-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jc6ajkPer3HJCCEEF89eNC9MM3jZZrSWXQN3fvrA72kiVBMoTioeihjxqsIwatzi TP9bp5oflPOt6zGiCvnzPA== 0000892569-96-000351.txt : 19960402 0000892569-96-000351.hdr.sgml : 19960402 ACCESSION NUMBER: 0000892569-96-000351 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMBANCORP CENTRAL INDEX KEY: 0000741316 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953737171 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-15984 FILM NUMBER: 96542754 BUSINESS ADDRESS: STREET 1: 6001 E WASHINGTON BLVD CITY: CITY OF COMMERCE STATE: CA ZIP: 90040 BUSINESS PHONE: 2137248800 MAIL ADDRESS: STREET 1: PO BOX 911070 STREET 2: 6001 E WASHINGTON BLVD CITY: CITY OF COMMERCE STATE: CA ZIP: 90091 10-K405 1 FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1995 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 Commission file number 0-15984 COMBANCORP (Exact name of registrant as specified in its charter) CALIFORNIA 95-3737171 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
6001 E. WASHINGTON BLVD., CITY OF COMMERCE, CA 90040 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (213) 724-8800 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN ANY AMENDMENT TO THIS FORM 10-K. /X/ As of March 22, 1996, there were 565,789 shares of Common Stock, no par value, issued and outstanding, and the aggregate market value of the Common Stock, based on the average bid and asked prices, quoted by the National Quotation Bureau, Inc., held by non-affiliates of the registrant was approximately $3,513,125. Solely for purposes of this calculation, all directors and officers were excluded as affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on a date to be established are incorporated by reference in Part III. THIS ANNUAL REPORT CONSISTS OF A TOTAL OF 196 PAGES. THE EXHIBIT INDEX APPEARS ON PAGE 88. 2 PART I ITEM 1. BUSINESS. General COMBANCORP (the "Company") was incorporated under the laws of the State of California on May 25, 1982 to operate as a bank holding company for Commerce National Bank (the "Bank"). On June 16, 1983, the Bank completed its organization and the Company acquired all of the Bank's issued and outstanding shares of common stock. The Bank is the sole subsidiary of the Company and its principal asset. All references herein to the "Company" include the Bank unless the context otherwise requires. The Bank The Bank was incorporated on May 26, 1982 as a national banking association. On June 16, 1983, the Bank received its Charter from the Comptroller of the Currency ("OCC") and commenced operations. The Bank's main office is located at 6001 East Washington Boulevard, City of Commerce, California. The Bank also has a branch office located at 420 N. Montebello Boulevard, Montebello, California, which opened on June 12, 1989, and a branch office located in Downey, California, which was acquired on August 26, 1994. The Bank's principal market area includes the City of Commerce, Downey, Montebello, Bell Gardens, Pico Rivera, Whittier, Lynwood, South Gate, Santa Fe Springs, Los Angeles and portions of Vernon, all located in California. This area is estimated to contain in excess of 15,000 businesses engaged in various phases of commerce, including industrial production and sales, service businesses and retail and wholesale establishments. The area also includes residential developments and regional and neighborhood shopping centers. On December 3, 1993, the Bank acquired all of the branch deposits of the Commerce, California branch of Community Bank, at a premium of $138,222. In conjunction with this transaction, the Bank assumed $12,454,049 of deposit liabilities. In connection with this transaction, the Bank did not retain the premises or management of the Commerce Branch of Community Bank, or the majority of its employees. On August 26, 1994, the Bank, as part of a consortium with Landmark Bank, entered into an Insured Deposit Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation ("FDIC") for the purchase and assumption of certain assets and liabilities of Capital Bank. The Bank purchased $674,000 of cash assets and assumed $22,536,000 of deposit liabilities of the Downey Branch of Capital Bank for a premium of 2 3 $185,000, including expenses. In addition, the Bank obtained a lease on the Downey branch facility of Capital Bank through May 1995, when an option to purchase the building for $650,000 was exercised. The Bank hired 12 former employees of Capital Bank, none of which were members of senior management, to staff the existing facility. See Note 2 to the Notes to the Consolidated Financial Statements. Bank Services The Bank is engaged primarily in the business of providing commercial banking service to the wholesale market. The Bank offers personal and business checking accounts and savings accounts (including interest-bearing negotiable order of withdrawal ("NOW") accounts and/or accounts combining checking and savings accounts with automatic transfers), and time certificates of deposit. The Bank also offers night depository, bank-by-mail services and MasterCard and VISA credit cards, sells travelers' checks (issued by an independent entity) and cashier's checks, and acts as a merchant depository for cardholder drafts under both MasterCard and VISA. In addition, it provides note and collection services, an automatic teller machine network and direct deposit of social security and other government checks. The following table sets forth the type and amount of deposits outstanding as of the dates indicated:
DECEMBER 31, DECEMBER 31, 1995 1994 ----------- ----------- Demand Deposits $21,805,536 $23,439,082 NOW Accounts 8,934,606 8,136,486 Money Market 8,553,950 10,902,747 Savings 9,203,336 9,831,453 Time Deposits of $100,000 or greater 5,381,974 4,329,934 Time Deposits of less than $100,000 8,144,395 8,259,595 ----------- ----------- Total Deposits $62,023,797 $64,899,297 =========== ===========
DEMAND DEPOSITS. At December 31, 1995, approximately 35% of the total deposits were non-interest bearing demand deposits, with an average account balance of approximately $12,000. Approximately 14% of total deposits were interest-bearing demand deposits, or Negotiable Order of Withdrawal ("NOW") accounts. The average interest-bearing demand account balance was approximately $6,000. 3 4 MONEY MARKET. At December 31, 1995, approximately 14% of total deposits were held in money market accounts, with an average account balance of approximately $26,000. SAVINGS. At December 31, 1995, approximately 15% of the total deposits were held in savings accounts, with an average account balance of approximately $5,000. TIME DEPOSITS. At December 31, 1995, approximately 22% of total deposits were held in time deposits, 83% of which were certificates of deposits and 17% were individual retirement ("IRA") accounts. Approximately 9% of total deposits were held in time deposits of $100,000 or greater. The Bank's lending activities consist primarily of commercial loans, real estate loans and consumer/installment loans. Commercial lending activities are directed toward small retail and wholesale establishments, professional organizations and light industrial and manufacturing companies. Real estate loans, which consist of interim construction loans and medium-term mortgages, are directed toward local developers and other wholesale banking customers. Consumer/installment lending is targeted to the Bank's principal market area and the Bank's commercial accounts. The lending activities of the Bank are guided by the basic lending policy established by the Bank's Board of Directors. Each loan must meet the tests of a prudent loan encompassing certain criteria, including character of the borrower, leverage capacity of the borrower, capital, collateral provided for the loan and prevailing economic conditions. The lending officer, the Loan Committee or the Board of Directors, depending on the amount of the loan, must consider all criteria and determine that the risks are appropriate in light of such evaluation. A fundamental principle of sound banking is avoiding a loan concentration in any particular industry or market segment, which would increase exposure to downturns in the business of such borrowers. Other than as disclosed herein, as of December 31, 1995 the Bank had no loan concentrations in any industry. The following table sets forth the type and amount of loans outstanding as of the dates indicated: 4 5
DECEMBER 31, DECEMBER 31, 1995 1994 ----------- ----------- Commercial $10,474,719 $11,210,049 Real Estate: Construction 2,338,979 2,998,619 Other 8,062,827 8,541,865 Mortgage loans acquired 1,216,165 1,242,636 Consumer/Installment 1,679,274 1,815,841 ----------- ----------- Total loans $23,771,964 $25,809,010 Allowance for possible loan losses 432,559 498,827 Deferred loan fees 65,731 59,280 Unearned discount on acquired loans 84,823 285,827 ----------- ----------- Total net loans $23,188,851 $24,965,076 =========== ===========
COMMERCIAL LOANS. At December 31, 1995, approximately 44% of the Bank's loan portfolio was comprised of commercial loans. Loans in this category, which amounts averaged approximately $77,000, included loans made to small businesses and professionals for working capital purposes and equipment acquisition. Although the Bank typically looks to the borrower's cash flow as the principal source of repayment for such loans, some of the loans within this category were secured by real estate. CONSTRUCTION LOANS. At December 31, 1995, approximately 10% of the Bank's loan portfolio was comprised of construction loans. The following table sets forth the composition of such construction loans by type of project as of the dates indicated: 5 6
DECEMBER 31, DECEMBER 31, 1995 1994 ---------- ---------- Residential: 1-4 family units $2,093,989 $1,418,048 Commercial and industrial 244,990 1,580,571 ---------- ---------- Total $2,338,979 $2,998,619 ========== ==========
The Bank's loans for construction of residential 1-4 family units, which amounts averaged approximately $162,000, bear a floating rate of interest and mature in one year or less. They are typically underwritten at no greater than a 75% loan-to-value ratio. As of December 31, 1995, the Bank had one commercial construction loan for $244,990 for the construction of a multi-family unit. The Bank will ordinarily advance up to a maximum of 65% of the value of the underlying property on these types of loans. All loans of this type bear a floating rate of interest. OTHER REAL ESTATE LOANS. Approximately 34% of the Bank's commercial and industrial loans, which ranged in amount from approximately $23 to $803,283 and averaged approximately $169,000, are primarily secured by small office buildings and industrial buildings that are either owner-occupied or built for rental purposes. The Bank's commercial and industrial loans generally have a maturity of three to five years with a 20-25 year amortization, and bear a floating rate of interest. The Bank generally applies a maximum loan-to-value ratio of 65% to these loans. MORTGAGE LOANS. Approximately 5% of the Bank's loan portfolio consisted of 13 mortgage loans secured by 1-4 family residences, which were acquired as part of the Bank's acquisition of Liberty Federal Savings Bank in June 1991. These loans averaged approximately $94,000 and ranged in amount from $61,112 to $146,349 at December 31, 1995. The majority of these loans have a 30-year amortization and bear a fixed rate of interest. CONSUMER/INSTALLMENT LOANS. Approximately 7% of the Bank's loan portfolio consisted of consumer/installment loans. Excluding credit card receivables, these loans ranged in amounts from $49 to $106,366, and averaged approximately $10,000. These loans consist principally of automobile loans and other personal loans and credit card receivables. Except for the credit card receivables, which represented 16.7% of the total consumer/installment portfolio at December 31, 1995, these loans typically are secured by liens on real or personal property. 6 7 Source of Business The Bank has undertaken an aggressive marketing program which includes advertising and direct mail to attract business in its market area. In addition, Business Development and Lending Officers of the Bank are responsible for making regular calls on existing and potential new customers to solicit business and client referrals. Promotional efforts are designed to attract personal banking relationships, small businesses, professional organizations, and all types of consumer loans in the market area served by the Bank. In order to expedite decisions on lending transactions, the Bank's Loan Committee meets on a regular basis and is available for daily telephonic meetings when immediate lending authorization is needed. Asset Management Consistent with the need to maintain adequate liquidity for anticipated clearings and other cash requirements, management of the Bank seeks to invest the largest portion of the Bank's assets in loans of the types described above under "ITEM 1. BUSINESS -- Bank Services." Because of low loan demand in 1995, total loans have been generally limited to less than 50% of deposits and capital. The balance of the Bank's funds are invested in government and other investment grade securities, short-term certificates of deposit, municipal securities, and Federal funds sold to other financial institutions. In order to maximize yields, the Bank's investment policy provides for investment in taxable securities only until such time as the Bank's overall profitability indicates a higher yield by investing in tax-exempt instruments, after taking into account the effects of taxes. The Bank's investment policy provides for a portfolio divided among issues purchased to meet one or more of the following goals: (1) to maintain a solid liquidity base in order to manage deposit fluctuations; (2) to maintain credit quality in order to reduce exposure to low- rated issues; (3) to achieve maximum yields commensurate with relatively low risk and appropriate maturities; and (4) to achieve maximum tax benefits. To assure liquidity and a reasonable income, the Bank's portfolio consists of investments which are subject to minimal credit risk. Most of the investments will be in government securities "A" rated or better, corporate bonds and municipal bonds "A" rated or better. The maturity composition of the investment portfolio, including investment securities, Federal funds sold and interest bearing deposits with other financial institutions, as of December 31, 1995 was as follows: 50.6% short term (under one year), 39.1% medium term (one to five years), and 10.3% long term. On December 31, 1995, all of the Bank's securities, with the exception of Federal Reserve Bank stock, were classified as "available for sale." 7 8 Competition The banking and financial services business in California generally, and in the Bank's market areas specifically, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. The Bank competes for loans and deposits and customers for financial services with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions and other nonbank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than the Bank. In order to compete with the other financial services providers, the Bank principally relies upon local promotional activities, personal relationships established by officers, directors and employees with its customers, and specialized services tailored to meet its customers' needs. In those instances where the Bank is unable to accommodate a customer's needs, the Bank will arrange for those services to be provided by its correspondents. Effect of Governmental Policies and Recent Legislation Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by the Bank on its deposits and its other borrowings and the interest rate received by the Bank on loans extended to its customers and securities held in the Bank's portfolio comprise the major portion of the Company's earnings. These rates are highly sensitive to many factors that are beyond the control of the Bank. Accordingly, the earnings and growth of the Company are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment. The commercial banking business is not only affected by general economic conditions but is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted. 8 9 From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory and other professional agencies. The Financial Services Modernization Act recently proposed in the House of Representatives would generally permit banks to expand activities further into the areas of securities and insurance, and would reduce the regulatory and paperwork burden that currently affects banks. Additionally, the proposed legislation would force the conversion of savings and loan holding companies into bank holding companies, although unitary savings and loan holding companies authorized to engage in activities as of January 1, 1995 would be exempted. Similar legislation has also been proposed in the Senate. In addition, legislation was recently introduced in Congress that would merge the deposit insurance funds applicable to commercial banks and savings associations and impose a one-time assessment on savings associations to recapitalize the deposit insurance fund applicable to savings associations. The likelihood of any major legislative changes and the impact such changes might have on the Company are impossible to predict. See "Item 1. Business - Supervision and Regulation." Supervision and Regulation Bank holding companies and banks are extensively regulated under both federal and state law. Set forth below is a summary description of certain laws which relate to the regulation of the Company and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. The Company The Company, as a registered bank holding company, is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company is required to file with the Federal Reserve Board quarterly and annual reports and such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may conduct examinations of the Company and its subsidiaries. The Federal Reserve Board may require that the Company terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the Federal Reserve Board believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, the Company must file written notice and obtain 9 10 approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities. Under the BHCA and regulations adopted by the Federal Reserve Board, a bank holding company and its nonbanking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Further, the Company is required by the Federal Reserve Board to maintain certain levels of capital. See "Item 1. Business - Supervision and Regulation Capital Standards." The Company is required to obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the Federal Reserve Board is also required for the merger or consolidation of the Company and another bank holding company. The Company is prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, the Company, subject to the prior approval of the Federal Reserve Board, may engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making any such determination, the Federal Reserve Board is required to consider whether the performance of such activities by the Company or an affiliate can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve Board is also empowered to differentiate between activities commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to 10 11 be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both. This doctrine has become known as the "source of strength" doctrine. Although the United States Court of Appeals for the Fifth Circuit found the Federal Reserve Board's source of strength doctrine invalid in 1990, stating that the Federal Reserve Board had no authority to assert the doctrine under the BHCA, the decision, which is not binding on federal courts outside the Fifth Circuit, was recently reversed by the United States Supreme Court on procedural grounds. The validity of the source of strength doctrine is likely to continue to be the subject of litigation until definitively resolved by the courts or by Congress. The Company is also a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the California State Banking Department. Finally, the Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, including but not limited to, filing annual, quarterly and other current reports with the Securities and Exchange Commission. The Bank The Bank, as a national banking association, is subject to primary supervision, examination and regulation by the OCC. If, as a result of an examination of a Bank, the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank's operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to the OCC. Such remedies include the power to enjoin "unsafe or unsound practices," to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, and to remove officers and directors. The FDIC has similar enforcement authority, in addition to its authority to terminate a Bank's deposit insurance in the absence of action by the OCC and upon a finding that a Bank is in an unsafe or unsound condition, is engaging in unsafe or unsound activities, or that its conduct poses a risk to the deposit insurance fund or may prejudice the interest of its depositors. The deposits of the Bank are insured by the FDIC in the manner and to the extent provided by law. For this protection, the Bank pays a semiannual statutory assessment. See "Item 1. Business - Supervision and Regulation Premiums for Deposit Insurance." The Bank is also subject to certain regulations of the Federal Reserve Board and applicable provisions of California law, insofar as they do not conflict with or are not preempted by federal banking law. 11 12 Various other requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal and California statutes and regulations relate to many aspects of the Bank's operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, capital requirements and disclosure obliga tions to depositors and borrowers. Further, the Bank is required to maintain certain levels of capital. See "Item 1. Business - Supervision and Regulation - Capital Standards." Restrictions on Transfers of Funds to the Company by the Bank The Company is a legal entity separate and distinct from the Bank. The Company's ability to pay cash dividends is limited by state law. There are statutory and regulatory limitations on the amount of dividends which may be paid to the Company by the Bank. California law restricts the amount available for cash dividends by state chartered banks to the lesser of retained earnings or the bank's net income for its last three fiscal years (less any distributions to shareholders made during such period). Notwithstanding this restriction, a bank may, with the prior approval of the Superintendent, pay a cash dividend in an amount not exceeding the greater of the retained earnings of the Bank, the net income for such bank's last preceding fiscal year, and the net income of the bank for its current fiscal year. The prior approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year exceeds the bank's net profits (as defined) for that year combined with its retained net profits (as defined) for the preceding two years, less any transfers to surplus. The the OCC also has authority to prohibit the Bank from engaging in activities that, in the OCC's opinion, constitute unsafe or unsound practices in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the OCC could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. Further, the OCC and the Federal Reserve Board have established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends which the Bank or the Company may pay. The Superintendent may impose similar limitations on the conduct of California-chartered banks. See "Item 1. Business - Supervision and Regulation - Prompt Corrective Regulatory Action and Other Enforcement Mechanisms" and - "Capital Standards" for a discussion of these additional restrictions on capital distributions. 12 13 At present, substantially all of the Company's revenues, including funds available for the payment of dividends and other operating expenses, is, and will continue to be, primarily dividends paid by the Bank. At December 31, 1995, the Bank had $2,002,105 legally available for the payment of cash dividends. The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or other affiliates, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of the Company or other affiliates. Such restrictions prevent the Company and such other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank to or in the Company or to or in any other affiliate is limited to 10% of the Bank's capital and surplus (as defined by federal regulations) and such secured loans and investments are limited, in the aggregate, to 20% of the Bank's capital and surplus (as defined by federal regulations). California law also imposes certain restrictions with respect to transactions involving the Company and other controlling persons of the Bank. Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of federal law. See "Item 1. Business - Supervision and Regulation - Prompt Corrective Action and Other Enforcement Mechanisms." Capital Standards The Federal Reserve Board and the OCC have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which includes off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock, retained earnings, noncumulative perpetual preferred stock (cumulative perpetual preferred stock for bank holding companies) and minority interests in certain subsidiaries, less most intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses, cumulative preferred stock, long term preferred stock, eligible term subordinated debt and certain other instruments with some 13 14 characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. The Company is currently exempt from the application of the Federal Reserve Board's capital guidelines under an exemption for bank holding companies with less than $150 million in consolidated assets. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. In August 1995, the federal banking agencies adopted final regulations specifying that the agencies will include, in their evaluations of a bank's capital adequacy, an assessment of the exposure to declines in the economic value of the bank's capital due to changes in interest rates. The final regulations, however, do not include a measurement framework for assessing the level of a bank's exposure to interest rate risk, which is the subject of a proposed policy statement issued by the federal banking agencies concurrently with the final regulations. The proposal would measure interest rate risk in relation to the effect of a 200 basis point change in market interest rates on the economic value of a bank. Banks with high levels of measured exposure or weak management systems generally will be required to hold additional capital for interest rate risk. The specific amount of capital that may be needed would be determined on a case-by-case basis by the examiner and the appropriate federal banking agency. Because this proposal has only recently been issued, the Bank currently is unable to predict the impact of the proposal on the Bank if the policy statement is adopted as proposed. In January 1995, the federal banking agencies issued a final rule relating to capital standards and the risks arising from the concentration of credit and nontraditional activities. Institutions which have significant amounts of their assets concentrated in high risk loans or nontraditional banking activities and who fail to adequately manage these risks, will be required to set aside capital in excess of the regulatory minimums. The federal banking agencies have not imposed any quantitative assessment for determining when these risks are significant, but have identified these issues as important factors they will review in assessing an individual bank's capital adequacy. 14 15 In December 1993, the federal banking agencies issued an interagency policy statement on the allowance for loan and lease losses which, among other things, establishes certain benchmark ratios of loan loss reserves to classified assets. The benchmark set forth by such policy statement is the sum of (a) assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of assets classified substandard; and (d) estimated credit losses on other assets over the upcoming 12 months. Federally supervised banks and savings associations are currently required to report deferred tax assets in accordance with SFAS No. 109. See "Item 1. Business -- Supervision and Regulation -- Accounting Changes." The federal banking agencies recently issued final rules, effective April 1, 1995, which limit the amount of deferred tax assets that are allowable in computing an institution's regulatory capital. The standard has been in effect on an interim basis since March 1993. Deferred tax assets that can be realized for taxes paid in prior carryback years and from future reversals of existing taxable temporary differences are generally not limited. Deferred tax assets that can only be realized through future taxable earnings are limited for regulatory capital purposes to the lesser of (i) the amount that can be realized within one year of the quarter-end report date, or (ii) 10% of Tier 1 Capital. The amount of any deferred tax in excess of this limit would be excluded from Tier 1 Capital and total assets and regulatory capital calculations. Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends. The following table presents the amounts of regulatory capital and the capital ratios for the Bank, compared to its minimum regulatory capital requirements as of December 31, 1995.
At December 31, 1995 ----------------------- Actual Minimum ------ Capital Requirement ----------- Leverage ratio ............ 8.4% 4.0% Tier 1 risk-based ratio ... 17.6 4.0 Total risk-based ratio .... 18.3 8.0
Prompt Corrective Action and Other Enforcement Mechanisms Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The law required each federal banking agency to promulgate regulations defining the following five categories in which an 15 16 insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. In September 1992, the federal banking agencies issued uniform final regulations implementing the prompt corrective action provisions of federal law. An insured depository institution generally will be classified in the following categories based on capital measures indicated below: "Well capitalized" "Adequately capitalized" Total risk-based capital of 10%; Total risk-based capital of 8%; Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and Leverage ratio of 5%. Leverage ratio of 4% (3% if the institution receives the highest rating from its primary regulator) "Undercapitalized" "Significantly undercapitalized" ---------------- ------------------------------ Total risk-based capital less than 8%; Total risk-based capital less than 6%; Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or Leverage ratio less than 4% (3% if the Leverage ratio less than 3%. institution receives the highest rating from its primary regulator) "Critically undercapitalized" Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as "well capitalized," "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat an institution as "critically undercapitalized" unless its capital ratio actually warrants such treatment. The law prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency, subject to asset growth restrictions and required to obtain prior regulatory approval for acquisitions, branching and engaging in new lines of business. Any undercapitalized depository institution must submit an acceptable capital restoration plan to the appropriate federal banking agency 45 days after becoming undercapitalized. The appropriate federal banking agency cannot accept a capital plan unless, among other things, it determines that the plan (i) specifies the steps the institution will take to become adequately capitalized, (ii) is 16 17 based on realistic assumptions and (iii) is likely to succeed in restoring the depository institution's capital. In addition, each company controlling an undercapitalized depository institution must guarantee that the institution will comply with the capital plan until the depository institution has been adequately capitalized on an average basis during each of four consecutive calendar quarters and must otherwise provide adequate assurances of performance. The aggregate liability of such guarantee is limited to the lesser of (a) an amount equal to 5% of the depository institution's total assets at the time the institution became undercapitalized or (b) the amount which is necessary to bring the institution into compliance with all capital standards applicable to such institution as of the time the institution fails to comply with its capital restoration plan. Finally, the appropriate federal banking agency may impose any of the additional restrictions or sanctions that it may impose on significantly undercapitalized institutions if it determines that such action will further the purpose of the prompt correction action provisions. An insured depository institution that is significantly undercapitalized, or is undercapitalized and fails to submit, or in a material respect to implement, an acceptable capital restoration plan, is subject to additional restrictions and sanctions. These include, among other things: (i) a forced sale of voting shares to raise capital or, if grounds exist for appointment of a receiver or conservator, a forced merger; (ii) restrictions on transactions with affiliates; (iii) further limitations on interest rates paid on deposits; (iv) further restrictions on growth or required shrinkage; (v) modification or termination of specified activities; (vi) replacement of directors or senior executive officers; (vii) prohibitions on the receipt of deposits from correspondent institutions; (viii) restrictions on capital distributions by the holding companies of such institutions; (ix) required divestiture of subsidiaries by the institution; or (x) other restrictions as determined by the appropriate federal banking agency. Although the appropriate federal banking agency has discretion to determine which of the foregoing restrictions or sanctions it will seek to impose, it is required to force a sale of voting shares or merger, impose restrictions on affiliate transactions and impose restrictions on rates paid on deposits unless it determines that such actions would not further the purpose of the prompt corrective action provisions. In addition, without the prior written approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to its senior executive officers or provide compensation to any of them at a rate that exceeds such officer's average rate of base compensation during the 12 calendar months preceding the month in which the institution became undercapitalized. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. For example, a critically undercapitalized institution generally would be prohibited from engaging in any material transaction other than in the ordinary course of business without prior regulatory approval and could not, with certain exceptions, make any payment of principal or interest on its subordinated debt beginning 60 days after becoming critically undercapitalized. Most importantly, however, 17 18 except under limited circumstances, the appropriate federal banking agency, not later than 90 days after an insured depository institution becomes critically undercapitalized, is required to appoint a conservator or receiver for the institution. The board of directors of an insured depository institution would not be liable to the institution's shareholders or creditors for consenting in good faith to the appointment of a receiver or conservator or to an acquisition or merger as required by the regulator. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease and desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted. Safety and Soundness Standards In July 1995, the federal banking agencies adopted final guidelines establishing standards for safety and soundness, as required by FDICIA. The guidelines set forth operational and managerial standards relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. Guidelines for asset quality and earnings standards will be adopted in the future. The guidelines establish the safety and soundness standards that the agencies will use to identify and address problems at insured depository institutions before capital becomes impaired. If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action. In December 1992, the federal banking agencies issued final regulations prescribing uniform guidelines for real estate lending. The regulations, which became effective on March 19, 1993, require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The policies must address loan portfolio management, underwriting standards and loan to value limits that do not exceed the supervisory limits prescribed by the regulations. 18 19 Appraisals for "real estate related financial transactions" must be conducted by either state certified or state licensed appraisers for transactions in excess of certain amounts. State certified appraisers are required for all transactions with a transaction value of $1,000,000 or more; for all nonresidential transactions valued at $250,000 or more; and for "complex" 1-4 family residential properties of $250,000 or more. A state licensed appraiser is required for all other appraisals. However, appraisals performed in connection with "federally related transactions" must now comply with the agencies' appraisal standards. Federally related transactions include the sale, lease, purchase, investment in, or exchange of, real property or interests in real property, the financing or refinancing of real property, and the use of real property or interests in real property as security for a loan or investment, including mortgage-backed securities. Premiums for Deposit Insurance Federal law has established several mechanisms to increase funds to protect deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90% of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. The result of these provisions is that the assessment rate on deposits of BIF members could increase in the future. The FDIC also has authority to impose special assessments against insured deposits. The FDIC implemented a final risk-based assessment system, as required by FDICIA, effective January 1, 1994, under which an institution's premium assessment is based on the probability that the deposit insurance fund will incur a loss with respect to the institution, the likely amount of any such loss, and the revenue needs of the deposit insurance fund. As long as BIF's reserve ratio is less than a specified "designated reserve ratio," 1.25%, the total amount raised from BIF members by the risk-based assessment system may not be less than the amount that would be raised if the assessment rate for all BIF members were .023% of deposits. On August 8, 1995, the FDIC announced that the designated reserve ratio had been achieved and, accordingly, issued final regulations adopting an assessment rate schedule for BIF members of 4 to 31 basis points effective on June 1, 1995. On November 14, 1995, the FDIC further reduced deposit insurance premiums to a range of 0 to 27 basis points effective for the semi-annual period beginning January 1, 1996. Under the risk-based assessment system, a BIF member institution such as the Bank is categorized into one of three capital categories (well capitalized, adequately capitalized, and 19 20 undercapitalized) and one of three categories based on supervisory evaluations by its primary federal regulator (in the Bank's case, the FDIC). The three supervisory categories are: financially sound with only a few minor weaknesses (Group A), demonstrates weaknesses that could result in significant deterioration (Group B), and poses a substantial probability of loss (Group C). The capital ratios used by the FDIC to define well-capitalized, adequately capitalized and undercapitalized are the same in the FDIC's prompt corrective action regulations. The BIF assessment rates are summarized below; assessment figures are expressed in terms of cents per $100 in deposits.
Assessment Rates Effective Through the First Half of 1995 Group A Group B Group C ------- ------- ------- Well Capitalized ......... 23 26 29 Adequately Capitalized ... 26 29 30 Undercapitalized ......... 29 30 31
Assessment Rates Effective through the Second Half of 1995 Group A Group B Group C ------- ------- ------- Well Capitalized ......... 4 7 21 Adequately Capitalized ... 7 14 28 Undercapitalized ......... 14 28 31 Assessment Rates Effective January 1, 1996 Group A Group B Group C ------- ------- ------- Well Capitalized ......... 0* 3 17 Adequately Capitalized ... 3 10 24 Undercapitalized ......... 10 24 27
*Subject to a statutory minimum assessment of $1,000 per semi-annual period (which also applies to all other assessment risk classifications). At December 31, 1995, the Bank's assessment rate was 0 cents per $100 of deposits, subject to a statutory minimum assessment of $1,000 per semi-annual period. A number of proposals have recently been introduced in Congress to address the disparity in bank and thrift deposit insurance premiums. On September 19, 1995, legislation was introduced and referred to the House Banking Committee that would, among other things: (i) impose a requirement on all SAIF member institutions to fully recapitalize the SAIF by paying a one-time special assessment of approximately 85 basis points on all assessable 20 21 deposits as of March 31, 1995, which assessment would be due as of January 1, 1996; (ii) spread the responsibility for FICO interest payments across all FDIC-insured institutions on a pro-rata basis, subject to certain exceptions; (iii) require that deposit insurance premium assessment rates applicable to SAIF member institutions be no less than deposit insurance premium assessment rates applicable to BIF member institutions; (iv) provide for a merger of the BIF and the SAIF as of January 1, 1998; (v) require savings associations to convert to state or national bank charters by January 1, 1998; (vi) require savings associations to divest any activities not permissible for commercial banks within five years; (vii) eliminate the bad-debt reserve deduction for savings associations, although savings associations would not be required to recapture into income their accumulated bad-debt reserves; (viii) provide for the conversion of savings and loan holding companies into bank holding companies as of January 1, 1998, although unitary savings and loan holding companies authorized to engage in activities as of September 13, 1995 would have such authority grandfathered (subject to certain limitations); and (ix) abolish the OTS and transfer the OTS' regulatory authority to the other federal banking agencies. The legislation would also provide that any savings association that would become undercapitalized under the prompt corrective action regulations as a result of the special deposit premium assessment could be exempted from payment of the assessment, provided that the institution would continue to be subject to the payment of semiannual assessments under the current rate schedule following the recapitalization of the SAIF. The legislation was considered and passed by the House Banking Committee's Subcommittee on Financial Institutions on September 27, 1995, and has not yet been acted on by the full House Banking Committee. On September 20, 1995, similar legislation was introduced in the Senate, although the Senate bill does not include a comprehensive approach for merging the savings association and commercial bank charters. The Senate bill remains pending before the Senate Banking Committee. The future of both these bills is linked with that of pending budget reconciliation legislation since some of the major features of the bills are included in the Seven-Year Balanced Budget Reconciliation Act. The budget bill, which was passed by both the House and Senate on November 17, 1995 and vetoed by the President on December 6, 1995, would: (i) recapitalize the SAIF through a special assessment of between 70 and 80 basis points on deposits held by institutions as of March 31, 1995; (ii) provide an exemption to this rule for weak institutions, and a 20% reduction in the SAIF-assessable deposits of so-called "Oakar banks;" (iii) expand the assessment base for FICO payments to include all FDIC-insured institutions; (iv) merge the BIF and SAIF on January 1, 1998, only if no insured depository institution is a savings association on that date; (v) establish a special reserve for the SAIF on January 1, 1998; and (vi) prohibit the FDIC from setting semiannual assessments in excess of the amount needed to maintain the reserve ratio of any fund at the designated reserve ratio. 21 22 The bill does not include a provision to merge the charters of savings associations and commercial banks. In light of ongoing debate over the content and fate of the budget bill, the different proposals currently under consideration and the uncertainty of the Congressional budget and legislative processes in general, management cannot predict whether any or all of the proposed legislation will be passed, or in what form. Accordingly, the effect of any such legislation on the Bank cannot be determined. Interstate Banking and Branching In September 1994, the Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") became law. Under the Interstate Act, beginning one year after the date of enactment, a bank holding company that is adequately capitalized and managed may obtain approval under the BHCA to acquire an existing bank located in another state without regard to state law. A bank holding company would not be permitted to make such an acquisition if, upon consummation, it would control (a) more than 10% of the total amount of deposits of insured depository institutions in the United States or (b) 30% or more of the deposits in the state in which the bank is located. A state may limit the percentage of total deposits that may be held in that state by any one bank or bank holding company if application of such limitation does not discriminate against out-of-state banks. An out-of-state bank holding company may not acquire a state bank in existence for less than a minimum length of time that may be prescribed by state law except that a state may not impose more than a five year existence requirement. The Interstate Act also permits, beginning June 1, 1997, mergers of insured banks located in different states and conversion of the branches of the acquired bank into branches of the resulting bank. Each state may permit such combinations earlier than June 1, 1997, and may adopt legislation to prohibit interstate mergers after that date in that state or in other states by that state's banks. The same concentration limits discussed in the preceding paragraph apply. The Interstate Act also permits a national or state bank to establish branches in a state other than its home state if permitted by the laws of that state, subject to the same requirements and conditions as for a merger transaction. In October 1995, California adopted "opt in" legislation under the Interstate Act that permits out-of-state banks to acquire California banks that satisfy a five-year minimum age requirement (subject to exceptions for supervisory transactions) by means of merger or purchases of assets, although entry through acquisition of individual branches of California institutions and de novo branching into California are not permitted. The Interstate Act and the California branching statute will likely increase competition from out-of-state banks in the 22 23 markets in which the Company operates, although it is difficult to assess the impact that such increased competition may have on the Company's operations. Community Reinvestment Act and Fair Lending Developments The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. In May 1995, the federal banking agencies issued final regulations which change the manner in which they measure a bank's compliance with its CRA obligations. The final regulations adopt a performance-based evaluation system which bases CRA ratings on an institution's actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. In March 1994, the Federal Interagency Task Force on Fair Lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment and evidence of disparate impact. Recent Accounting Developments In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of." Statement No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. Statement No. 121 will first be required for the Bank's year ending December 31, 1996. Based on its preliminary analysis, the Bank does not anticipate that the adoption of Statement No. 121 will have a material impact on the financial statements as of the date of adoption. In 1995 the FASB issued Statement No. 123, "Accounting for Stock-based Compensation." Statement No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans such as a purchase plan. The Statement generally suggests stock-based compensation transactions be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. An enterprise may continue to follow the 23 24 requirements of Accounting Principles Board (APB) Opinion No. 25, which does not require compensation to be recorded if the consideration to be received is at least equal to the fair value at the measurement date. If an enterprise elects to follow APB Opinion No. 25, it must disclose the pro forma effects on net income as if compensation were measured in accordance with the suggestions of Statement No. 123. The Company has not determined if it will continue to follow APB Opinion No. 25 or follow the guidance of Statement No. 123. However, adoption of this pronouncement in 1996 is not expected to have a material impact on the financial statements. Employees As of December 31, 1995, the Company employed 26 full-time employees and 16 part-time employees. Management believes that the Company's and the Bank's relations with its employees are good. Executive Officers In addition to the executive officers listed under the caption "ELECTION OF DIRECTORS" in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year, which information is incorporated herein by reference, the following person is considered an executive officer of the Company: Name ................ Age Principal Occupation - ---- --- -------------------- Hugh Waddell ............... 56 Mr. Waddell joined Commerce National Bank on May 25, 1994 as its Senior Vice President and Credit Administrator. Mr. Waddell has over 32 years of experience in all phases of community banking. Prior to joining the Bank, Mr. Waddell served as Executive Vice President for nine years with Western Security Bank in Burbank. 24 25 STATISTICAL DISCLOSURE I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential A. Average Balances The following table sets forth the Company's consolidated condensed daily average balances of each major category of assets, liabilities and shareholders' equity for the periods indicated.
YEAR ENDED YEAR ENDED ASSETS DECEMBER 31, 1995 DECEMBER 31, 1994 ------ ----------------- ----------------- Cash and due from banks $ 5,305,762 7.48% $ 5,628,006 9.08% Interest-bearing deposits with financial institutions 9,913,452 13.98% 7,714,864 12.45% Federal Reserve Bank stock 120,000 0.17% 120,000 0.19% Investments available for sale 17,729,951 25.01% 14,224,555 22.96% Federal funds sold 9,821,823 13.85% 9,043,958 14.60% Loans (net of allowance for credit losses) 23,927,123 33.74% 22,657,720 36.57% Other assets 4,092,477 5.77% 2,569,986 4.15% ----------- ------ ----------- ------ Total assets $70,910,588 100.00% $61,959,089 100.00% =========== ====== =========== ====== Liabilities and Shareholders' Equity Demand deposits $23,878,416 33.67% $20,274,807 32.72% Interest-bearing deposits 40,444,174 57.04% 35,712,238 57.64% Other liabilities 438,038 0.62% 182,650 0.30% ----------- ------ ----------- ------ Total liabilities 64,760,628 91.33% 56,169,695 90.66% Shareholders' equity 6,149,960 8.67% 5,789,394 9.34% ----------- ------ ----------- ------ Total liabilities and shareholders' equity $70,910,588 100.00% $61,959,089 100.00% =========== ====== =========== ======
25 26 B. Analysis of Net Interest Income The following table sets forth the average amounts outstanding for each category of interest-earning assets and interest-bearing liabilities, the average interest rates earned and paid thereon and the net interest margin for the periods indicated.
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994 ---------------------------- ---------------------------- Interest Interest Average Income/ Average Average Income/ Average Balance Expense Yield Balance Expense Yield ------- ------- ----- ------- ------- ----- Loans $24,691,646 $2,904,107 11.76% $23,370,301 $2,750,210 11.77% Interest-bearing deposits with financial institutions 9,913,452 610,821 6.16% 7,714,864 334,074 4.33% Federal Reserve Bank stock 120,000 7,200 6.00% 120,000 7,200 6.00% Securities available for sale 17,729,951 1,111,063 6.27% 14,224,555 699,344 4.92% Federal funds sold 9,821,823 566,857 5.77% 9,043,958 402,391 4.45% ----------- ---------- ----- ----------- ---------- ----- Total interest-earning assets $62,276,872 $5,200,048 8.35% $54,473,678 $4,193,219 7.70% =========== ========== ===== =========== ========== ===== Interest-Bearing Liabilities: Deposits: Money market demand $ 9,669,341 $ 272,090 2.81% $ 8,820,983 $ 220,407 2.50% Savings and other interest- bearing demand 18,090,611 356,992 1.97% 15,802,130 294,018 1.86% Time deposits 12,684,221 570,329 4.50% 11,089,125 369,996 3.34% ----------- ---------- ----- ----------- ---------- ----- Total interest-bearing liabilities $40,444,173 $1,199,411 2.97% $35,712,238 $ 884,421 2.48% =========== ========== ===== =========== ========== ===== Net interest income 4,000,637 3,308,798 ========== ========== Net interest margin 6.42% 6.07% ===== =====
26 27 C. Net Interest Income Information as to the impact of changes in average rates and average balances on interest-earning assets and interest-bearing liabilities is set forth in the following table. The variances attributable to simultaneous balance and rate changes have been allocated to volume.
1995 OVER 1994 1994 OVER 1993 ---------------------------------------- ------------------------------------------ Increase (Decrease) Increase (Decrease) due to changes in: due to changes in: Volume Net Rate Change Volume Net Rate Change -------- --------- ---------- --------- --------- ---------- Interest-Earning Assets: Loans $155,495 $ (1,598) $ 153,897 $ 34,014 $ 486,848 $ 520,862 Interest-bearing deposits with financial institutions 95,205 181,542 276,747 (3,007) 37,974 34,967 Securities available for sale 172,341 239,378 411,719 635,072 (179,542) 455,530 Federal funds sold 34,609 129,857 164,466 157,504 147,092 304,596 -------- --------- ---------- --------- --------- ---------- Total $457,650 $ 549,179 $1,006,829 $ 823,583 $ 492,372 $1,315,955 ======== ========= ========== ========= ========= ========== Interest-Bearing Liabilities: Money market demand $ 21,198 $ 30,485 $ 51,683 $ 48,866 $ 8,152 $ 57,018 Savings and other interest- bearing deposits 42,580 20,394 62,974 136,009 (22,939) 113,070 Time deposits 53,221 147,112 200,333 61,613 11,979 73,592 -------- --------- ---------- --------- --------- ---------- Total $116,999 $ 197,991 $ 314,990 $ 246,488 ($ 2,808) $ 243,680 ======== ========= ========== ========= ========= ========== Interest Differential $340,651 $ 351,188 $ 691,839 $ 577,095 $ 495,180 $1,072,275 ======== ========= ========== ========= ========= ==========
II. Investment Portfolio Effective December 31, 1993, the Bank adopted FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Bank classified substantially all of its investment portfolio as available for sale on December 31, 1995. At December 31, 1995, the Bank recorded an increase to shareholders' equity of $134,960 net of income taxes of $97,200 to adjust the portfolio classified as available for sale to its market value. 27 28 The following table sets forth the Bank's investment securities as of the dates indicated:
DECEMBER 31, 1995 DECEMBER 31, 1994 ----------------- ----------------- Federal Reserve Bank stock $ 120,000 $ 120,000 ----------------- ----------------- Securities available for sale: U.S. Treasury securities $ 7,988,578 14,024,459 U.S. Government agencies 11,842,739 2,105,067 Corporate notes 317,098 495,020 Municipal securities 898,150 205,858 ----------------- ----------------- $ 21,046,565 $ 16,830,404 ----------------- ----------------- TOTAL $ 21,166,565 $ 16,950,404 ================= =================
The following table sets forth the amounts, term, distribution and weighted average yields of the Bank's investment securities as of December 31, 1995.
AFTER ONE YEAR ONE YEAR OR LESS THROUGH FIVE YEARS AFTER FIVE YEARS ---------------------- ----------------------- ------------------------ AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ---------------------- ----------------------- ------------------------ Federal Reserve Bank stock -- -- -- -- $ 120,000 6.00% ---------- ----------- ---------- Securities available for sale: U.S. Treasury securities $2,968,497 6.41% $ 5,020,080 6.87% $ -- -- U.S. Government agencies 453,140 6.46% 8,227,779 6.78% 3,161,823 8.17% Corporate notes -- -- 208,799 6.94% 108,298 7.75% Municipal securities 100,017 3.40% 515,502 4.17% 282,630 5.03% ---------- ----------- ---------- $3,521,654 $13,972,160 $3,552,751 ---------- ----------- ---------- TOTAL $3,521,654 $13,972,160 $3,672,751 ========== =========== ==========
28 29 III. Loan Portfolio A. Types of Loans The composition of the Company's loan portfolio (all domestic) at the dates indicated was as follows:
DECEMBER 31, 1995 DECEMBER 31, 1994 ----------------- ----------------- Commercial: $ 10,474,719 $ 11,210,049 Real Estate: Construction 2,338,979 2,998,619 Other 8,062,827 8,541,865 Mortgage loans acquired 1,216,165 1,242,636 Consumer / Installment 1,679,274 1,815,841 ----------------- ----------------- Total loans $ 23,771,964 $ 25,809,010 ================= =================
29 30 B. Maturities and Sensitivity to Changes in Interest Rates The following table sets forth the amount of total loans outstanding (excluding consumer/installment loans) at December 31, 1995, which are based on remaining scheduled principal repayments due in one year or less, after one year through five years and after five years. The amounts outstanding which are due after one year are classified according to their sensitivity to changes in interest rates. One year or less $ 7,719,471 After one year through five years: Floating interest rate 7,846,631 Fixed interest rate 3,775,596 After five years: Floating interest rate 862,517 Fixed interest rate 1,888,475 ----------- Total $22,092,690 ===========
C. Risk Elements The following table sets forth the Bank's loans accounted for on a non-accrual basis and loans accruing which are contractually past due 90 days or more, as to principal or interest payments. The Bank does not have any loans which are considered "troubled debt restructurings" as defined in Statement of Financial Accounting Standards No. 15 ("FAS 15"), "Accounting by Debtors and Creditors for Troubled Debt Restructurings."
LOANS PAST DUE OVER 90 LOANS ON NON-ACCRUAL DAYS AND STILL ACCRUING STATUS ----------------------- -------------------- Commercial $ -- $ -- Real Estate: Construction -- -- Other -- 102,575 Mortgage loans acquired 146,349 -- Consumer / Installment 20,764 -- ----------------------- -------------------- Total $ 167,113 $ 102,575 ======================= ====================
30 31 The gross interest income included in net income on the impaired loans outstanding at December 31, 1995 and the gross interest income that would have been reported in the period ending December 31, 1995 if non-accrual loans had been current in accordance with their original terms are as follows: Interest income included in net income on impaired loans $21,732 Interest income excluded from net income on non-accrual loans $ 8,065
The Company's current policy is to cease accruing interest on loans which are 90 days or more past due as to principal or interest, except in instances where management believes that the loan is fully collectible. Each such loan that is 90 days or more past due is evaluated individually to determine its collectibility and the adequacy of its collateral. The loan on non-accrual status is secured by a first trust deed on commercial property; the borrower has been contacted but the Bank was unable to obtain a promise to pay. The Bank is currently consulting with counsel regarding a resolution. The other real estate single family dwelling secured loan in the amount of $146,349 made a payment on January 5, 1996, and is no longer 90 days past due. These two loans account for 92.3% of the Bank's non performing loans. The other three represent a credit card receivable and two loans secured by commercial vehicles; these loans total $20,763, or 7.7% of non performing loans, of which $1,600 was charged off in February 1996. The Bank received payoffs on the two remaining loans in February 1996. Management believes that it has adequately reserved for those loans representing an above normal degree of risk. On February 16, 1996, the Bank was made aware of the Chapter 7 bankruptcy filing on two unsecured commercial loans totaling $163,333. These loans are not included in the non performing asset totals as of December 31, 1995. The Bank has contacted counsel and will prepare a charge off to remove the loans from its performing assets. On January 1, 1995, the Bank adopted FASB Statement No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by FASB Statement No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." There was no effect on the Bank's financial statements from this change. At January 1, 1995, the Bank classified $244,000 of its loans as impaired with a specific loss reserve of $56,000. Impairment of loans having recorded investments of $103,000 at December 31, 1995 has been recognized. The total allowance for loan losses related to these loans was $5,200 on December 31, 1995. The average recorded investment for all impaired loans during 1995 was $276,000. Interest income of $57,000 was recognized on impaired loans in 1995 and was 31 32 recognized using a cash basis method of accounting during the time within that period that the loans were impaired. Other than the loan categories disclosed herein, the Bank does not have any material concentration of loans. Management believes that the loan portfolio is diversified sufficiently to avoid the impact of significant adverse changes in economic or other conditions related to any single industry. IV. Summary of Loan Loss Experience
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1995 1994 ------------ ------------ Average net loans outstanding $ 23,927,123 $ 22,657,720 ------------ ------------ Balance of allowance for loan losses at beginning of period 498,827 534,625 Charge-offs: Commercial loans (768,475) (199,700) Real Estate loans -- (73,924) Consumer loans (16,775) (59,549) Recoveries 69,982 4,575 ------------ ------------ Net charge-offs (715,268) (328,598) ------------ ------------ Provisions charged to expense 649,000 292,800 ------------ ------------ Balance of allowance for loan losses at end of period $ 432,559 $ 498,827 ------------ ------------ Ratio of net charge-offs to average net loans outstanding 2.99% 1.45% ------------ ------------
The allowance for loan losses is established through charges to operations in the form of provisions for loan losses. Loan losses are charged, and recoveries credited, directly to the allowance. The Company determines its allowance for loan losses on the basis of a qualitative and quantitative review of all loans on a quarterly basis. In determining the adequacy of the 32 33 allowance for loan losses, management considers such factors as known problem loans, evaluations made by bank regulatory authorities and/or independent firms retained to perform loan reviews, assessment of economic conditions and other appropriate data in order to identify the risks in the portfolio. The adequacy of the allowance is evaluated by assessing the risks inherent in each category of loans. If, following a review of the allowance, the allowance is determined to be inadequate or supererogatory, the amount of the allowance is adjusted accordingly. Management believes that the allowance for loan losses was adequate at December 31, 1995. At December 31, 1995, the allowance was 1.8% of total outstanding loans receivables. The allowance for loan losses should not be interpreted as an indication of future charge-off trends. Allocation of the Allowance for Loan Losses
YEAR ENDED YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, 1994 ------------------------- ------------------------- Commercial $266,487 44.06% $275,028 43.43% Real Estate 139,001 48.87% 185,863 49.53% Installment 27,071 7.06% 37,936 7.04% -------- ------ -------- ------ $432,559 100.00% $498,827 100.00% ======== ====== ======== ======
33 34 V. Deposits The average deposit balances are summarized for the periods indicated:
YEAR ENDED DECEMBER 31, 1995 1994 ----------- ----------- Demand deposits, non-interest bearing $23,878,416 $20,274,807 Money market demand 9,669,341 8,820,983 Savings and other interest-bearing demand 18,090,612 15,802,130 Time deposits 12,684,221 11,089,125 ----------- ----------- Total $64,322,590 $55,987,045 =========== ===========
The following table sets forth the maturities of the Company's time certificates of $100,000 or more at December 31, 1995: Maturing within: Three months or less $3,112,000 Over three months to six months 707,000 Over six months to twelve months 1,436,000 Over twelve months 127,000 ---------- Total $5,382,000 ==========
At December 31, 1995 the Company had no brokered deposits. VI. Return on Equity and Assets
YEAR ENDED DECEMBER 31, 1995 1994 ------ ------ Return on average assets 0.46% 0.76% Return on average equity 5.35% 8.09% Average equity to average assets 8.67% 9.34% Dividend pay-out ratio 42.98% - %
34 35 ITEM 2. PROPERTIES. Premises The Company's executive offices and the Bank's Main Office are located at 6001 E. Washington Blvd., City of Commerce, California, in a structure which was completed in August 1994. This Bank-owned structure consists of approximately 15,000 square feet of space and is located on approximately 36,000 square feet of underlying land. The Montebello Office is located on the first floor of a three story structure at 420 N. Montebello Blvd., Montebello, California. This office consists of approximately 4,000 square feet and was on a month to month rental during lease negotiations. The Bank signed a three year lease effective April, 1995. The Bank's Downey Branch is located at 11101 La Reina Blvd., Downey, California. This Bank-owned structure consist of a two-story structure of approximately 10,816 square feet on approximately 28,990 square feet of land. The Bank has recently received approval from the City of Downey to upgrade this facility. ITEM 3. LEGAL PROCEEDINGS. During the ordinary course of its business, the Company and the Bank may be involved in various legal proceedings and litigation. While no assurance can be given as to the likelihood of an unfavorable outcome of any such litigation or the estimated amount of potential loss, if any, based upon currently available information, the Company does not believe that the outcome of any such litigation will have a material adverse effect upon the operations or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 35 36 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock has been traded in the over-the-counter market since the Company commenced operations in 1983. The below table sets forth, on a per-share basis for the periods indicated, the range of high and low bid quotations for the Company's Common Stock reported by the National Quotation Bureau. The bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. As of December 31, 1995, there were approximately 366 shareholders of record of the Company's Common Stock. The Company paid a cash dividend of $0.25 per share in 1995, and did not declare a dividend in 1994. Under Federal banking law, dividends declared by the Bank (and payable to the Company) in any calendar year may not, without the approval of the OCC, exceed its net income, as defined, for that year combined with its retained net income for the preceding two years.
1995 1994 ------------------ ------------------ High Low High Low ---- ---- ---- ---- First Quarter 7.00 6.50 5.50 5.50 Second Quarter 7.38 7.00 6.75 5.50 Third Quarter 8.50 7.00 6.75 6.00 Fourth Quarter 9.50 7.00 7.00 6.50
36 37 ITEM 6. SELECTED FINANCIAL DATA.
Year ended December 31, 1995 1994 1993 1992 1991 ----------------------------------------------------------------------- Statement of Income Data: Interest income $ 5,200,048 $ 4,193,219 $ 2,877,264 $ 3,369,831 $ 3,882,298 Interest expense 1,199,411 884,421 640,741 924,485 1,555,078 Net interest income 4,000,637 3,308,798 2,236,523 2,445,346 2,327,220 Provision for loan losses (649,000) (292,800) (651,314) (85,000) (107,000) Net interest income after provision for loan losses 3,351,637 3,015,998 1,585,209 2,360,346 2,220,220 Other income 609,522 619,498 558,814 517,673 416,088 Other operating expenses (3,399,064) (2,814,859) (2,420,863) (2,465,206) (2,403,478) Net income before income taxes and cumulative effect of a change in accounting 562,095 820,637 (276,840) 412,813 232,830 principle Provision for income taxes (233,000) (352,000) 87,500 (170,400) (99,500) Earnings (loss) before cumulative effect of a change in accounting principle 329,095 468,637 (189,340) 242,413 133,330 Cumulative effect of a change in accounting principle -- -- 55,582 -- -- Net earnings (loss) $ 329,095 $ 468,637 $ (133,758) $ 242,413 $ 133,330 Earnings (loss) per common share: Earnings (loss) before cumulative effect of a change in accounting principle $ 0.58 $ 0.83 $ (0.34) $ 0.43 $ 0.24 Cumulative effect of a change in accounting principle -- -- $ 0.10 -- -- Net earnings (loss) per common share $ 0.58 $ 0.83 $ (0.24) $ 0.43 $ 0.24 Dividends per common share $ 0.25 -- $ 0.09 $ 0.08 $ 0.07
37 38
Year ended December 31, 1995 1994 1993 1992 1991 ----------------------------------------------------------------------------- Balance Sheet Data: Interest-bearing deposits in other banks $11,755,000 $ 8,102,000 $ 7,974,874 $ 6,692,734 $ 6,219,035 Securities 21,166,565 16,950,404 13,030,912 3,038,206 3,342,335 Net loans 23,188,851 24,965,076 21,633,656 24,074,047 27,508,185 Total assets 68,830,029 71,188,448 51,350,657 39,888,021 42,828,966 Total deposits 62,023,797 64,899,298 45,539,681 33,863,116 36,910,549 Shareholders' equity 6,384,910 5,946,627 5,666,825 5,778,344 5,581,194 Book value per share $ 11.29 $ 10.51 $ 10.02 $ 10.21 $ 9.86 Non-performing loans $ 269,688 $ 397,100 $ 1,774,712 $ 733,768 $ 817,875 As a percent of gross loans 1.1% 1.5% 8.0% 3.0% 3.0% As a percent of total assets 0.4% 0.6% 3.5% 1.8% 1.9% Risk-based capital ratios:(1) Tier 1 18.3% 16.7% 19.6% 19.5% 17.1% Total 17.6% 17.9% 20.8% 20.9% 18.1% Leverage ratio 8.4% 7.7% 10.0% 13.7% 12.9%
(1) The Company is currently exempt from the Federal Reserve Board's risk-based guidelines because consolidated assets are under $150 million. Therefore, the indicated ratios are those of the Bank only. 38 39 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Financial Condition The Company's principal source of growth in recent years has been a series of deposit and loan acquisitions beginning with the acquisition of certain assets and all of the deposits of a branch of Liberty Federal Savings Bank in Montebello, California, in 1991. In 1993, the Bank acquired all of the branch deposits of the Commerce, California branch of Community Bank at a premium of approximately $138,000 and assumed approximately $12.5 million in deposit liabilities. On August 26, 1994, the Bank, as part of a consortium, entered into an Insured Deposit Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation ("FDIC") for the purchase and assumption of certain assets and liabilities of the Downey Branch of Capital Bank (the "Downey Branch"). In that transaction, the Bank purchased $674,000 of cash assets and approximately $7,784,000 in face value loans, net of participations sold of $2,035,000, from various pools of loans at a discount of $203,000. The deposits purchased totaled $22.5 million. The Company's total assets at December 31, 1995 decreased by 3.3% from December 31, 1994, due primarily to the 4.4% decrease in deposits. Gross loans decreased 7.9%, primarily due to the continued moderate economic growth and the resulting lack of loan demand during 1995. The Bank will continue to maintain a conservative approach to new loan generation until the California and local economies demonstrate definitive signs of improvement. The components of the decrease in loans as of December 31, 1995 are as follows:
Total Change compared to December 31, 1994 --------------------- Commercial loans (6.6)% Real estate - construction loans (22.0)% Real estate - primarily loans for acquisition or improvement of owner occupied offices and industrial property (5.6)% Real estate - mortgage loans acquired (2.1)% Installment loans (7.5)%
As of December 31, 1995, the Bank had approximately $4.5 million in net loans outstanding which were initially acquired as part of the Downey Branch acquisition. Although the Company does not regularly calculate net earnings of each branch or department utilizing 39 40 strict cost accounting methods, an analysis of the net interest income of the Bank in the amount of $4,000,637 for the year ended December 31, 1995 indicates that 23.6% of such amount is attributable to the Downey Branch acquisition in 1995. The average loans to deposits and demand deposits to total deposits for the Downey Branch were 32.6% and 42.8%, respectively, compared to 38.4% and 37.1%, respectively, for the Company as a whole. The components of the outstanding loans attributable to the Downey Branch acquisition are as follows:
August 26, 1994 December 31, 1994 December 31, 1995 ----------------------------------------------------- Commercial loans $3,222,676 $3,406,718 $2,421,277 Real estate - primarily loans for acquisition or improvement of owner occupied offices and industrial property 2,124,541 1,702,456 1,729,700 Installment loans 401,599 457,363 389,483 ----------------------------------------------------- Total $5,748,816 $5,566,537 $4,540,460
The components of the changes in deposits of the Company as of December 31, 1995 are as follows:
Total Change compared to December 31, 1994 Increase (Decrease) --------------------- Demand deposits (7.0)% Money market demand (21.5)% NOW accounts 9.8 % Savings (6.4)% Time deposits of $100,000 or greater 24.3 % Time deposits of less than $100,000 (1.4)%
As part of the Downey Branch acquisition, the Bank assumed $22.5 million of deposits, including approximately $2.0 million of uninsured deposits which the Bank had the right to put back to the FDIC, for a total premium of $185,000, including expenses. The Bank put back such uninsured deposits to the FDIC on June 29, 1995. As of December 31, 1995, the Bank had approximately $13.0 million in deposits attributable to such acquisition. Management believes that the run-off in deposits acquired through this transaction was due primarily to the normal deposit attrition caused by the change in bank ownership, and that the Bank will be able to maintain the current level of deposits without significant further loss of deposits. The components of the outstanding deposits attributable to the Downey Branch acquisition are as follows: 40 41
August 26, 1994 December 31, 1994 December 31, 1995 ----------------------------------------------------------------- Demand deposits $ 8,200,638 $ 6,783,201 $ 5,288,941 Interest-bearing deposits 4,915,937 4,286,138 3,664,874 Time certificates of deposit 5,667,724 2,721,154 2,378,134 Savings deposits 3,697,787 2,034,327 1,803,390 Accrued interest payable 53,476 29,327 23,302 ----------------------------------------------------------------- Total $22,535,562 $15,854,147 $13,158,641
The Company's loan to deposit ratio at December 31, 1995, was 38.4%, compared to 39.8% at December 31, 1994. Total non-performing assets as of December 31, 1995 amounted to $377,000 or 0.5% of total assets, consisting of loans of $270,000 and other real estate owned of $107,000. This compares favorably with total non-performing assets as of December 31, 1994 of $768,000 or 1.1% of total assets, consisting of $397,000 of loans and other real estate owned of $371,000. Total non-performing loans (i.e., those past due 90 days and/or on non-accrual status) at December 31, 1995 amounted to approximately $270,000, a 32% decrease compared to December 31, 1994. Of the five non-performing loans, one loan in the amount of $102,575 or 38% of the non-performing loans, is secured by commercial property. Based on the appraisal and estimated costs associated upon an eventual sale, management does not expect a loss to be incurred. Foreclosure proceedings will be initiated after the Bank is granted a relief from the "stay" imposed by the court in this matter. The Bank received a payment in January on a second loan in the amount of $146,349 which is secured by a single family dwelling. Payments are expected to continue and no loss is anticipated. This loan represents 54.3% of the non-performing loans. The remaining three loans total $20,763 or 7.7% of non-performing loans, and consist of a credit card receivable and two loans secured by commercial vehicles. The Bank will charge off $1,600 of this amount, and anticipates payoffs on the remaining amount. At December 31, 1995, only one loan in the amount of $102,575 was impaired. The total allowance for loan loss related to this loan was $5,200 as of December 31, 1995. The average recorded investment for all impaired loans during 1995 was $276,000. Interest income of $57,000 was recognized on impaired loans in 1995 and was recognized using a cash basis method of accounting during the time within that period that the loans were impaired. As of December 31, 1995 and 1994, the allowance for loan losses as a percentage of non-performing loans was 160.4% and 125.6%, respectively. The allowance for loan losses was $432,559 or 1.8% of total outstanding loans at December 31, 1995, as compared to $498,827 or 1.9% of total outstanding loans at December 31, 1994. Management believes that the allowance for loan losses was adequate at December 31, 1995. On January 1, 1995, the Bank adopted FASB Statement No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by FASB Statement No. 118, "Accounting by 41 42 Creditors for Impairment of a Loan - Income Recognition and Disclosures." There was no effect on the Bank's financial statements from this change. At January 1, 1995, the Bank classified $244,000 of its loans as impaired with a specific loss reserve of $56,000. The Company maintains a portfolio of securities which provide income and serve as a source of liquidity for its operations. Changes in liquidity needs and changes in the economic climate and loan demand may necessitate restructuring the portfolio from time to time. On December 31, 1993, the Bank adopted Financial Accounting Standards Board Statement No.115 and classified all securities except the Federal Reserve Stock as available for sale. The types of securities held in the Company's portfolio are influenced by several factors among which are rate of return, maturity and risk. Under the risk based capital guidelines, the nature of the securities held in the portfolio can affect the amount of the Company's risk-based assets and consequently, the amount of required capital the Company must maintain. From time to time, the Company may alter the composition of its investment portfolio to change its capital position under the risk-based guidelines. At December 31, 1995, the Company's excess funds were invested in Federal funds sold, U.S. Treasury and Agency securities, investment grade corporate notes, municipal bonds, and interest-bearing deposits with other financial institutions. Note 4 to the consolidated financial statements sets forth the distribution of, as well as unrealized gains and losses in, the investment portfolio at December 31, 1995 and 1994. Cash, unrestricted interest-bearing deposits, Federal funds sold and investment securities totaled $41,361,328 at December 31, 1995, compared to $42,402,760 at December 31, 1994, a 2.5% decrease, due primarily to a decrease of $2,875,500 or 4.4% in deposit liabilities. Federal funds decreased 75.9% from $11,605,000 in 1994 to $2,800,000 in 1995, offset by increases of $3,653,000 or 45.1%, and $4,216,161 or 25.1%, in interest bearing deposits with other financial institutions and securities available for sale, respectively, compared to 1994. Due to the Downey Branch acquisition in August 1994, management sought to maintain excess funds in Federal funds to provide liquidity for anticipated run-off of some deposits. As such deposit levels stabilized, excess funds were shifted to higher yielding securities with longer maturities. Results of Operations Year ended December 31, 1995 versus December 31, 1994 Interest income increased by 24.0% during 1995, due to a 14.3% increase in average interest bearing assets and an increase in average yield of 0.7% during 1995 compared to 1994. Average loans increased by only 5.7% during 1995, with the balance of the increase in average interest bearing assets in securities, which typically have lower yields than loans. The yield on average earning assets reflects an increase from 7.7% in 1994 to 8.4% in 1995. The yield on average earning assets at the Downey Branch was 9.1% at December 31, 1995, reflecting the higher reference rate utilized on the loan portfolio purchased. Interest expense increased by 35.6% 42 43 during 1995, due to a 13.3% increase in interest-bearing liabilities during the year and an increase in the average cost of funds to 3.0% in 1995 from 2.5% in 1994. The cost of funds at the Downey Branch was 2.8% compared to 3.0% for the entire Bank. Net interest income increased by $691,800 or 20.9%. The Company's net interest margin increased slightly to 6.4% during 1995 from 6.1% during 1994. The improved totals for 1995 reflect the 7.3% interest margin attributable to the Downey Branch acquisition in August 1994. The provision for loan losses which is charged to operations increased by $356,200 or 121.7% in 1995, compared to 1994. During 1995, management instigated a program of corrective actions to enhance loan quality. As a result, the Company charged off three unsecured loans totaling approximately $721,000, which management considered uncollectible. Although progress is being made, management believes that completing this program will be a long process, particularly in the current economy. On February 16, 1996, that Bank was made aware of the Chapter 7 bankruptcy filing on two unsecured commercial loans totaling approximately $163,000. These loans were not included in the non-performing asset totals as of December 31, 1995; accordingly, no specific reserves were provided at December 31, 1995. The Bank will increase its provision to keep the allowance constant. Management has contacted counsel and will take appropriate action to charge off and remove these loans from its performing assets. Asset quality will continue to receive priority attention from management. Management believes that the Company has adequately provided an allowance for loan losses as of December 31, 1995 to cover any potential and unanticipated loan losses within the existing loan portfolio. At December 31, 1995, the allowance for loan losses was 1.8% of outstanding loans as compared to 1.9% at December 31, 1994. Other income decreased by 1.6% during 1995, while other operating expenses increased by 20.8%. The following is a discussion of certain other expense items which have had significant fluctuations during the year. Salaries and employee benefits increased $241,832 or 19.7% over 1994, reflecting the salaries for 12 months in 1995 compared to only four months in 1994 of the additional employees acquired in the assumption of the Downey Branch of Capital Bank in August 1994. Equipment expense increased by $91,111 or 66.8% over 1994, reflecting the growth of the Company and equipping the Bank with computers and installing a wide-area network. Professional fees increased $106,399 or 101.4% over 1994, attributable to litigation involving the Bank's other real estate owned and other problem assets, and professionals utilized in the Bank's marketing and sales training. Stationery and supplies increased $43,043 or 33.6% over 1994, reflecting additional supplies necessary for the Downey Branch for the entire year, compared to only four months in 1994. Amortization of deposit premium associated with the various acquisitions increased to approximately $57,000 in 1995 from approximately $39,000 in 1994, and is included in other operating expenses. Total other operating expenses as a percentage of total interest income decreased to 65.4% in 1994 from 67.1% in 1994. 43 44 Net income for 1995 was $329,095 or $0.58 per share, compared to $468,637 or $0.83 per share for 1994. Year ended December 31, 1994 versus December 31, 1993 Interest income reflects an increase of 45.7% during 1994, primarily due to an increase of 42.1% in average interest bearing assets at December 31, 1994 over December 31, 1993, principally as a result of the Downey branch acquisition in August 1994. Average loans increased 1.5% during 1994. The balance of the increase in average interest bearing assets is in securities which typically have lower yields than loans. The yield on average earning assets reflects an increase from 7.5% in 1993 to 7.7% in 1994. Interest expense also reflects an increase of approximately 38% during 1994, due primarily to a 42.9% increase in interest-bearing liabilities during the year, principally as a result of the Downey branch acquisition in August 1994. Cost of funds decreased nominally from 2.6% in 1993 to 2.5% in 1994. Net interest income reflects an increase of approximately $1,072,275 or 47.9%. The Company's net interest margin increased slightly from 5.8% during 1993 to 6.1% during 1994. The industry-wide increase in prime rate of interest during 1994 resulted in the increase of the yield on average earning assets. However, the average cost of funds for the Company decreased slightly because the depository rates continued to decline in 1994, lagging behind the increasing prime rate of interest. The provision for loan losses which is charged to operations decreased by $358,514 or 55% in 1994 compared to 1993. At December 31, 1994, the allowance for loan losses was 1.9% of outstanding loans as compared to 2.4% at December 31, 1993. The 1993 provision for loan losses was higher than the Bank's experience in recent years due in part to management's action to clean up the loan portfolio and effects of the California economy. The provision for loan losses in 1994 declined compared to 1993 because of the improved economy and improvements in the loan portfolio. Other income increased approximately 10.9% during 1994 while other operating expenses increased approximately 16.3%. The following is a discussion of certain other income and expense items which have had significant fluctuations during the year. Gain on the sale of securities decreased $62,529 or 100% over 1993. Equipment expense increased $38,357 or 39.1% over 1993 reflecting the growth of the Company and equipping of the new permanent structure housing the Bank's headquarters built on the City of Commerce property which was completed in August 1994. Data processing expenses increased $33,313 or 30.1% over 1993, reflecting the additional processing needs due to the deposit acquisition of the Commerce Branch of Community Bank in December 1993 and the acquisition of the Downey Branch of Capital Bank in August 1994. Other expenses increased $188,121 or 57.7% over 1993, due primarily to the increase in correspondent bank fees related to increased activity because of the acquisitions, and due to the fact that the Bank elected to outsource the proof processing function in December 1993, 44 45 which resulted in significant additional expense but improved efficiency. Total other operating expenses as a percentage of total interest income decreased to 67.1% in 1994 from 84.1% in 1993. Liquidity and Interest Rate Sensitivity The Company manages its liquidity position to ensure that sufficient funds are available to meet customers' needs for borrowing and deposit withdrawals. Liquidity is derived from both the asset and liability sides of the balance sheet. Asset liquidity arises from the ability to convert assets to cash and self-liquidation or maturity of assets. Liquid asset balances include cash, investment securities maturing within one year, Federal funds sold and other short-term assets. Liability liquidity arises from a diversity of funding sources, as well as from the ability of the Company to attract deposits of varying maturities. If the Company were limited to one source of funding or all its deposits had the same maturity, its liquidity position would be adversely impacted. As of December 31, 1995, the Company had cash, unrestricted interest-bearing deposits, Federal funds sold and investment securities of approximately $41.4 million or 60.1% of total assets. As of December 31, 1995, the Company had $22.6 million in liquid assets and its liquidity ratio (i.e., liquid assets to total deposits) was 36.5%, compared to 56.2% at December 31, 1994. This decrease reflects the movement away from lower yielding securities which mature within one year to higher yielding, longer maturity securities. Except for commitments to extend credit in the amount of $6.6 million, the Company had no material unrecorded contingencies at December 31, 1995. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Interest-bearing deposits with financial institutions at December 31, 1995 consisted exclusively of time certificates of deposit, all of which mature within one year. The Company's available for sale securities consisted primarily of U.S. Treasury and Agency obligations, corporate bonds, and bank qualified municipal bonds, which were readily marketable. Securities totaling $1,100,000 were pledged as collateral to secure Treasury Tax and Loan deposits and public funds. The Company's loan portfolio also was relatively liquid with approximately 70.2% of the outstanding loans maturing within one year and/or sensitive to changes in interest rates. To cushion unanticipated fluctuations in its liquidity position, the Bank, as all member commercial banks, may borrow from the regional Federal Reserve Bank, subject to compliance with regulatory requirements. In addition, the Bank has available a Federal funds facility with one of its correspondent banks for $1 million. This facility is subject to customary terms for such arrangements. As of December 31, 1995, the Company, on an unconsolidated basis, held liquid assets of approximately $248,000. (See Note 15 for the Company's Condensed Unconsolidated Financial Statements.) 45 46 Interest rate sensitivity management, the management of the risk associated with fluctuations in interest rates, seeks to stabilize net interest income during periods of changing interest rates. A change in interest rates may not affect all interest-earning assets (generally, loans that bear interest at floating or adjustable rates, interest-bearing deposits and Federal funds sold) and interest-bearing liabilities (generally, money market savings, interest-bearing transaction accounts and time certificates of deposit) at the same time because of differences in the terms and maturities of such assets and liabilities. The Company believes that its position with respect to interest rate fluctuations is favorable, in that substantially all of the Company's loans bear a floating rate of interest and many of its investments have short maturities. At December 31, 1995, the Company was in an asset sensitive position and its 90 day gap, (i.e., the difference between assets and liabilities that reprice in that period as a percentage of total assets) was (16)% and its cumulative gap was 28%. Generally, an asset sensitive position will result in enhanced earnings in a rising interest rate environment and declining earnings in a falling interest rate environment because larger volumes of assets than liabilities will reprice in the short term. Conversely, a liability sensitive position will be detrimental to earnings in a rising interest rate environment and will enhance earnings in a falling interest rate environment. The Asset and Liability Maturity Repricing Schedule below sets forth the distribution of repricing opportunities for the Company's interest earning assets and liabilities, the interest sensitivity gap and the ratio of cumulative gap to total assets. 46 47 Interest Sensitivity Period (IN THOUSANDS)
OVER OVER OVER 3 MONTHS 6 MONTHS 1 YEAR 3 MONTHS THROUGH THROUGH THROUGH OVER OR LESS 6 MONTHS 1 YEAR 5 YEARS 5 YEARS TOTAL Interest Earning Assets: Federal funds sold $ 2,800 $ - $ - $ - $ - $ 2,800 Securities 749 601 2,172 13,972 3673 21,167 Deposits with other institutions 3,945 3,550 4,260 - - 11,755 Loans 15,051 1,259 385 5,002 2,075 23,772 - -------------------------------------------------------------------------------------------------------------------- TOTAL $22,545 $ 5,410 $ 6,817 $18,974 $ 5,748 $59,494 ==================================================================================================================== Interest Bearing Liabilities: Time Deposits: A) TCD'S less than $100M $3,419 $ 2,107 $ 1,872 $ 745 $ 1 $ 8,144 B) TCD'S $100M and over 3,112 707 1,437 126 - 5,382 Savings 9,203 - - - - 9,203 Money Market 8,554 - - - - 8,554 Now Accounts 8,935 - - - - 8,935 - -------------------------------------------------------------------------------------------------------------------- TOTAL $33,223 $ 2,814 $ 3,309 $ 871 $ 1 $40,218 ==================================================================================================================== Interest Sensitivity Gap: Interval $(10,678) $2,596 $3,508 $18,103 $ 5,747 Cumulative $(10,678) $(8,082) $(4,574) $13,529 $19,276 $19,276 ==================================================================================================================== Ratio of cumulative gap to total assets (16)% (12)% (7)% 20% 28% 28% - --------------------------------------------------------------------------------------------------------------------
47 48 Capital Resources Management seeks to maintain capital adequate to support anticipated asset growth and credit risks, and to ensure that the Company is within established regulatory guidelines and industry standards. The Company is currently exempt from the Federal Reserve Board's risk-based guidelines because consolidated assets are under $150 million. However, the Bank is subject to the risk-based capital guidelines adopted by the OCC. These guidelines require the Bank to maintain a minimum ratio of total capital-to-risk-weighted assets of 8%, of which at least 4% must consist of Tier 1 capital. At December 31, 1995, the Bank had a total capital-to-risk-weighted assets ratio of 18.3%, with a Tier 1 capital ratio of 17.6%. The Bank's leverage ratio at December 31, 1995 was 8.4%. During the last two years, capital has been generated primarily through the retention of earnings. Management believes that it can meet its present regulatory capital requirements through earnings for at least the next two years. Risk Elements Management believes that the California economy has continued to improve slowly in 1995, but continues to lag behind the country, particularly in unemployment rates. Southern California continues to feel the economic pressures of reductions in government defense spending, overbuilt commercial real estate, unaffordable housing and high unemployment. Many of these economic factors are the result of long-term structural adjustments resulting from major changes in many of the State's basic industries. However, the index of leading economic indicators has shown signs of improvement as well as an increase in housing starts. In addition, California's unemployment rate is expected to improve in 1996. Management anticipates that the California economy will continue to improve in 1996. The Company has been able to maintain a positive interest margin even with the decreases in loan yields through tight controls on operating expenses. Management believes the results reflect favorably in 1995 and will continue to focus on conservative management policies. Effects of Inflation The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. 48 49 Virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. In the current interest rate environment where the Federal Reserve has actively used the discount rate as a tool to stimulate the economy, the Company recognizes the importance of maintaining adequate liquidity and effectively managing the maturity structure of the Company's interest bearing assets and liabilities. Recent Accounting Developments In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of." Statement No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. Statement No. 121 will first be required for the Bank's year ending December 31, 1996. Based on its preliminary analysis, the Bank does not anticipate that the adoption of Statement No. 121 will have a material impact on the financial statements as of the date of adoption. In 1995 the FASB issued Statement No. 123, "Accounting for Stock-based Compensation." Statement No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans such as a purchase plan. The Statement generally suggests stock- based compensation transactions be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. An enterprise may continue to follow the requirements of Accounting Principles Board (APB) Opinion No. 25, which does not require compensation to be recorded if the consideration to be received is at least equal to the fair value at the measurement date. If an enterprise elects to follow APB Opinion No. 25, it must disclose the pro forma effects on net income as if compensation were measured in accordance with the suggestions of Statement No. 123. The Company has not determined if it will continue to follow APB Opinion No. 25 or follow the guidance of Statement No. 123. However, adoption of this pronouncement in 1996 is not expected to have a material impact on the financial statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14(a) herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 49 50 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information concerning the Company's directors and executive officers is incorporated herein by reference from the section entitled "ELECTION OF DIRECTORS" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. See "ITEM 1. BUSINESS -- Executive Officers." ITEM 11. EXECUTIVE COMPENSATION. Information concerning executive compensation is incorporated herein by reference from the section entitled "COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information concerning the security ownership of certain beneficial owners and management is incorporated by reference from the sections entitled "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and "SECURITY OWNERSHIP OF MANAGEMENT" in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information concerning certain relationships and related transactions is incorporated herein by reference from the section entitled "COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS -- Transactions with Management" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. 50 51 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements and Schedule Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1995 and 1994 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements 2. No financial statement schedules are included in this report on the basis that they are inapplicable, are not material or the information required to be set forth therein is contained in the financial statements incorporated herein by reference. 51 52 3. Exhibits (i) Executive Compensation Plans and Arrangements The following is a summary of the Company's executive compensation plans and arrangements which are required to be filed as exhibits to this Report on Form 10-K: A. Amended and Restated COMBANCORP Employee Stock Savings Plan - Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-15984), Exhibit 10.7.2. B. COMBANCORP Employee Stock Ownership Plan Trust Agreement - Annual Report on Form 10-K for the year ended December 31, 1988 (Commission File No. 0-15984), Exhibit 4.6. C. 1993 Stock Option Plan - Annual Report on Form 10-K for the year ended December 31, 1992 (Commission File No. 0-15984), Exhibit 10.9. D. Form of Incentive Stock Option Agreement applicable to 1993 Stock Option Plan - Annual Report on Form 10-K for the year ended December 31, 1993 (Commission File No. 0- 15984), Exhibit 10.10. E. Form of Non-Qualified Stock Option Agreement applicable to 1993 Stock Option Plan - Annual Report on Form 10-K for the year ended December 31, 1993 (Commission File No. 0-15984), Exhibit 10.11. (ii) Exhibit Index Exhibit Number Description - ------- ----------- 3.1 Articles of Incorporation (3.1)(1) 3.1.1 Certificate of Amendment of Articles of Incorporation, filed February 26, 1988 (3.1a)(3) 3.1.2 Certificate of Amendment of Articles of Incorporation, filed May 13, 1988 (3.1b)(4) 3.2 Bylaws (3.2)(1) 3.2.1 Amendment to Article V of the Bylaws, adopted February 17, 1988 (3.2a)(3) 3.2.2 Amendments to Article II and III of the Bylaws, adopted April 18, 1990 (3.2b)(5) 3.2.3 Amendment to Article III of the Bylaws, adopted June 28, 1990 (3.2c)(5) 4.1 Specimen Stock Certificate (4.1)(3) 10.1 Form of Indemnification Agreement entered into with each director and executive officer of the Registrant (10.1)(4) 52 53 10.2 Form of Indemnification Agreement entered into with each director and executive officer of the Bank (10.2)(4) 10.3 Reserved 10.4 Reserved 10.5 Reserved 10.6 Reserved 10.7 Reserved 10.7.1 Reserved 10.7.2 Amended and Restated COMBANCORP Employee Stock Savings Plan 10.8 COMBANCORP Employee Stock Ownership Plan Trust Agreement (4.6)(4) 10.9 1993 Stock Option Plan (10.9)(6) 10.10 Form of Incentive Stock Option Agreement applicable to 1993 Stock Option Plan (10.10)(7) 10.11 Form of Non-Qualified Stock Option Agreement applicable to 1993 Stock Option Plan (10.11)(7) 10.12 Lease between Pace Development Company and Commerce National Bank, dated November 2, 1995 21.1 Subsidiaries of the Registrant (22.1)(4) 23.1 Consent of McGladrey & Pullen, LLP 99.1 Consortium agreement dated August 26, 1994, among Commerce National Bank, Landmark Bank, the assuming Bank, the FDIC, receiver of Capital Bank, and the FDIC in its corporate capacity (99)(8) - --------------------------------- (Footnotes commence next page) 53 54 (1) This exhibit was previously included in the Registrant's Registration Statement on Form S- 18, Registration No. 2-89698, filed with the Commission on February 29, 1984, under the Exhibit number indicated in parentheses, and is incorporated herein by reference. (2) This exhibit was previously included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1986 (Commission File No. 2-89698), under the Exhibit number indicated in parentheses, and is incorporated herein by reference. (3) This exhibit was previously included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987 (Commission File No. 2-89698), under the Exhibit number indicated in parentheses, and is incorporated herein by reference. (4) This exhibit was previously included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988 (Commission File No. 0-15984), under the Exhibit number indicated in parentheses, and is incorporated herein by reference. (5) This exhibit was previously included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 (Commission File No. 0-15984), under the Exhibit number indicated in parentheses, and is incorporated herein by reference. (6) This exhibit was previously included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 (Commission File No. 0-15984), under the Exhibit number indicated in parentheses, and is incorporated herein by reference. (7) This exhibit was previously included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (Commission File No. 0-15984), under the Exhibit number indicated in parentheses, and is incorporated herein by reference. (8) This exhibit was previously included in the Registrant's Report on Form 8-K filed September 12, 1994 (Commission File No. 0-15984), under the Exhibit number indicated in parentheses, and is incorporated herein by reference. 54 55 (b) Reports on Form 8-K The Registrant filed no reports on Form 8-K during the last quarter of the period covered by this report. (c) Exhibits Required by Item 601 of Regulation S-K See Item 14(a)(3) above. (d) Additional Financial Statements Not applicable. 55 56 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMBANCORP Date: March 29, 1996 By: /s/ RICHARD F. DEMERJIAN ------------------------- Richard F. Demerjian Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 29, 1996 By: /s/ RICHARD F. DEMERJIAN ------------------------- Richard F. Demerjian Chairman of the Board, President and Chief Executive Officer Date: March 29, 1996 By: /s/ ESTHER G. WILSON -------------------- Esther G. Wilson Chief Financial Officer, Secretary and Director Date: March 29, 1996 By: /s/ ROBERT L. GLOVER -------------------- Robert L. Glover Director Date: March 29, 1996 By: /s/ JACK MINASIAN ----------------- Jack Minasian Director Date: March 29, 1996 By: /s/ JAMES C. OPPENHEIM ---------------------- James C. Oppenheim Director Date: March 29, 1996 By: /s/ PHILLIP J. PACE -------------------- Phillip J. Pace Director Date: March 29, 1996 By: /s/ RICHARD J. STRAYER ---------------------- Richard J. Strayer Director 57 [MC GLADREY & PULLEN, LLP LETTERHEAD] INDEPENDENT AUDITOR'S REPORT To the Board of Directors COMBANCORP City of Commerce, California We have audited the accompanying consolidated balance sheets of COMBANCORP and subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of COMBANCORP and subsidiary at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Pasadena, California January 26, 1996 F - 1 58 COMBANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994 - ------------------------------------------------------------------------------------- Cash and due from banks (Note 2) $ 5,639,763 $ 5,745,356 Federal funds sold 2,800,000 11,605,000 ----------- ----------- CASH AND CASH EQUIVALENTS (Note 1) 8,439,763 17,350,356 ----------- ----------- Interest bearing deposits in other financial institutions 11,755,000 8,102,000 ----------- ----------- Federal Reserve Bank stock (Note 4) 120,000 120,000 ----------- ----------- Securities available for sale (Note 4) 21,046,565 16,830,404 ----------- ----------- Loans (Notes 5 and 13) 23,771,964 25,809,010 Less: Deferred loan fees and costs 65,731 59,280 Unearned discount on acquired loans 84,823 285,827 Allowance for loan losses (Note 6) 432,559 498,827 ----------- ----------- NET LOANS 23,188,851 24,965,076 ----------- ----------- Bank premises and equipment, net (Note 7) 3,291,753 2,526,677 ----------- ----------- Accrued income receivable and other assets (Notes 3 and 9) 881,171 922,922 ----------- ----------- Other real estate owned 106,926 371,013 ----------- ----------- $68,830,029 $71,188,448 =========== ===========
See Notes to Consolidated Financial Statements. F - 2 59
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994 - --------------------------------------------------------------------------------------------------------- Liabilities Deposits (Notes 3, 8 and 13): Demand noninterest bearing $21,805,536 $ 23,439,082 Savings and other interest bearing accounts 26,691,892 28,870,686 Time 13,526,369 12,589,529 ----------- ------------ 62,023,797 64,899,297 Accrued interest payable and other liabilities (Note 9) 421,322 342,524 ----------- ------------ TOTAL LIABILITIES 62,445,119 65,241,821 ----------- ------------ Commitments and Contingencies (Note 11) Shareholders' Equity (Notes 4, 10, 12 and 14) Preferred stock, no par value, 5,000,000 shares authorized; no shares issued Common stock, no par value, 20,000,000 shares authorized; 565,789 issued and outstanding 4,453,300 4,453,300 Retained earnings 1,796,650 1,609,002 Unrealized gain (loss) on securities available for sale, net 134,960 (115,675) ----------- ------------ TOTAL SHAREHOLDERS' EQUITY 6,384,910 5,946,627 ----------- ------------ $68,830,029 $ 71,188,448 =========== ============
F - 3 60 COMBANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 - ------------------------------------------------------------------------------------- Interest income: Loans $2,904,107 $2,750,210 $2,229,348 Deposits in other financial institutions 610,821 334,074 299,107 Securities 1,118,263 706,544 251,014 Federal funds sold 566,857 402,391 97,795 ---------- ---------- ---------- 5,200,048 4,193,219 2,877,264 Interest expense on deposits 1,199,411 884,421 640,741 ---------- ---------- ---------- Net interest income 4,000,637 3,308,798 2,236,523 Provision for loan losses (Note 6) 649,000 292,800 651,314 ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,351,637 3,015,998 1,585,209 ---------- ---------- ---------- Other income: Gross gain on sales of investment securities -- -- 62,529 Other, principally service charges on deposit accounts 609,522 619,498 496,285 ---------- ---------- ---------- 609,522 619,498 558,814 ---------- ---------- ---------- Other expenses: Salaries and employee benefits 1,469,449 1,227,617 1,142,288 Occupancy (Note 11) 316,599 282,353 249,715 Equipment 227,548 136,437 98,080 Professional fees (Note 13) 211,304 104,905 123,701 Advertising 54,447 48,959 45,287 Business promotion 69,834 78,465 68,019 Supplies and office 171,246 128,203 109,406 Insurance 167,583 149,961 147,842 Data processing 146,924 144,046 110,733 Other 564,130 513,913 325,792 ---------- ---------- ---------- 3,399,064 2,814,859 2,420,863 ---------- ---------- ----------
See Notes to Consolidated Financial Statements. F - 4 61 COMBANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 - -------------------------------------------------------------------------------------- Income (loss) before income taxes (benefits) $562,095 $820,637 $(276,840) Provision for income taxes (benefits) (Note 9) 233,000 352,000 (87,500) -------- -------- --------- Income (loss) before cumulative effect of a change in accounting principle 329,095 468,637 (189,340) Cumulative effect of a change in accounting principle (Note 9) -- -- (55,582) -------- -------- --------- NET INCOME (LOSS) $329,095 $468,637 $(133,758) ======== ======== ========= Earnings (loss) per common share: Income (loss) before cumulative effect of a change in accounting principle $ 0.58 $ 0.83 $ (0.34) Effect of a change in accounting principle on net income -- -- 0.10 -------- -------- --------- Earnings (loss) per common share $ 0.58 $ 0.83 $ (0.24) ======== ======== ========= Dividends per common share $ 0.25 $ -- $ 0.09 ======== ======== =========
See Notes to Consolidated Financial Statements. F - 5 62 COMBANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Unrealized Gain (Loss) on Number of Securities Shares Common Retained Available for Outstanding Stock Earnings Sale, Net Total - ---------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1992 565,789 $4,453,300 $1,325,044 $ -- $5,778,344 Cash dividend ($.09 per common share) -- -- (50,921) -- (50,921) Cumulative change in unrealized gain on securities available for sale, net -- -- -- 73,160 73,160 Net (loss) -- -- (133,758) -- (133,758) ------- ---------- ----------- --------- ----------- Balance, December 31, 1993 565,789 4,453,300 1,140,365 73,160 5,666,825 Change in unrealized (loss) on securities available for sale, net -- -- -- (188,835) (188,835) Net income -- -- 468,637 -- 468,637 ------- ---------- ----------- --------- ----------- Balance, December 31, 1994 565,789 4,453,300 1,609,002 (115,675) 5,946,627 Cash dividend ($.25 per common share) -- -- (141,447) -- (141,447) Change in unrealized gain on securities available for sale, net -- -- -- 250,635 250,635 Net income -- -- 329,095 -- 329,095 ------- ---------- ----------- --------- ----------- Balance, December 31, 1995 565,789 $4,453,300 $ 1,796,650 $ 134,960 $ 6,384,910 ======= ========== =========== ========= ===========
See Notes to Consolidated Financial Statements. F - 6 63 COMBANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 - --------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income (loss) $ 329,095 $ 468,637 $(133,758) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect on prior years of a change in accounting principle for computing deferred taxes (55,582) Loss (gain) on sale of premises and equipment and other real estate owned 3,924 (24,253) 17,914 Valuation write-down of other real estate owned 20,000 48,836 30,000 Gain on sale of securities (62,529) Provision for loan losses 649,000 292,800 651,314 Depreciation and amortization 247,372 136,472 136,031 Amortization of deferred loan fees (68,468) (87,478) (41,027) Net accretion of discount on securities (229,474) (337,461) (5,129) Accretion of unearned discount on acquired loans (169,611) (341,311) (181,076) Net increase in accrued income receivable and other assets (15,209) (65,910) (122,318) Net increase (decrease) in accrued interest payable and other liabilities (99,655) 334,429 (101,168) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 666,974 424,761 132,672 --------- --------- ---------
See Notes to Consolidated Financial Statements. F - 7 64 COMBANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 - ---------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Net increase in interest bearing deposits with other financial institutions $ (3,653,000) $ (127,126) $ (1,282,140) Proceeds from sales of securities available for sale 462,064 Proceeds from maturities and calls of securities available for sale 14,500,851 23,759,907 996,587 Purchases of securities available for sale (18,058,450) (27,662,866) (11,259,699) Net (increase) decrease in loans 1,219,383 (3,566,444) 1,726,455 Purchases of premises and equipment (956,782) (2,013,119) (123,188) Proceeds from sale of other real estate owned and equipment 387,378 36,254 352,616 ------------ ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (6,560,620) (9,573,394) (9,127,305) ------------ ------------ ------------ Cash Flows from Financing Activities Net increase (decrease) in deposits (2,875,500) 19,174,616 11,538,343 Dividends paid (141,447) (50,921) ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,016,947) 19,174,616 11,487,422 ------------ ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,910,593) 10,025,983 2,492,789 Cash and Cash Equivalents Beginning of year 17,350,356 7,324,373 4,831,584 ------------ ------------ ------------ End of year $ 8,439,763 $ 17,350,356 $ 7,324,373 ============ ============ ============
See Notes to Consolidated Financial Statements. F - 8 65 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS ACTIVITIES COMBANCORP (the Company) is a bank holding company located in the City of Commerce, California, which provides a full range of banking services to its commercial and consumer customers through three branches located in the cities of Commerce, Montebello, and Downey, California. The Bank grants commercial, residential and consumer loans to customers, substantially all of whom are middle market businesses or residents. The Bank's business is concentrated in the cities of Commerce, Montebello, Downey and the surrounding areas and the loan portfolio includes a significant credit exposure to the real estate industry of this area. As of December 31, 1995, real estate related loans accounted for approximately 49% of total loans. Substantially all of these loans are secured by first liens with an initial loan-to-value ratio of generally no more than 75%. The loans are expected to be repaid from cash flows or proceeds from the sale of selected assets of the borrowers. The Bank's policy requires that collateral be obtained on substantially all loans. Such collateral is primarily first trust deeds on real estate and business assets. A SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES UTILIZED BY THE COMPANY IS AS FOLLOWS: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include all the accounts of COMBANCORP and its wholly owned subsidiary, Commerce National Bank (the Bank). All material intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. F - 9 66 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and federal funds sold. Cash flows from loans originated by the Bank, interest bearing deposits in other financial institutions and deposits are reported net. The Bank, subject to policy guidelines, maintains amounts due from banks which, at times, may exceed federally insured limits. SECURITIES AVAILABLE FOR SALE Securities classified as available for sale are those debt securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in shareholders' equity, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. LOANS Loans are stated at the amount of unpaid principal, reduced by unearned discounts and fees and the allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing loans that may become uncollectible based on evaluation of the collectibility of loans and prior loan loss experience. F - 10 67 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower's ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic or other conditions. In addition, the Office of the Comptroller of the Currency (OCC), as an integral part of their examination process, periodically reviews the Bank's allowance for loan losses and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. A loan is impaired when it is probable the creditor will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. INTEREST AND FEES ON LOANS Interest on loans is recognized over the terms of the loans and is calculated using the simple-interest method on principal amounts outstanding. Interest is accrued daily on the outstanding balances. Accrual of interest is discontinued on a loan when management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. When the accrual of interest is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Unearned discounts on acquired loans are amortized to income over the contractual life of the loans unless certain homogeneous loans have been grouped as a pool, in which case the discount is amortized to income over the estimated life of the loans. Management periodically reevaluates the prepayment assumptions based upon actual payment experience. Any changes in these estimates are accounted for prospectively. Loan origination and commitment fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan's yield. The Bank is amortizing these amounts over the contractual life of the loan. F - 11 68 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets, which range from three to 30 years. OTHER REAL ESTATE OWNED Other real estate owned (OREO), consisting of properties acquired as a result of foreclosure of loans, are carried at the lower of the loan balance or appraised value of collateral, net of selling costs. Any write-down to estimated fair value less cost to sell at the time of transfer to OREO is charged to the allowance for loan losses. Property is evaluated regularly by management and reductions of the carrying amount to estimated fair value less estimated costs to dispose are recorded as necessary. INTANGIBLES The premiums paid for the deposits purchased are amortized over a period of seven years on a straight-line method. At December 31, 1995 and 1994, the unamortized balances of $215,385 and $330,998, respectively, are included in other assets in the accompanying consolidated balance sheets. The Bank periodically reviews the value of its intangibles to determine if impairment has occurred. The Bank does not believe that an impairment of its intangibles has occurred based on an evaluation of deposit balances and operating results. INCOME TAXES Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. F - 12 69 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED FINANCIAL INSTRUMENTS In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded. EARNINGS (LOSS) PER COMMON SHARE Earnings (loss) per common share are computed by dividing applicable amounts by the weighted average number of shares of common stock outstanding. Stock options are considered common stock equivalents but were not included in the earnings per share computation because the effect is immaterial or antidilutive. The number of shares used in computing earnings per share was 565,789 for 1995, 1994 and 1993. STATEMENT OF CASH FLOWS During 1995, 1994 and 1993, the Bank paid interest and income taxes as follows:
1995 1994 1993 -------------------------------------------- Interest $1,210,204 $862,071 $636,967 Income taxes 250,408 115,000 162,012
During the years ended December 31, 1995, 1994 and 1993, $145,921, $444,937 and $284,725, respectively, of other real estate owned was acquired in settlement of loans. In 1993 the Bank acquired deposit liabilities of $12,454,049 for a premium of $138,222. This transaction is reflected in the consolidated statement of cash flows in the net change in deposits. RECLASSIFICATIONS Certain reclassifications have been made to conform prior year financial data to current reporting policies of the Bank. Such reclassifications do not affect net income. FAIR VALUE OF FINANCIAL INSTRUMENTS Effective January 1, 1995, the Company adopted FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, which requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. F - 13 70 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Management uses its best judgment in estimating the fair value of the Bank's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Bank could have realized in a sales transaction at December 31, 1995. The estimated fair value amounts for 1995 have been measured as of December 31, 1995 and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to that date. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at December 31, 1995. This disclosure of fair value amounts does not include the fair values of any intangibles, including core deposit intangibles, purchased. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Bank's disclosures and those of other banks may not be meaningful. The following methods and assumptions were used by the Bank in estimating the fair value of its financial instruments: CASH AND SHORT-TERM INSTRUMENTS The carrying amounts reported in the consolidated balance sheet for cash and due from banks and federal funds sold approximate their fair values. SECURITIES Carrying amounts approximate fair values for securities available for sale. INTEREST BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS The carrying amount reported in the consolidated balance sheet for interest bearing deposits in other financial institutions approximates the fair value. F - 14 71 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED LOANS For variable rate loans that reprice frequently and that have experienced no significant change in credit risk, fair values are based on carrying values. At December 31, 1995, variable rate loans comprised approximately 63% of the loan portfolio. Fair values for all other loans are estimated based on discounted cash flows using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Prepayments prior to the repricing date are not expected to be significant. Loans are expected to be held to maturity and any unrealized gains or losses are not expected to be realized. OFF-BALANCE-SHEET INSTRUMENTS Fair values for off-balance-sheet instruments (guarantees, letters of credit and lending commitments) are based on quoted fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. DEPOSIT LIABILITIES Fair values disclosed for demand deposits equal their carrying amounts, which represent the amounts payable on demand. The carrying amounts for variable rate 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 aggregate expected monthly maturities on time deposits. Early withdrawals of fixed rate certificates of deposit are not expected to be significant. ACCRUED INTEREST RECEIVABLE AND PAYABLE The fair values of both accrued interest receivable and payable approximate their carrying amounts. F - 15 72 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of. Statement No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. Statement No. 121 will first be required for the Bank's year ending December 31, 1996. Based on its preliminary analysis, the Bank does not anticipate that the adoption of Statement No. 121 will have a material impact on the financial statements as of the date of adoption. ACCOUNTING FOR STOCK-BASED COMPENSATION In 1995 the FASB issued Statement No. 123, Accounting for Stock-based Compensation. Statement No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans such as a purchase plan. The Statement generally suggests stock-based compensation transactions be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. An enterprise may continue to follow the requirements of Accounting Principles Board (APB) Opinion No. 25, which does not require compensation to be recorded if the consideration to be received is at least equal to the fair value at the measurement date. If an enterprise elects to follow APB Opinion No. 25, it must disclose the pro forma effects on net income as if compensation were measured in accordance with the suggestions of Statement No. 123. The Company has not determined if it will continue to follow APB Opinion No. 25 or follow the guidance of Statement No. 123. However, adoption of this pronouncement in 1996 is not expected to have a material impact on the financial statements. NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS The Bank is required to maintain reserve balances in cash or on deposit with Federal Reserve Banks. The total of those reserve balances was approximately $380,000 and $329,000 as of December 31, 1995 and 1994, respectively. F - 16 73 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3. ACQUISITION OF ASSETS AND ASSUMPTION OF DEPOSITS On August 26, 1994, the Bank, as part of a consortium with Landmark Bank, entered into an Insured Deposit Purchase and Assumption Agreement (Agreement) with the Federal Deposit Insurance Corporation (FDIC) for the purchase and assumption of certain assets and liabilities of Capital Bank. The Bank purchased $674,000 of assets consisting of cash and assumed $22,536,000 of deposit liabilities, principally insured and accrued interest, of the Downey branch for a premium of $185,000, including expenses. In addition, the Bank obtained a lease on the Downey branch facility of Capital Bank through May 1995 when an option to purchase the building for $650,000 was exercised. The Bank hired 12 former employees of Capital Bank, none of which were members of senior management, to staff the existing facility. The initial transaction is reflected in the consolidated statement of cash flows in the net change in deposits in 1994. The purchase of the building is reflected in the consolidated statement of cash flows in the purchases of premises and equipment in 1995. The Bank purchased approximately $5,352,000 of net loans from the FDIC. The purchase of these loans is reflected in the consolidated statement of cash flows in the net increase in loans. Because it views the Agreement previously described as one in which the Bank assumed the insured deposit liabilities of the Downey branch of Capital Bank and acquired certain of the Downey branch assets, management believes that a continuity of business is substantially lacking and, as a consequence, historical and pro forma financial information regarding this branch of Capital Bank would not be meaningful. NOTE 4. SECURITIES AVAILABLE FOR SALE Effective December 31, 1993, the Bank adopted FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Bank classified substantially all of its investment portfolio as available for sale on December 31, 1993. F - 17 74 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 4. SECURITIES AVAILABLE FOR SALE, CONTINUED Securities available for sale as of December 31, 1995 and 1994 are summarized as follows:
1995 -------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE -------------------------------------------------- U.S. Treasury securities $ 7,827,599 $161,197 $ 218 $ 7,988,578 U.S. Government and agency obligations 11,795,751 53,493 6,505 11,842,739 Other 1,191,055 24,702 509 1,215,248 ----------- -------- ----------- ----------- $20,814,405 $239,392 $ 7,232 $21,046,565 =========== ======== =========== =========== 1994 -------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE -------------------------------------------------- U.S. Treasury securities $14,170,967 $122,057 $ 268,565 $14,024,459 U.S. Government and agency obligations 2,140,402 1,087 36,422 2,105,067 Other 715,963 52 15,137 700,878 ----------- -------- ----------- ----------- $17,027,332 $123,196 $ 320,124 $16,830,404 =========== ======== =========== ===========
Securities available for sale as of December 31, 1995 by contractual maturity are shown below.
Amortized Cost Fair Value ----------------------------- Due in one year or less $ 3,494,342 $ 3,521,654 Due after one through five years 13,793,414 13,972,160 Due after five through ten years 3,474,767 3,497,029 Due after ten years 51,882 55,722 ----------- ----------- $20,814,405 $21,046,565 =========== ===========
F - 18 75 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 4. SECURITIES AVAILABLE FOR SALE, CONTINUED Securities available for sale with a carrying amount of $1,100,000 and $400,000 at December 31, 1995 and 1994, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. There were no realized gains or losses from the sales of securities classified as available for sale for the years ended December 31, 1995 and 1994. Federal Reserve Bank stock is carried at cost which approximates fair value. NOTE 5. LOANS Major classifications of loans at December 31 are as follows:
1995 1994 ---------------------------- Commercial $10,474,719 $11,210,049 Real estate - construction 2,338,979 2,998,619 Real estate - other 8,062,827 8,541,865 Real estate mortgage loans acquired 1,216,165 1,242,636 Installment 1,679,274 1,815,841 ----------- ----------- $23,771,964 $25,809,010 =========== ===========
The majority of loans have variable interest rates based on the Bank's reference rate. On January 1, 1995, the Bank adopted FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan, as amended by FASB Statement No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. There was no effect on the Bank's financial statements from this change. At January 1, 1995, the Bank classified $244,000 of its loans as impaired with a specific loss reserve of $56,000. Impairment of loans having recorded investments of $103,000 at December 31, 1995 has been recognized. The total allowance for loan losses related to these loans was $5,200 on December 31, 1995. The average recorded investment for all impaired loans during 1995 was $276,000. Interest income of $57,000 was recognized on impaired loans in 1995 using a cash-basis method of accounting during the time within that period that the loans were impaired. F - 19 76 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 6. ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR OTHER REAL ESTATE OWNED Changes in the allowance for loan losses during each of the three years in the period ended December 31, 1995 are summarized as follows:
1995 1994 1993 ----------------------------------- Balance, beginning $ 498,827 $ 534,625 $ 451,827 Provision charged to operating expense 649,000 292,800 651,314 Loans charged off (785,250) (333,173) (629,986) Recoveries on loans previously charged off 69,982 4,575 61,470 --------- --------- --------- $ 432,559 $ 498,827 $ 534,625 ========= ========= =========
Changes in the reserve for other real estate owned are as follows:
Years Ended December 31, --------------------------------- 1995 1994 1993 --------------------------------- Balance, beginning $ 73,924 $ 30,000 $ -- Provision charged to other real estate expense 20,000 73,924 30,000 Disposal of other real estate owned (73,924) (30,000) -- -------- -------- ------- Balance, ending $ 20,000 $ 73,924 $30,000 ======== ======== =======
F - 20 77 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 7. BANK PREMISES AND EQUIPMENT The major classes of bank premises and equipment and the total accumulated depreciation and amortization are as follows:
December 31, ------------------------ 1995 1994 ------------------------ Land $ 907,143 $ 417,143 Buildings 2,060,222 1,729,986 Building improvements 290,751 407,306 Furniture, fixtures and equipment 842,202 637,590 Construction in progress 24,042 ---------- ---------- 4,124,360 3,192,025 Less accumulated depreciation and amortization 832,607 665,348 ---------- ---------- $3,291,753 $2,526,677 ========== ==========
NOTE 8. DEPOSITS The aggregate amount of short-term jumbo certificates of deposit, each with a minimum denomination of $100,000 were $5,381,974 and $4,329,934 in 1995 and 1994, respectively. At December 31, 1995, the scheduled maturities of certificates of deposits are as follows:
Year Ending December 31, Amount - ------------------------ ----------- 1996 $12,654,400 1997 672,779 1998 and thereafter 199,190 ------------ $13,526,369 ===========
NOTE 9. INCOME TAXES On January 1, 1993, the Company changed its method of accounting for income taxes as a result of the adoption of FASB Statement No. 109, Accounting for Income Taxes, with a cumulative effect of a benefit of $55,582 to 1993 net income. F - 21 78 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 9. INCOME TAXES, CONTINUED The components of income tax expenses (benefits) are as follows:
1995 1994 1993 ---------------------------------- Currently paid or payable (refundable): Federal $ 84,000 $ 193,000 $(35,682) State 17,000 40,000 1,600 -------- --------- -------- 101,000 233,000 (34,082) -------- --------- -------- Deferred: Federal 83,000 62,000 (22,818) State 49,000 57,000 (30,600) -------- --------- -------- 132,000 119,000 (53,418) -------- --------- -------- $233,000 $ 352,000 $(87,500) ======== ========= ========
The Company's income tax expenses (benefits) differed from the statutory federal rate of 35% as follows:
1995 1994 1993 ---------------------------------- Computed "expected" tax expenses (benefits) $ 197,000 $ 287,000 $(97,000) State income tax expenses (benefits), net of federal income tax benefit 43,000 64,000 (20,000) Other (7,000) 1,000 29,500 --------- --------- -------- $ 233,000 $ 352,000 $(87,500) ========= ========= ========
F - 22 79 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 9. INCOME TAXES, CONTINUED Net deferred tax assets (liabilities) consist of the following components as of December 31:
1995 1994 --------------------- Deferred tax assets: Property and equipment $ 18,000 $ 27,000 Allowance for loan losses 51,000 118,000 Valuation allowance for other real estate owned 8,000 36,000 Unrealized loss on securities available for sale -- 81,000 State taxes 7,000 16,000 Other 32,000 -- --------- -------- 116,000 278,000 --------- -------- Deferred tax liabilities: Accrual to cash basis 217,000 135,000 Unrealized gain on securities available for sale 96,000 Accumulated discount on loans purchased 56,000 54,000 Other -- 5,000 --------- -------- 369,000 194,000 --------- -------- $(253,000) $ 84,000 ========= ========
NOTE 10. STOCK OPTIONS The Company's 1993 Stock Option Plan (the Plan) provides for the issuance of up to 93,501 shares of common stock. The Plan provides for the granting of nonqualified and incentive stock options to directors, officers and other key full-time salaried employees of the Company and its subsidiary. Purchase prices are based on the fair market value of the Company's stock at the time the option is granted. Options are granted for a term of ten years and are exercisable in cumulative annual increments as the Board of Directors may determine, commencing one year after date of grant. All outstanding options are exercisable at $7.00 per share. Unless terminated at an earlier date, the Plan shall terminate ten years from the effective date of March 17, 1993. F - 23 80 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 10. STOCK OPTIONS, CONTINUED Other pertinent information related to the Plan is as follows:
1995 1994 1993 --------------------------------- Under option, beginning of year 56,250 57,500 60,000 Granted -- 5,000 57,500 Terminated and canceled -- (6,250) (60,000) ------ ------ ------- Under option, end of year 56,250 56,250 57,500 ====== ====== ======= Options exercisable, end of year 56,250 56,250 57,500 ====== ====== ======= Available for grant, end of year 37,251 37,251 36,001 ====== ====== =======
NOTE 11. COMMITMENTS AND CONTINGENCIES AND SUBSEQUENT EVENT CONTINGENCIES In the normal course of business, the Bank is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. F - 24 81 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 11. COMMITMENTS AND CONTINGENCIES AND SUBSEQUENT EVENT, CONTINUED The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments. A summary of the Bank's commitments at December 31 is as follows:
1995 1994 ---------------------------- Commitments to extend credit $5,861,829 $3,330,071 Standby letters of credit 210,000 212,000 Credit card commitments 573,886 630,732 ---------- ---------- $6,645,715 $4,172,803 ========== ==========
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 credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. They are issued primarily to support real estate construction projects and other business related ventures. Collateral held varies as specified above and is required in instances which the Bank deems necessary. At December 31, 1995, all of the standby letters of credit were collateralized. CREDIT CARD COMMITMENTS Credit card commitments are commitments on credit cards and are unsecured. F - 25 82 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 11. COMMITMENTS AND CONTINGENCIES AND SUBSEQUENT EVENT, CONTINUED LEASES AND RELATED PARTY TRANSACTIONS The Bank leases the Montebello branch facility from a company owned by a director of the Company under a lease agreement expiring April 1, 1998. The lease agreement requires monthly rent of $5,191 plus normal repairs and maintenance, property taxes and insurance. Future minimum annual lease payments as of December 31, 1995 are as follows:
Year Ending December 31, Amount - ------------------------ -------- 1996 $ 62,000 1997 62,000 1998 16,000 -------- $140,000 ========
Lease expense for all operating leases was $73,000, $164,000 and $147,000 in 1995, 1994 and 1993, respectively, substantially all of which was paid to the related party. NOTE 12. EMPLOYEE STOCK OWNERSHIP PLAN The Company has an employee stock ownership plan, established in 1987, which covers substantially all employees. The Company accrued or paid a cash contribution of $25,000 and $50,000 in 1995 and 1994, respectively. No contribution was made for 1993. The contribution is at the discretion of the Board of Directors. In the event terminated plan participants desire to sell their shares of the Company's stock, the Company may be required to purchase the shares from the participants at their fair market value established at the last valuation date. At December 31, 1995, the Plan owns approximately 22,571 shares of the Company's common stock, and the Company has a maximum contingent liability of $208,782 to repurchase all the shares from plan participants. The Company did not purchase any stock in 1995, 1994 or 1993. F - 26 83 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 13. RELATED PARTY TRANSACTIONS Shareholders of the Company and officers and directors, including their families and companies of which they are principal owners, are considered to be related parties. As part of its normal banking activity, the Bank has extended credit to various executive officers, directors and companies in which they have an interest. Loans to related parties are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons, and do not involve more than normal risk of collectibility. The approximate aggregate dollar amounts and activity of these loans were as follows:
1995 1994 --------------------------------- Balance, beginning $ 1,066,000 $ 1,247,000 Advances 345,000 101,000 Repayments (519,000) (282,000) ----------- ----------- Balance, ending $ 892,000 $ 1,066,000 =========== ===========
These persons and companies had deposits at the Bank of approximately $1,480,000 and $1,075,000 at December 31, 1995 and 1994, respectively. During the years ended December 31, 1995, 1994 and 1993, the Company paid to a company controlled by one of the directors approximately $60,000, $60,000 and $46,000, respectively, for insurance premiums. It is the opinion of management that such insurance premiums were no less favorable to the Company than those which could have been obtained from persons not affiliated with the Company. NOTE 14. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. F - 27 84 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 14. REGULATORY MATTERS, CONTINUED Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 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, 1995, the Bank meets all capital adequacy requirements to which it is subject. Under federal banking law, dividends declared by the Bank in any calendar year may not, without the approval of the Comptroller of the Currency, exceed its net income (as defined) for that year combined with its retained net income for the preceding two years. The Bank's actual capital amounts and ratios as of December 31, 1995 and 1994 are presented in the following table:
For Capital Actual Adequacy Purposes ------------------ --------------------------------- Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------------------- As of December 31, 1995: Total capital (to risk-weighted assets) $6,196,282 18.3% greater than $2,633,996 greater than 8.0% greater than or equal to or equal to or equal to Tier I capital (to risk-weighted assets) 5,786,720 17.6 greater than 1,316,998 greater than 4.0 greater than or equal to or equal to or equal to Tier I capital (to average assets) 5,786,720 8.4 greater than 2,753,319 greater than 4.0 greater than or equal to or equal to or equal to As of December 31, 1994: Total capital (to risk-weighted assets) 5,868,020 17.9 greater than 2,621,893 greater than 8.0 greater than or equal to or equal to or equal to Tier I capital (to risk-weighted assets) 5,458,350 16.7 greater than 1,310,964 greater than 4.0 greater than or equal to or equal to or equal to Tier I capital (to average assets) 5,458,350 7.7 greater than 2,847,538 greater than 4.0 greater than or equal to or equal to or equal to To be Well Capitalized Under Prompt Corrective Action Provisions ------------------------------- Amount Ratio - -------------------------------------------------------------------------- As of December 31, 1995: Total capital (to risk-weighted assets) 3,292,495 greater than 10.0% or equal to Tier I capital (to risk-weighted assets) 1,975,497 greater than 6.0 or equal to Tier I capital (to average assets) 3,441,649 greater than 5.0 or equal to As of December 31, 1994: Total capital (to risk-weighted assets) 3,277,366 greater than 10.0 or equal to Tier I capital (to risk-weighted assets) 1,966,419 greater than 6.0 or equal to Tier I capital (to average assets) 3,559,422 greater than 5.0 or equal to
Federal banking law also restricts the Bank from extending credit to the Company in excess of 10% of the Bank's capital stock and surplus, as defined. Any such extensions of credit are subject to strict collateral requirements. F - 28 85 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 15. PARENT COMPANY ONLY FINANCIAL INFORMATION The following are condensed unconsolidated financial statements of COMBANCORP: CONDENSED BALANCE SHEETS
December 31, ------------------------ ASSETS 1995 1994 ------------------------ Cash and due from banks $ 247,844 $ 272,956 Investment in Commerce National Bank 6,137,066 5,673,671 ---------- ----------- TOTAL ASSETS $6,384,910 $ 5,946,627 ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Shareholders' equity: Common stock $4,453,300 $ 4,453,300 Retained earnings 1,796,650 1,609,002 Unrealized gain (loss) on securities available for sale, net 134,960 (115,675) ---------- ----------- TOTAL SHAREHOLDERS' EQUITY 6,384,910 5,946,627 ---------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,384,910 $ 5,946,627 ========== ===========
CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31, ----------------------------------- 1995 1994 1993 ----------------------------------- Equity in earnings (loss) of subsidiary $ 354,759 $ 496,192 $(143,149) Other income 7,365 6,893 57,892 Other expense (33,029) (34,448) (48,501) --------- --------- --------- NET INCOME (LOSS) $ 329,095 $ 468,637 $(133,758) ========= ========= =========
F - 29 86 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 15. PARENT COMPANY ONLY FINANCIAL INFORMATION, CONTINUED CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, ----------------------------------- 1995 1994 1993 ----------------------------------- Cash Flows from Operating Activities Net income (loss) $ 329,095 $ 468,637 $(133,758) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in (income) loss of subsidiary (354,759) (496,192) 143,149 --------- --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (25,664) (27,555) 9,391 --------- --------- --------- Cash Flows from Investing Activities Interest bearing deposits in banks -- -- 99,000 Dividends received from subsidiary 141,999 -- -- --------- --------- --------- NET CASH PROVIDED BY INVESTING ACTIVITIES 141,999 -- 99,000 --------- --------- --------- NET CASH (USED IN) FINANCING ACTIVITIES - DIVIDENDS PAID (141,447) -- (50,921) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANK (25,112) (27,555) 57,470 Cash and Due from Bank Beginning of year 272,956 300,511 243,041 --------- --------- --------- End of year $ 247,844 $ 272,956 $ 300,511 ========= ========= =========
F - 30 87 COMBANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of the Bank's financial instruments are as follows:
December 31, 1995 ------------------------- Carrying Amount Fair Value ------------------------- Financial assets: Cash and short-term investments $ 8,439,763 $ 8,439,763 Interest bearing deposits in other financial institutions 11,755,000 11,785,000 Federal Reserve Bank stock 120,000 120,000 Securities available for sale 21,046,565 21,046,565 Loans, net 23,188,851 22,598,606 Accrued interest receivable 526,998 526,998 Financial liabilities: Deposits 62,023,797 61,965,572 Accrued interest payable 71,469 71,469
FAIR VALUE OF COMMITMENTS The estimated fair value of fee income on letters of credit at December 31, 1995 is insignificant. Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at December 31, 1995. F - 31 88 EXHIBIT INDEX
Page Number Exhibit in Sequential Number Description Numbering System - ------- ----------- ---------------- 3.1 Articles of Incorporation(3.1)(1) 3.1.1 Certificate of Amendment of Articles of Incorporation, filed February 26, 1988 (3.1a)(3) 3.1.2 Certificate of Amendment of Articles of Incorporation, filed May 13, 1988 (3.1b)(4) 3.2 Bylaws (3.2)(1) 3.2.1 Amendment to Article V of the Bylaws, adopted February 17, 1988 (3.2a)(3) 3.2.2 Amendments to Article II and III of the Bylaws, adopted April 18, 1990 (3.2b)(5) 3.2.3 Amendment to Article III of the Bylaws, adopted June 28, 1990 (3.2c)(5) 4.1 Specimen Stock Certificate (4.1)(3) 10.1 Form of Indemnification Agreement entered into with each director and executive officer of the Registrant (10.1)(4) 10.2 Form of Indemnification Agreement entered into with each director and executive officer of the Bank (10.2)(4) 10.3 Reserved 10.4 Reserved 10.5 Reserved 10.6 Reserved 10.7 Reserved 10.7.1 Reserved 10.7.2 Amended and Restated COMBANCORP Employee Stock Savings Plan 10.8 COMBANCORP Employee Stock Ownership Plan Trust Agreement (4.6)(4) 10.9 1993 Stock Option Plan (10.9)(6) 10.10 Form of Incentive Stock Option Agreement applicable to 1993 Stock Option Plan (10.10)(7) 10.11 Form of Non-Qualified Stock Option Agreement applicable to 1993 Stock Option Plan (10.11)(7) 10.12 Lease between Pace Development Company and Commerce National Bank, dated November 2, 1995 21.1 Subsidiaries of the Registrant (22.1)(4) 23.1 Consent of McGladrey & Pullen, LLP 99.1 Consortium agreement dated August 26, 1994, among Commerce National Bank, Landmark Bank, the assuming Bank, the FDIC, receiver of Capital Bank, and the FDIC in its corporate capacity (99)(8)
- --------------- (Footnotes commence next page) 89 1 This exhibit was previously included in the Registrant's Registration Statement on Form S-18, Registration No. 2-89698, filed with the Commission on February 29, 1984, under the Exhibit number indicated in parentheses, and is incorporated herein by reference. 2 This exhibit was previously included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1986 (Commission File No. 2-89698), under the Exhibit number indicated in parentheses, and is incorporated herein by reference. 3 This exhibit was previously included in the Registrant's Annual Report on From 10-K for the year ended December 31, 1987 (Commission File No. 2-89698), under the Exhibit number indicated in parentheses, and is incorporated herein by reference. 4 This exhibit was previously included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988 (Commission File No. 0-15984), under the Exhibit number indicated in parentheses, and is incorporated herein by reference. 5 This exhibit was previously included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 (Commission File No. 0-15984), under the Exhibit number indicated in parentheses, and is incorporated herein by reference. 6 This exhibit was previously included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 (Commission File No. 0-15984), under the Exhibit number indicated in parentheses, and is incorporated herein by reference. 7 This exhibit was previously included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (Commission File No. 0-15984), under the Exhibit number indicated in parentheses, and is incorporated herein by reference. 8 This exhibit was previously included in the Registrant's Report on Form 8-K filed September 12, 1994 (Commission File No. 0-15984), under the Exhibit number indicated in parentheses, and is incorporated herein by reference. EX-10.7.2 2 AMENDED AND RESTATED EMPLOYEE STOCK SAVINGS PLAN 1 EXHIBIT 10.7.2 2 COMBANCORP EMPLOYEE STOCK OWNERSHIP PLAN (Amended and Restated Effective Generally As of January 1, 1989) COMBANCORP EMPLOYEE STOCK SAVINGS PLAN (Effective April 1, 1995) 3 TABLE OF CONTENTS
Article/Section Subject Page - --------------- ------- ---- ARTICLE I INTRODUCTION ......................................... 1 Section 1.1 Amendment of the Plan ................................ 1 ARTICLE II DEFINITIONS .......................................... 3 Section 2.1 Definitions .......................................... 3 Section 2.2 Gender and Number .................................... 15 ARTICLE III ELIGIBILITY AND PARTICIPATION ........................ 16 Section 3.1 Eligibility Requirements ............................. 16 Section 3.2 Enrollment of Participants ........................... 16 Section 3.4 Transfers to Participation ........................... 17 Section 3.5 Transfers to Inactive Participation .................. 17 ARTICLE IV EMPLOYER CONTRIBUTIONS ............................... 18 Section 4.1 Employer Contributions ............................... 18 Section 4.2 Allocation of Employer Contributions ................. 19 Section 4.3 Limitation on Employer Matching Contributions ........ 20 Section 4.4 Distribution of Excess Aggregate Contributions ....... 21 Section 4.5 Disposition of Forfeitures ........................... 24 Section 4.6 Payment of Contributions ............................. 24 Section 4.7 Obligations .......................................... 24 Section 4.8 Exempt Loans ......................................... 24 ARTICLE V PRETAX DEFERRALS ..................................... 29 Section 5.1 Pretax Deferrals ..................................... 29 Section 5.2 Election Procedures .................................. 29 Section 5.3 Election Changes ..................................... 29 Section 5.4 Discontinuance of Pretax Deferrals ................... 30 Section 5.5 Salary Reduction ..................................... 30 Section 5.6 Limitations on Pretax Deferrals ...................... 30 Section 5.7 Distribution of Excess Deferral Amounts - Deferrals Over $7,000 .......................................... 32 Section 5.8 Distribution of Excess Contributions - Contributions Over Nondiscrimination Limits ........................ 33 Section 5.9 Reduction for Excess Deferrals Distributed ........... 35
i 4
Article/Section Subject Page - --------------- ------- ---- Section 5.10 Transfer of Pretax Deferrals ......................... 35 Section 5.11 Crediting of Pretax Deferrals ........................ 35 Section 5.12 Ordering of Excess Contribution Adjustments .......... 35 Section 5.13 Restrictions on Distributions ........................ 35 Section 5.14 Multiple Use of Alternative Limitations .............. 36 ARTICLE VI PARTICIPANTS' VOLUNTARY CONTRIBUTIONS ................ 37 Section 6.1 Participant Contributions ............................ 37 Section 6.2 Rollover Contributions ............................... 37 ARTICLE VII LIMITATIONS ON CONTRIBUTIONS ......................... 38 Section 7.1 Limitations on Annual Addition ....................... 38 Section 7.2 "Annual Addition" Defined ............................ 38 Section 7.3 Other Defined Contribution Plans ..................... 39 Section 7.4 Combined Plan Limit .................................. 39 Section 7.5 Adjustment of Excess Annual Addition ................. 40 Section 7.6 Interpretation ....................................... 41 ARTICLE VIII VESTING AND PAYMENT OF BENEFITS ...................... 42 Section 8.1 Vesting Rights ....................................... 42 Section 8.2 Vesting of Accounts .................................. 42 Section 8.3 Payment of Benefits .................................. 43 Section 8.4 Form of Payment ...................................... 43 Section 8.5 Payment of Small Amounts ............................. 44 Section 8.6 Time of Payment of Benefits .......................... 45 Section 8.7 Distribution of Vested Account Balance Prior to Normal Retirement Date ...................................... 46 Section 8.8 Maximum Period of Payout ............................. 48 Section 8.9 Claim for Benefits and Review of Denial .............. 49 Section 8.10 Option to Sell Employer Stock ........................ 51 Section 8.11 Participant Loans .................................... 53 Section 8.12 In-Service Distribution of Accounts at Age 59-1/2 .... 53 Section 8.13 Hardship Withdrawals ................................. 53 Section 8.14 Missing Persons ...................................... 56 ARTICLE IX DISABILITY BENEFITS .................................. 57 Section 9.1 Disability Benefits .................................. 57
ii 5
Article/Section Subject Page - --------------- ------- ---- ARTICLE X DEATH BENEFITS ....................................... 59 Section 10.1 Death Benefits ....................................... 59 Section 10.2 Designation of Beneficiary ........................... 59 ARTICLE XI PARTICIPANTS' ACCOUNTS ............................... 60 Section 11.1 Employer Contributions ............................... 60 Section 11.2 Valuation of Accounts ................................ 60 Section 11.3 Valuation of Employer Stock .......................... 61 ARTICLE XII INVESTMENT OF CONTRIBUTIONS .......................... 62 Section 12.1 Investment of Contributions .......................... 62 Section 12.2 Investment of Pretax Deferrals ....................... 62 Section 12.3 Investment Transfers ................................. 62 Section 12.4 Investment of Plan Assets Pending Designation ........ 62 Section 12.5 Investment Elections ................................. 62 Section 12.6 Transfer of Assets ................................... 62 Section 12.7 ESOP Diversification of Investments .................. 62 ARTICLE XIII FINANCING ............................................ 64 Section 13.1 Financing ............................................ 64 Section 13.2 Non-Reversion ........................................ 64 ARTICLE XIV PLAN ADMINISTRATION .................................. 66 Section 14.1 Plan Administrator ............................... 66 Section 14.2 Committee Membership ............................. 66 Section 14.3 Compensation and Expenses ........................ 66 Section 14.4 Committee Action ................................. 66 Section 14.5 Investment Discretion ............................ 67 Section 14.6 Powers of Committee .............................. 69 Section 14.7 Correction of Administrative Errors .............. 70 Section 14.8 Information ...................................... 70 Section 14.9 Funding Method and Policy ........................ 71 Section 14.10 Indemnity ........................................ 71 Section 14.11 Allocation and Delegation of Duties .............. 71 Section 14.12 Voting of Qualifying Employer Securities ......... 72
iii 6
Article/Section Subject Page - --------------- ------- ---- ARTICLE XV AMENDMENT, PLAN TERMINATION AND MERGER RESTRICTION 74 Section 15.1 Amendment ........................................ 74 Section 15.2 No Contractual Obligation ........................ 75 Section 15.3 Vesting upon Plan Termination or Complete Discontinuance of Contributions .................. 75 Section 15.4 Procedure on Termination ......................... 75 Section 15.5 Suspension of Contributions ...................... 75 Section 15.6 Merger Restriction ............................... 76 ARTICLE XVI TOP-HEAVY PROVISIONS ............................. 77 Section 16.1 Application ...................................... 77 Section 16.2 Definitions ...................................... 77 Section 16.3 Determination of Account Balance ................. 78 Section 16.4 Top-Heavy Group .................................. 80 Section 16.5 Combined Limit for Key Employees ................. 80 Section 16.6 Ceiling on Includable Compensation ............... 80 Section 16.7 Vesting Requirements ............................. 81 Section 16.8 Minimum Contributions ............................ 81 Section 16.9 Minimum Benefit or Contribution for Combined Plans ................................... 82 ARTICLE XVII PARTICIPATION BY AFFILIATES AND OTHER EMPLOYERS .. 83 Section 17.1 Affiliate Participation .......................... 83 Section 17.2 Action Binding on Participating Affiliates and Other Employers .................................. 83 Section 17.3 Effect of Participation .......................... 83 Section 17.4 Termination of Participation of Affiliate or Other Employer ................................... 83 ARTICLE XVIII MISCELLANEOUS .................................... 85 Section 18.1 Limitation on Participants' Rights ............... 85 Section 18.2 Receipt and Release .............................. 85 Section 18.3 Nonassignability ................................. 85 Section 18.4 Incompetency ..................................... 86 Section 18.5 Severability ..................................... 86 Section 18.6 Counterparts ..................................... 86 Section 18.7 Service of Legal Process ......................... 86
iv 7
Article/Section Subject Page - --------------- ------- ---- Section 18.8 Headings of Articles and Sections ................ 86 Section 18.9 Applicable Law ................................... 86 ARTICLE XIX TENDER OFFERS .................................... 88 Section 19.1 Retention/Sale of Employer Stock ................. 88 Section 19.2 Suspension of Employer Stock Purchases ........... 88 Section 19.3 Information to Trustee ........................... 88 Section 19.4 Information to Participants ...................... 88 Section 19.5 Expense .......................................... 89 Section 19.6 Follow-Up Efforts; Other Information ............. 89 Section 19.7 No Recommendations ............................... 89 Section 19.8 Tender of Employer Stock ......................... 89 Section 19.9 Confidentiality .................................. 90 Section 19.10 Investment of Proceeds ........................... 90 ARTICLE XX POST-1992 PLAN DISTRIBUTION RULES ................ 91 Section 20.1 Distribution on or after January 1, 1993 ......... 91 Section 20.2 Definitions. ..................................... 91
v 8 ARTICLE I INTRODUCTION Section 1.1 Amendment of the Plan. COMBANCORP (hereinafter referred to as the "Employer") previously established an employee stock ownership plan, entitled the "COMBANCORP Employee Stock Ownership Plan" (hereinafter referred to as the "Plan") for the benefit of its eligible Employees, originally effective January 1, 1987. The Plan has been amended from time to time. Effective January 1, 1989, unless otherwise provided for, the Plan was amended and restated in order to comply with the applicable requirements of the Tax Reform Act of 1986 and later legislation, and effective as of April 1 1995, the Plan will be amended in order to incorporate a cash-or-deferred (401(k)) arrangement, and to be renamed the "COMBANCORP EMPLOYEE STOCK SAVINGS PLAN," and in certain other particulars. The primary purposes of this Plan are to encourage participating Employees to adopt a regular savings program to provide security for their retirement and to enable participating Employees to share in the growth and prosperity of the Employer through the acquisition of stock ownership interest in the Employer with the ESOP Contributions, Employer matching contributions and Qualified Nonelective Contributions (if any) allocated to their Accounts. Accordingly, the Trust established under the Plan shall invest ESOP Contributions and Employer matching contributions and Qualified Nonelective Contributions (if any) primarily in Employer Stock. The Plan is also designed to be available as a technique of corporate finance to the Employer. Based on the foregoing purposes of the Plan, it may be used to accomplish the following objectives: (A) To permit participating Employees to defer a portion of their pretax compensation as Pretax Deferrals under the Plan; (B) To meet general financing requirements of the Employer, including capital growth and transfers in the ownership of Employer Stock; (C) To provide participating Employees with beneficial ownership of Employer Stock through the use of ESOP Contributions and possibly Employer matching contributions and Qualified Nonelective Contributions (if any) to invest in such Stock; (D) To receive loans (or other extensions of credit) to finance the acquisition of Employer Stock ("Exempt Loans"), with such loans to be repaid by Employer contributions to the Trust and dividends received on such Employer Stock. 1 9 The Plan is a stock bonus plan and a profit sharing plan with a 401(k) feature intended to qualify under Section 401 et seq. of the Code. Because the Plan is intended to be an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Code, the Plan shall invest Employer contributions primarily in Employer Stock. All Pretax Deferrals will be invested solely in the Investment Funds designated by the Committee. Therefore, the Employer hereby amends and restates the Plan in its entirety, effective generally as of January 1, 1989 with respect to the employee stock ownership portion of the Plan to comply with TRA '86, except as otherwise provided in the Plan, and effective as of April 1, 1995 with regard to the 401(k) portion of the Plan, provided that such amendments and restatement shall not have the effect of reducing the account balance of any Participant in the Plan as of such effective dates, nor as of the date of execution of this document, as follows: END OF ARTICLE I 2 10 ARTICLE II DEFINITIONS Section 2.1 Definitions. In this Plan, the following words and phrases shall have the meaning set forth below, unless a different meaning is expressly provided or plainly required by the context in which the words or phrases are used: (A) "Account, Accounts" means the Account or Accounts maintained for each Participant and which consist of the following: (1) "Employee Stock Ownership Account" means the Account, maintained by the Committee for each Participant to receive credit for his share of the ESOP Contributions made by the Employer to the Trust, together with the other allocations attributable to ESOP Contributions required by this Plan. (2) "Employer Matching Account" means a Participant's Account to which Employer matching contributions made on behalf of the Participant have been credited, together with other allocations attributable to Employer matching contributions which are required by this Plan. (3) "Pretax Deferral Account" means a Participant's Account to which Pretax Deferrals have been credited under the Plan, together with other allocations attributable to Pretax Deferrals which are required by this Plan. (4) "Qualified Employer Contribution Account" means a Participant's Account to which special Qualified Nonelective Contributions have been credited, together with other allocations attributable to such contributions which are required by the Plan. (B) "Accrued Benefit" means the balance of a Participant's Accounts. (C) "Adjustment Factor" means the cost of living adjustment factor prescribed by the Secretary of the Treasury under Section 415(d) of the Code for years beginning after December 31, 1987, as applied to such items and in such manner as the Secretary shall provide. (D) "Affiliate" means (1) Any corporation which is included in a controlled group of corporations (within the meaning of Section 414(b) of the Code), of which the Employer is a member; 3 11 (2) Any trade or business which is under common control with the Employer (within the meaning of Section 414(c) of the Code); (3) Any member of an affiliated service group of which the Employer is a member (within the meaning of Section 414(m) of the Code); and (4) Any other entity required to be aggregated with the Employer pursuant to regulations under Section 414(o) of the Code. Unless expressly provided to the contrary by resolution of the Board of Directors, a corporation, other trade or business, or affiliated service group member shall not be deemed to constitute an Affiliate with respect to periods prior to its coming under common control with the Employer or prior to its being included in a controlled group or affiliated group, as provided in the preceding sentence. An employee of an entity which becomes an Affiliate shall be deemed to have been employed by such Affiliate on the date it becomes an Affiliate. (E) "Anniversary Date" means the last business day of the Plan Year. (F) "Beneficiary" means any person or persons designated by a Participant to receive benefits hereunder upon such Participant's death, as provided in Section 10.2. (G) "Board of Directors" means the Board of Directors of COMBANCORP. (H) "Break in Service" means, for purposes of Eligibility Service, a twelve (12) consecutive month period, commencing on the date an Employee performs his first Hour of Service, in which he has not completed more than five hundred (500) Hours of Service. For purposes of Vesting Service, "Break in Service" means a Plan Year in which a Participant has not completed more than five hundred (500) Hours of Service. (I) "Code" means the Internal Revenue Code of 1986, as amended. (J) "Committee" means the committee as constituted from time to time under Article XIV and having the administrative duties set forth therein. (K) "Compensation" means, with respect to any Employee for any period of time, the gross salary and wages accrued on behalf of such Employee for such period of time by the Employer for services rendered, including bonuses, overtime compensation and commissions, and, except as provided below, all other remuneration of the Employee by the Employer included on the Employee's Form W-2 (wages as defined in Section 3401(a) of the Code and all other payments of compensation for which the Employer is required to furnish the Employee a written statement under Section 6041(d) and 6051(a)(3) of the Code, without regard to any rules under Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or services performed), and including any 4 12 amounts contributed to this Plan as Pretax Deferrals (on and after April 1, 1995) and to a Code Section 125 cafeteria plan pursuant to a salary reduction agreement entered into by the Employee or not currently includable in the Employee's gross income by reason of the application of Sections 402(g), 402(h)(1)(B) or 403 of the Code, but excluding: (1) Any amount contributed by the Employer to any pension plan or plan of deferred compensation, (2) An amount contributed by the Employer to this Plan other than Pretax Deferrals, (3) Any amount paid by the Employer for other fringe benefits, including but not limited to health and welfare, hospitalization, and group life insurance benefits, or perquisites, (4) Reimbursement for expenses or allowances, including automobile allowances and moving allowances, and (5) Amounts earned by an Employee before he becomes a Participant and after he ceases to be a Participant. The foregoing notwithstanding, and subject to the provisions of Section 16.6, the Plan shall disregard Compensation in excess of two hundred thousand dollars ($200,000), adjusted by the cost-of-living Adjustment Factor prescribed by the Secretary of the Treasury. In determining the Compensation of a Participant for purposes of this limitation, the rules of Section 414(q)(6) of the Code shall apply, except in applying such rules, the term "family" shall include only the Participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. If as a result of the application of such rules the adjusted Two Hundred Thousand Dollars ($200,000) limitation is exceeded, then (except for purposes of determining the portion of Compensation up to the integration level if the Plan provides for permitted disparity), the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of this limitation. In addition to other applicable limitations set forth in the Plan and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under Section 401(a)(17) of the Code shall mean the OBRA '93 annual compensation limit set forth in this provision. If compensation for any prior determination period is taken into account in determining an Employee's benefits accruing in the current Plan Year, the compensation for that prior determination period is subject to the OBRA '93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods 5 13 beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is $150,000. (L) "Disabled" or "Disability" means: (1) The permanent loss, or loss of use, of a member or function of the body, or the permanent disfigurement, of a Participant; or (2) The inability of a Participant to engage in any substantial gainful activity for which he is reasonably fitted by education, training or experience by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. The determination of the Disability of a Participant under this definition shall be made by a licensed physician designated by the Committee to serve this function. (M) "Early Retirement Age" means the attainment of age sixty-two (62) and the completion of five (5) or more years of Vesting Service. (N) "Early Retirement Date" means the Anniversary Date following the election by an eligible Participant to accept early retirement if the Plan provides for an Early Retirement Age. (O) "Effective Date" means the effective date of this comprehensive amendment and restatement, which is January 1, 1989, with respect to the employee stock ownership portion of the Plan, except as otherwise provided in the Plan, and April 1, 1995 with respect to the 401(k) portion of the Plan. The initial effective date of the Plan was January 1, 1987. (P) "Eligibility Service" means the service an Employee accrues for purposes of eligibility to participate in the Plan. An Employee initially accrues one (1) year of Eligibility Service at the end of a twelve (12) consecutive-month period if he completes at least one thousand (1,000) Hours of Service within that twelve (12) consecutive-month period beginning on the date he first performs an Hour of Service (the "Anniversary Year"). Thereafter, one year of "Eligibility Service" shall mean the Plan Year (which includes the first anniversary of the Employee's employment commencement date) during which the Employee completes at least one thousand (1,000) Hours of Service. (Q) "Employee" means a common law employee of the Employer and Affiliate and shall include leased employees within the meaning of Section 414(n)(2) of the Code, but excludes any person who is employed by the Employer as an independent contractor. The term "leased employee" means any person (other than an employee of the recipient) who pursuant to an agreement between the recipient and any other person ("leasing 6 14 organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least one year, and such services are of the type historically performed by employees in the business field of the recipient employer. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. Notwithstanding the foregoing, if such leased employees constitute less than twenty percent (20%) of the Employer's non-highly-compensated employees within the meaning of Section 414(n)(5)(C)(ii) of the Code, or if such leased employees are covered by a money purchase pension plan providing: (1) a non-integrated employer contribution of at least ten percent (10%) of Compensation, but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employees' gross income under Sections 125, 402(a)(8), 402(h) or 403(b) of the Code, (2) immediate participation and (3) full and immediate vesting, the term "Employee" shall not include such leased employees. (R) "Employer" means COMBANCORP (which is designated as the "Sponsoring Employer"), any successor to all or a major portion of the assets or business of COMBANCORP, and any other employer which, with the permission of the Sponsoring Employer, shall adopt this Plan. As of the date of the amendment and restatement of the Plan, Commerce National Bank is a participating Employer of the Plan. (S) "Employer Stock" means "qualifying employer securities" or "employer securities" as the term is defined in Section 4975(e)(8) and Section 409(1) of the Code and which, for purposes of the Employer and this Plan, means the duly issued shares of any class of stock of the Employer, and shall include preferred or common, voting or non-voting stock. (T) "Entry Date" means January 1 and July 1. (U) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (V) "ESOP Contributions" means the Employer contributions made to the Plan each Plan Year and allocated to the Employee Stock Ownership Account of each Participant, as provided in Article IV. (W) "Exempt Loan" means a loan, or other extension of credit, used by the Trustee to finance the acquisition of Employer Stock, which loan may constitute an extension of credit to the Trust from a party-in-interest as that term is defined under ERISA. (X) "Family Member" means, with respect to any Employee, such Employee's spouse and lineal ascendants or descendants and the spouses of such lineal ascendants or descendants, as provided in Section 414(q)(6) of the Code. 7 15 (Y) "Fiduciary" means Fiduciary as the term is defined under Section 3(21) of ERISA and includes any person who with respect to the Plan or Trust: (1) Exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets; (2) Renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan, or has any authority or responsibility to do so; or (3) Has any discretionary authority or responsibility in the administration of the Plan. A person is only a Fiduciary to the extent he has or exercises any such authority, responsibility or control. (Z) "Fiscal Year" means the accounting period adopted from time to time by the Employer for Federal income tax purposes. (AA) "Fiscal Year End of Sponsoring Employer" means December 31. (BB) "Highly Compensated Employee" means "highly compensated employee" as defined in Section 414(q) of the Code and the Treasury Regulations promulgated thereunder. The term "Highly Compensated Employee" includes highly compensated active Employees and highly compensated former Employees. A highly compensated active Employee includes any Employee who performs service for the Employer during the determination year and who during the look-back year: (1) Received Compensation from the Employer in excess of Seventy-Five Thousand Dollars ($75,000), multiplied by the Adjustment Factor as provided by the Secretary of the Treasury; (2) Received Compensation from the Employer in excess of Fifty Thousand Dollars ($50,000) and was in the top-paid group of Employees for such year, multiplied by the Adjustment Factor as provided by the Secretary of the Treasury; To determine the number of Employees in the top-paid group, only active Employees are included and the following Employees may be excluded: (a) Employees who have not completed six (6) months of service; (b) Employees who work fewer than seventeen and one-half (17-1/2) Hours of Services per week; 8 16 (c) Employees who normally work not more than six (6) months during any year; (d) Except as otherwise provided in the regulations, Employees who are included in a unit of employees covered by a bona fide collective bargaining agreement; (e) Employees who have not attained age twenty-one (21), and (f) Employees who are nonresident aliens and who receive no U.S. source earned income. Also for purposes of this Subsection (BB), an Employee is in the top-paid group of Employees for any year if such Employee is in the group consisting of the top twenty percent (20%) of the Employees when ranked on the basis of Compensation during the year. (3) Was at any time an officer and received Compensation greater than fifty percent (50%) of the amount in effect under Section 415(b)(1)(A) of the Code for such year. For purposes of making this determination, no more than fifty (50) Employees (or, if lesser the greater of three (3) Employees or ten percent (10%) of the Employees) shall be treated as officers. If for any look-back year or determination year no officer is described in this subparagraph, the highest paid officer of the Employer for such year shall be treated as described in this subparagraph. (4) The determination year is the Plan Year for which the determination of who is highly compensated is being made. (5) The look-back year is the twelve (12) month period immediately preceding the determination year or, if the Employer elects, the calendar year ending with or within the determination year. Compensation is compensation within the meaning of Code Section 415(c)(3), including elective or salary reduction contributions to a cafeteria plan, cash or a deferred arrangement or tax-sheltered annuity. If, however, the Plan Year is a calendar year, or if another Plan of the Employer so provides, then the "look-back year" shall be the calendar year ending with or within the Plan Year for which testing is being performed, and the "determination year" (if applicable) shall be the period of time, if any, which extends beyond the "look-back year" and ends on the last day of the Plan Year for which testing is being performed (the "lag period"). With respect to this election, it shall be applied on a uniform and consistent basis to all plans, entities, and arrangements of the Employer. (6) Employers aggregated under Code Sections 414(b), (c), (m) and (o) are treated as a single employer. 9 17 The term highly compensated active Employee also includes Employees who are described in subparagraph (3) above if the term "determination year" is substituted for the term "look-back year" and such Employee is a member of the group consisting of the one hundred (100) Employees paid the greatest Compensation from the Employer during the determination year. The term also includes Employees who are five percent (5%) owners at any time during the look-back year or determination year. If an Employee during a determination year or look-back year is a Family Member of a five percent (5%) owner who is an active or former employee or one of the top ten (10) Highly Compensated Employees by Compensation, then such Employee is not considered a separate Employee and any Compensation paid to such Employee (and any contribution made on behalf of such Employee) shall be aggregated with the Compensation paid and amounts contributed on behalf of the five percent (5%) owner or the Highly Compensated Employee. Finally, a highly compensated former Employee includes any Employee who separated from service (or was deemed to have separated) prior to the determination year, performed no service for the Employer during the determination year, performed no service for the Employer during the determination year, and was a highly compensated active Employee for either the separation year or any determination year ending on or after the Employee's fifty-fifth (55th) birthday. (CC) "Hours of Service". Each Employee shall receive credit for "Hours of Service" with the Employer and any Affiliate as follows: (1) One (1) hour for each hour for which the Employee is directly or indirectly paid, or entitled to payment, by the Employer or Affiliate for the performance of duties during the applicable computation period for which his Hours of Service are being determined under the Plan. (These hours shall be credited to the Employee for the computation period or periods in which the duties were performed, and shall include hours for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to by the Employer or Affiliate as provided by regulations under ERISA, with no duplication of credit for hours.) (2) One (1) hour for each hour, in addition to the hours in paragraph (1) above for which the Employee is directly or indirectly paid, or entitled to payment, by the Employer or Affiliate for reasons other than for the performance of duties during the applicable computation periods, such as paid vacation, holidays, sickness, Disability and similar paid periods of non-working time. (These hours shall be counted in the computation period or periods in which the hours occur for which payment is made.) (3) One (1) hour for each hour of the normally scheduled work hours during any period the Employee is on any Leave of Absence from work with the Employer or Affiliate for military service with the armed forces of the United States, but not to exceed the period required under the law pertaining to veterans' reemployment rights; 10 18 provided, however, if he fails to report for work at the end of such Leave during the period in which he has reemployment rights, he shall not receive credit for hours on such Leave. (4) One (1) hour for each hour of the number of normally scheduled work hours during any period of paid or unpaid Leave of Absence on account of: (a) The Employee's pregnancy; (b) The birth of the Employee's child; (c) The placement of a child with the Employee in connection with an adoption; or (d) Caring for the Employee's child during the period immediately following the birth or placement. The Hours of Service credited under this Subsection shall be credited solely for purposes of preventing the Employee on a permitted Leave to incur a Break in Service and such hours shall not be taken into account for purposes of determining whether the Employee has accrued a year of Eligibility Service or Vesting Service. The Employee shall be credited with Hours of Service under this Subsection only in the Plan Year in which the Leave of Absence begins if the crediting is necessary to prevent a Break in Service in such Year. In all other cases, the crediting shall occur only in the following Plan Year. Prior to the time the Plan credits the Employee with Hours of Service under this Subsection, the Committee may require the Employee to submit timely information in such form as the Committee may prescribe to enable it to establish that the Leave is for one of the purposes set forth under this Subsection and to determine the number of days of the permitted Leave. (5) One (1) hour for each hour of the number of normally scheduled work hours during any period of authorized Leave of Absence or temporary layoff granted by the Employer or Affiliate for which the Employee is not compensated, as determined under the Employer's or Affiliate's policy which is uniformly applicable to all Employees in similar circumstances. Notwithstanding the foregoing, no more than five hundred one (501) Hours of Service shall be credited to an Employee on account of any single continuous period during which the Employee performs no duties. When no time records are available, the Employee shall be given credit for eight (8) Hours of Service for each day he is on the Employer's or Affiliate's payroll. There shall be no duplication of credit for hours under (1), (2), (3) or (4), above, and all such hours shall be determined in accordance with reasonable standards and policies from time to 11 19 time adopted by the Committee under Regulation Sections 29 C.F.R. 2530.200b-2(b) and (c) which are incorporated into this Plan by this reference. (DD) "Investment Fund" means the investment funds selected by the Committee from time to time for the investment of Participants' Pretax Deferrals and rollover contributions under this Plan. (EE) "Investment Manager" means any Fiduciary (other than a Trustee or Named Fiduciary), as defined in Section 402(a)(2) of ERISA: (1) Who has the power to manage, acquire or dispose of any asset of the Plan or the Trust; (2) Who is (a) Registered as an investment adviser under the Investment Advisers Act of 1940; (b) A bank, as defined in that Act; or (c) An insurance company qualified to perform services described in Subsection (1) under the laws of more than one state; and (3) Who has acknowledged in writing that he is a Fiduciary with respect to the Plan. (FF) "Leave of Absence" means a period of absence from regular employment which is approved by the Board of Directors or the Committee in a non-discriminatory manner for reasons such as, but not limited to, sickness, Disability, education, jury duty, convenience to the Employer, any one of the permitted purposes set forth in Section 2.1(CC)(4), or for periods of military duty during which the Employee's reemployment rights are protected by law. An Employee who is on a Leave of Absence shall not be considered to have incurred a Break in Service or termination from employment. However, if the Employee does not return to the service of the Employer on or prior to the expiration of such Leave or within the period after the completion of such military service for which his employment rights are guaranteed by law, the Employee shall be deemed to have terminated employment at the time the absence commenced (unless such absence was a paid Leave of Absence, or a Leave for permitted purposes set forth in Section 2.1(CC)(4), in which case the Employee shall be deemed to have terminated employment on the last day of the Leave of Absence). (GG) "Limitation Year" means the Plan Year. (HH) "Limitation Year Compensation" means the Compensation credited to a Participant during a Limitation Year under the cash method of accounting. 12 20 (II) "Named Fiduciary" means a Fiduciary who is named in the Plan or who, pursuant to a procedure specified in the Plan, is identified as such by the Employer. The Named Fiduciaries for this Plan are, to the extent they have or exercise fiduciary powers, the Committee, the Employer and the Investment Manager, if any. (JJ) "Non-Highly Compensated Employee" means any Employee who is not a Highly Compensated Employee or Family Member. (KK) "Normal Retirement Age" means age sixty-five (65). (LL) "Normal Retirement Date" means the Anniversary Date coinciding with or next following a Participant's attaining his Normal Retirement Age. (MM) "Participant" means an Employee who has been admitted to participate in the Plan and shall include, where the context requires, a former Participant entitled to benefits under this Plan. (NN) "Plan" means the COMBANCORP EMPLOYEE STOCK OWNERSHIP PLAN, as now in effect or as hereafter amended. Effective April 1, 1995, "Plan" shall mean the "COMBANCORP EMPLOYEE STOCK SAVINGS PLAN." (OO) "Plan Administrator" means the Employer or such other entity or person the Board of Directors may designate, which shall be the administrator of the Plan within the meaning of Section 3(16) of ERISA. (PP) "Plan Year" means, for the initial Plan Year of this amended and restated Plan, January 1, 1989 through December 31, 1989. Thereafter, "Plan Year" means the calendar year. (QQ) "Pretax Deferrals" means the amount (within the percentage range set in Section 5.1) of Compensation a Participant requests the Employer to defer on his behalf under the Plan on a pretax basis in accordance with Section 5.2. (RR) "Qualified Election Period" means the six (6) Plan Year period beginning with the later of (1) the Plan Year after the Plan Year in which the Participant attains age fifty-five (55); or (2) the Plan Year after the Plan Year in which the Participant has attained age fifty-five (55) and has completed at least ten (10) years of participation. (SS) "Qualified Nonelective Contribution" means special matching contributions made by the Employer and allocated to Participants' Accounts, as provided in Section 4.1(C), which the Participants may not elect to receive in cash until distributed from the Plan, which are one hundred percent (100%) vested when made, and which are not distributable under the terms of the Plan to Participants or their Beneficiaries earlier than as provided in Section 5.13. 13 21 Elective contributions and/or qualified non-elective contributions may be treated as matching contributions under this Plan only if the conditions described in Treasury Regulation Section 1.41(m)-1(b)(5). (TT) "Taxable Compensation" means, for purposes of the Code Section 415 limitations and Code Section 416, "Compensation" as defined under Section 2.1(K) of the Plan, which includes all remuneration of an Employee by the Employer during a Plan Year, and which would be subject to tax under Section 3101(a) of the Code (but without the dollar limitation of Section 3121(a)(1) of the Code), but shall exclude: (1) All Pretax Deferrals made under this Plan; (2) Amounts earned by an Employee in any calendar year in which the Employee is not at any time a Participant; and (3) Any other Employer contributions or payments to this Plan or to any trust, fund or plan to provide retirement, pension, profit sharing, health, welfare, death, insurance or similar benefits to or on behalf of such Employee. (UU) "Trust Agreement" means the trust agreement between the Employer and the Trustee for purposes of providing benefits of the Plan. (VV) "Trustee" means Sanwa Bank California or any successor Trustee duly appointed by the Board of Directors. Effective January 1, 1995, the Trustee shall be FIRST INTERSTATE BANK OF CALIFORNIA. (WW) "Trust Fund" means all cash and securities and all other assets of whatever nature deposited with or acquired by the Trustee in the capacity of Trustee hereunder and all accumulated income. (XX) "Trust Year" means the Plan Year. (YY) "Valuation Date" means the last business day of the Plan Year for the valuation of Employer Stock, and the last business day of each calendar quarter for the valuation of Plan assets invested in Investment Funds other than Employer Stock. (ZZ) "Vesting Service" means the service credited to an Employee for vesting purposes. An Employee shall be credited with Vesting Service for his service with the Employer in accordance with any rules of uniform application adopted by the Committee from time to time to implement the following paragraphs of this Section: (1) A Participant shall receive one (1) full year of Vesting Service for any Plan Year during which he has at least one thousand (1,000) Hours of Service. (2) A Participant shall accrue Hours of Service for Vesting Service purposes beginning on the date he first performs an Hour of Service for the Employer. 14 22 (3) In the case of a Participant who has no vested right to his Accrued Benefit, years of Vesting Service before any Break in Service shall not be taken into account if the number of consecutive one-year Breaks in Service equals or exceeds the greater of: (a) Five (5) consecutive years of Breaks in Service; or (b) The aggregate number of years of Vesting Service prior to such Break. (4) In the case of an Employee who has a Break in Service, years of Vesting Service before such break shall not be taken into account until he has completed a year of Vesting Service after his return. Section 2.2 Gender and Number. Except when otherwise indicated by the context, any masculine terminology herein shall also include the feminine, and the definition of any term herein in the singular shall also include the plural. END OF ARTICLE II 15 23 ARTICLE III ELIGIBILITY AND PARTICIPATION Section 3.1 Eligibility Requirements. (A) Eligibility Requirements. All Employees shall become Participants by meeting the age and service requirements set forth below: (1) Service. The service requirement is one (1) year of Eligibility Service. (2) Age. The age requirement is twenty-one (21). (B) Exclusions. The following Employees are excluded from participation in the Plan: any Employee who is included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such employer or employer, is excluded from participation in the Plan. (C) Commencement of Participation. All Employees who have satisfied the service requirement set forth in subsection (A) shall become Participants on the Entry Date coincident with or next following the date they satisfy the service requirement of this Section. (a) However, if the Employee terminates employment before that Entry Date and is not in the employment of the Employer on that Entry Date, the Employee will not enter the Plan. (b) However, if such separated Employee returns to employment after the Entry Date without incurring a Break in Service, the Employee shall commence participation immediately upon his return. Section 3.2 Enrollment of Participants. Each Employee eligible to participate in the Plan as provided in Section 3.1 above shall complete such enrollment forms as the Committee may prescribe prior to the time he commences participation in the Plan. The completion of such enrollment forms, however, shall not be a prerequisite to participation in the Plan. Section 3.3 Duration of Participation. An Employee who becomes a Participant shall remain a Participant until he terminates employment for whatever reason. A Participant who terminates employment and is subsequently reemployed by the Employer shall become a Participant on the date of his reemployment. An Employee who terminates employment before he completes the eligibility requirement set forth in this Article and who is rehired after he has incurred five (5) consecutive one (1) year Breaks in Service shall be 16 24 treated as a new Employee and shall become a Participant in accordance with the provisions of Section 3.1. An Eligible Employee who terminates employment before he completes the eligibility requirement set forth in this Article and who is rehired before he has incurred five (5) consecutive one (1) year Breaks in Service shall become a Participant as provided in Section 3.1, taking into account his prior service for the Employer. Section 3.4 Transfers to Participation. An Employee who transfers into employment where he becomes eligible to participate in the Plan shall be treated as having satisfied the service requirement set forth in Section 3.1 if the Employee would have satisfied such requirements based upon his service as an Employee before the date of the transfer. Such Employee shall become a Participant in the Plan on the first Entry Date coincident with or next following the date of the transfer. Section 3.5 Transfers to Inactive Participation. Any Participant who transfers into employment where he becomes ineligible to participate in the Plan shall no longer be eligible to make Pretax Deferrals, nor shall the Participant be eligible to receive allocations of Employer contributions hereunder, but he shall continue to accrue Vesting Service under this Plan during the period he is ineligible to be a Participant. If such Participant is transferred into employment where he is again eligible to participate in the Plan, the Participant shall resume participation as of the date of the transfer. Upon his termination from employment, the Participant's vesting in his Employer contributions (if any) under the plan shall be based on his total years of Vesting Service. END OF ARTICLE III 17 25 ARTICLE IV EMPLOYER CONTRIBUTIONS Section 4.1 Employer Contributions. Each Plan Year, so long as the Plan is in existence, the Employer may contribute to the Trust such amounts as provided in Subsections (A) and (B) below. The Employer may make contributions to the Plan without regard to current or accumulated earnings and profits for the taxable year or years ending with or within the Plan Year. Notwithstanding the foregoing, the Plan is designed to qualify as an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Code and a profit sharing plan within the meaning of Sections 401(a), 402, 412, and 417 of the Code. The Employer's contribution made on behalf of Participants shall be allocated as provided in Section 4.2. (A) ESOP Contributions. Each Plan Year, so long as the Plan is in existence, the Employer shall make ESOP Contributions to the Plan in such amount as necessary in order to meet its obligations under an Exempt Loan for the Plan Year. To the extent that the Plan does not have an Exempt Loan, the Employer may make such ESOP Contributions to the Plan as determined by its Board of Directors. (B) Employer Matching Contributions. Effective April 1, 1995, each Participant for whom a Pretax Deferral is made may be entitled to an Employer matching contribution equal to one hundred percent (100%) of the amount of the Participant's Pretax Deferrals, up to two percent (2%) of such Participant's Compensation. The maximum Employer matching contribution made on behalf of any Participant under the Plan in any Plan Year shall not exceed two percent (2%) of his Compensation. The Employer may increase or decrease the rate of matching contributions at any time; provided, however, that any reduction in the matching contribution rate may be made on a prospective basis only. Employer matching contributions and ESOP Contributions to be made for any Participant shall automatically cease whenever the limitations of Section 7.1 prevent additional allocations to the Employer Matching Account and Employee Stock Ownership Account of the Participant, after first taking into account the amount of such Participant's Pretax Deferrals for such Plan Year. No Employer matching contributions or ESOP Contributions will be made for such Participant during the remainder of the Plan Year. (C) Qualified Nonelective Contributions. In order to satisfy the special nondiscrimination rules applicable to Section 401(k) plans, the Plan may take into account any ESOP Contributions made to the Plan in any plan year, or the Board of Directors may approve a special qualified Employer matching contribution on behalf of some or all Eligible Participants with Pretax Deferrals for the Plan Year who are not and have never been Highly 18 26 Compensated Employees. Notwithstanding anything to the contrary contained elsewhere in this Plan, any profit sharing contributions or Employer matching contributions that are taken into account for purposes of complying with the special nondiscrimination test, and any special Qualified Nonelective Contributions made in accordance with the preceding sentence, shall be one hundred percent (100%) vested immediately and shall be subject to the same restrictions on withdrawal as are Pretax Deferrals under the Plan. Section 4.2 Allocation of Employer Contributions. Subject to the provisions of Section 4.1(A) and 4.1(B), the Employer's contribution for a Plan Year shall be allocated in the manner provided in the paragraphs below, among the Accounts of the Participants who are entitled to an allocation for the Plan Year, as soon as practicable after such contributions have been transferred to the Trust; provided, however, that the Employer shall first allocate Employer contributions to Participants' Employer Matching Account. After such allocation, the Employer shall allocate the balance of Employer contributions for the Plan Year to Participants' Employee Stock Ownership Accounts. The foregoing notwithstanding, Employer contributions made to the Plan for any period during which the Plan has an outstanding ESOP Loan shall first be allocated as ESOP Contributions, and the balance, if any, shall be allocated as Employer matching contributions to the Accounts of eligible Participants. (A) Employer Matching Account. Subject to Section 4.3, Employer matching contributions shall be allocated among the Employer Matching Accounts of all Participants who are Employees on the Anniversary Date, who have completed a year of Vesting Service for the Plan Year, and who have made a Pretax Deferral for the allocation period in proportion to the matched Pretax Deferrals made on behalf of such Participants for such allocation period. The foregoing notwithstanding, a Participant who terminates employment with the Employer on account of retirement, death or Disability shall be eligible to an allocation of Employer matching contributions in the year of termination, regardless of whether or not he has met the Anniversary Date employment requirement. (B) Employer Stock Ownership Account. ESOP Contributions made by the Employer to the Trust Fund in any Plan Year shall be allocated among the Employee Stock Ownership Accounts of Participants who are Employees on the Anniversary Date, and who have completed a year of Vesting Service for the Plan Year, in the proportion that the Compensation of each such Participant bears to the Compensation of all Participants for such Plan Year. The foregoing notwithstanding, a Participant who terminates employment with the Employer on account of retirement, death or Disability shall be eligible to an allocation of ESOP Contributions in the year of termination, regardless of whether or not he has met the year of Vesting Service requirement or the Anniversary Date employment requirement. (C) Qualified Nonelective Contributions. The Employer shall allocate any special Qualified Nonelective Contributions it makes to the Plan in any Plan Year to the Qualified Employer Contribution Accounts of Eligible Participants who are not and have never been Highly Compensated Employees on the same basis that Employer matching contributions as made to the Plan for the same Plan Year on behalf of such Participants. 19 27 Notwithstanding any provisions in the Plan to the contrary, in the event the Plan purchases Employer Stock from a shareholder of the Employer who elects tax-free rollover treatment of such stock pursuant to Section 1042 of the Code, the Plan shall not allocate any Employer Stock purchased in such transaction to the selling shareholder, to any individual who is related to the selling shareholder (as defined in Code Section 267(b), or to any shareholder who (after the application of Section 318(a) of the Code) is a more than twenty-five percent (25%) owner of the Employer. The Employer shall not discontinue or decrease allocations of Employer contributions under the Plan on account of a Participant's attainment of a certain age. (D) Release From Suspense Account. The Plan shall initially credit Employer Stock purchased or acquired with the proceeds of an Exempt Loan to a suspense account and allocate Employer Stock held in such suspense account as of each Anniversary Date to the Employee Stock Ownership Accounts and Employer Matching Accounts of eligible Participants only as payments of principal and interest on the Exempt Loan are made by the Trustee. The number of shares of Employer Stock to be released from the suspense account for allocation to the Employee Matching Accounts and Employee Stock Ownership Accounts of Participants for each Plan Year shall be determined in accordance with the provisions of Section 4.8(B)(8) below. Section 4.3 Limitation on Employer Matching Contributions. (A) General. Employer matching contributions (to the extent not taken into account as part of the Average Deferral Percentage under Section 5.6) made on behalf of Eligible Participants who are Highly Compensated Employees in any Plan Year shall be subject to the limitations set forth in this Section. In any Plan Year, the Average Contribution Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Eligible Participants who are Non-Highly Compensated Employees by more than the greater of: (1) One hundred twenty-five percent (125%), or (2) The lesser of (i) two hundred percent (200%) of the Average Contribution Percentage for Eligible Participants who are Non-Highly Compensated Employees, or (ii) the Average Contribution Percentage for Eligible Participants who are Non-Highly Compensated Employees plus two (2) percentage points. (3) The testing made under this Section 4.3 shall be limited as to multiple use of alternative (2) as provided in the final regulations issued under Section 401(k) of the Code. This Section 4.3 is intended to implement the restrictions of Section 401(m) of the Code and shall be construed and interpreted in accordance with that Section and Treasury Regulations thereunder. Based on the foregoing, the Employer shall not use the two hundred 20 28 percent (200%) or two (2) percentage point alternative limit under both this Section 4.3 and Section 5.6 in the same Plan Year. (B) Definitions. For purposes of this Section, the following definitions shall apply: (1) "Average Contribution Percentage" shall mean the average (expressed as a percentage) of the Contribution Percentage of the Eligible Participants in a group. (2) "Contribution Percentage" shall mean the ratio (expressed as a percentage) of the Employer matching contributions under the Plan on behalf of an Eligible Participant for the Plan Year to the Eligible Participant's Compensation for the Plan Year. (3) "Eligible Participant" shall mean any Participant who is otherwise authorized under the terms of the Plan to have Employer matching contributions allocated to his Account for the Plan Year. (C) Special Rules - Aggregation. (1) The Contribution Percentage for any Eligible Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Employer matching contributions or Pretax Deferrals allocated to his Accounts under two or more plans described in Section 401(a) of the Code or arrangements described in Section 401(k) of the Code that are maintained by the Employer or an Affiliate shall be determined as if all such contributions and Pretax Deferrals are made under a single plan. (2) In the event that the Plan satisfies the requirements of Section 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of Section 410(b) of the Code only if aggregated with this Plan, then this Section shall be applied by determining the Contribution Percentages of Eligible Participants as if all such plans were a single plan. (3) For purposes of determining the Contribution Percentage of an Eligible Participant who is a Highly Compensated Employee, the Employer matching contributions and Compensation of such Eligible Participant shall include the Employer matching contributions and Compensation of his Family Members who are also Employees, and such Family Members shall be disregarded in determining the Contribution Percentage for Eligible Participants who are Non-Highly Compensated Employees. (4) The determination and treatment of the Contribution Percentage of any Eligible Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. Section 4.4 Distribution of Excess Aggregate Contributions. 21 29 (A) Disposition of Excess Aggregate Contributions. In the event that the Contribution Percentage of the Highly Compensated Participants would (if not reduced) cause the Average Contribution Percentage of such Participants to exceed the maximum average permitted under Section 4.3, then the Committee shall reduce the maximum Contribution Percentage of those Highly Compensated Participants who exceeded the limit (as provided in Section 4.4(B)(2) until the excess has been eliminated. Such reduction shall be effected by reducing the Highly Compensated Participant's Qualified Nonelective Contributions (to the extent made and taken into account under Section 5.3) for the remainder of the Plan Year (qualified matching contributions). If the Employer did not make any Qualified Nonelective Contributions to the Plan for the Plan Year, then the reduction shall be effected by reducing the Highly Compensated Participants' Employer matching contributions (if necessary) for the remainder of the Plan Year. The Employer shall reduce the Employer matching contributions of such Highly Compensated Employees in the same manner that it reduces the ADP of such Highly Compensated Employees as set forth in Section 5.8. If the reduction in the maximum Contribution Percentage of a Highly Compensated Participant, as described in the preceding paragraph, results in any "Excess Aggregate Contribution", as that term is defined below in accordance with Section 401(m)(6)(B) of the Code, then such Excess Aggregate Contributions and income allocable thereto shall be forfeited, if otherwise forfeitable under the terms of this Plan or, if not forfeitable, distributed from the Participant's Qualified Employer Contribution Account or Employer Matching Account (as the case may be) in proportion to the Participant's Qualified Nonelective Contributions (to the extent taken into account under Section 4.3 for the Plan Year) or Employer Matching Contributions no later than the last day of each Plan Year, to Participants on whose behalf such contributions were made. The Excess Aggregate Contributions to be distributed to a Participant shall be adjusted for income and, if there is a loss allocable to the Excess Aggregate Contribution, shall in no event be greater than the lesser of the Participant's Account under the Plan or the Participant's Qualified Nonelective Contributions (or Employer matching contributions) for the Plan Year. (B) Excess Aggregate Contribution Defined. For purposes of this Article, "Excess Aggregate Contributions" shall mean, with respect to any Plan Year, the excess of: (1) The aggregate amount of the Qualified Nonelective Contributions or Employer matching contributions actually made on behalf of Highly Compensated Employees for such Plan Year, over (2) The maximum amount of such contributions permitted under the limitations of Section 4.3 (determined by reducing contributions made on behalf of Highly Compensated Employees in order of their Contribution Percentages beginning with the highest of such percentage). (C) Determination of Income. The income allocable to Excess Aggregate Contributions may be determined on the same reasonable basis that the Plan calculates and 22 30 allocates income for normal plan accounting purposes; or income may be determined by multiplying the income allocable to the Participant's Qualified Nonelective Contributions or Employer matching contributions for the Plan Year by a fraction, the numerator of which is the Excess Aggregate Contribution on behalf of the Participant for the preceding Plan Year, and the denominator of which is the sum of the Participant's account balance attributable to Qualified Nonelective Contributions or Employer matching contributions on the last day of the preceding Plan Year. (D) Allocation of Forfeitures. (1) Amounts forfeited by Highly Compensated Employees under this Section shall be: (a) Treated as Annual Additions and either; (b) Applied to reduce Employer contributions if forfeitures of matching contributions under the Plan are applied to reduce Employer contributions; or (c) Allocated, after all other forfeitures under the Plan, and subject to the paragraph below, to the same Participants and in the same manner as such other forfeitures of Employer matching contributions are allocated to other Participants under the Plan. 23 31 (2) Notwithstanding the foregoing, no forfeitures arising under this Section 4.4 shall be allocated to the account of any Highly Compensated Employee. Section 4.5 Disposition of Forfeitures. The Committee shall reallocate forfeitures occurring in any Plan Year among the Accounts of Participants who are entitled to an allocation of Employer contributions for the Plan Year in the same manner that Employer contributions are allocated. Forfeitures arising from Employer matching contributions shall be allocated among the Employer Matching Accounts of Participants entitled to matching contributions for the Plan Year. Forfeitures arising from discretionary ESOP Contributions shall be allocated among the Employee Stock Ownership Accounts of Participants entitled to such contributions for the Plan Year. If, however, the allocation of forfeitures causes the limitations of Section 415 of the Code to be exceeded with respect to each Participant for the Plan Year, then these amounts shall be held unallocated in a suspense account for the Plan Year and reallocated in the next Plan Year to all of the Participants in the Plan in accordance with this Section and as permitted by Section 415 of the Code. Section 4.6 Payment of Contributions. The Employer may make annual Employer matching and ESOP Contributions in cash or Employer Stock or any combination thereof directly to the Trustee. The contributions may be made on any date or dates selected by the Employer within the times prescribed by law for the filing of the Employer's federal income tax return for the taxable year for which the contribution is made, including any extensions of time obtained for filing the return. Section 4.7 Obligations. Except for the Employer's obligations hereunder to make contributions to the Trustee as set forth herein, the Employer shall not be responsible for the adequacy of the Trust Fund to meet and discharge any or all payments and liabilities hereunder. Section 4.8 Exempt Loans. (A) General. Upon direction from the Committee, Trustee shall borrow from a lender (other than affiliates of the Trustee) designated by the Committee to acquire Employer Stock as authorized herein. (B) Requirements. Notwithstanding any other provision of this Plan, all Exempt Loans shall meet the following requirements: (1) Arm's-Length Standard. At the time the Exempt Loan is made, the terms, whether or not between independent parties, must be at least as favorable to the Plan as the terms of a comparable loan resulting from arms-length negotiations between independent parties. (2) Term of Loan. The Exempt Loan must be for a specific term and not be payable at the demand of any person, except in the case of default. The 24 32 Employer may guarantee repayment of the Exempt Loan. The loan agreement shall require the Employer to contribute to the Trust amounts sufficient to enable the Trust to pay such installments of principal and interest on the Loan on or before the date each installment is due. (3) Use of Loan Proceeds. The Plan must use the proceeds of an Exempt Loan within a reasonable time after their receipt by the Trustee only for any or all of the following purposes: (a) To acquire Employer Stock which is both common stock and publicly traded stock or, if not publicly traded stock, is common stock which has a combination of voting power and dividend rights equal to or in excess of: (i) That class of common stock of the Employer having the greatest voting power; and (ii) That class of stock of the Employer having the greatest dividend rights. (b) To repay such Exempt Loan, or (c) To repay a prior Exempt Loan. Except as provided in Section 8.11, no Employer Stock acquired with the proceeds of an Exempt Loan may be subject to a put, call or other option, or buy-sell or similar arrangement while held by and when distributed from the Trust, whether or not the Plan is then an employee stock ownership plan. For purposes of this Section, the term "publicly traded" security refers to a security that is listed on a national securities exchange registered under Section 6 of the Securities Exchange Act of 1934 or that is quoted on a system sponsored by a national securities association registered under Section 15A(b) of the Securities Exchange Act. (4) Liability and Collateral of Loan. The Exempt Loan must be without recourse against the Trust. The only assets of the Trust which may be given by the Trustee as collateral on an Exempt Loan shall consist of shares of Employer Stock which have been acquired with the proceeds of the Exempt Loan or which were used as collateral on a prior Exempt Loan which has been repaid with proceeds of the current Exempt Loan. No person entitled to payment under the Exempt Loan shall have any right to any assets of the Trust other than: (a) Collateral given for the Exempt Loan; (b) Contributions (other than contributions of Employer Stock) that are made under the Plan to meet the Trust's obligations under the Exempt Loan; and 25 33 (c) Earnings attributable to such collateral and the investment of such contributions. (5) Payment of Exempt Loan. The payments made with respect to an Exempt Loan by the Trust during a Plan Year may not exceed an amount equal to the sum of: (a) Contributions (other than contributions of Employer Stock) that are made under the Plan to meet the Trust's obligations under the Exempt Loan; and (b) Earnings attributable to the collateral given for the Exempt Loan and the investment of the contributions described in the paragraph above, less payments made in the prior years. Such contributions and earnings must be accounted for separately until the Exempt Loan is repaid. (6) Default. In the event of default upon an Exempt Loan, the value of Trust assets transferred in satisfaction of the Exempt Loan must not exceed the amount of the default. In the event the lender is a "Disqualified Person," as defined in Section 4975(e)(2) of the Code, or "Party in Interest" as defined in Section 408(e) of ERISA, the loan must provide for a transfer of Trust assets only upon and to the extent of failure of the Trust to meet the payment schedule of the Exempt Loan. For purposes of this paragraph, the making of a guarantee does not make a person a lender. (7) Reasonable Rate of Interest. The Exempt Loan must be at a reasonable rate of interest as determined by the Committee and certified to the Trustee. In determining a reasonable rate of interest, all relevant factors shall be considered, including the amount and duration of the loan, the security and guarantee (if any) involved, the credit standing of the Trust and the guarantor (if any), and the interest rate prevailing for comparable loans. Where these factors are considered, a variable interest rate may be reasonable. (8) Release from Encumbrance. Upon the payment of any portion of the balance due on the Exempt Loan (which shall only be done at the direction of the Committee) the assets originally pledged as collateral for such portion shall be released from encumbrance. The Exempt Loan provision covering such release must be in compliance with either the "General Rule" or the "Special Rule" as selected by the Committee and described below. (a) General Rule: For each Plan Year during the duration of the Exempt Loan, the number of shares released from encumbrance must equal the number of encumbered shares held immediately before release for the current Plan Year multiplied by a fraction: 26 34 (i) The numerator of which is the amount of principal and interest paid for the Plan Year; and (ii) The denominator of which is the sum of the numerator plus the principal and interest to be paid for all future years. (b) Special Rule: (i) For each Plan Year during the duration of the Exempt Loan, the number of shares released from encumbrance must equal the number of encumbered shares held immediately before release for the current Plan Year multiplied by a fraction: a. The numerator of which is the amount of principal paid for the Plan Year; and b. The denominator of which is the sum of the numerator plus the principal to be paid for all future years. (ii) Anything herein to the contrary notwithstanding, the Special Rule described in this paragraph may only be used with respect of an Exempt Loan if: a. The Exempt Loan provides for annual payments of principal and interest at a cumulative rate which is not less rapid at any time than level annual payments of such amounts for ten (10) years. b. The interest included in any payment is disregarded only to the extent that it would be determined to be interest under standard loan amortization tables; and c. The Exempt Loan provides that the General Rule described above shall be the method used to determine the assets released from encumbrance from the time that, by reason of renewal, extension or refinancing, the sum of the expired duration of the Exempt Loan, the renewal period, the extension period and the duration of a new Exempt Loan exceeds ten (10) years. (c) In determining the number of shares to be released for any Plan Year under either the General Rule or the Special Rule: (i) The number of future years under the Exempt Loan must be definitely ascertainable and must be determined without taking into account any possible extensions or renewal periods. (ii) If the Exempt Loan provides for a variable interest rate, the interest to be paid for all future Plan Years must be computed by using the 27 35 interest rate applicable as of the end of the Plan Year for which the determination is being made. (iii) If the collateral for an Exempt Loan includes more than one class of shares, the number of shares of each class to be released for a Plan Year must be determined by applying either of the applicable fractions provided for in this subsection to each class. (9) Other. The provisions of an Exempt Loan may not restrict the payment provisions set forth with respect to "put options" in Section 8.10 of the Plan unless such restrictions are required by applicable state law. END OF ARTICLE IV 28 36 ARTICLE V PRETAX DEFERRALS Section 5.1 Pretax Deferrals. Effective April 1, 1995, each Participant may elect to have the Employer contribute to the Plan on his behalf each Plan Year, in whole percentage points, from one percent (1%) to fifteen percent (15%) of his Compensation as a Pretax Deferral, in accordance with the rules set forth in Section 5.2 and such other rules as the Committee may prescribe. The foregoing notwithstanding, in no event shall a Participant's Pretax Deferrals exceed Seven Thousand Dollars ($7,000) in any taxable year of the Participant, multiplied by the Adjustment Factor as provided by the Secretary of the Treasury. To the extent the Pretax Deferrals for the Participant exceed the seven thousand dollar ($7,000) amount, the excess shall automatically be paid to the Participant, notwithstanding his election under Section 5.2 or the application of the limitations set forth in Section 5.6. In addition, any Excess Deferral Amounts and income allocable thereto shall be distributed to Participants claiming such amounts in accordance with Section 5.7 hereof. For purposes of this Plan, the term "Excess Deferral Amount" means the amount of Pretax Deferrals for a calendar year that the Participant allocates to this Plan pursuant to the claim procedure set forth in Section 5.7. Section 5.2 Election Procedures. Subject to the provisions of Section 5.1, each Employee expected to become a Participant within the next ninety (90) days shall make the election described in Section 5.1 by completing an election form obtained from the Committee. The Employee shall return the election form to the Committee within such time period as the Committee may prescribe, provided that such time period shall not be more than thirty (30) days immediately preceding the Entry Date on which he expects to become a Participant. The foregoing notwithstanding, an Employee who transfers into employment where he becomes eligible to participate in the Plan on the next Entry Date but whose transfer date is fewer than thirty (30) days preceding the next Entry Date shall be entitled to make an election under this Section 5.2 in accordance with such rules as the Committee may prescribe. Such election shall be effective as of the Entry Date coinciding with or next following the date he first performs an Hour of Service for the Employer or a participating Affiliate after the transfer. All elections hereunder shall apply to Compensation earned during the calendar months which follow the elections. Section 5.3 Election Changes. Subject to the provisions of Section 5.1, elections made in accordance with Section 5.2 shall remain in effect until a new election to increase or decrease the deferral percentage is filed with the Committee within such time 29 37 period as the Committee may prescribe, provided that such time period shall not be more than thirty (30) days prior to the Entry Date on which the Participant desires the change to become effective. Any new election so filed shall become effective on such Entry Date and shall remain in effect until changed under the rules of this Section 5.3. No Participant shall be entitled to change his elections made under Section 5.2 more frequently than once every six (6) months from the effective date of his prior election. Section 5.4 Discontinuance of Pretax Deferrals. Subject to the provisions of Section 5.1, a Participant may discontinue his Pretax Deferrals under the Plan at any time by filing a written notice with the Committee within such time period as the Committee may prescribe, and such discontinuance shall become effective as of the first payroll period practicable following the receipt by the Committee of the Participant's request for discontinuance. Such Participant shall be eligible to resume making Pretax Deferrals to the Plan by filing a new election form with the Committee within such time period as the Committee may prescribe, provided that such time period shall not be more than thirty (30) days prior to the Entry Date on which he desires his election to become effective. Section 5.5 Salary Reduction. Each Participant who makes an election described in Section 5.2 to have the Employer contribute a percentage of his Compensation as Pretax Deferrals under this Plan shall, by the act of making such election, agree to have his Compensation reduced by an equivalent percentage for so long as the election remains in effect. Section 5.6 Limitations on Pretax Deferrals. (A) New Limits. Subject to the provisions of Section 4.3(A)(3), prior to the beginning of each Plan Year, and at such other time or times throughout the Plan Year as the Committee may determine, the Committee shall test elections under Section 5.2 in order to determine whether the Average Actual Deferral Percentage for the Eligible Participants who are Highly Compensated Employees exceeds the Average Actual Deferral Percentage of Eligible Participants who are Non-Highly Compensated Employees by more than the greater of: (1) One hundred twenty-five percent (125%), or (2) The lesser of (i) two hundred percent (200%) of the Average Actual Deferral Percentage for Eligible Participants who are Non-Highly Compensated Employees, or (ii) the Average Actual Deferral Percentage for Eligible Participants who are Non-Highly Compensated Employees plus two (2) percentage points, or such lesser amount as the Secretary of the Treasury shall prescribe to prevent the multiple use of this alternative limitation with respect to any Highly Compensated Employee. The testing made under this Section 5.6 shall be based on a Participant's Compensation while a Participant. This Section 5.6 and Section 5.7 are intended to 30 38 implement the restrictions contained in Section 401(k) of the Code, and shall be construed and interpreted in accordance with that Section and Treasury Regulations promulgated thereunder. Any corrections to be made in order to reduce the amount in excess of the maximum permissible deferral percentage shall be made from Compensation to be earned for the remainder of the Plan Year. (B) Definitions. For purposes of this Article V, the following terms shall have the meaning set forth below: (1) "Actual Deferral Percentage" shall mean the ratio (expressed as a percentage) of Pretax Deferrals on behalf of the Eligible Participant for the Plan Year to the Eligible Participant's Compensation for the Plan Year. The Plan shall take into account a Participant's Pretax Deferrals under the actual deferral percentage test of Code Section 401(k)(3)(A) for a Plan Year only if such deferrals relate to Compensation that either would have been received by the Participant in Plan Year (but for the deferral election) or attributable to services performed by the Participant in the Plan Year and would have been received by the Participant within two and one-half months after the close of the Plan Year (but for the deferral election). Finally, the Plan shall take into account Pretax Deferrals of a Participant under the actual deferral percentage test of Code Section 401(k)(3)(A) for a Plan Year only if they are allocated to the Participant as of a date within that Plan Year. For this purpose, a Pretax Deferral is considered allocated as of a date within a Plan Year if the allocation is not contingent on participation or performance of services after such date and the Pretax Deferral is actually paid to the trust no later than twelve months after the Plan Year to which the deferral relates. (2) "Average Actual Deferral Percentage" shall mean the average (expressed as a percentage) of the Actual Deferral Percentages of the Eligible Participants as a group. (3) "Eligible Participant" shall mean any Participant who is otherwise authorized under the terms of the Plan to have Pretax Deferrals allocated to his Account for the Plan Year. (C) Special Rules - Aggregation. (1) For purposes of determining whether the Plan satisfies the actual deferral percentage test of Code Section 401(k), all Pretax Deferrals that are made under two or more plans that are aggregated for purposes of Code Section 401(a)(4) or 410(b) (other than Code Section 401(b)(2)(a)(ii)) are to be treated as made under a single plan, and that if two or more plans are permissively aggregated for purposes of Code Section 401(k), the aggregated plans must also satisfy Code Sections 401(a)(4) and 410(b) as though they were a single plan. (2) For purposes of this Article, the Actual Deferral Percentage for any Eligible Participant who is a Highly Compensated Employee for the Plan Year and who 31 39 is eligible to have Pretax Deferrals allocated to his Account under two or more plans or arrangements described in Section 401(k), 408(k) or 403(b) of the Code that are maintained by the Employer or an Affiliate shall be determined as if all such Pretax Deferrals were made under a single arrangement. (3) For purposes of determining the Actual Deferral Percentage of a Participant who is a Highly Compensated Employee, the Pretax Deferrals and Compensation of such Participant shall include the Pretax Deferrals and Compensation of Family Members, and such Family Members shall be disregarded in determining the Actual Deferral Percentage for Participants who are Non-Highly Compensated Employees. (4) The determination and treatment of the Pretax Deferrals and Actual Deferral Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (D) Non-elective contributions and/or matching contributions may be treated as elective contributions only if they meet the conditions described in Treasury Regulation Section 1.401(k)-1(b)(5). Section 5.7 Distribution of Excess Deferral Amounts - -Deferrals Over $7,000. (A) General. In the event that a Participant's Pretax Deferrals for any calendar year, when aggregated with the amounts he defers during the same year under any other plans or arrangements described in Sections 401(k), 408(k) or 403(b) of the Code, exceed the seven thousand dollar ($7,000) limit set forth in Section 5.1, then upon a written claim from the Participant, the Plan shall distribute such Excess Deferral Amount, along with income and minus any loss allocable to such excess, to the Participant by no later than the April 15 following the calendar year in which such Excess Deferral Amount was made, notwithstanding his election under Section 5.2 or the application of the limitations set forth in Section 5.8. The Plan shall treat Excess Deferral Amounts as Annual Additions. The Taxable Compensation of a Participant whose Pretax Deferrals have been reduced shall be increased by the amount of the excess. The Plan shall distribute the excess to the Participant as provided in the paragraphs above, notwithstanding his election under Section 5.2. The Pretax Deferrals of a Participant shall be further limited by the limits set forth in Sections 5.6 and 7.1. (B) Determination of Income or Loss. Excess Deferral Amounts shall be adjusted for income or loss. The income or loss allocable to such excess may be calculated on the same reasonable basis that the Plan calculates and allocates income and loss for normal plan account purposes, or income or loss may be determined by multiplying the income or loss allocable to the Participant's Deferred Income Account for the calendar year 32 40 by a fraction, the numerator of which is the Excess Deferral Amounts on behalf of the Participant for the preceding calendar year and the denominator of which is the Participant's account balance attributable to Pretax Deferrals on the last day of the preceding calendar year. (C) Claims. The Participant shall submit a written claim to the Committee no later than March 1 following the year in which the Deferrals are made. The claim must specify the amount of Excess Deferral Amounts for the preceding calendar year and it must be accompanied by the Participant's written statement that if such amounts are not distributed, such Excess Deferral Amount, when added to amounts he deferred under other plans or arrangements described in Sections 401(k), 408(k), or 403(b) of the Code, will exceed the limit imposed on the Participant by Section 402(g) of the Code for the year in which the deferral occurred. Section 5.8 Distribution of Excess Contributions - Contributions Over Nondiscrimination Limits. (A) General. Notwithstanding any other provision of the Plan, in the event there are Excess Contributions in any Plan Year, then unless sufficient Qualified Nonelective Contributions are made by the Employer in such Plan Year to eliminate the Excess, the Committee shall reduce the Excess, plus any income and minus any loss allocable to such Excess by distributing the Excess Contributions to Eligible Participants who are Highly Compensated Employees who exceeded the limit until the excess has been eliminated. The Employer shall distribute Excess Contributions to Eligible Participants who are Highly Compensated Employees by first reducing the highest Actual Deferral Percentage ("ADP") of the Highly Compensated Employee(s) until the ADP test set forth under Section 5.6 is met or until such Highly Compensated Employee(s)' ADP is reduced to equal the next highest ADP of any Highly Compensated Employee. If the reduction in the maximum deferral percentage of a Highly Compensated Participant as described in the preceding paragraph results in an Excess Contribution then the Excess Contributions and income allocable thereto shall be distributed no later than the last day of each Plan Year to Participants on whose behalf such Excess Contributions were made for the preceding Plan Year. Amounts distributed under this Section 5.8 shall first be treated as distributions from the Participant's Pretax Deferral Account and shall be treated as distributed from the Participant's Qualified Employer Contribution Account only to the extent such Excess Contributions exceed the balance in the Participant's Deferred Income Account. The Plan shall treat Excess Contributions as Annual Additions. The Taxable Compensation of a Participant whose Actual Deferral Percentage has been reduced shall be increased by the amount of his distribution. The Plan shall distribute the Excess to the Participant as provided in the paragraphs above, notwithstanding his election under Section 5.2. 33 41 The Pretax Deferrals of a Participant shall be further limited by the limits set forth in Sections 5.1 and 7.1. (B) Excess Contributions. For purposes of this Article, "Excess Contributions" shall mean Pretax Deferrals made by Participants who are Highly Compensated Employees in excess of the limits set forth under Section 5.6 and Section 401(k)(8)(B) of the Code. (C) Determination of Income and Loss. Excess Contributions shall be adjusted for income or loss. The Plan may determine the income or loss allocable to Excess Contributions on the same reasonable basis that it determines income and loss for normal plan accounting purposes, or the Plan may determine the income or loss allocable to Excess Contributions by multiplying the income or loss allocable to the Participant's Pretax Deferrals for the Plan Year by a fraction, the numerator of which is the Excess Contribution on behalf of the Participant for the preceding Plan Year, and the denominator of which is the sum of the Participant's Account balance attributable to Pretax Deferrals on the last day of the preceding Plan Year. The income allocable to Excess Contributions include both income for the Plan Year for which the Excess Contributions were made and income for the period between the end of the Plan Year and the date of distribution. The Plan shall treat Excess Contributions as Annual Additions. The Taxable Compensation of a Participant whose Actual Deferral Percentage has been reduced shall be increased by the amount of his distribution. The Plan shall distribute the Excess to the Participant as provided in the paragraphs above, notwithstanding his election under Section 5.2. The Pretax Deferrals of a Participant shall be further limited by the limits set forth in Sections 5.1 and 7.1. (D) Excess Contributions. For purposes of this Article, "Excess Contributions" shall mean Pretax Deferrals made by Participants who are Highly Compensated Employees in excess of the limits set forth under Section 5.6 and Section 401(k)(8)(B) of the Code. (E) Determination of Income and Loss. Excess Contributions shall be adjusted for income or loss. The Plan may determine the income or loss allocable to Excess Contributions on the same reasonable basis that it determines income and loss for normal plan accounting purposes, or the Plan may determine the income or loss allocable to Excess Contributions by multiplying the income or loss allocable to the Participant's Pretax Deferrals for the Plan Year by a fraction, the numerator of which is the Excess Contribution on behalf of the Participant for the preceding Plan Year, and the denominator of which is the sum of the Participant's Account balance attributable to Pretax Deferrals on the last day of the preceding Plan Year. The income allocable to Excess Contributions include both income for the Plan Year for which the Excess Contributions were made and income for the period between the end of the Plan Year and the date of distribution. 34 42 Section 5.9 Reduction for Excess Deferrals Distributed. The amount of Excess Contributions to be distributed or recharacterized under the Plan shall be reduced by Excess Deferral Amount previously distributed for the taxable year ending in the same Plan Year and Excess Deferral Amount to be distributed for a taxable year will be reduced by Excess Contributions previously distributed or recharacterized for the Plan beginning in such taxable year. Section 5.10 Transfer of Pretax Deferrals. The amount to be contributed to the Plan because of a Participant's election shall be transferred to the Trust Fund at such time as the Employer may prescribe, whether on a monthly, quarterly or semi- annual basis, and in no event later than thirty (30) days after the end of the Plan Year. Section 5.11 Crediting of Pretax Deferrals. The amounts contributed to the Trust on behalf of a Participant shall be credited within a reasonable time after Pretax Deferrals are transferred to the Trust, to the Pretax Deferral Account of each Participant on whose behalf they were made. If the Trustee places the assets of any investment fund in a mutual fund or in any other pooled investment vehicle, then the amounts contributed under this Article shall be credited on the date such amounts are applied to purchase shares in the mutual fund or other pooled investment. Section 5.12 Ordering of Excess Contribution Adjustments. In the event that adjustments are required to avoid exceeding the limitations of any provision in this Plan, then adjustments shall be made to meet those requirements in the following order: (A) Section 7.1; (B) Section 5.1, paragraph one and Section 5.7 (Excess Deferral Amount or excess over the $7,000 limit); (C) Sections 5.6 and 5.8 (Excess Contributions); (D) Sections 4.3 and 4.4 (Excess Aggregate Contributions); and (E) Any other adjustments required hereunder. Section 5.13 Restrictions on Distributions. Subject to the provisions of Section 18.3(B), distributions from the Pretax Deferral Account and Qualified Employer Contribution Account of a Participant who is a Non-Highly Compensated Employee, in accordance with the remaining provisions of this Plan, may not be made earlier than upon termination of employment, death, Disability, or in the following circumstances. (A) Termination of the Plan without the establishment of another defined contribution Plan; (B) The disposition by the Employer to an unrelated corporation of substantially all of the assets (within the meaning of Section 409(d)(2) of the Code) used in a 35 43 trade or business of the Employer if the Employer continues to maintain this Plan after the disposition, but only with respect to Employees who continue employment with the corporation acquiring such assets; (C) The disposition by the Employer to an unrelated entity of the Employer's interest in a subsidiary (within the meaning of Section 409(d)(3) of the Code) if the Employer continues to maintain this Plan, but only with respect to Employees who continue employment with such subsidiary; (D) The Participant's attainment of age fifty-nine and a half (59-1/2) (as provided in Section 8.11). (E) The hardship of the Participant (as provided in Section 8.13); or (F) Distributions to an alternate payee pursuant to a qualified domestic relations order (as provided in Section 18.3). Section 5.14 Multiple Use of Alternative Limitations. The Plan hereby provides the test for multiple use of alternative limitation by incorporating by reference the provisions of Treasury Regulation Section 1.401(m)-2(b). END OF ARTICLE V 36 44 ARTICLE VI PARTICIPANTS' VOLUNTARY CONTRIBUTIONS Section 6.1 Participant Contributions. This Plan neither requires nor permits Participants to make voluntary nondeductible contributions. Section 6.2 Rollover Contributions. The Plan does not permit rollover contributions to the Plan. The foregoing notwithstanding, effective for all plan distributions made on and after January 1, 1993, the Trustee shall comply with a Participant's request to directly transfer all or a portion of the amount of a distribution that is not less than Five Hundred Dollars ($500) from this Plan to the trustee of an individual retirement account or to another qualified defined contribution plan or a Code Section 403(b) annuity that accepts rollovers, as designated by the Participant, provided that the Participant furnishes the Trustee with all of the information necessary to effectuate the transfer. In the absence of an election for a direct transfer, in the event the Trustee does not have sufficient information to effectuate the transfer, or upon a Participant's direction, the Trustee shall automatically withhold twenty percent (20%) from the amount of the distribution to the Participant in accordance with the requirement of the Unemployment Compensation Amendments of 1992. END OF ARTICLE VI 37 45 ARTICLE VII LIMITATIONS ON CONTRIBUTIONS Section 7.1 Limitations on Annual Addition. Notwithstanding anything to the contrary contained in this Plan, the total Annual Additions under this Plan to a Participant's Accounts for any Limitation Year shall not exceed the lesser of: (A) Thirty thousand dollars ($30,000) or, if larger, one-fourth (1/4) of the defined benefit dollar limitation set forth in Section 415(b)(1) of the Code as in effect for the Limitation Year; or (B) Twenty-five percent (25%) of the Participant's Taxable Compensation for the Limitation Year. The compensation limitation referred to in Section 7.1 shall not apply to: (1) Any contribution for medical benefits (within the meaning of Section 419A(F)(2) of the Code) after termination of employment which is otherwise treated as an Annual Addition, or (2) Any amount otherwise treated as an Annual Addition under Section 415(1)(1) of the Code. Section 7.2 "Annual Addition" Defined. For purposes of this Section, the term "Annual Addition" with respect to any Participant for a Limitation Year shall mean: (A) Employer contributions allocated to the Participant's Employee Stock Ownership Account, Employer Matching Account and Qualified Employer Contribution Account (if any); (B) Forfeitures allocated to the Participant's Employee Stock Ownership Account and Employee Matching Account, (C) Pretax Deferrals and other Employee contributions (if any), (D) Amounts allocated, after March 31, 1984, to an individual medical account, as defined in Section 415(1)(2) of the Code, which is part of a pension or annuity plan maintained by the Employer, are treated as annual additions to a defined contribution plan. Also amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits, allocated to the separate account of a key employee, as defined in Section 419A(d)(3) of the Code, under a welfare benefit fund, as defined in Section 419(e) of the Code maintained by the Employer are treated as annual additions to a defined contribution plan. 38 46 For this purpose, any excess amount applied under this Plan in the limitation year to reduce Employer contributions will be considered annual additions for such limitation year. (E) Excess Deferrals as provided in Section 5.7 and Excess Contributions as provided in Section 5.8, and (F) Any Annual Additions under any plan maintained by an affiliated employer (as such term is modified by Section 415(h) of the Code.) The foregoing notwithstanding, if the Plan allocates no more than one-third (1/3) of the ESOP Contributions for a Limitation Year to Participants who are Highly Compensated Employees, Annual Addition with respect to any Participant for such Limitation Year shall not include ESOP Contributions used to repay interest on an Exempt Loan or forfeitures of Employer Stock acquired with proceeds of an Exempt Loan. Section 7.3 Other Defined Contribution Plans. If the Employer is contributing to any other defined contribution plan, as defined in Section 414(i) of the Code, for its Employees, some or all of whom are Participants of this Plan, then any such Participant's Annual Addition shall be aggregated with amounts credited to the Participant under the other plan for purposes of applying the limitations and reducing allocations under this Plan. In the event an adjustment is necessary hereunder in order to comply with the limitations set forth under this Subsection, the contributions to be made on behalf of a Participant in any Limitation Year under the other defined contribution plan shall be reduced in an amount sufficient to ensure that the sum of the allocations to the Participant under this Plan and under such other defined contribution plan for the Limitation Year complies with such limitations. Section 7.4 Combined Plan Limit. If the Employer maintains both a defined contribution plan and a defined benefit plan qualifying under Section 401(a) or 403(a) of the Code, the sum of the defined contribution plan fraction and the defined benefit plan fraction for any Limitation Year shall not exceed 1.0 as provided in Section 415 of the Code. To the extent that such sum exceeds 1.0, then (A) The contributions made to this Plan shall be reduced to the extent necessary so that the sum of the defined contribution plan fraction and the defined benefit plan fraction for any Limitation Year shall not exceed 1.0 as provided in Section 415 of the Code. The Committee shall reduce the contributions to the Plan, upon the Employer's direction, by adjusting the numerator of the defined contribution plan fraction as follows: An amount of the Employer contribution and forfeitures to any defined contribution plan of the Employer which will not result in any Participant exceeding the limitations on Annual Additions shall be retained in a suspense account to be allocated as part of the Employer contribution as of the next following Anniversary Date. The suspense account shall not receive allocations of investment gains and losses and other income. If a suspense account is 39 47 in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to Participants' Accounts before any Employer or Employee contributions may be made to the Plan for that Limitation Year. Excess amounts may not be distributed to Participants or former Participants. If the Plan is terminated while any balance exists in the suspense account, the balance of the suspense account shall revert to the Employer. (B) The defined benefit plan fraction for any year is a fraction, the numerator of which is the projected annual benefit of the Participant under the Plan (determined as of the close of the Limitation Year), and the denominator of which is the lesser of: (1) The product of 1.25 multiplied by the maximum dollar limitation in effect under Section 415(b)(1)(A) of the Code for such Year; or (2) The product of 1.4 multiplied by the amount which may be taken into account under Section 415(b)(1)(B) of the Code for such Year. (C) The defined contribution plan fraction for any year is a fraction, the numerator of which is the sum of the Annual Additions to the Participant's Account as of the close of the Limitation Year and the denominator of which is the sum of the lesser of the following amounts determined for such year and each prior year of service with the Employer: (1) The product of 1.25 multiplied by the dollar limitation in effect under Section 415(c)(1)(A) of the Code for such Year (determined without regard to Section 415(c)(6) of the Code); or (2) The product of 1.4 multiplied by the amount which may be taken into account under Section 415(c)(1)(B) of the Code for such Year. (D) In the event that the Plan and a pre-TRA '86 defined benefit plan are aggregated, a permanent adjustment shall be made to the numerator of the defined contribution fraction to ensure that the sum of the defined contribution fraction and the defined benefit fraction does not exceed 1.0 as of the effective date of the Tax Reform Act of 1986. Section 7.5 Adjustment of Excess Annual Addition. As soon as administratively feasible after the end of the Limitation Year, the maximum permissible amounts for the Limitation Year will be determined on the basis of the Participant's actual Compensation for Limitation Year. If pursuant to this determination or as a result of the allocation of forfeitures, the contributions (or forfeitures) made to the Plan for any Limitation Year exceeds the Annual Addition applicable for the Participant, the Committee shall dispose of the amount of excess by reducing Employer contributions (if any) allocated to such Participant by the amount of the excess and reallocate the excess, first Employer matching contributions, then ESOP Contributions, finally Qualified Nonelective Contributions (if any) 40 48 among Participants who are eligible to Employer contributions for the Plan Year. If the reallocation of the excess shall cause the limitations of Code Section 415 to be exceeded with regard to any Participant, then the Plan shall place the excess amount in a suspense account for the Plan Year and reallocate such excess in the following Plan Year to all of the Participants. The suspense account shall not receive allocations of investment gains and losses and other income. If a suspense account is in existence at any time during a Limitation Year, all amounts in the suspense account must be allocated and reallocated to Participants' Accounts before any Employer or any Employee contributions may be made to the Plan for the Limitation Year. Excess amounts may not be distributed to Participants or former Participants. If the Plan is terminated while any balance exists in the suspense account, the balance of the suspense account shall revert to the Employer. If, after the adjustments provided above are made, a Participant still has excess Annual Additions in any Plan Year, the excess Pretax Deferrals of the Participant shall automatically be paid to him along with his regular paycheck, notwithstanding the Participant's election under Section 5.2. The foregoing notwithstanding, the Plan may adjust excess Annual Additions as provided under this Section 7.5 only in situations where excess capital Annual Additions may result from contributions based on estimates on annual Compensation or the allocation of forfeitures. Section 7.6 Interpretation. This Article VII is intended to implement the restrictions contained in Section 415 of the Code, and shall be construed and interpreted in accordance with that Section and Treasury Regulations promulgated thereunder. END OF ARTICLE VII 41 49 ARTICLE VIII VESTING AND PAYMENT OF BENEFITS Section 8.1 Vesting Rights. No Participant shall have any vested right or interest, or any right to payment, of any assets of the Trust Fund, except as herein provided. Neither the making of any allocations nor the credit of any Account of a Participant in the Trust Fund shall vest in any Participant any right, title, or interest in or to any assets of the Trust Fund. Section 8.2 Vesting of Accounts. The interest of a Participant in his Pretax Deferral Account and Qualified Employer Contribution Account (if any) shall be fully vested in him at all times. The interest of a Participant in his Employee Stock Ownership Account and Employer Matching Account shall be contingent, except as such interest becomes vested under the following provisions of this Section: (A) The interest of each Participant in his Employee Stock Ownership Account and Employer Matching Account shall fully vest in him or his Beneficiary upon the happening of any of the following events: (1) His attainment of Early Retirement Age; (2) His attainment of the earlier of Normal Retirement Age under the Plan or the later of age sixty- five (65) or the fifth (5th) anniversary of the date the Participant commences participation in the Plan; (3) His death while employed by the Employer; (4) His Disability while employed by the Employer; or (5) Termination or partial termination (as defined in Treasury Regulations, rulings or cases) of the Plan. (B) Prior to January 1, 1995, the interest of a Participant in his Employee Stock Ownership Account and Employer Matching Account became fully vested after five (5) or more years of Vesting Service. Effective January 1, 1995 subject to the provisions of paragraph (A), the interest of a Participant in his Employee Stock Ownership Account and Employer Matching Account shall vest in accordance with the schedule set forth below:
Years of Nonforfeitable Vesting Service Percentage --------------- -------------- 1 0% 2 0% 3 20%
42 50
Years of Nonforfeitable Vesting Service Percentage --------------- -------------- 4 40% 5 60% 6 80% 7 or more years 100%
Section 8.3 Payment of Benefits. Upon the termination of employment, retirement, death, or Disability of a Participant, the Trustee shall distribute such terminated Participant's vested benefits to him at such time as provided under Sections 8.5, 8.6 and 8.7. To the extent that the Plan has an outstanding Exempt Loan, the Plan shall distribute the Participant's benefits which are invested in Employer Stock in the form of Employer Stock or cash, as the Participant may elect. To the extent that the Plan does not have an outstanding Exempt Loan, the Plan may distribute the Participant's benefits which are invested in Employer Stock only in the form of Employer Stock. The Committee in its sole discretion, which shall be exercised in a uniform and nondiscriminatory manner, may distribute the Participant's benefits in cash, unless the Participant elects to receive his benefits in the form of stock. Each Participant receiving his benefits in the form of Employer Stock may have a right to a put option as provided in Section 8.10 below. The benefits payable to the Participant which are invested in other than Employer Stock shall be distributed in cash. If more than one class of Employer Stock is in the Trust, the Trustee shall distribute such different classes of Employer Stock on a non-discriminatory basis. Section 8.4 Form of Payment. (A) Normal Form of Payment. Subject to the provisions of Section 8.5 and a Participant's election to receive the vested interest he has in his Accounts in one of the forms provided in Section 8.4(B) below, the Plan shall distribute the Participant's vested account balance to him in the form of substantially equal payments on a monthly, quarterly or annual basis, as the Participant may elect. Upon the Participant's termination of employment or retirement, the Committee may segregate the value of his account balance as of the date of his termination of employment or retirement and hold such amounts in a segregated account. Upon the direction of the Committee, the assets held under such segregated account may be commingled with the general assets of the Trust Fund for investment purposes. A Participant who is receiving his vested account balance in installment form shall specify the number of years over which the installments will be paid. In no event shall the installment payout period exceed five (5) years. The foregoing notwithstanding, the Committee may extend the distribution period for any Participant whose vested account balance under the Plan is in excess of five hundred thousand dollars ($500,000) by one (1) year, up to a maximum of five (5) years, 43 51 for each one hundred thousand dollars ($100,000) (or fraction thereof) by which his vested account balance exceeds five hundred thousand dollars ($500,000). The segregated account of a Participant who is receiving his benefits in the form of installments shall be revalued throughout the installment period, and the amount of each installment shall equal the undistributed portion of the Participant's account balance as of the first day of the year multiplied by a fraction, the numerator of which is one and the denominator of which is the number of installments (including the current one) which remains to be made. (B) Optional Forms of Payment. In lieu of receiving benefits in the form of installments as provided above, a Participant may elect to receive his benefits in one of the forms provided below: (1) Lump Sum. A Participant may elect to receive his vested account balance in the form of a lump sum. (2) Other Options. A Participant may elect to receive his vested account balance in any other form the Committee may make available from time to time under the Plan. The foregoing notwithstanding, no Participant may elect to receive his Plan benefits in the form of an annuity. Section 8.5 Payment of Small Amounts. Subject to the provisions of Article XX and any other provision of the Plan notwithstanding, if the vested account balance payable hereunder to a Participant who terminates employment with the Employer does not exceed Three Thousand Five Hundred Dollars ($3,500), the Committee shall direct that such benefit be paid in a lump sum as soon as practicable and in no event later than the close of the second Plan Year following the Plan Year in which the terminated Employee ceased being an active Participant. If the Plan has an outstanding Exempt Loan at the time of the distribution, then prior to such payment, the Committee shall obtain from the Participant his written election to receive the benefits which are invested in Employer Stock in the form of Employer Stock or cash. In the event that the Committee is unable to obtain such election after reasonable efforts, the Plan shall distribute benefits which are invested in Employer Stock in the form of Employer Stock, and the benefits which are invested in Investment Funds other than Employer Stock in the form of cash. If the Plan does not have an outstanding Exempt Loan at the time of the distribution, then the Plan shall distribute the Participant's benefits invested in Employer Stock in the form of Employer Stock, without prior election by the Participant. Upon the distribution to such Participant of the entire vested interest he has in his Accounts, the Plan shall forfeit the non-vested portion of his Accounts as of the date of the distribution. 44 52 In the event such Participant is rehired into employment where he is again eligible to participate in the Plan before the Participant has incurred five (5) consecutive Breaks in Service, the non-vested portion of his Employee Stock Ownership Account and Employer Matching Account which was previously forfeited shall be reinstated as of the date of his reemployment. The Employer may reinstate the Participant's non-vested interest by a special contribution to the Plan, by using the current year's forfeitures or by applying a combination of both. The amount of any subsequent distribution from such Accounts prior to the time the Participant has become fully vested shall be determined by adding to such Accounts his prior distribution, multiplying the total by his vested percentage, and then subtracting the amount of his prior distribution. Such Participant's Accounts shall be valued as of the Valuation Date immediately preceding his termination of employment, as provided in Section 11.2(B). The foregoing notwithstanding, the Committee shall not direct the payment of an Employee's benefit in a lump sum on or subsequent to such Participant's benefit commencement date without the consent of such Participant and his spouse. Section 8.6 Time of Payment of Benefits. (A) General Rule. Unless a Participant elects otherwise in accordance with Subsection (C) hereof and subject to the requirements of Section 401(a)(14) and Treas. Reg. Section 1.401(a)-14, the payment of benefits under the Plan to the Participant shall begin as soon as it is administratively practicable after the Participant terminates employment and in any event not later than one (1) year after the Plan Year in which the Participant terminates employment on account of retirement, death or Disability, or if the Participant terminates employment for any other reason and the Participant is not reemployed by the Employer at the end of the fifth (5th) Plan Year following the Plan Year of such termination of employment, payment of benefits shall begin not later than one (1) year after the close of the fifth (5th) Plan Year following the Plan Year in which the Participant terminated employment. The foregoing notwithstanding, to the extent a Participant's Accrued Benefits include any Employer Stock acquired with the proceeds of an Exempt Loan, such Employer Stock or amounts attributable to such Employer Stock shall not be distributed until the close of the Plan Year in which the Exempt Loan is repaid in full. If the Participant terminates employment for reasons other than death, Disability or retirement and he is employed by the Employer as of the last day of the fifth (5th) Plan Year following the Plan Year of such termination, payment of benefits to the Participant, prior to any subsequent termination of employment, shall be in accordance with Sections 8.5 or 8.7 of the Plan. 45 53 (B) Age 70-1/2 Restriction. If the Participant has attained age seventy and one-half (70-1/2) in the calendar year he terminates from employment, then distribution of his benefits shall commence not later than the April 1 following the close of that calendar year. (C) Deferral of Receipt of Benefits. The foregoing notwithstanding, prior to the time benefits payable to a Participant are distributed to him, a Participant (regardless of whether or not he is a five percent (5%) owner of the Employer) who has not attained age seventy and one-half (70-1/2) in the calendar year of his termination of employment or in the calendar year in which benefits become distributable to him, as the case may be, may elect to defer the receipt of such benefits. Such Participant shall file a notice to that effect with the Committee on such form and in accordance with such rules as the Committee may prescribe. In no event, however, shall the Plan distribute or commence to distribute benefits to such Participant later than the April 1 following the calendar year in which he attains age seventy and one-half (70-1/2). (D) Delay in Determination of Benefits. If for any reason the amount which is required to be paid cannot be ascertained on the date payment would be due under this Section, payment or payments shall be made not later than sixty (60) days after the earliest date on which the amount of such payment can be ascertained. Section 8.7 Distribution of Vested Account Balance Prior to Normal Retirement Date. Subject to the provisions of Section 8.6(A) and Article XX, if the value of a Participant's vested Accrued Benefit is in excess of Three Thousand Five Hundred ($3,500), then the written request of the Participant and the written and notarized consent of his spouse (if he is married at time of the commencement of the distribution of benefits) are required before the Plan can distribute benefits to the Participant or his spouse prior to the Participant's Normal Retirement Date. Such written request by the Participant shall also specify the Participant's election to receive his benefits in the form of a lump sum and his election to receive the benefits which are invested in Employer Stock in the form of Employer Stock or cash. (A) The Plan must provide the Participant with a notice of his right to defer the receipt of the distribution no fewer than thirty (30) and no more than ninety (90) days before the date of the distribution. (B) The consent of the Participant must not be made: (1) Before he receives the notice, or (2) More than ninety (90) days before the date of the distribution. (C) This consent requirement shall not apply in the case of the: (1) Termination of the Plan, provided neither the Employer nor any Affiliate maintain any other defined contribution plan, other than an employee stock 46 54 ownership plan. If the Participant does not consent to an immediate distribution from this Plan, his benefit shall be transferred to the other defined contribution plan, or (2) Death of the Participant. (D) The foregoing notwithstanding, effective January 1, 1994, if a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than thirty (30) days after the notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (1) The plan administrator clearly informs the Participant that the Participant has a right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) The Participant, after receiving the notice, affirmatively elects a distribution. In the absence of an election, or if the Plan does not have an outstanding Exempt Loan at the time of the distribution, subject to a Participant's right to defer distribution of his benefits as provided in Section 8.6(C), the Plan shall distribute the Participant's benefits to him in installments of Employer Stock with respect to the benefits which are invested in Employer Stock, and in installments of cash with respect to the benefits which are invested in Investment Funds other than Employer Stock. The Plan shall make such distributions only as provided in Section 8.6 over a period not to exceed five (5) years. If a Participant requests a lump sum distribution, then upon such request the Committee shall direct the Trustee to make a lump sum distribution to the Participant of his vested account balance as practicable and in no event later than the close of the second Plan Year following the Plan Year in which the terminated Participant ceased being an active Participant. Upon the distribution of benefits to such Participant, the Plan shall forfeit the non-vested portion of his Employee Stock Ownership Account and Employer Matching Account as of the date of the distribution. In the event the Participant elects to receive his vested benefit in the form of installments, the Plan shall forfeit the non-vested portion of his Employee Stock Ownership Account and Employer Matching Account at the same time that the Plan distributes his first installment to him. The foregoing notwithstanding, the non-vested portion of the Participant's interest in Employer Stock withdrawn from a suspense account shall be forfeited only after the forfeiture of other assets in the Account. If interests in more than one class of Employer Stock have been allocated to the Participant's Accounts, the Participant shall be treated as forfeiting the same portion of each such class. 47 55 Such Participant's Accounts shall be valued of the Valuation Date immediately preceding the date of distribution, as provided in Section 11.2(B). In the event a terminated Participant who is not fully vested in his Employee Stock Ownership Account and Employer Matching Account and who receives a distribution of his entire vested benefit prior to his Normal Retirement Date, as provided in Section 8.5 or this Section, is rehired before he has incurred five (5) consecutive Breaks in Service, the portion of such Participant's Employee Stock Ownership Account and Employer Matching Account which was forfeited upon the distribution of his vested interest shall be reinstated as of the date of his reemployment. The Employer may reinstate the Participant's non-vested interest by making a special contribution to the Plan, by using the current year's forfeitures, or by a combination of both. The amount of any subsequent distribution from such Accounts prior to the time such Participant has become fully vested shall be determined by adding to such Account his prior distribution, multiplying the total by his vested percentage, and then subtracting the amount of his prior distribution. Section 8.8 Maximum Period of Payout. (A) Required Lifetime Distribution. The Plan shall distribute a Participant's benefits in such amounts and at such times that the present value of the death benefits payable to his Beneficiaries is incidental to the primary purpose of distributing benefit funds to the Participant. The death benefits payable to a Participant's Beneficiary(s) shall be incidental if the Plan distributes the Participant's benefits over: (1) A term not to exceed the life expectancy of the Participant or the joint life expectancies of the Participant and his Beneficiary, where the periodic payments to the Beneficiary are no greater than the periodic payments to the Participant in his lifetime, or (2) If the Plan provides for the payment of benefits in the form of an annuity, over the life of the Participant or the joint lives of the Participant and his Beneficiary. The Plan shall first make the determination of the period certain and the life expectancies at the time of the initial distribution, and the Plan may redetermine annually the life expectancies of the Participant and his spouse. (B) Required Distributions Upon Death. The following rules shall apply: (1) Where Participant Dies After Benefit Payments Have Commenced. If: (a) The Plan has commenced distributing benefits to a Participant, and 48 56 (b) The Participant dies before his entire benefits have been distributed to him, then the Plan shall distribute the remaining portion of such benefit to such Participant's Beneficiary in the form of a lump sum. (2) Where Participant Dies Before Benefit Payments Have Commenced. If a Participant dies before the Plan has commenced to distribute benefits to him, then the Plan shall distribute entire interest of the Participant to his Beneficiary in the form of a lump sum. The Plan shall distribute a Participant's death benefit to his Beneficiary as soon as practicable after the Participant's death, and in no event later than one (1) year from the date of his death, subject to the Beneficiary' selection to defer the receipt of his benefits as provided in Section 8.6. In the event the designated Beneficiary is the surviving spouse of the deceased Participant, distribution may begin the later of one (1) year from the date of the death of the Participant or the date on which the deceased Participant would have attained age seventy and one-half (70-1/2). The surviving spouse, however, may direct the commencement of payments within a reasonable time after the Participant's death. For purposes of the foregoing, any amount paid to the child or children of the deceased Participant shall be treated as if it has been paid to the surviving spouse if such amount will become payable to the surviving spouse upon such child or children reaching majority. Section 8.9 Claim for Benefits and Review of Denial. (A) Submission of Claim. As provided in Section 8.5, the Plan shall automatically distribute benefits in a lump sum to all Participants and Beneficiaries whose vested Accrued Benefit does not exceed three thousand five hundred dollars ($3,500) without any benefit claim by such Participants and Beneficiaries. All other Participants and Beneficiaries whose vested Accrued Benefit is in excess of three thousand five hundred dollars ($3,500) shall be entitled to a distribution from the Plan only by filing a written election with the Committee. In the absence of an election by such Participants or Beneficiaries, the Plan shall make the distributions within the time provided in Section 8.6. In the event a Participant or Beneficiary shall disagree with the benefits distributed to him, such Participant or Beneficiary shall state his disagreement to the Committee by filing a claim which requests a determination of the Committee on his entitlement to benefits and which states the basis for his claim, i.e., death, disability, retirement or other severance from service with the Employer. The claim must be dated and signed by the claimant or his authorized representative, and must contain the claimant's address, telephone number, and form of benefits elected. 49 57 (B) Denial of Claim. If a claim is wholly or partially denied, the Committee or its delegate shall, within ninety (90) days after receipt of the claim, provide written notice to the claimant setting forth the following in a manner calculated to be understood by the claimant: (1) The specific reason or reasons for the denial; (2) Specific reference to pertinent Plan provisions on which the denial is based; (3) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (4) Appropriate information as to the steps to be taken if the claimant wishes to submit his claim for review. If special circumstances require an extension of time for processing the claim, the Committee or its delegate may extend the period for an additional ninety (90) days by furnishing written notice of the extension to the claimant prior to the termination of the initial ninety (90) day period. If notice of denial of the claim is not furnished to a claimant within these periods, and the claim has not been granted within these periods, the claim shall be deemed denied for the purposes of review. (C) Appeal from Denial of Claim. A claimant may appeal the denial of a claim to the Committee by delivery to the Committee of a written application for review within sixty (60) days after receipt by the claimant of written notification of denial of the claim, or such longer period as the Committee may, in its discretion, permit. The written application shall be dated and signed by the claimant or his authorized representative and shall request a review of the prior denial of the claim. The claimant shall be entitled to a full and fair review of the denial of his claim, including the opportunity for the claimant or his authorized representative to review pertinent documents and to submit issues and comments in writing. (D) Committee Review of Appeal. The Committee shall make its decision on the appeal within sixty (60) days after receipt of the request for review, unless special circumstances (such as the need to hold a hearing, if in the Committee's determination a hearing is necessary or advisable) require an extension of time, in which case a decision shall be rendered as soon as possible, but not later than one hundred twenty (120) days after receipt of the request for review. If such an extension of time for review is required because of special circumstances, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension. If the decision on review is not furnished within these time limits, the claim shall be deemed denied on review. 50 58 The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to the pertinent Plan provisions on which the decision is based. (E) Authority. In determining whether to approve or deny any claim, the Committee shall exercise its discretionary authority to interpret the Plan and the facts presented with respect to the claim and its discretionary authority to determine eligibility for benefits under the Plan. Any approval or denial shall be final and conclusive upon all persons. (F) Review of Claims by Insurance Company. If at any time benefits under this Plan are provided or administered by an insurance company, the Committee may, in its discretion, designate the insurance company as the fiduciary for processing claims and reviewing appeals pertaining to benefits provided by such insurance company. Section 8.10 Option to Sell Employer Stock. (A) Grant of Put Options. Subject to the limitations set forth in Subsection (B) below concerning publicly traded stock (stock that is readily tradable on an established securities market), the Plan shall grant each Participant at the time it distributes shares of Employer Stock to such Participant, a put option to sell such shares to the Trustee. For purposes of this Section, the term "Participant" shall include a Participant's Beneficiary, donee, any other person (including an estate or its distributee) to whom Employer Stock passes by reason of the Participant's death, or the trustee of an individual retirement account, as defined in Section 408 of the Code, to which the Employer Stock is transferred. The option to sell shall: (1) Initially be exercisable during a period beginning on the date the Employer Stock is distributed to the Participant and ending sixty (60) days thereafter. Following the Anniversary Date of the Plan Year in which the option expires, as provided in the preceding sentence, and after the valuation of the Employer Stock as of said Anniversary Date has been made, the Committee shall notify each Participant who did not exercise his option hereunder of the value of the Employer Stock. Each such Participant shall then have an additional sixty (60) days from the date of said notification in which to exercise the option. At the expiration of the sixty (60) day period, the option shall terminate. The expiration dates provided hereunder shall in each case be extended by any time the holder is not able to exercise said option because the Trustee, or other person bound by the option, is prohibited from honoring it under applicable federal or state law. (2) Specify that the option shall be exercised by the Participant notifying the Trustee in writing that the option is being exercised. (3) Specify that the sales price for any shares sold hereunder shall be the fair market value of such shares determined as of: 51 59 (a) The date the Participant exercises the option if such Participant is a "Disqualified Person" as defined at Section 4975(e)(2) of the Code or "Party-in-Interest" as defined in Section 408(e) of the ERISA; or (b) The most recent preceding Anniversary Date if the Participant is not such a Disqualified Person or Party-in-Interest. (4) Specify that if the Participant shall exercise the option provided hereunder, the Trustee shall have the prior right to purchase the shares being sold and that in the event the Trustee shall decline to purchase such shares, the Employer shall be required to purchase the shares; provided, however, if the stock being sold were purchased with the proceeds of an Exempt Loan and, at the time said Exempt Loan was obtained it is known that federal or state law will be violated by the Employer's purchasing the shares under the option provided hereunder, then the option shall specify that said shares shall be sold, if the Trustee so declines, to a named third party who has substantial net worth at the time the loan is made and whose net worth is reasonably expected to remain substantial. (5) Specify that the sales price for any shares sold hereunder shall be paid in cash, or at the discretion of the Trustee, in substantially equal payments not less frequently than annually. If the distribution to the Participant constitutes a part of a total distribution, then the payment shall be made over a period not to exceed five (5) years. The first installment shall be paid not later than thirty (30) days after the Participant exercises the put option. The Trustee shall pay a reasonable rate of interest and provide adequate security on amounts not paid after thirty (30) days. If payment to the Participant constitutes a partial distribution, then the Trustee shall pay the Participant an amount equal to the fair market value of the Employer Stock repurchased no later than thirty (30) days after the Participant exercises the put option. (B) Publicly Traded Stock. The put option provided under this Section shall not be granted with respect to publicly traded stock unless such publicly traded stock is subject to a trading limitation at the time it is distributed to the Participant. However, should any publicly traded stock cease to be publicly traded within fifteen (15) months after distribution to a Participant, then such Employer Stock shall be subject to the option provisions provided hereunder for the remainder of said fifteen (15) month period and the Trustee shall notify each holder of such Employer Stock in writing on or before the tenth (10th) day after the date the Employer Stock ceases to be publicly traded that the put option provisions of this Section are applicable and shall also inform the holder of the terms of the option. In the event the Trustee gives notification after the ten (10) day period, then the number of days between the tenth (10th) day and the date on which notice is actually given shall be added to the duration of the put option. 52 60 The put option set forth under this Section shall not be granted under this Plan because the Employer Stock contributed to the Plan are publicly traded stock and are not subject to any trading limitations. (C) Restrictions on Put Option. The payment provisions set forth in this Section may not be restricted by the provisions of an Exempt Loan or other similar arrangement, including the Articles of Incorporation of the Employer, unless such restrictions are required under applicable state law. (D) Put Option Right Nonterminable. This Section shall continue to apply to shares of Employer Stock distributed under this Plan notwithstanding the fact that the Plan should at any time cease to be an employee stock ownership plan as defined in Section 4975 of the Code. Section 8.11 Participant Loans. The Plan shall not permit any loans to Participants or their Beneficiaries. Section 8.12 In-Service Distribution of Accounts at Age 59-1/2. Notwithstanding any other provisions in the Plan to the contrary, subject to the approval of the Committee, a Participant who has attained age fifty-nine and one-half (59-1/2) may elect, in accordance with such rules as the Committee may prescribe, to have the value of all of the vested interest he has his Accounts, valued as provided in Section 11.2, distributed to him on or after the date he attains age fifty-nine and one-half (59- 1/2) in the form of a single lump sum. Section 8.13 Hardship Withdrawals. (A) Amount. Effective April 1, 1995, upon the application of a Participant, the Plan Committee may (in a uniform and nondiscriminatory manner and subject to such policies as it may from time to time adopt) direct the Trustee to permit the Participant to make a cash withdrawal, in any whole percentage increment or dollar amount, of up to one hundred percent (100%) of the principal amount in his Pretax Deferral Account and Qualified Employer Contribution Account (if any). Earnings on the Participant's Pretax Deferrals and Qualified Nonelective Contributions are not subject to withdrawals. The amount of any distribution under this Section, however, shall generally be limited to the amount necessary to defray the hardship expense which is not reasonably available from other sources outside the Plan. For this purpose, the Plan Committee may accept the written statement of the Participant stating the nature of his immediate and heavy financial need, his financial resources, and the fact that the amount of withdrawal requested is not reasonably available from other sources. (B) Withdrawal Procedure. A Participant wishing to withdraw any amount hereunder shall do so by making application therefor which demonstrates to the satisfaction of the Plan Committee that the Participant is confronted by a financial hardship. Application 53 61 for withdrawals shall be made on such forms as the Plan Committee prescribes and may be made at any time, effective as of the first day of the month following at least thirty (30) days notice to the Plan Committee. Distribution of withdrawals shall be made in a lump sum as soon as is administratively possible following such date. Withdrawal distributions shall be based on the value of a Participant's Pretax Deferral Account and Qualified Employer Contribution Account (if any) as of the date provided in Section 11.2(B). The foregoing notwithstanding, if the amount of the withdrawal exceeds or exceeded three thousand five hundred dollars ($3,500), then the Plan must obtain the written request of the Participant for the withdrawal and the written consent of his spouse to the withdrawal no more than ninety (90) days prior to the date of the distribution. (C) Conditions for Hardship. The Plan Committee shall approve a request for hardship withdrawal only if the following conditions are met: (1) General. (a) The Participant requesting the withdrawal had an immediate and heavy financial need, and (b) The distribution is necessary to meet such need. (2) "Immediate and Heavy Financial Need" Defined. In order to show that he has an "immediate and heavy financial need," a Participant requesting a hardship withdrawal shall submit a written statement to indicate that: (a) The amount requested is needed for a necessity of life; (b) The expense cannot be postponed; and (c) The Participant has no other source of funds to use to offset the hardship. (3) "Necessary to Meet Financial Need" Defined. In order to show that a hardship expense is necessary to meet the financial need, the Participant shall submit written proof which indicates that the need cannot be satisfied: (a) Through reimbursement or compensation by insurance; (b) By reasonable liquidation of the Participant's assets without creating an additional immediate and heavy financial need; (c) By cessation of employee contributions to any qualified plan; 54 62 (d) Through all other distribution and nontaxable loans that the Participant can obtain from any qualified retirement plan, and (e) Through loans available from commercial sources on reasonable terms. In determining whether an amount is necessary to meet a need, all resources of the Participant's spouse and minor children that are reasonably available to the Participant shall be considered. In addition, in determining whether a hardship distribution is "necessary to meet the financial need," the Employer shall not be required to make an independent investigation of the Participant's financial status. An expense will not fail to be eligible for a hardship withdrawal merely because the expense was reasonably foreseeable or voluntarily incurred. (D) Definition of Hardship. For purposes of this Section, "financial hardship" includes, but is not limited to: (1) Purchase of a Participant's primary residence; (2) Tuition and related educational fees for post-secondary education of the Participant, the Participant's spouse or children for the next twelve (12) months; (3) Medical expenses including expenses necessary to secure medical care of the Participant, the Participant's spouse or children not otherwise covered by the Employer's medical insurance program; or (4) Expenses to prevent eviction from, or foreclosure on the mortgage on the Participant's principal residence. The foregoing notwithstanding, the Plan Committee shall not approve a hardship withdrawal for any of the reasons listed under this Paragraph (D) unless such hardship withdrawal complies with the applicable regulations promulgated by the Department of Treasury. Other than the withdrawals permitted under this Section and Section 8.12, there shall be no other types of withdrawals under the Plan. (5) Suspension From Making Contributions. Any Participant receiving a hardship withdrawal distribution from the Plan shall: (a) Be suspended from making Pretax Deferrals for twelve (12) months after receipt of the distribution; and (b) The maximum amount of Pretax Deferrals that a Participant is permitted to make in a taxable year following the year of the distribution is the 55 63 annual dollar limit in effect for the year, minus the Participant's Pretax Deferrals in the year the hardship withdrawal was made. In determining whether an amount is necessary to meet a need, all resources of the Participant's spouse and minor children that are reasonably available to the Participant shall be considered. In addition, in determining whether a hardship distribution is "necessary to meet the financial need," the Employer shall not be required to make an independent investigation of the Participant's financial status. An expense will not fail to be eligible for a hardship withdrawal merely because the expense was reasonably foreseeable or voluntarily incurred. Other than the withdrawals permitted under this Section and Section 8.12, there shall be no other types of withdrawals under the Plan. Section 8.14 Missing Persons. If the Committee shall be unable, within two (2) years after the Participant's distribution becomes due, to make payment because the identity or whereabouts of the Participant or Beneficiary cannot be ascertained, the Committee may direct that such Participant's interest and all further benefits with respect to such person shall be discontinued and all liability for the payment thereof shall terminate. However, in the event of the subsequent reappearance of the Participant or Beneficiary, the benefit due such person, without interest, shall be paid in a single sum. The amount of any discontinued interest shall be applied to reduce Employer contributions under Article IV, and reinstatement of a benefit shall be accomplished by the making of a special contribution in an appropriate amount to restore the Participant's distribution. END OF ARTICLE VIII 56 64 ARTICLE IX DISABILITY BENEFITS Section 9.1 Disability Benefits. The provisions for payment of Disability benefits in this Plan constitute an accident or health plan under Section 105 of the Code and are for the purpose of providing for the personal and financial security of a disabled Participant. The benefits payable under it are eligible for income tax exclusion. Subject to the provisions of Article XX, a Participant whose employment is terminated due to Disability shall be deemed to have retired as of the date of termination and shall be entitled to a Disability benefit, payable in accordance with the provisions of Article VIII. Such Participant's Accounts shall be valued as of the Valuation Date immediately preceding the date of the Committee receives the Participant's written request for a distribution on account of Disability, as provided in Section 11.2 (B). A committee of three (3) disinterested persons shall determine the amount of Disability benefit to be paid to a Disabled Participant, with reference to the nature of such Participant's injury. The persons to serve on such committee shall be selected by the Employer. Each person on the committee shall submit a written report setting forth the amount of Disability benefit to be paid to the Disabled Participant, and the reasons for his determination. The average of the three amounts submitted by the committee members shall be the amount paid to the Disabled Participant. The foregoing notwithstanding, the amount of Disability benefit paid to a Disabled Participant shall not exceed one hundred percent (100%) of his Accrued Benefit, subject to any further legal limitations, if any, which maybe applicable to the payment of Disability benefit under the Plan. In the event that the amount of Disability benefit so determined is less than the Participant's Accrued Benefit, then the amount of Disability benefit payable to the Participant shall not be less than his Accrued Benefit determined as of the Valuation Date provided in Section 11.2(B). The Disability benefit payable under this Plan shall also be offset by any retirement benefits payable to a Disabled Participant under the Plan. In the event that the retirement benefit payable under the Plan is integrated with Social Security benefits, then the Plan shall be administered so that any Disability benefit payable hereunder shall not exceed the integration limits permitted by the applicable laws. Notwithstanding any other provision of this Plan to the contrary, if a Participant terminates employment with the Employer prior to his Normal Retirement Date on account of his Disability due to the permanent loss, or loss of use, of a member or function of his body, or his permanent disfigurement, he shall become fully vested in his Accrued Benefit as of the date of such termination of employment. The Plan shall pay a 57 65 Disability benefit to such Participant without regard to such Participant's length of service with the Employer or the period such Participant is absent from work on account of Disability. The amount of the Disability benefit shall be determined in accordance with the terms set forth in this Section. END OF ARTICLE IX 58 66 ARTICLE X DEATH BENEFITS Section 10.1 Death Benefits. Subject to the provisions of Article XX, should a Participant die while he is still in the service of the Employer or an Affiliate, the balance of said deceased Participant's Accounts shall be distributed to his Beneficiary in the form of a lump sum. Such Participant's Accounts shall be valued as of the Valuation Date provided in Section 11.2(B). Subject to the provisions of Article XX, the Plan shall distribute death benefits to a deceased Participant's Beneficiary in accordance with the terms of Article VIII. Section 10.2 Designation of Beneficiary. A Participant may designate, in writing, the Beneficiary whom he desires to receive the benefits provided by the Plan in the event of his death, such designation to be filed on a form provided by the Committee for that purpose. The Committee shall require that a married Participant or Beneficiary who designates a Beneficiary other than his spouse obtain the spouse's written and notarized consent to the designation. The Participant or Beneficiary may from time to time change his designated Beneficiary by filing a new designation in writing with the Committee. Any new designation of Beneficiary by the Participant or Beneficiary shall also be subject to the written consent of his spouse, unless his spouse's prior consent is a general consent to the designation of any Beneficiary. If a Participant fails to designate a Beneficiary, or if a designated Beneficiary shall not survive to receive any or all payments due hereunder, then the death benefits payable under this Plan shall be payable to the Participant's spouse, and if no spouse survives, to the Participant's estate. END OF ARTICLE X 59 67 ARTICLE XI PARTICIPANTS' ACCOUNTS Section 11.1 Employer Contributions. The Plan shall establish and maintain an Employee Stock Ownership Account, Employer Matching Account, Pretax Deferral Account and Qualified Employer Contribution Account, as required, for each Participant showing his proportionate total interest in the Trust Fund. Each of the Participant's Accounts shall be assigned a share of the Trust Fund which is attributable to the Participant's total interest in the Plan, taking into account if applicable any segregated accounts established under this Plan. The Committee shall maintain records relative to a Participant's Accounts so that there may be determined as of any Valuation Date the current value of his Accounts in the Trust Fund. Section 11.2 Valuation of Accounts. As of each Valuation Date (or more frequently if the Committee in its own discretion determines that interim valuations are necessary for the convenient administration of the Plan), pursuant to its discretionary authority to administer and interpret the Plan, the Committee shall determine the fair market value of the Trust assets (other than Employer Stock) held in Participants' Accounts. Such valuation shall exclude the Employer's matching contributions, ESOP Contributions, Pretax Deferrals and Qualified Nonelective Contributions (if any) for the Plan Year ending on such Valuation Date and shall also exclude insurance or annuity contracts and segregated investments, if any (which shall be separately valued). A Participant's Accounts on such Valuation Date shall be proportionately increased or decreased in the ratio of those account balances at the beginning of the Plan Year (or, if deposits were made during the Plan Year, on an adjusted basis which reasonably reflects the dates of deposit) so that the total of such Accounts will equal the fair market value of the share of the Trust assets held in such Accounts as of such Valuation Date. (A) Interim Valuation. If the benefits attributable to a Participant's Accounts are to be distributed on a date other than a Valuation Date and, if at the time of the distribution there has been a substantial change in the value of the Trust assets, pursuant to its discretionary authority to administer and interpret the Plan, the Committee, using the same procedure as for the periodic valuation, shall determine the fair market value of the Trust assets as of the end of the calendar month preceding the date of distribution, or, if the information necessary for the valuation cannot reasonably be obtained and acted upon in a one (1) month period, as of the calendar quarter preceding the date of distribution. If any distributions or contributions have occurred between the preceding Valuation Date and the interim Valuation Date, the valuation shall be adjusted for those intervening transactions. The Committee shall then determine the percentage of increase or decrease in the fair market value of such assets as compared with the fair market value as of the immediate preceding valuation date. The Accounts (including the Account to be distributed) shall be increased or decreased by the percentage of change so determined. 60 68 (B) Valuation of Accounts For Distribution. For purposes of determining the value of benefits to be distributed to a terminated Participant or his Beneficiary under Section 8.5 or Section 8.7, or to a Participant requesting a Plan loan under Section 8.11, or to a Participant requesting an in-service withdrawal under Section 8.12 or 8.13, the Committee shall use the value of the Participant's Accounts as of the Valuation Date or interim Valuation Date immediately preceding: the date of termination of employment with respect to a Participant to whom benefits are paid pursuant to Section 8.5, the date on which the Committee receives a written request for a withdrawal with respect to a Participant requesting an in-service withdrawal pursuant to Section 8.12 or 8.13, or the date on which the Committee receives a written request for a termination distribution with respect to a Participant who postpones receipt of his Plan benefits pursuant to Section 8.6(C) and whose benefits are paid pursuant to Section 8.7, or the date on which the Committee receives a written request for a distribution on account of the disability or death of a Participant, as provided in Articles IX or X, respectively. Section 11.3 Valuation of Employer Stock. The Employer shall, as of each Valuation Date, make a good faith determination of the fair market value of the Employer Stock, which determination shall be based on the most recent price at which the stock has been publicly traded. However, in the event the Employer determines that there have been sufficient public sales and purchases of the Employer Stock to provide a fair market value thereof, then the Employer shall determine such fair market value by obtaining an independent appraisal of the value of the Employer Stock from a person who customarily makes such appraisals and who is independent of the Employer, the Trust and any person who is a party to a transaction. The Employer shall promptly notify the Trustee as to the valuation of the Employer Stock. All expenses incurred in connection with the annual valuation of Employer Stock shall be deemed expenses of the Plan and shall be paid in accordance with Section 14.3. END OF ARTICLE XI 61 69 ARTICLE XII INVESTMENT OF CONTRIBUTIONS Section 12.1 Investment of Contributions. Subject to the provisions of section 12.3, the Plan shall invest all ESOP Contributions and may invest any or all Employer matching contributions and Qualified Nonelective Contributions (if any) made on behalf of a Participant primarily in Employer Stock, in accordance with the terms of this Plan and the Trust Agreement. Section 12.2 Investment of Pretax Deferrals. Effective April 1, 1995, all Pretax Deferrals contributed to the Plan by or on behalf of a Participant shall be invested in any one (1) or more of the Investment Funds, as the Participant shall designate, in increments of ten percent (10%) of the aggregate amount of such contributions. Section 12.3 Investment Transfers. Each Participant may elect to transfer any amounts invested in an Investment Fund pursuant to the provisions of Section 12.2 to one (1) or more of the other Investment Funds so that the resulting allocation between the Investment Funds is in increments of ten percent (10%) of the account balance. Section 12.4 Investment of Plan Assets Pending Designation. If at any time a Participant has not directed the investment of all or any part of his Pretax Deferrals, the Participant shall be deemed to have elected to invest his entire interest in the Plan in an Investment Fund which invests in money market type investments (or the nearest equivalent to such an Investment Fund offered by the Plan). Section 12.5 Investment Elections. Each Participant may make the election described in Section 13.1 by filing and an election form with the Committee upon becoming a Participant. The election described in Sections 13.1 and 13.2 may be changed together or separately, not more frequently than once every three (3) months, unless the Committee authorizes more frequent changes. Each such election shall be effective as of the January 1, April 1, July 1, or October 1, coinciding with or immediately following the receipt of thirty (30) days written notice thereof by the Committee. Section 12.6 Transfer of Assets. The Committee shall direct the Trustee to transfer moneys or other property from the appropriate Investment Fund to the other Investment Fund(s) as may be necessary to carry out the aggregate transfer transactions after the Committee has caused the necessary entries to be made in the Participants' Accounts in the Investment Funds and has reconciled offsetting transfer elections, in accordance with uniform rules therefor established by the Committee. Section 12.7 ESOP Diversification of Investments. Notwithstanding any provisions of the Plan to the contrary, a Participant who has attained age fifty-five (55) and who has completed at least ten (10) years of Plan participation ("Qualified Participant") shall have the right to receive a distribution of up to twenty-five percent (25%) of his Employee 62 70 Stock Ownership Account and Employer Matching Account within ninety (90) days after the last day of each Plan Year during the Participant's Qualified Election Period. Within ninety (90) days after the close of the last Plan Year in the Participant's Qualified Election Period, a Qualified Participant shall have the right to receive a distribution of up to fifty percent (50%) of his Employee Stock Ownership Account, Employer Matching Account and Qualified Employer Contributions (if any). In lieu of electing a distribution of the portion of his Accounts subject to the diversification rights, such Participant may direct the Committee to invest such portion of his Employee Stock Ownership Account, Employer Matching Account and Qualified Employer Contributions (if any) in one or more of the Investment Funds. Any distributions made pursuant to this Section shall be subject to such requirements of the Plan concerning put options as would otherwise apply to a distribution of Employer Stock from the Plan. This Section shall apply notwithstanding any other provision of the Plan other than such provisions as require the consent of the Participant and the Participant's spouse to a distribution with a present value in excess of three thousand five hundred dollars ($3,500). If the Participant's spouse does not consent, such amount shall be retained in the Plan. END OF ARTICLE XII 63 71 ARTICLE XIII FINANCING Section 13.1 Financing. The Employer shall maintain a Trust Fund to finance the benefits under the Plan, by entering into one or more Trust Agreements. Any Trust Agreement is designated as and shall constitute a part of this Plan shall be subject to all the terms and provisions of such Trust Agreement. The Employer may modify the Trust Agreement from time to time to accomplish the purpose of the Plan and may appoint a successor Trustee or Trustees. By entering into such Trust Agreements, the Employer and the Committee shall retain the power to direct the Trustee or the Investment Manager(s) appointed under the terms of the Trust Agreement from time to time, by action of the Committee, to invest some or all Employer contributions in Employer Stock and to invest Pretax Deferrals such Investment Fund(s) as Participants may designate. In the event the Committee appoints any such Investment Manager, the Trustee shall not be liable for the acts or omissions of the Investment Manager or have any responsibility to invest or otherwise manage any portion of the Trust Fund subject to the management and control of the Investment Manager. Section 13.2 Non-Reversion. Anything in this Plan to the contrary notwithstanding, it shall be impossible at any time for the contributions of the Employer or any part of the Trust Fund to revert to the Employer or an Affiliate or to be used for or diverted to any purpose other than the exclusive benefit of Participants or their Beneficiaries, except that: (A) In the event that the Internal Revenue Service initially determines that the Plan does not constitute a qualified employee pension benefit plan meeting the requirements of Section 401(a) of the Code and the Plan was submitted to the Internal Revenue Service within the time prescribed by law for filing the Employer's tax return for the taxable year in which the Plan was adopted, or such date as the Secretary of the Treasury may prescribe, then the Plan shall be null and void from the Effective Date, and any funds in the Trust Fund shall be returned to the Employer within one (1) year after the date the initial qualification is denied, unless the Plan is amended and a favorable determination is obtained. (B) If a contribution or portion thereof is made by the Employer by a mistake of fact, upon written request to the Committee, such contribution or such portion and any increment thereon shall be returned to the Employer within one (1) year after the date of payment. (C) In the event that any contributions made by the Employer are not deductible for federal income tax purposes in any Plan Year, then that portion of the Employer contribution that is not deductible shall be returned to the Employer within one (1) year from the date the Employer receives notice of the disallowance of the deduction. 64 72 The amount of contributions to be returned under this Section is the difference between the actual contribution made, and the amount that would have been contributed had no mistake in fact or mistake in determining the contribution occurred. The foregoing notwithstanding, any reversion provided hereunder shall not reduce the Accrued Benefit of any Participant below the balance such Participant would have had if the mistake had not occurred. END OF ARTICLE XIII 65 73 ARTICLE XIV PLAN ADMINISTRATION Section 14.1 Plan Administrator. The Employer (or such other entity or person as the Board of Directors may designate) is the administrator of the Plan and the agent for service of legal process on the Plan. However, the Committee is responsible for the day-to-day administration of the Plan. If no Committee is appointed, the Employer may appoint and perform all duties assigned to the Committee hereunder. If a Committee is appointed, the Employer shall oversee the Committee in its performance of its duties hereunder. Section 14.2 Committee Membership. The Board of Directors shall appoint the Committee and the members of the Committee shall serve at the pleasure of the Board. A member of the Committee may resign by written notice to the Board of Directors. The Board of Directors shall notify the Trustee of the original membership and of any change in the members and, until notified, the Trustee may assume the membership continues without change. The Board of Directors shall, upon request by the Trustee, provide the Trustee with the names and specimen signatures of the Committee members serving from time to time. If at any time a person who is entitled to a distribution under the Plan is serving as a Committee member, that person (or his or her spouse) shall be ineligible to participate in the decision of the eligibility, amount, method and timing of the distribution, or any other matters pertaining to such distribution. If, by virtue of such disqualification, the Committee does not have any members qualified to make the decisions on distribution, the Board of Directors shall immediately appoint an interim Committee to serve until the decisions are made. Section 14.3 Compensation and Expenses. A member of the Committee who is an Employee shall serve without compensation for services as such a member. Any member of the Committee may receive reimbursement by the Employer of expenses properly and actually incurred. All expenses of the Committee shall be paid out of Plan assets unless paid directly by the Employer. Such expenses shall include any expenses incident to the functioning of the Committee, including, but not limited to, fees of the Plan's accountants, counsel and other specialists and other costs of administering the Plan. Section 14.4 Committee Action. Any action of the Committee shall be taken by majority vote or by the written consent of a majority of its members. The Committee may give authority to any one or more of its members to execute any certificate or direction on behalf of the Committee. The Committee shall notify the Trustee in writing of such action and of the name or names of those so designated. The Trustee and any third party dealing with the Committee may conclusively rely upon any certificate or direction signed by the designated Committee members and which purports to have been authorized by the Committee. 66 74 Section 14.5 Investment Discretion. (A) Committee Discretion. The Committee shall determine the number and type of Investment Funds in which the assets of the Trust shall be invested. If the Committee in its sole discretion so decides, it may authorize Participants to exercise investment discretion and authority over the assets in their accounts, subject to such restrictions as the Committee may impose. The Employer may, by resolution of its Board of Directors, from time to time allocate and reallocate such investment authority among the Trustee, the Committee and Investment Manager(s), if any. A change in such investment authority shall be effective upon delivery of a certified copy of the resolution to the parties affected by the change. As provided under Article XII, the Committee shall direct the Trustee to invest all ESOP Contributions, Employer matching contributions and Qualified Nonelective Contributions (if any) primarily in Employer Stock, in accordance with the terms of the Trust Agreement. (B) Employer Stock. Subject to the direction of the Committee, the following rules shall apply with respect to investments in Employer Stock: (1) Investment in Employer Stock. Contributions to be invested in Employer Stock shall be so invested by the Trustee as soon as practicable after receipt thereof. Such investment will be made in such manner, at such prices, in such amounts and at such times as the Trustee in its sole discretion may determine. The Trustee may in its sole discretion either keep the portion of the Trust Fund not so invested in cash or non-interest bearing bank accounts or temporarily invest the same in short- term United States Government obligations until such time as the Trustee shall find it practicable to invest in Employer Stock. For the purposes of determining the value of any Participant's Accounts at any time, amounts invested in short-term United States Government obligations shall be regarded as cash. All shares of stock acquired by the Trustee for the separate Account of any Participant shall be held by it in such Account, together with any uninvested cash, until disposed of in accordance with the provisions of the Plan. All shares of the Employer Stock shall be registered in the name of the Trustee or its nominee. (2) Charge against Account upon Purchase. Upon the purchase of any stock by the Trustee, the purchase price chargeable to the account of each Participant shall be its proportionate share (based upon the number of shares purchased and the number of shares allocable to that Account) of the entire amount paid by the Trustee, after taking into account all brokerage fees, transfer taxes, the additional cost incurred on purchases of odd lots and any other expenses incurred in connection with the purchase and transfer of such stock (to the extent such fees, taxes, and/or costs are not borne by the Employer). All similar expenses incurred in connection with the purchase and sale of United States Government obligations will be charged pro rata to the Accounts of Participants. 67 75 (3) Disposition of Dividends. Cash dividends received by the Trustee upon encumbered Employer Stock pending repayment of an Exempt Loan may be used toward the repayment of the Exempt Loan. Cash dividends received by the Trustee upon Employer Stock in a Participant's Accounts may be used toward the repayment of the Exempt Loan, or be credited to such Accounts and applied to the purchase of additional shares of Employer Stock, or distributed to the Participant, as the Committee in its discretion may determine. Notwithstanding any provision to the contrary provided hereunder, cash dividends may be used to repay an Exempt Loan only if such dividends are made on Employer Stock purchased with proceeds of the Exempt Loan and only if Employer Stock with a fair market value of not less than the amount of the dividend is allocated to the Employee Stock Ownership Accounts, Employer Matching Accounts and Qualified Employer Contribution Accounts (if any) of eligible Participants in the same Plan Year that the repayment is made in accordance with the allocation rules of Section 4.8(B)(8). If Employer Stock is split, new or additional shares shall be credited as of the record date to the Accounts of Participants in proportion to the number of shares credited to their respective Accounts immediately prior to such date. Cash dividends received by the Trustee upon Employer Stock held in the suspense account may be used to repay an Exempt Loan or distributed to Participants in the proportion that the Employer Stock held by each Participant under the Plan bears to the Employer Stock held in the suspense account, as the Committee may determine. Stock dividends received by the Trustee upon stock in the suspense account shall be credited to such account. (4) Exercise of Rights, Warrants and Options. In the event that any rights, warrants or options for the acquisition of additional shares of stock, or other property, are distributed with respect to shares of Employer Stock, the Trustee may in its discretion exercise such rights, warrants or options attributable to the Account of each Participant to the extent that there is a cash balance in such Account sufficient for such purposes. If and to the extent that other property is received or rights, warrants or options are not exercised, the Trustee shall sell such property or any remaining rights, warrants or options in the open market, provided that there is any market therefor, and shall credit the proceeds to the Account of such Participant. (C) Participant Direction of Investments. If a Participant's interest in the Trust Fund, or any portion thereof, is to be invested separately from the general Trust Fund, the Committee shall establish and maintain a segregated fund for the Participant's separate investments. The Committee shall provide separate accounting for those investments and the gains, losses, income and expenses attributable thereto, and the Plan may charge any administration costs incurred in connection with the segregation of account directly to the Participant. When Participants are entitled to exercise investment discretion and authority, they shall exercise that authority by notifying the Committee of their investment decisions and the Committee shall, in turn, direct the Trustee to make the investments. If at any time a Participant has approved the segregation of his interest, but has not directed the investment 68 76 of all or any part of the segregated funds, the Committee shall direct the Trustee to hold those funds in a demand of short term interest-bearing account or fund, pending further investment direction. Participant-selected investments shall be the sole responsibility of the Participant, and neither the Committee nor the Trustee, nor any other fiduciary, shall have any duty to review such investments or otherwise manage that portion of the Trust Fund. However, the Committee may from time to time adopt such rules and impose such limitations on the exercise of the Participant's investment discretion as may be necessary or convenient to the administration of the Plan and the investment of the Trust Fund. Section 14.6 Powers of Committee. The Committee shall have full discretionary authority to administer and interpret the Plan, including discretionary authority to determine eligibility for participation and benefits under the Plan. The Committee may, however, delegate such duties and responsibilities as it deems appropriate to facilitate the day-to-day administration of the Plan. Any determination by the Committee or the Committee's delegate shall be final and conclusive upon all persons. The Committee's duties shall include, but not be limited to, the following: (A) To construe and interpret the Plan and to determine all questions arising in the administration, interpretation and application of the Plan; (B) To make and publish such rules for the regulation of the Plan which are consistent with the terms thereof; (C) To determine all questions relating to the eligibility of Employees to participate; (D) To maintain all the necessary records for the administration of the Plan other than those maintained by the Trustee; (E) To comply with the reporting and disclosure requirements for qualified plans to Participants, Beneficiaries, and governmental bodies as may be required from time to time by state and Federal law. However, the responsibility for such reporting and disclosure shall be borne by the Employer; (F) To obtain from the Employees such information as shall be necessary for the proper administration of the Plan and, when appropriate, to furnish such information promptly to the Trustee or other persons entitled thereto; (G) To compute and certify to the Trustee the amount and kind of benefits payable to Participants and their Beneficiaries; (H) To direct all disbursements by the Trustee from the Trust; (I) To prepare and distribute, in such manner as the Employer determines to be appropriate, information explaining the Plan; 69 77 (J) To establish and maintain such Accounts in the name of each Participant as are necessary; (K) To provide for any required bonding of fiduciaries and other persons who may from time to time handle Plan assets; (L) To engage an independent public accountant to conduct such examinations and to render such opinions as may be required by ERISA; (M) To establish a funding policy and method consistent with the objectives of the Plan and the requirements of ERISA; (N) To determine whether a Participant may transfer funds from another qualified plan or individual retirement account to the Trust and to direct the Trustee to receive such transferred funds; and (O) To authorize the Trustee to purchase life insurance policies on the lives of Participants. The Committee, in exercising its discretion, shall act in a uniform and nondiscriminatory manner. Section 14.7 Correction of Administrative Errors. If an error is made in the administration of the Plan, the Committee shall promptly correct the error upon its discovery. For this purpose, "administration" shall encompass the entire operation of the Plan, including but not limited to, eligibility, participation, vesting, and benefit calculation and distribution. If a Participant has been denied a benefit distribution due to such administrative oversight, the Committee shall determine the correct interest of the Participant and shall direct the Trustee to disburse an amount to the Participant (or his Beneficiary) as is necessary to rectify the error. If an excessive distribution has been made to or for a Participant or Beneficiary, the Committee shall advise the party who received the distribution of the error and shall take such actions on the Plan's behalf as is necessary to retrieve the excessive payment. Section 14.8 Information. Each person entitled to benefits from the Plan must file with the Committee or its agent, in writing, his post office address and each change of post office address. Any communication, statement or notice addressed to such a person at his latest reported post office address will be binding upon him for all purposes of the Plan, and neither the Committee nor the Employer or any Trustee shall be obliged to search for or ascertain his whereabouts. To enable the Committee to perform its functions, the Employer shall supply full and timely information to the Committee on all matters relating to the compensation of all Participants, their employment, their retirement, death or other cause for termination of employment, and such other pertinent facts as the Committee may require. 70 78 Section 14.9 Funding Method and Policy. The Committee from time to time shall establish a funding method and policy consistent with the objectives of this Plan and, to implement the policy and method, shall communicate it to the Trustee or other fiduciary exercising investment control over the Trust assets. Without limiting the generality of the foregoing,the Committee shall, from time to time, accomplish the following: (A) Determine and review short-term, intermediate and long-range investment goals; (B) Determine and project benefit liabilities; (C) Make plans to satisfy the liquidity needs of the Plan; and (D) Consult with the Trustee, and such other advisors as may be necessary, to assure the payment of benefits under the Plan. Section 14.10 Indemnity. The Employer shall indemnify each member of the Committee (which, for purposes of this Section, includes any Employee to whom the Committee has delegated fiduciary duties) against any and all claims, losses, damages, expenses, including counsel fees, incurred by the Committee and any liability, including any amounts paid in settlement with the Employer's approval, arising from the member's or Committee's action or failure to act, except when the same is judicially determined to be attributable to the gross negligence or willful misconduct of such member. The right of indemnity described in the preceding sentence shall be conditioned upon: (A) The timely receipt of notice by the Employer of any claim asserted against the Committee member, which notice, in the event of a lawsuit shall be given within ten (10) days after receipt by the Committee member of the complaint; and (B) The receipt by the Employer of an offer from the Committee member of an opportunity to participate in the settlement or defense of such claim. Section 14.11 Allocation and Delegation of Duties. The Committee may appoint one or more subcommittees and delegate such of its power and duties as it deems desirable to any such subcommittee, in which case every reference herein made to the Committee shall be deemed to mean or include the subcommittees as to matters within their jurisdiction. The members of any such subcommittee shall consist of such officers or Employees and any such other persons as the Committee may appoint. The Committee may also appoint one or more persons or other agents to aid it in carrying out its duties, and delegate such of its powers and duties as it deems desirable to such person or agents. It may authorize one or more of their number or any agent to execute or deliver any instrument or instruments on their behalf, and may employ such counsel, 71 79 auditors, and other specialists and such clerical, medical, actuarial and other services as they may require in carrying out the provisions of the Plan. Section 14.12 Voting of Qualifying Employer Securities. (A) Voting of Registration-Type Stock. To the extent that the Employer Stock allocated to the Accounts of Participants constitute a class of stock which is required to be registered under Section 12 of the Securities Exchange Act of 1934, then Participants shall be entitled to direct the manner in which Employer Stock allocated to their Accounts is to be voted on all matters. (B) Voting of Non-Registration-Type Stock. To the extent that the Employer Stock allocated to the Accounts of Participants do not constitute a registration-type class of stock (as defined above), then the Trustee shall vote such stock in such manner as shall be directed by the Committee and as provided below. (1) Employer Stock Allocated to Participants' Accounts. A Participant shall be entitled to direct the Trustee as to the manner in which voting rights will be exercised with respect to any corporate matters which involve the voting of Employer Stock allocated to such Participant's Account(s) with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transactions as may be prescribed in Treasury regulations. The Trustee shall follow the procedure set forth below in obtaining the Participant's vote. (C) Employer Stock Purchased With Exempt Loan Proceeds. Notwithstanding any provision of this Plan to the contrary, Participants shall be entitled to direct the manner in which Employer Stock allocated to their Accounts is to be voted, regardless of whether the Employer Stock is a registration-type or no-registration-type class of stock, if the Employer Stock is purchased with the proceeds of an Exempt Loan subject to the Code Section 133 interest exclusion. (D) Employer Stock Held in Suspense Account. The Trustee shall vote unallocated Employer Stock (whether Employer Stock is registration-type or non-registration type stock) held under the suspense account in the manner determined by the Committee. (E) Voting Procedure. (1) At the time notice of any stockholders' meeting at which a corporate matter is to be considered (which requires the vote of Participants), the Committee shall cause to be prepared and delivered to each Participant who has Employer Stock allocated to his Account(s), a notice and form of proxy instructing the Trustee as to how it shall vote at such meeting or any adjournment thereof, concerning such matter and the full number of shares of Employer Stock allocated to such Account(s). Such notice shall instruct each Participant to return proxy to the Trustee. 72 80 (2) The Trustee shall vote all shares of Employer Stock allocated to the Accounts of Participants in accordance with the instructions contained on the proxy forms returned to the Trustee duly executed by the Participant. (3) With respect to Employer Stock for which the Trustee has not received a duly executed proxy from the Participant pursuant to the above paragraph (2), five (5) days prior to such meeting, the Trustee shall vote said shares. (F) Confidentiality. The Trustee shall vote the Employer Stock held by the Plan only in accordance with the provisions of this Section 14.12. Each Participant may direct the Trustee to vote the shares allocated to his Account(s) as provided in this Section; provided, however, that such directions from Participants shall be confidential and shall not be divulged by the Trustee to anyone, including the Employer or any director, officer, Employee or agent of the Employer, it being the intent of this provision to ensure that the Employer (and its directors, officers, Employees and agents) cannot determine the direction given by any Participant. END OF ARTICLE XIV 73 81 ARTICLE XV AMENDMENT, PLAN TERMINATION AND MERGER RESTRICTION Section 15.1 Amendment. The Employer shall have the right to amend this Plan from time to time by resolution of the Board of Directors, and to amend or cancel any such amendments. Employer amendments shall be stated in an instrument executed by the Employer in the same manner as this Plan, and this Plan shall be deemed to have been amended in the manner and at the time therein set forth and all Participants shall be bound thereby; provided, however: (A) Limitations. No amendments shall be effective which shall: (1) Attempt to cause any of the assets of the Trust to be used for or diverted to purposes other than for the exclusive benefit of Participants or their Beneficiaries. (2) Cause the reduction of the balance of any Participant's Accounts unless the requirements of Section 412(c)(8) of the Code have been met, or effect or create any discrimination in favor of Participants who are officers, shareholders, or highly compensated employees. (B) Amendment of Vesting Provision. If an amendment is adopted which directly or indirectly affects the computation of a Participant's nonforfeitable percentage, then: (1) The nonforfeitable percentage of a Participant's right to his Employer contributions shall not be reduced below his percentage computed under the Plan (as of the amendment date) without regard to such amendment. For this purpose, "amendment date" shall mean the later of: (a) The date the amendment is adopted; or (b) The date the amendment is effective. (2) The nonforfeitable percentage of the Employer contributions made on behalf of each Participant who has completed at least three (3) years of Vesting Service with the Employer shall not at any time be less than such percentage determined without regard to the amendment. The three (3) years of Vesting Service need not be consecutive, and the requirement shall be calculated without regard to the exceptions of Section 411(a)(4) of the Code. The three (3) years of Vesting Service must be completed by the Participant within sixty (60) days after the later of: (a) The day the amendment is adopted; (b) The day the amendment becomes effective; or 74 82 (c) The day the Participant is issued written notice of the amendment by the employer or the Committee. Section 15.2 No Contractual Obligation. It is the expectation of the Employer that it will continue the Plan indefinitely, but the continuance thereof is not assumed as a contractual obligation by the Employer or any Affiliate. In the event of a sale of substantially all of the assets or stock of the Employer to a nonaffiliated company, the Plan shall be terminated. The Plan may also be discontinued or terminated at any time by action of the Board of Directors for whatever reason. Discontinuance or termination of the Plan shall not have the effect of revesting in the Employer any part of the funds of the Trust Fund, except as provided in Section 13.2. Section 15.3 Vesting upon Plan Termination or Complete Discontinuance of Contributions. In the event of the termination of or complete discontinuance of contributions to the Plan within the meaning of Treas. Reg. Section 1.411(d)-2, the rights of all Participants to their Employee Stock Ownership accounts and Employer Matching Accounts shall become fully vested as of the date of Plan termination or complete discontinuance of contributions. In the event of a partial termination of the Plan within the meaning of Section 411 of the Code, the rights of all affected Participants to their Employee Stock Ownership Accounts and Employer Matching Accounts shall become fully vested. Section 15.4 Procedure on Termination. On or before the effective date of termination, the Employer shall direct the Trustee to proceed as soon as possible, but in any event within one (1) year from such effective date, to reduce to the extent practicable all of the assets of the Trust Fund in cash and, after first reserving therefrom such sums as it may deem to be reasonably necessary for its expenses and compensation and for any liabilities, absolute or contingent, chargeable to the Trust Fund, to distribute the balance of such assets among the then Participants of the Plan, each such Participant to receive his Accrued Benefit under the Plan. The Trustee and the Employer shall continue to function in their respective positions with respect to the Plan for such period of time as may be necessary for the winding up of the Plan and for the making of contributions provided in this Article. Section 15.5 Suspension of Contributions. In the event the Employer decides it is impossible or inadvisable for business reasons to continue to make contributions under the Plan, the Employer shall not make any further contributions under the Plan and no contributions under Section 4.1 need be made by the Employer for the balance of the Plan Year in which such suspension occurs. The suspension of contributions (within the meaning of Treas. Reg.1.411(d)-2(d)) on the part of the Employer shall not terminate the Plan as to the Trust Fund then held by the Trustee, or operate to accelerate any payments or distributions to or for the benefit of Participants or Beneficiaries, and the Trustee shall continue to administer the Trust Fund in accordance with the provisions hereof until the obligations hereunder shall have been discharged and satisfied. 75 83 Section 15.6 Merger Restriction. This Plan shall not in whole or in part merge or consolidate with, or transfer its assets or liabilities to any other plan unless each affected Participant in this Plan would (if the Plan then terminated) be entitled to receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the Plan had then terminated). END OF ARTICLE XV 76 84 ARTICLE XVI TOP-HEAVY PROVISIONS Section 16.1 Application. If, as of the Determination Date in any Plan Year beginning after December 31, 1983, (A) the sum of the account balances of Participants who are "Key Employees" for such Plan Year and the beneficiaries of deceased Key Employees (hereinafter referred to as "beneficiaries") exceeds sixty percent (60%) of the sum of the account balances of all Employees and beneficiaries, or (B) the Plan is part of a top-heavy group, then the following provisions under this Article XVI shall apply for such Plan Year. The foregoing notwithstanding, the provisions of this Article XVI shall not apply to the Plan in any Plan Year during which it is part of an aggregation group (as defined in Section 16.4(A)), whether or not it is top-heavy as a single plan, unless the aggregation group of which it is a part is top-heavy in such Plan Year. Section 16.2 Definitions. Whenever used in this Article XVI, the following terms shall have the meanings set forth below unless a different meaning is expressly provided or plainly required by the context in which the term is used: (A) Key Employees. The term "Key Employee" means any Employee or former Employee who at any time during a Plan Year or any of the four (4) preceding Plan Years is: (1) An officer of the Employer and its Affiliates whose Compensation is greater than fifty percent (50%) of the amount in effect under Code Section 415(b)(1)(A) for any Plan Year; provided, however, no more than the lesser of fifty (50) employees, or the greater of three (3) employees of ten percent (10%) of all employees are to be treated as officers; (2) One of the ten (10) employees owning the largest interests in the Employer or an Affiliate and who earns an amount equal to or more than the dollar limit specified in Code Section 415(c)(1)(A); (3) A five percent (5%) owner of the Employer or an Affiliate; or (4) A one percent (1%) owner of the Employer or an Affiliate having annual Compensation of more than one hundred fifty thousand dollars ($150,000). If an employee ceases to be a Key Employee, such employee's Account Balance shall be disregarded under the top-heavy plan computation for any Plan Year following the last Plan Year for which he was treated as a Key Employee. 77 85 The term "Key Employee" or "former Key Employee" shall include the beneficiary of such Key Employee or the beneficiary of a former Key Employee. For purposes of determining ownership under this Section, the Plan shall disregard Code Sections 414(b), (c) and (m) for determining Employees who are five percent (5%)and one percent (1%) owners. (B) Non-Key Employee. The term "Non-Key Employee" means any employee who is not a Key Employee. The beneficiary of a former Non-Key Employee shall be treated as a former Non-Key Employee. (C) Determination Date. The term "Determination Date" means the date for determining the applicability of this Article XVI and is: (1) For the first Plan Year, the last day of the Plan Year; and (2) For any other Plan Year, the last day of the preceding Plan Year. (D) Valuation Date. The term "valuation date" means the annual date on which the Plan assets must be valued for purposes of determining the value of account balances or the date on which liability and assets of the defined benefit pension plan are valued. For purposes of the top-heavy test, the valuation date for a defined benefit plan shall be the same valuation date used for computing plan costs for minimum funding. The valuation date for a defined contributed plan shall be the most recent valuation date within a twelve (12)-month period ending on the Determination Date. (E) Accrued Benefits Treated as Accruing Ratably. The accrued benefit of any Employee (other than a key employee) shall be determined: (1) under the method which is used for accrual for purposes of all plans of the Employer, or (2) if there is no method described in subsection (1) above, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under Section 411(b)(1)(C) of the Code. Section 16.3 Determination of Account Balance. (A) Account Balance. In determining the sum of the account balances under this Plan and the present value of accrued benefits under a defined benefit pension plan, all Employer contributions, nondeductible contributions (whether mandatory or voluntary), rollover contributions received by the Plan from a related rollover, and contributions received by the Plan from a related plan-to-plan transfer shall be taken into account. However, the accrued benefit or account balance of a former Key Employee who is now a Non-Key Employee shall not be taken into account. For purposes of this Article XVI, a "related rollover" or a "related plan-to-plan transfer" is a rollover or a transfer either not initiated by the Employee or a rollover or a transfer made to the Plan by the same Employer. 78 86 If the Plan makes a rollover or transfers the benefits of a Participant to a plan maintained by another employer in an unrelated rollover or unrelated plan-to-plan transfer, then the Plan shall count such distribution in determining its top-heavy status under this Article XVI. An "unrelated rollover" or "unrelated plan-to-plan transfer" is a rollover or transfer which is both initiated by an employee and made by this Plan to a plan maintained by another employer. If, however, the Plan is the transferee plan in an unrelated rollover or unrelated plan-to-plan transfer after December 31, 1983, then the Plan shall not count such rolled over or transferred amounts in determining its top-heavy status under this Article XVI. (B) Computation of Account Balance. The account balance as of the Determination Date for any Participant is the sum of: (1) The account balance as of the most recent valuation date occurring within a twelve (12)-month period ending on the Determination Date; and (2) An adjustment for contributions due as of the Determination Date. The adjustment is the amount of any contributions made after the valuation date but on or before the Determination Date. In the first Plan Year, the adjustment shall also reflect the amount of any contributions made after the Determination Date that are made as of a date in the first Plan Year. (C) The Five-Year Rule. The account balance under this Plan will include any amount distributed to a Participant (who has received Compensation from the Employer or an Affiliate) and beneficiary within the five (5)-year period ending on the Determination Date. The account balance under this Plan shall also include all distributions under a terminated plan which if it had not been terminated would have been required to be included in the aggregation group. The present value of the accrued benefit in a defined benefit plan or account balance in a defined contribution plan shall not include the accrued benefit or account balance of any Participant who has not performed any services for the Employer during the five (5)-year period ending on the Determination Date. Finally, if a Participant returns after the five (5)-year period, such Participant's total accrued benefit shall be included in determining the top-heavy ratio. (D) Segregation of Accounts. The Committee shall maintain a segregated account on behalf of each Key Employee to which Employer contributions made on behalf of such Employee shall be allocated in any Plan Year in which the Plan is top-heavy. (E) Accrued Benefits Treated As Accruing Ratably. The accrued benefit of any Employee (other than a key employee) shall be determined: (1) under the method which is used for accrual for purposes of all plans of the Employer, or (2) if there is no method described in subsection (1) above, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under Section 411(b)(1)(c) of the Code. 79 87 Section 16.4 Top-Heavy Group. For purposes of determining whether the Plan is part of a top-heavy group, the following rules shall apply: (A) Aggregation Group. All plans maintained by the Employer or an Affiliate at any time during the five (5) year period ending on the Determination Date, including any terminated plans of the Employer if it was maintained with the last five (5) years ending on the Determination Date, shall be aggregated to determine whether the plans, as a group, are top heavy. The aggregation group shall include any plan which covers a Key Employee and any other plan which enables a plan covering a key employee to meet the requirements of Section 401(a)(4) or 410 of the Code. (B) Top-Heavy Group. An aggregation group is a top-heavy group if, as of the Determination Date, the sum of: (1) The account balances of Key Employees and beneficiaries under all defined contribution plans included in the group; and (2) The present value of the accumulated accrued benefits for Key Employees and beneficiaries under all defined benefit plans in the group, exceeds sixty percent (60%) of a similar sum determined for all Employees and beneficiaries under all such plans in the group. In any Plan Year, in testing for top-heaviness under this Article XVI, the Employer may in its discretion take into account accumulated accrued benefits and account balances in any other plan maintained by it or an Affiliate, so long as such expanded aggregation group continues to meet the requirements of Sections 401(a)(4) and 410 of the Code. Section 16.5 Combined Limit for Key Employees. If this Plan is determined to be top-heavy in any Plan Year and if the Plan does not provide for a minimum contribution equal to one percent (1%) of a Participant's Compensation, in addition to the minimum contribution provided in Section 16.9, or if the account balances of Key Employees and beneficiaries equal or exceed ninety percent (90%) of the value of all account balances, then the denominator of the defined benefit fraction and the defined contribution fraction for any Employee who participates in both a defined benefit plan and a defined contribution plan which are included in a top-heavy group as provided in Section 16.4 above shall be the lesser of 1.0 (as applied to the dollar limit) or 1.4 (as applied to the limit based upon compensation). Section 16.6 Ceiling on Includable Compensation. If the Plan is determined to be top-heavy in any Plan Year, then only the first two hundred thousand dollars ($200,000) of a Participant's Compensation may be taken into account in determining the amount of the Participant's earnings for this Plan Year. The two hundred thousand dollar ($200,000) limit shall automatically be adjusted for the Plan Years beginning after December 31, 1987 to the extent permitted by the Internal Revenue Service. 80 88 Section 16.7 Vesting Requirements. If this Plan is determined to be top-heavy in any Plan Year, the interest of each Participant in his Employee Stock Ownership Account and Employer Matching Account shall to vest in accordance with the vesting schedule set forth in below: Top-Heavy Vesting Schedule
Years of Service Vested Percentage ---------------- --------------------- 1 0% 2 20% 3 40% 4 60% 5 80% 6 or more years 100%
Section 16.8 Minimum Contributions. If the Plan is determined to be top-heavy in any Plan Year, the rate of Employer contributions allocated to the Employee Stock Ownership Account, Employer Matching Account and Qualified Employer Contribution Account (if any) of any Participant who is a non-key Employee for such Plan Year and who is employed by the Employer on the last day of such Plan Year (regardless of whether the non-key Employee has less than one thousand (1,000) Hours of Service and regardless of the non-key Employee's level of Compensation) shall not be less than the lesser of the maximum rate of Employer contributions allocated to Employee Stock Ownership Accounts, Employer Matching Accounts and Qualified Employer Contribution Accounts (if any) of Key Employees or three percent (3%) of such Employee's Compensation for the Plan Year, reduced by Employer contributions allocated to the account of such non-key Employee for such year under any other qualified defined contribution plan. If the highest rate allocated to Key Employees is less than three percent (3%) in a Plan Year in which the Plan is top-heavy, then the Plan shall take into account amounts contributed as a result of salary reduction agreement in determining contributions made on behalf of Key Employees. A minimum contribution calculated under this Section in any Plan Year shall not decrease in a later Plan Year nor shall Employer contributions to Social Security be used to reduce the minimum contribution. For purposes of Section 416 of the Code and this Section, the term "Compensation" shall have the same meaning as W- 2 compensation or compensation as defined in Section 415 of the Code. The Committee shall maintain a segregated account on behalf of each Key Employee to which Employer contributions made on behalf of such Employee shall be allocated in any Plan Year in which the Plan is top-heavy. 81 89 Notwithstanding the foregoing provisions, in the event that the contribution formula set forth under the Plan is integrated with Social Security benefits, no Non-Key Employee may fail to receive the defined contribution minimum provided under this Section on account of the fact that such Employee is excluded from participation in the Plan because his Compensation is less than a stated amount or because he fails to make mandatory contributions to the Plan. Section 16.9 Minimum Benefit or Contribution for Combined Plans. In case the top-heavy provisions set forth in the Plan become applicable, and a Non-Key Employee is covered by both this Plan and one or more defined benefit plans maintained by the Employer, such Employee shall receive the defined contribution minimum set forth in this Plan not less than annual contributions and forfeitures equal to five percent (5%) of the Non-Key Employee's compensation for each Plan Year the Plan is top-heavy. The foregoing notwithstanding, all defined contribution plans maintained by the Employer shall be treated as one plan, and all defined benefit pension plans maintained by the Employer shall be treated as one plan for purposes of determining the minimum contribution or benefit the Employer is required to make on behalf of Non-Key Employees under this Plan. A Non-Key Employee who is covered by two defined contribution plans or two defined benefit pension plans maintained by the Employer shall receive only one defined contribution minimum or defined benefit minimum. The payment of minimum benefits as provided under this Section is intended to satisfy the requirements set forth under Section 416(f) of the Code relating to the coordination of benefits or contributions when the Employer has two or more plans, and this Section shall be construed and applied so as to satisfy the requirements of Section 416(f). END OF ARTICLE XVI 82 90 ARTICLE XVII PARTICIPATION BY AFFILIATES AND OTHER EMPLOYERS Section 17.1 Affiliate Participation. An Affiliate or another employer may become a party to the Plan and Trust Agreement by adopting the Plan for the benefit of any specified group of its Employees, effective as of any Entry Date or any other date approved by the Employer by filing with the Employer a certified copy of a resolution of its board of directors to that effect, and such other instruments as the Employer may require ("Participating Employer"). Acceptance by the Employer of such resolution shall constitute the Employer's approval of the Affiliate's participation in the Plan as a Participating Employer. Section 17.2 Action Binding on Participating Affiliates and Other Employers. As long as the Employer is a party to the Plan and the Trust Agreement it shall be empowered to act thereunder for any Participating Employer in all matters respecting the Committee and the Trustee, and any action taken by the Employer with respect thereto shall automatically include and be binding upon any Participating Employer. Section 17.3 Effect of Participation. Each Participating Employer agrees by its continued participation to make such contributions to the Trust as are determined by the Committee to fulfill such Participating Employers' obligations under the Plan. Each Participating Employer's contributions to the Plan shall be available to pay benefits to all Participants. Section 17.4 Termination of Participation of Affiliate or Other Employer. The Employer may in its sole discretion and at any time, terminate the participation in this Plan of any or all Participating Employers. Such termination shall be effective upon thirty (30) days' notice of such termination from the Employer to the Trustee and the Participating Employer(s) being terminated. A Participating Employer may also withdraw from participating in the Plan by giving the Employer thirty (30) days' written notice to that effect. In event of such termination or withdrawal, this Plan shall not terminate, but the portion of the Plan attributable to the terminated Participating Employer shall become a separate plan, and the Employer shall inform the Trustee of the portion of the Trust Fund that is attributable to the participation of such terminated Participating Employer. Such portion shall as soon thereafter as is administratively feasible be set apart by the Trustee as a separate trust which shall be part of the separate plan of such terminated Participating Employer. Thereafter, the administration, control, and operation of the Plan with respect to 83 91 such terminated Participating Employer shall be on a separate basis in accordance with the terms hereof, or as such terms may be amended by appropriate action of such terminated Participating Employer in accordance with the provisions of this Article XVII. END OF ARTICLE XVII 84 92 ARTICLE XVIII MISCELLANEOUS Section 18.1 Limitation on Participants' Rights. Participation in the Plan shall not give any Employee the right to be retained in the Employer's employ, or any right or interest in the Plan or Trust other than as herein provided. The Employer reserves the right to dismiss any Employee without any liability for any claim either against the Plan and Trust, except to the extent herein provided, or against the Employer. All benefits provided hereunder shall be provided solely from the Trust, and a person claiming an interest under the Plan shall not have recourse toward satisfaction of his benefits from other than the Trust assets. Section 18.2 Receipt and Release. Any payment to any Participant or his legal representative or Beneficiary in accordance with the provisions of this Plan shall be, to the extent thereof, in full satisfaction of all claims against the Trustee, the Committee and the Employer. The Trustee may require such Participant, legal representative or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. Section 18.3 Nonassignability. (A) Nonassignability. None of the benefits, payments, proceeds or claims of any Participant shall be subject to any claim of any creditor of any Participant and, in particular, the same shall not be subject to attachment or garnishment or other legal process by any creditor of any Participant, nor shall any Participant have any right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments or proceeds which he may expect to receive under this Plan (except as provided in this Plan for loans from the Trust). (B) Division of Benefit upon Divorce. Notwithstanding the foregoing, the Trustee may comply with a Qualified Domestic Relations Order (QDRO) requiring deductions from the benefits of a Participant in pay status for spousal and/or child support. Upon the receipt of a QDRO, the Trustee shall distribute benefits to the named alternate payee(s) in such amount and at such time as provided by the QDRO. The Committee is authorized to establish and maintain such accounts (and, if appropriate or necessary, to direct the Trustee to segregate the trust funds into Sub-Funds for investment, directed by the interested parties) as may be necessary to comply with such QDRO, which is not in contravention of ERISA and other applicable legislation, regulations and court decisions. For the purpose of this Section, the term "Participant" shall include any person participating in the Plan, as well as any former Participant or Beneficiary who has any undistributed benefits under the Plan. The term "QDRO" shall mean a Domestic Relations Order (DRO) that creates or recognizes an alternate payee's right to all or a part of a Participant's plan benefits, specifies the information required by law, and does not alter the amount or form of plan benefits. The term "DRO" shall mean a judgment, decree, or 85 93 order(including a property settlement agreement) that is made pursuant to a state domestic relations law and that relates to the provision of child support, alimony or marital property rights to a spouse, former spouse, child or dependent. The term "alternate payee" shall mean a spouse, former spouse, child or other dependent of the Participant who is recognized by a DRO as having a right to receive all or a part of the Participant's plan benefits. Section 18.4 Incompetency. Every person receiving or claiming benefits under the Plan shall be conclusively presumed to be mentally competent and of age until the date on which the Committee receives a written notice, in a form and manner acceptable to the Committee, that such person is incompetent or a minor, for whom a guardian or other person legally vested with the care of his person or estate has been appointed; provided, however, that if the Committee shall find that any person to whom a benefit is payable under the Plan is unable to care for his affairs because of incompetency, or is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) may be paid to the spouse, a child, a parent or a brother or sister, or to any person or institution deemed by the Committee to have incurred expense for such person otherwise entitled to payment. To the extent permitted by law, any such payment so made shall be a complete discharge of liability therefor under the Plan. In the event a guardian of the estate of any person receiving or claiming benefits under the Plan shall be appointed by a court of competent jurisdiction, benefit payments may be made to such guardian provided that proper proof of appointment and continuing qualification is furnished in a form and manner acceptable to the Committee. To the extent permitted by law, any such payment so made shall be a complete discharge of any liability therefor under the Plan. Section 18.5 Severability. In the event any provision of this Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining parts of this Plan, and it shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. Section 18.6 Counterparts. This Plan may be executed in any number of counterparts, each of which shall be deemed to be an original. All the counterparts shall constitute but one and the same instrument and may be sufficiently evidenced by any one counterpart. Section 18.7 Service of Legal Process. The Secretary of the Employer is hereby designated agent of the Plan for the purpose of receiving service of summons, subpoena or other legal process. Section 18.8 Headings of Articles and Sections. The headings of Sections and subsections are included solely for convenience of reference, and if there is any conflict between such headings and the text of the Plan, the text shall control. Section 18.9 Applicable Law. The Plan and all rights hereunder shall be governed, construed and administered in accordance with the laws of the State of California 86 94 with the exception that any Trust Agreement which may constitute a part of the Plan shall be construed and enforced in all respects under and by the laws of the State in which the Trustee thereunder is located. END OF ARTICLE XVIII 87 95 ARTICLE XIX TENDER OFFERS Section 19.1 Retention/Sale of Employer Stock. The Trustee has no authority or responsibility to sell or dispose of Employer Stock acquired by the Trust Fund regardless of fluctuations in value of the Employer Stock except as follows: (A) In the normal course of Trust administration, the Trustee shall sell Employer Stock only to satisfy the Committee and distribution requirements as directed by the Committee or in accordance with provisions of this Plan specifically authorizing such sales. (B) In the event of a tender offer involving the Employer Stock (hereinafter referred to as a "Tender Offer"), the Trustee shall sell, convey or transfer Employer Stock only in accordance with the written instructions of the Participants or the Committee delivered to the Trustee as hereafter provided in this Article. Section 19.2 Suspension of Employer Stock Purchases. In the event of a Tender Offer, the Trustee shall suspend all purchases of Employer Stock except those that might be in the Trustee's sole discretion necessary to satisfy Plan administration or distribution requirements. Until termination of such Tender Offer, subject to the direction of the Committee, the Trustee shall invest any available cash not otherwise invested in Employer Stock due to the restriction of this Article in such other assets as are authorized under the Trust Agreement. Section 19.3 Information to Trustee. Promptly after the filing date of the Tender Offer, the Committee shall (i) deliver to the Trustee a list of the names and addresses of Participants with Employer Stock allocated to their Employee Stock Ownership Accounts Employee Matching Accounts and Qualified Employer Contribution Accounts (if any) showing the number of such Employer Stock so allocated and (ii) inform the Trustee, in writing, of the number of unallocated Employer Stock that remain at any time during the pendency of the Tender Offer. The Committee shall date and certify as correct the Participant list and the unallocated Employer Stock balance. Section 19.4 Information to Participants. The Trustee shall request confidential written instructions from Participants who wish to tender Employer Stock credited to their Accounts pursuant to the Tender Offer. In seeking such instructions, the Trustee shall distribute and/or make available to each affected Participant all or any portion of the following materials deemed relevant by the Trustee: (A) A copy of the description of the terms and conditions of the Tender Offer filed with the Securities and Exchange Commission on Schedule 14D-1. 88 96 (B) If requested by the Employer, a statement from Employer management setting forth its position with respect to the Tender Offer which is filed with the Securities and Exchange Commission on Schedule 14D-9 and/or a communication from the Employer conforming with 17 C.F.R. 240.14d-9(e), as amended. (C) An instruction form to be used by any Participant who wishes to instruct the Trustee to tender Employer Stock held in the Participant's Account(s), in response to the Tender Offer. The instruction form shall state that (i) if the Participant fails to return an instruction form to the Trustee by the indicated deadline, the Trustee will not tender any Employer Stock held in the Participant's Account(s), and (ii) the Participant's instructions to the Trustee shall be kept confidential. (D) Such additional material or information as the Trustee may consider necessary to assist the Participant in completing or delivering the instruction form (andy any amendments thereto) to the Trustee on a timely basis. Section 19.5 Expense. The Trustee shall have the right to require payment in advance by the Employer and the party making the Tender Offer of all reasonably anticipated expenses of the Trustee in connection with the distribution of information to the Participants and the processing of instructions received from the Participants. Section 19.6 Follow-Up Efforts; Other Information. The Trustee shall make such reasonable follow-up efforts, including without limitation, additional mailings or deliveries, bulletins, and posting in work areas as the Trustee considers appropriate under the circumstances to ensure that each Participant is made aware of his right to respond to the Tender Offer. The Employer shall furnish former Participants who have received Employer Stock so recently as not to be shareholders of record with the information given to Participants pursuant to Section 19.4. The Trustee is hereby authorized to tender any Employer Stock it may receive from such former Participants in accordance with appropriate instructions from them. Section 19.7 No Recommendations. Neither the Committee nor the Trustee shall express any opinion or give any advice or recommendation to any Participant concerning the Tender Offer nor shall they have any authority or responsibility to do so. The Trustee has no duty to monitor or police the party making the Tender Offer or the Employer in promoting or resisting the Tender Offer provided, however, that if the Trustee becomes aware of activity that on its face reasonably appears to the Trustee to be materially false, misleading or coercive, the Trustee shall demand promptly that the offending party take appropriate corrective action, the Trustee shall communicate with affected Participants in such manner as it deems advisable. Section 19.8 Tender of Employer Stock. The Trustee shall sell, convey or transfer Employer Stock allocated to Participants' Accounts pursuant to the terms and conditions of the Tender Offer as directed by Participants on the instruction forms. The Trustee shall sell, convey or transfer unallocated Employer Stock pursuant to the Tender Offer as directed by the Committee. 89 97 Section 19.9 Confidentiality. The Trustee shall keep Participant instructions to tender Employer Stock in confidence to the extent that the Trustee, in its discretion, determines that it is necessary to do so in order to comply with ERISA and any applicable regulations or other pronouncements of the U.S. Department of Labor. Section 19.10 Investment of Proceeds. If Employer Stock are sold pursuant to the Tender Offer, the Committee or a duly appointed Investment Manager qualified under Section 3(38) of ERISA shall direct the Trustee regarding the investment of the proceeds of such sale provided, however, that such proceeds shall not be reinvested in Employer Stock in the absence of confidential written instructions to the Trustee from affected Participants until such time as the Tender Offer lapses. END OF ARTICLE XIX 90 98 ARTICLE XX POST-1992 PLAN DISTRIBUTION RULES Section 20.1 Distribution on or after January 1, 1993. This Article applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Article, a distributee may elect, at the time and in the manner prescribed by the plan administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. Section 20.2 Definitions. (A) Eligible Rollover Distribution. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (B) Eligible Retirement Plan. An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (C) Distributee. A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternative payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (D) Direct Rollover. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. END OF ARTICLE XXI 91 99 The Employer has caused this Plan to be executed this ____th day of December, 1994. COMBANCORP By /s/Richard F. Demerjian --------------------------------- Richard F. Demerjian President By /s/Esther G. Wilson --------------------------------- Esther G. Wilson Secretary 92 EX-10.12 3 LEASE DATED NOVEMBER 2, 1995 1 EXHIBIT 10.12 LEASE AGREEMENT This lease is made between Phillip J. Pace and PACE DEVELOPMENT COMPANY, P. O. Box 159, Montebello, California 90640, herein called "Lessor" and Commerce National Bank of 6001 East Washington Boulevard, City of Commerce, California 90040, herein called "Lessee". 1. DESCRIPTION OF PREMISES Lessor leases to Lessee and Lessee hires from Lessor as herein provided, those certain premises commonly known as 420 N. Montebello Boulevard, Suite 101, Montebello, California 90640, AS MORE PARTICULARLY OUTLINED ON EXHIBIT "A" ATTACHED HERETO. 2. TERM The term of this lease is Three (3) years, beginning April 1, 1995. 3. RENT The rent for the first twenty-four (24) month period under this lease TOTALS One Hundred Twenty Four Thousand Five Hundred Eighty One Dollars and 60/100 ($124,581.60). Lessee agrees to pay Lessor installments of Five Thousand One Hundred Ninety and 90/100 ($5,190.90) each, payable beginning April 1, 1995 and payable on the first of each month thereafter during the first twenty four (24) month period of the lease. The remaining term of this lease will be at a rate adjusted to the CONSUMER PRICE index for LOS ANGELES-ANAHEIM- RIVERSIDE ALL URBAN CONSUMERS 1982-84=100, as published by the United States Department of Labor Statistics, or another acceptable published index, maximum not to exceed 6% per year. Said adjustment will take place annually throughout the term of this lease beginning with the 25th month of lease. All rent is due on or before first of each month. At no time will an adjustment be made that lowers the monthly rental amount. This is a Triple Net Lease (N.N.N. Lessee pays 29% proportionate share of property taxes, insurance, and maintains office interior and all PREMISES heating, air conditioning, electrical and plumbing, BUT EXCLUDING THE elevator). 4. USE OF PREMISES, GENERALLY The premises are leased to be used as a bank. Lessee agrees to restrict their use to such purposes and not to use or permit the use of the premises for any other purpose without first obtaining the consent in writing of Lessor, or of Lessor's authorized agent, Such consent not to be unreasonably withheld. Lessee o obtain all necessary licenses from City of Montebello, or any other governing agency having jurisdiction thereof to operate said business. 5. NO USE THAT INCREASES INSURANCE RISK Lessee shall not use the premises in any manner, even in his use for the purposes for which the premises are leased, that will increase risks covered by insurance on the building where the premises are located, so as to increase the rate of insurance on the premises, or to cause cancellation of any insurance policy covering the building. Lessee further agrees not to keep on the premises, or permit to be kept, used, or sold thereon, anything prohibited by the policy of fire insurance covering the premises. Lessee shall comply, at this own expense, with all requirements of insurers necessary to keep in force the fire and public liability insurance covering the premises and building. Lessee shall not store any toxic materials including, but not limited to paint, varnish, solvents, or oil on the premises EXCEPT NORMAL OFFICE SUPPLIES. 6. NO WASTE NUISANCE, OR UNLAWFUL USE Lessee shall not commit, or allow to be committed, any waste on the premises, create or allow any nuisance to exist on the premises, or allow the premises to be used for any unlawful purpose. 7. UTILITIES Lessee shall pay FOR ALL OF ITS OWN utilities furnished to its premises for the term of this lease, and SHALL PAY FOR maintenance of common areas, taxes and insurance prorated in proportion to the square footage leased. 8. MAINTENANCE Lessee, at its expense, shall maintain and keep the premises, including, without limitation, windows, doors, skylight, signs and interior walls. Lessor shall maintain the building roof, exterior walls, storefront, and adjacent sidewalks and parking areas in good condition. INITIALS: /s/ RFD / /s/ PJP ---------------------------- -1- 2 9. DELIVERY, ACCEPTANCE, AND SURRENDER OF PREMISES Lessor represents that the premises are in fit condition for use as a Bank. Lessee agrees to accept the premises on possession as being in a good state of repair and in sanitary condition. They shall surrender the premises to Lessor at the end of the lease term, if the lease is not renewed, in the same condition as when it took possession, allowing for reasonable use and wear, and damage by acts of Nature, including fire and storms. Lessee shall remove all business signs and symbols placed on the premises by them before redelivery of the premises on which they were placed in the same condition as before their placement. 10. PARTIAL DESTRUCTION OF PREMISES Partial destruction of the leased premises shall not render this lease void or voidable, or terminate it except as herein provided. Lessee hereby waives any rights it may have under the provisions of Sections 1932(2) and 1933(4) of the Civil Code. If the premises are partially destroyed during the term of this lease, Lessor shall repair them, when such repairs can be made in conformity with local, state, and federal laws and regulation, within one hundred eighty (180) days of the partial destruction. Rent for the premises will be reduced proportionally to be extent to which the repaid operations interfere with the normal conduct of Lessee's business on the premises. If the repairs cannot be so made within the time limited, Lessor has the option to make them within a reasonable time, provided notice is given to Lessee within thirty (30) days of partial destruction, and continue this lease in effect with proportional rent rebate to Lessee as provided for herein. If the repairs cannot be so made in one hundred eighty (180) days, and if Lessor does not elect to make them within a reasonable time, either party hereto has the option to terminate this lease. If the building in which the leased premises are located is more than one-third destroyed, Lessor and Lessee may each at ITS option terminate the lease whether the premises are insured or not. 11. LESSOR'S ENTRY FOR INSPECTION AND MAINTENANCE Lessor reserves the right to enter on the premises at a reasonable time UPON NOT LESS THAN 24 HOURS NOTICE to inspect them, to perform required maintenance and repair, or to make additions or alterations to any part of the building in which the premises leased are located, and Lessee agrees to permit Lessor to do so. Lessor may, in connection with such alterations, additions, or repairs erect scaffolding, fences, and similar structures, post relevant notices, and place moveable equipment PROVIDED THERE IS NO LOSS TO LESSEE of quiet enjoyment of the premises or loss of occupation thereof. 12. POSTING "FOR SALE", "FOR LEASE", OR "FOR RENT" SIGNS Lessor reserves the right to place "For Sale" signs on the premises at any time during the lease, or "For Lease" or " For Rent" signs on the premises at any time within thirty (30) days of expiration of the lease, if Lessee has not exercised his option to renew, and Lessee agrees to permit Lessor to do so. 13. SIGNS, AWNINGS, MARQUEES, ETC. Lessee MAY construct or place OR CHANGE THE ONE FREE STANDING SIGN CURRENTLY USED BY LESSEE AND MAY CONSTRUCT OR PLACE or permit to be constructed or placed signs, awnings, banners, marquees, or other structures projecting from the exterior of the premises without Lessor's written consent thereto PROVIDED THAT SUCH SIGNAGE IS ALLOWED BY THE CITY OF MONTEBELLO. 14. "QUITTING BUSINESS', "BANKRUPTCY" OR "LOST OUR LEASE" SALES Lessor agrees not to conduct "Quitting Business", "Lost our Lease", "Bankruptcy" or other such types of sales on the premises without Lessor's written consent. 15. NON-LIABILITY OF LESSOR FOR DAMAGES; INDEMNITY Lessor shall not be liable for liability or damage claims for injury to persons, including Lessee and his agents or employees, or for property damage from any cause, related to Lessee's occupancy of the premises, including those arising out of damages or losses occurring on sidewalks and other areas adjacent to the leased premises, during the terms of this lease or any extension hereof, except to the extent of Lessor's negligence. 16. LESSEE TO CARRY LIABILITY INSURANCE Lessee shall procure and maintain in force during the term of this lease and any extension thereof, at its INITIALS: /s/ RFD / /s/ PJP --------------------------------- -2- 3 expense, approved by Lessor, adequate to protect against liability for damage claims through public use of r arising out of accidents occurring in or around the leased premises, in a minimum amount of One Million Dollars ($1,000,000.00) for each person injured, Three Hundred Thousand Dollars ($300,000.00) for any one accident, and Three Hundred Thousand Dollars ($300,000.00) for property damage. Such insurance policies shall provide coverage for Lessor's contingent liability on such claims or losses. Copies of the policies shall be delivered to Lessor for keeping. Lessee agrees to obtain a written obligation from the insurers to notify Lessor in writing at least thirty (30) days prior to cancellation or refusal to renew any such policies. Lessee agrees that if such insurance policies are not kept in force during the entire term of this lease and any extension thereof, Lessor may procure the necessary insurance and pay the premium therefor, and that such premium shall be repaid to Lessor as an additional rent installment for the month following the date on which such premiums are paid. 17. LESSEE TO CARRY FIRE INSURANCE Lessee agrees to and shall, within ten (10) days from the date hereof, secure from a good and responsible company doing insurance business in California, and maintain during the entire term of this lease fire and extended insurance coverage upon the interior leased premises. Lessee hereby agrees to hold lessor armless for any and all losses sustained by fire to said premises, except to the extent of Lessor's negligence. Lessor and Lessee agree that in the event of loss due to any of the perils for which they have agreed to provide insurance, that each party shall look solely to its insurance for recovery. Lessor and Lessee hereby grant to each other, on behalf OF any insurer providing insurance to either of them with respect to the demised premises a waiver of any loss under such insurance. 18. LESSEE ASSIGNMENT, SUBLEASE, OR LICENSE FOR OCCUPATION BY OTHER PERSONS Lessee agrees not to assign or sublease the leased premises, any part thereof, OR any right or privilege connected therewith, or to allow any other person, except Lessee's agents and employees, to occupy the premises or any part thereof, without first obtaining Lessor's written consent. Lessor expressly covenants that such consent shall not be unreasonably or arbitrarily refused. One consent by Lessor shall not be a consent to a subsequent assignment, sublease, or occupation by other persons. Lessee's unauthorized assignment, sublease, or license to occupy shall be void, and shall terminate the lease at Lessor's option. Lessee's interest in this lease is not assignable. 19. LEASE BREACHED BY LESSEE'S RECEIVERSHIP ASSIGNMENT FOR BENEFIT OF CREDITORS, INSOLVENCY OR BANKRUPTCY Appointment of a receiver to take possession of assets (except a receiver appointed at Lessor's request as herein provided.) Lessee's general assignment for benefit of creditors, or Lessee's insolvency or taking or suffering action under the Bankruptcy Act is a breach of this lease. 20. LESSOR'S REMEDIES ON LESSEE'S BREACH If Lessee breaches this lease, Lessor shall have the following remedies in addition to his other rights and remedies in such event: A. Reentry. Lessor may reenter the premises immediately, and remove all Lessee's personal and property therefrom. Lessor may store the property in a public warehouse or at another place of its choosing at Lessee's expense. B. Termination. After reentry, Lessor may terminate the lease on giving thirty (30) days written notice of such termination to Lessee. Reentry only, without notice of termination, will not terminate the lease. C. Reletting Premises. After reentering, Lessor may relet the premises or any part thereof, for any term, without terminating the lease at such rent and on such terms as he may choose. Lessor may make alterations and repairs to the premises. 1. Liability of Lessee on Reletting. Lessee shall be liable to Lessor in addition to its other liability for breach of the lease for all expenses of reletting, and of the alterations and repairs made, which Lessor may incur. In addition Lessee shall be liable to Lessor for the difference between the rent installments that are due for the same period under this lease. 2. Application of Rent on Reletting. Lessor at his option may apply the rent received from reletting the premises as follows: INITIALS: /s/ RFD / /s/ PJP ----------------------------- -3- 4 (A) To reduce Lessee indebtedness to Lessor under the lease, not including indebtedness for rent; (B) To expenses of the reletting and alterations and repairs made; (C) To rent due under this lease; (D) To payment of future rent under this lease as it becomes due. If the new Lessee does not pay a rent installment promptly to Lessor, and the rent installment has been credited in advance of payment to Lessee's indebtedness other than rent, or if rentals from the new lease have been otherwise applied by Lessor as provided for herein, and during any rent installment period are less than the rent payable for the corresponding installment period under this lease, Lessee agrees to pay Lessor the deficiency separately for each rent installment deficiency period, and before the end of that period. Lessor may at anytime after such reletting terminate the lease for the breach because of which he reentered and relet. Lessor may recover from Lessee on terminating the lease for Lessee's breach all damages proximately resulting from the breach, including the cost of recovering the premises, and the worth of the balance of this lease over the reasonable rental value of the premises for the remainder of the lease term, which shall be immediately due Lessor from Lessee. 3. Appointment of Receiver. After reentry, Lessor may procure the appointment of a receiver to take possession of and collect rents from Lessee's business. If necessary, to collect such rents the receiver may carry on Lessee's business and take possession of Lessee's personal property used in the business, including inventory, trade fixtures, and furnishings, and use them in the business without compensating Lessee therefor. Proceedings for appointment of a receiver by Lessor, or the appointment of a receiver by Lessor, or the appointment of a receiver and the conducting by him of Lessee's business, shall not terminate this lease unless Lessor has given Lessee written notice of such termination as provided herein. 21. LESSEE TO PAY LESSOR'S ATTORNEYS' FEES If Lessor OR LESSEE files an action to enforce any covenant of this lease, or for breach of any covenant herein, THE LOSING PARTY SHALL PAY THE ATTORNEY FEES OF THE PREVAILING PARTY, such fees to be fixed by the Court. 22. MANNER OF GIVING NOTICE Notices given pursuant to the provisions of this lease, or necessary to carry out its provisions, shall be in writing, and delivered personally to the person to whom the notice is to be given, or mailed postage prepaid, addressed to such person. Lessor's address for this purpose shall be P. O. Box 159, Montebello, California 90640, or such other address as he may designate to Lessee in writing. Notices to Lessee may be addressed to Lessee at the premises leased. 23. EFFECT OF LESSOR'S WAIVER Lessor's waiver of breach of one covenant or condition of this lease is not a waiver of breach of others, or of subsequent breach of the one waived. Lessor's acceptance of rent installments after breach is not a waiver of the breach, except of breach of the covenant to pay such rent installment(s) accepted. 24. LEASE APPLICABLE TO SUCCESSORS This lease and the covenants and conditions hereof apply to and are binding on the heirs, successors, legal representatives, and assigns of the parties. 25. TIME OF ESSENCE Time is of the essence of this lease. 26. EFFECT OF EMINENT DOMAIN PROCEEDINGS Eminent domain proceedings resulting in the condemnation of a part of the premises leased herein that leave the rest useable by Lessee for purposes of the business for which the premises are leased will not terminate this lease, unless Lessor at his option terminates it by giving written notice of termination to Lessee. The effect of such condemnation should such option not be exercised will be to terminate the INITIALS: /s/ RFD / /s/ PJP ------------------------------------ -4- 5 lease as to the portion of the premises condemned, and leave it in effect as to the remainder of the premises. Lessee's rental for the remainder of the lease term shall in such case be reduced by the amount that the usefulness of the premises to it for such business purposes is reduced. All compensation awarded in the eminent domain proceedings as a result of such condemnation shall be Lessor's. 27. OPTION TO RENEW Lessor grants Lessee an option to renew this lease for a period of Five (5) years after expiration of the term of this lease. Rental equal to the reserve herein, plus an additional amount to be determined by the CONSUMER PRICE index for the LOS ANGELES-ANAHEIM- RIVERSIDE ALL URBAN CONSUMERS 1982-84=100 as published by the United States Department of Labor Statistics, or another acceptable published index, (maximum cost of living calculations not to exceed 6% per year). The other terms, covenants, and conditions of the renewal lease to be the same as those herein. To exercise such option Lessee must give Lessor written notice of his intention to do so at least sixty (60) days before this lease expires. Lessor grants to Lessee a second option to renew this lease for a period of Five (5) years after expiration of the term hereof at a rental equal to the rental reserve herein, plus an additional amount to be determined by the CONSUMER PRICE index for the LOS ANGLES- ANAHEIM-RIVERSIDE ALL URBAN CONSUMERS 1982-84=100 as published by the United States Department of Labor Statistics, or another acceptable published index, the other terms, covenants and conditions of the renewal lease to be the same as those herein. To exercise such option Lessee must give Lessor written notice to do so at least sixty (60) days before this lease expires. In the event that the lessee fails to notify lessor of its intent in writing lessor reserves the option to renew the lease for the option period if he so chooses. Executed at Montebello, California 90640, November 2, 1995. ----------------------- "LESSOR" ADDRESS: P. O. Box 159, Montebello, CA 90640 BY: /s/ PHILLIP J. PACE ----------------------------------- ------------------------------- PHILLIP J. PACE PACE DEVELOPMENT COMPANY "LESSEE" ADDRESS: 6001 EAST WASHINGTON BOULEVARD BY: /s/ RICHARD F. DEMERJIAN ----------------------------------- ------------------------------- RICHARD F. DEMERJIAN, PRESIDENT CITY OF COMMERCE, CA 90040 COMMERCE NATIONAL BANK
INITIALS: /s/ RFD / /s/ PJP ------------------------------- -5- EX-23.1 4 CONSENT OF MCGLADREY & PULLEN, LLP 1 EXHIBIT 23.1 2 [MCGLADREY & PULLEN LETTERHEAD] CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Registration No. 33-89924) of our report, dated January 26, 1996, which appears on page F1 of COMBANCORP's Annual Report on Form 10-K for the year ended December 31, 1995. Pasadena, California March 28, 1996 McGladrey & Pullen, LLP /S/ McGladrey & Pullen, LLP EX-27 5 FINANCIAL DATA SCHEDULE
9 1 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 5,639,763 11,755,000 2,800,00 0 21,046,565 120,000 0 23,771,964 (432,559) 68,830,029 62,023,797 0 421,322 0 0 0 4,453,300 1,931,610 68,830,029 2,904,107 2,295,941 0 5,200,048 1,199,411 1,199,411 4,000,637 (649,000) 0 3,399,064 562,095 562,095 0 0 329,095 0.58 0.58 6.42 102,575 167,113 0 163,333 498,827 785,250 69,982 432,559 432,559 0 0
-----END PRIVACY-ENHANCED MESSAGE-----