
thereof. and to all renewals. modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lender") shall have no liability or obligation to perform any of
the obligations of Lessor under this Lease. Any Lender may elect to have this
Lease and/or any Option granted hereby superior to the lien of its Security
Device by giving written notice thereof to Lessee whereupon this Lease and such
Options shall be deemed prior to such Security Device, not withstanding the
relative dates of the documentation or recordation thereof.
30.2 Attornment. In the event that Lessor transfers title to the
Premises or the Premises are acquired by another upon the foreclosure or
termination of a Security Device to which this Lease is subordinated (i) Lessee
shall, subject to the non-disturbance provisions of Paragraph 30.3, attorn to
such new owner and, upon request, enter into a new lease, containing all of the
terms and Provisions of this Lease, with such new owner for the remainder of the
term hereof, or, al the election of such new owner, this Lease shall
automatically become a new Lease between Lessee and such new owner, upon all of
the terms and conditions hereof, for the remainder of the term hereof, and (ii)
Lessor shall thereafter be relieved of any further obligations hereunder and
such new owner shall assume all of Lessor's obligations hereunder, except that
such new owner shall not: (a) be liable for any act or omission of any prior
lessor or with respect to events occurring prior to acquisition of ownership;
(b) subject to any offsets or defenses which Lessee might have against any prior
lessor, (c) be bound by prepayment of more than one month s rent, or (d) be
liable for the return of any security deposit paid to any prior lessor.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Least
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within 60 days after the execution of this Lease. Lessor
shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is secured
by the Premises. In the event that Lessor unable to provide the Non-Disturbance
Agreement within said 60 days, then Lessee may, at Lessee's option, directly
contact Lender and attempt to negotiate for the execution and delivery of a
Non-Disturbance Agreement. Lessor represents as of the date this lease that
there are no Security Devices effecting the subject properly.
30.4 Sell-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises. Lessee and Lessor shall execute
such further writings as may be reasonably required to Separately document any
subordination, attornment and/or Non-Disturbance Agreement Provided for herein.
31. Attorneys' Fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgement. The term, "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise settlement, judgement, or the abandonment by the other Party or Broker of is claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonable incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation).
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable prior notice for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary or desirable and the erecting, using and maintaining of utilities services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. All such activities shall be without abatement of rent or liability to Lessee and shall not unreasonably interfere with the conduct of Lessee's business.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction.
34. Signs. Lessor may place on the Premises ordinary "For Sale" signs at any time and ordinary "For Lease" signs during the last 6 months of the term hereof. Except for ordinary "for sublease" signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all Applicable Requirements.
35. Termination; Merger Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessors failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination on of such interest.
36. Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers and other consultants fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within 10 business days following such request.
37. Guarantor.
37.1 Execution. The Guarantors, if any, shall each execute a guaranty
in the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.
37.2 Default. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of it's board of directors
authorizing the making of such guaranty, (b) current financial statements, (c)
an Estoppel Certificate, or (d) written confirmation that the guaranty is still
in effect.
38. Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.
39. Options. If Lessee is granted an Option, as defined below, then the
following provisions shall apply:
39.1 Definition. "Option" shall mean: (a) the right to extend the term
of or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor, (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.
39.3 Multiple Options. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later Option cannot be exercised unless
the prior Options have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option: (i) during
the period commencing with the giving of any notice of Default and until said
Default is cured, (ii) during the period of time any Rent is unpaid (without
regard to whether notice thereof is given Lessee), (iii) during the .
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time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given 3 or more notices of separate Default, whether or not the Defaults
are cured, during the 12 month period immediately preceding the exercise of the
Option.
(b) The period of time within which an Option may be exorcised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4 (a)
(c) An Option shall terminate and be of no further force or
effect, notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term or
completion of the purchase, (i) Lessee fails to pay Rent for a period of 30 days
after such Rent becomes due (without any necessity of Lessor to give notice
thereof), or (ii) if Lessee commits a Breach of this Lease.
4O. Multiple Buildings. if the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by and conform to all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and to cause its employees suppliers, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessee also agrees to pay its fair share of common expenses incurred in connection with such rules and regulations.
41. Security Measures. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment under protest, and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit far recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay.
44. Authority; Multiple Parties; Execution.
(a) If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each party
shall within 30 days after request, deliver to the other party satisfactory
evidence of such authority.
(b) If this Lease is executed by more than one person or entity
as "Lessee", each such person or entity shall be jointly and severally liable
hereunder. It is agreed that any one of the named Lessees shall be empowered to
execute any amendment to this Lease, or other document ancillary thereto and
bind all of the named Lessees, and Lessor may rely on the same as if all of the
named Lessees had executed such document.
(c) This Lease may be executed by the Parties in counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.
45. Conflict. Any conflict between the printed provisions of this Lease and typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.
46. Offer. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises.
48. Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INYOLVING THE PROPERTY OR ARISING OUT OF THIS AGREEMENT.
49. Mediation and Arbitration of Disputes. An addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease [ ] is [ ] is not attached to this lease.
50. Americans with Disabilities Act. Since compliance with the Americans with Disabilities Act (ADA) is dependent upon Lessee's specific use of the Premises, Lessor makes no warranty or representation as to whether or not the Premises comply with ADA or any similar legislation. In the event that Lessee's use of the Premises requires modifications or additions to the Premises in order to be in ADA compliance, Lessee agrees to make any such necessary modifications and/or additions at Lessee's expense.
12.4 ADDITIONAL TERMS APPLICABLE TO SUBLETTING. Lessee shall be permitted transfers without Lessor's consent when(a)the involvement of Lessee or its assets in any transaction, or series of transactions, whether or not a formal assignment or hypothecation of the Lease or Lessee's assets occurs, which does not result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it exists immediately prior to such transaction or transactions, and (b) a transfer to any entity which controls, is controlled, or is under common control with Lessee.
52. CONDITION OF PREMISES. Lessor shall deliver the Premises in its "AS-IS" condition subject to paragraph 2.2 and the following:(i)Lessor shall be responsible for reimbursing Lessee for painting the exterior of the building (colors selected by Lessee); (ii) Lessor shall re responsible for reimbursing Lessee for the removal of the conapy on the front exterior; (iii) Lessor shall be responsible for reimbursing Lessee for the replacement of the existing front and rear entrance doors with new similar glass doors (to include door handles selected by Lessee); (iv) Lessor shall be responsible for reimbursing Lessee for any existing windows that are currently damaged, broken, cracked, or containing holes in them; (v) Lessor shall certify the existing HVAC system is in good operating order. Lessor will fully cooperate with Lessee's interest to apply for funds being offered by the City of San Mateo for `store front" improvements, it is further understood by both parties that Lessor shall receive fifty (50%)per cent of the funds from the specific items listed above that are being solicited from the City of San Mateo involving the Store Front Improvement Fund. The current request being made to the City is $50,000.00. Lessor;shall also certify the HVAC system is in good operating order. Lessee shall be responsible for, at their sole expense, all other improvements to be Made to the front and rear exteriors of the subject building and the installation of a new electrical panel adequate top support the financial institution.
53. PARKING. All parking on site shall be for Lessees exclusive use 24 hours per day.
54. OPTION TERM. Lessee shall have two (2) five (5) year option terms, upon the same terms and conditions, except for rent, Rent shall be established at Fair Market Rent. (See Addendum Titled, Options to Extend).
55. TENENT ALLOWANCE. Lessor shall provide Lessee a construction allowance in the form of a rental concession of seven (7) months; the value of the concession is $63,000.00 by way of offering Lessee seven (7) months of free rent (7x $9,000.00 = $63,000.00) following the execution of the lease. Therefore, rent payments commence effectively March 1, 2004.
56. RENT SCHEDULE. Lease Execution Date through February 29, 2004 $ 0.00 per month
March 1, 2004 through April 30, 2006 $9,000.00 per month
March 1, 2006 through July 31, 2008 $9,500.00 per month
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/s/ JIM BLACK /s/ WILLIAM SONG
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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEOUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE
PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE
PRESENCE OF HAZARDOUS SUBSTANCES. THE ZONING OF THE PREMISES, THE STRUCTURAL
INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY
OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED.
The parties herein have executed this Lease at the place and on the date specified above their respective signatures.
Executed at: San Mateo Executed at: San Mateo
------------------------- ------------------------
On: /Signed Date/ 8/13/2003 On: /Signed Date/ 8/13/2003
---------------------------------- ---------------------------------
By LESSOR: By LESSEE:
Song Development Company a First National Bank of Northern
--------------------------------- --------------------------------------
California corporation California, a California corporation
---------------------------------------- --------------------------------------
By: /s/ WILLIAM SONG By: /s/ JIM BLACK
------------------------------------ ----------------------------------
Name Printed: William Song Name Printed: Jim Black
-------------------------- -------------------------
Title: President Title: President
--------------------------------- -------------------------------
By: By:
------------------------------------ ----------------------------------
Name Printed: Name Printed:
--------------------------- -------------------------
Title: Title:
---------------------------------- --------------------------------
Address: P.O. Box 4105 Foster City, Address: 975 El Camino Real
------------------------------- ------------------------------
CA 94404 South San Francisco, CA 94080
------------------------------- ------------------------------
Federal ID No.: Federal ID No.:
------------------------- -----------------------
BROKER: BROKER:
The Berube Company
---------------------------------------- --------------------------------------
/s/ MICHAEL BERUBE
---------------------------------------- --------------------------------------
Title: Title:
---------------------------------- --------------------------------
Address: 1700 S El Camino Real Address:
------------------------------- ------------------------------
P.H. Suite, San Mateo, CA 94402
------------------------------- --------------------------------------
Telephone/Facsimile: 650 574 7163 Telephone/Facsimile:
------------------- ------------------
Federal ID No.: Federal ID No.:
------------------------- -----------------------
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NOTE: These forms are often modified to meet the changing requirements of law and industry need. A ways write or call to make sure Your are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777. Fax No. (213) 687-8616
(C) Copyright 1997 - By American Industrial Real Estate Association. All rights reserved. No part of these works may be reproduced in any form without permission in writing.
/s/ JIM BLACK /s/ WILLIAM SONG
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RETAIL SPACE FOR LEASE
150 East Third Avenue
San Mateo
[GRAPHIC OMITTED]
For Leasing Information, Contact: Michael Berube Tel. 650.574.7163 Fax 650.574.7304 Email: Berube@AOL.com
/s/ JIM BLACK /s/ WILLIAM SONG |
[GRAPHIC OMITTED]
OPTION(S) TO EXTEND
STANDARD LEASE ADDENDUM
By and Between (Lessor) Song Development Company, a California
--------------------------------------
Corporation
--------------------------------------
(Lessee) First National Bank of Northern
California, a California corporation
|
A. OPTION (S) TO EXTEND: Lessor hereby grants to Lessee the option to extend the term of this Lease for Two (2) additional Sixty (60) month period(s) commencing when the prior term expires upon each and all of the following terms and conditions: |
(i) In order to exercise an option to extend, Lessee must give written notice of such election to Lessor and Lessor must receive the same at least 6 but not more than 12 months prior to the date that the option period would commence, time being of the essence. If proper notification of the exercise of an option is not given and/or received. such option shall automatically expire. Options (if there are more than one) may only be exercised consecutively.
(ii) The provisions of paragraph 39, including those relating to Lessee s Default set forth in paragraph 39.4 of this Lease, are conditions of this Option.
(iii) Except for the provisions of this Lease granting an option or options to extend the term, all of the terms and conditions of this Lease except where specifically modified by this option shall apply.
(iv) This Option is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and without the intention of thereafter assigning or subletting.
(v) The monthly rent for each month of the option period shall be calculated as follows, using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately)
[X] II. Market Rental Value Adjustment(s) (MRV)
a. On (Fill in MRV Adjustment Date(s)) August 13, 2008 and August 13,
2013 the Base Rent shall be adjusted to the "Market Rental Value" of the
property as follows:
1) Four months prior to each Market Rental Value Adjustment Date described above, the Parties shall attempt to agree upon what the new MRV will be on the adjustment date. If agreement cannot be reached, within thirty days, then:
(a) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the Parties, or
(b) Both Lessor and Lessee shall each immediately make a reasonable determination of the MRV and submit such determination, in writing, to arbitration in accordance with the following provisions:
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(i) Within 15 days thereafter, Lessor and Lessee shall each select an appraiser or broker ("Consultant" - check one) of their choice to act as an arbitrator. The two arbitrators so appointed shall immediately select a third mutually acceptable Consultant to act as a third arbitrator.
(ii) The three arbitrators shall within 30 days of the appointment of the third arbitrator reach a decision as to what the actual MRV For the Premises is, and whether Lessor's or Lessee's submitted MRV is the closest thereto. The decision of a majority of the arbitrators shall be binding on the Parties. The submitted MRV which is determined to be the closest to the actual MRV Shall thereafter be used by the Parties.
(iii) If either of the Parties fails to appoint an arbitrator within the specified 15 days, the arbitrator timely appointed by one of them shall reach a decision on his or her own, and said decision shall be binding on the Parties.
(iv) The entire cost of such arbitration shall be paid by the party whose submitted MRV is not selected, ie. The one that is NOT the closest to the actual MRV.
2) Notwithstanding the foregoing, the new MRV shall not be less than the rent payable for the month immediately preceding the rent adjustment.
b. Upon the establishment of each New Market Rental Value:
1) the new MRV will become the new "Base Rent" for the purpose of
calculating any further Adjustments, and
2) the first month of each Market Rental Value term shall become the
new "Base Month" for the purpose of calculating any further
Adjustments.
[ ] III. Fixed Rental Adjustment(s) (FRA)
B. NOTICE:
Unless specified otherwise herein, notice of any rental adjustments, other
than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the
Lease.
NOTE: These forms are often modified to meet the changing requirements of law
and industry need. A ways write or call to make sure you are utilizing the most
current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower
Street, Suite 600, Los Angeles, California 90017
/s/ JIM BLACK /s/ WILLIAM SONG
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FNB BANCORP
CODE OF ETHICS
General Policy Statement
It is the policy of FNB Bancorp and it's subsidiary, First National Bank of Northern California (together, the "Company"), that the Company's directors, officers (including the principal executive, financial and accounting officers, or controller and persons performing similar functions) and employees conduct business in accordance with the highest ethical standards and in compliance with all laws, rules and regulations applicable to the Company in order to merit and maintain the complete confidence and trust of the Company's customers, shareholders and the public in general.
This Code of Ethics ("Code") establishes standards of compliance to implement the above-referenced policy and is intended to supplement the provisions of any other personnel policies of the Company which may establish additional standards of ethical behavior applicable to the Company's directors, officers and employees. Any conflicts or inconsistencies between the Code and such policies shall be resolved in favor of the provisions of this Code.
I. CODE OF ETHICS PROVISIONS
A. Honest and Ethical Conduct. It is policy of the Company that all of its directors, officers and employees shall act in an honest and ethical manner, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. The Company expects its directors, officers and employees to use good judgment, maintain high ethical standards and to refrain from any form of illegal, dishonest or unethical conduct. Additionally, directors, officers and employees may not engage in any conduct directly or indirectly to influence, coerce, manipulate or mislead any accountant engaged in preparing an audit for the Company.
B. Accurate and Timely Disclosure. It is the policy of the Company that shareholders and financial markets receive full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Securities Exchange Commission and in other public communications. The Company realizes that only through compliance with such disclosure obligations can shareholders and the public analyze the condition of the Company. To the extent that directors, officers and employees of the Company participate in the preparation or filing of such reports (which in each case shall be presumed to include the principal executive officers, principal financial and accounting officers, or controller, and persons performing similar functions), such persons shall be responsible to ensure that those reports and documents comply with such policy.
C. Compliance with Applicable Governmental Laws, Rules and Regulations. All directors, officers and employees of the Company must fully comply with the spirit and intent of all laws, rules and regulations applicable to the Company.
D. Prompt Internal Reporting of Code Violations. The Company has established procedures governing the receipt, investigation and treatment of reports of violations of this Code and governmental laws, rules and regulations applicable to the Company. The Company encourages its officers and employees to promptly report any such violations. Violations should be reported to the Chairman of the Board of Directors of the Company. No retaliation against an officer or employee reporting such a violation in good faith shall be permitted.
E. Accountability. It is the responsibility of each director, officer and employee to be familiar with this Code and any personnel policies of the Company which establish ethical standards of behavior. The Company's Board of Directors is expected to make every reasonable effort to ensure that directors, officers and employees comply with the provisions of this Code and any such Company policies. Any director, officer or employee who violates the provisions of this Code or any such Company policies may be subject to disciplinary action including, without limitation, as to officers and employees, the termination of employment.
II. DISCLOSURE OBLIGATIONS
A. Public Availability. The Company will make a copy of this Code publicly available in compliance with applicable laws, rules and regulations.
B. Changes and Waivers. Any change to this Code or waiver from this Code may be made only with the prior consent of the Company's Board of Directors. Any such change or waiver will be disclosed in compliance with applicable laws, rules and regulations.
Independent Auditor's Consent
The Board of Directors
FNB Bancorp
We consent to incorporation by reference in the registration statements (No. 333-91596, 333-98293, and 222-106363) on Forms S-8 of FNB Bancorp of our report dated February 28, 2004, relating to the consolidated balance sheets of FNB Bancorp and subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of earnings, changes in stockholders' equity and comprehensive income, and cash flows for the years then ended, which report appears in the December 31, 2003 annual report on Form 10-K of FNB Bancorp.
/s/ KPMG LLP San Francisco, California March 30, 2004 |
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated January 31, 2002, accompanying the consolidated financial statements of FNB Bancorp and Subsidiary and included in the Annual Report on Form 10-K for the year ended December 31, 2003. We hereby consent to the incorporation by reference of said report in the Registration Statements of FNB Bancorp and Subsidiary on Forms S-8 (File no. 333-91596, effective July 1, 2002, File no. 333-98293, effective August 16, 2002, and File no. 333-106363, effective June 23, 2003).
/s/ Grant Thornton LLP San Francisco, California March 29, 2004 |
Rule 13A-14(a)/15d-14(a) Certifications
I, Thomas C. McGraw, Chief Executive Officer (Principal Executive Officer) of the registrant, FNB Bancorp, certify that:
1. I have reviewed this annual report on Form 10-K of FNB Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; and
Date: March 26, 2004 /s/ Thomas C. McGraw ----------------------------- Thomas C. McGraw Chief Executive Officer (Principal Executive Officer) |
Rule 13A-14(a)/15d-14(a) Certifications
I, James B. Ramsey, Senior Vice President and Chief Financial Officer (Principal Financial Officer) of the registrant, FNB Bancorp, certify that:
1. I have reviewed this annual report on Form 10-K of FNB Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; andin the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls;
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 26, 2004 /s/ James B. Ramsey ------------------------------------------------- Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
Section 1350 Certifications
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections
(a) and (b) of section 1350, chapter 63 of title 18, United States Code), each
of the undersigned officers of FNB Bancorp, a California corporation (the
"Company"), does hereby certify that:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 2003 (the "Form 10-K") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
2. Information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 26, 2004. /s/ Thomas C. McGraw
------------------------------------------
Thomas C. McGraw
Chief Executive Officer
Dated: March 26, 2004. /s/ James B. Ramsey
------------------------------------------
James B. Ramsey
Senior Vice President
and Chief Financial Officer
|
A signed original of this statement required by Section 906 has been provided to FNB Bancorp and will be retained by FNB Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.