-----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, C2flcJItGtSR61U84zE+Au8I+uS7j7jVCJevqApLOmlVuEZI/zyhXC1VSSVwFwQc QnF0H+5DS0xyAJ4sYzMG5w== 0000841074-96-000003.txt : 19960517 0000841074-96-000003.hdr.sgml : 19960517 ACCESSION NUMBER: 0000841074-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COAST SAVINGS FINANCIAL INC CENTRAL INDEX KEY: 0000841074 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 954196764 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10264 FILM NUMBER: 96564707 BUSINESS ADDRESS: STREET 1: 1000 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90017-2457 BUSINESS PHONE: 2133622000 MAIL ADDRESS: STREET 1: 1000 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90017-5624 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file number 1-10264 COAST SAVINGS FINANCIAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4196764 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1000 Wilshire Boulevard, Los Angeles, California 90017-2457 (Address of principal executive offices) (Zip Code) (213) 362-2000 (Registrant's telephone number, including area code) _________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 As of May 4, 1996, the registrant had 18,583,317 shares of common stock, $.01 par value, outstanding. The shares of common stock represent the only class of common stock of the registrant. COAST SAVINGS FINANCIAL, INC. PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Statement of Financial Condition at March 31, 1996 and December 31, 1995. Consolidated Statement of Operations for the Three Months Ended March 31, 1996 and 1995. Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1996 and 1995. Notes to Consolidated Financial Statements. 1 COAST SAVINGS FINANCIAL, INC. CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
March 31, December 31, 1996 1995 (In thousands) ASSETS Cash and due from banks $ 145,602 $ 119,717 Federal funds sold and other short term investments 17,744 30,394 Investment securities held to maturity (fair value of $70.9 million and $73.2 million) 70,637 72,785 Loans receivable, net 5,281,049 5,245,464 Loans receivable held for sale, at the lower of cost or fair value (fair value of $212.3 million and $230.0 million) 205,560 221,032 Mortgage-backed securities held to maturity (fair value of $1.77 billion and $1.83 billion) 1,756,165 1,817,403 Mortgage-backed securities available for sale, at fair value 343,638 354,398 Real estate held for sale 39,999 31,696 Federal Home Loan Bank stock 86,949 85,837 Land and depreciable assets 97,571 92,920 Interest receivable and other assets 187,911 172,702 Goodwill 7,055 7,332 $8,239,880 $8,251,680 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $6,250,070 $6,123,472 Federal Home Loan Bank advances 727,000 804,250 Other borrowings 663,397 733,340 Other liabilities 105,203 104,754 Income taxes payable 13,049 12,684 Capital notes 55,801 55,746 7,814,520 7,834,246 Stockholders' Equity: Serial preferred stock, without par value; 50,000,000 shares authorized, none outstanding - - Common stock, $.01 par value; 100,000,000 shares authorized, 18,583,317 and 18,582,917 shares issued and outstanding at March 31, 1996, and December 31, 1995, respectively 186 186 Additional paid-in capital 265,026 265,018 Unrealized gain on securities available for sale, net of taxes 4,970 6,554 Retained earnings 155,178 145,676 425,360 417,434 $8,239,880 $8,251,680
See accompanying Notes to Consolidated Financial Statements. 2 COAST SAVINGS FINANCIAL, INC. CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31, 1996 1995 (In thousands except per share amounts) Interest income: Loans receivable $111,168 $113,441 Mortgage-backed securities 34,624 25,675 Investment securities 5,190 5,918 150,982 145,034 Interest expense: Deposits 71,286 64,039 Borrowings 25,420 33,585 96,706 97,624 Net interest income 54,276 47,410 Provision for loan losses 10,000 10,000 Net interest income after provision for loan losses 44,276 37,410 Noninterest income: Loan servicing fees and charges 3,458 3,430 Other 9,574 8,162 13,032 11,592 Noninterest expense: Compensation and benefits 16,408 19,516 Office occupancy, net 9,923 10,033 Federal deposit insurance premiums 4,421 4,297 Other general and administrative expenses 8,821 8,066 Total general and administrative expenses 39,573 41,912 Real estate operations, net 1,622 977 Amortization of goodwill 276 316 41,471 43,205 Earnings before income tax expense 15,837 5,797 Income tax expense 6,335 2,319 Net earnings $ 9,502 $ 3,478 Net earnings per share of common stock: Primary $0.50 $ .18 Fully diluted $0.50 $ .18
See accompanying Notes to Consolidated Financial Statements. COAST SAVINGS FINANCIAL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 1996 1995 (In thousands) Cash flows from operating activities: Net earnings $ 9,502 $ 3,478 Adjustments to reconcile net earnings to net cash used by operating activities: Proceeds from the sale of loans held for sale 46,825 529 Provision for loan losses 10,000 10,000 Deferred income tax expense 5,937 2,319 Net increase in accounts payable 545 13,602 Net increase in accounts receivable (8,764) (4,291) Loans originated for sale, net of refinances and principal payments (12,920) (55,654) Other (11,352) (12,511) Total adjustments 30,271 (46,006) Net cash provided (used) by operations 39,773 (42,528) Cash flows from investing activities: Loans originated for investment, net of refinances (196,518) (320,944) Principal repayments on loans 119,063 81,509 Principal repayments on mortgage-backed securities ("MBS") held to maturity 53,513 38,382 Principal repayments on MBS available for sale 8,458 4,328 Net decrease in short term investment securities 2,081 8,090 Purchase of investment securities (51) (47) Maturities and principal repayment on investment securities 14 13 Purchase of land and depreciable assets, net (6,016) (3,749) Sale of real estate held for sale 11,627 8,097 Purchase of FHLB stock - (2,450) Net cash used by investing activities (7,829) (186,771) Continued COAST SAVINGS FINANCIAL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended March 31, 1996 1995 (In thousands) Continued Cash flows from financing activities: Net increase in deposits 126,598 134,800 Net increase (decrease) in FHLB advances (77,250) 108,000 Net increase (decrease) in short-term borrowings (68,063) 111,595 Common stock options exercised 6 - Net cash provided (used) by financing activities (18,709) 354,395 Net increase in cash and cash equivalents 13,235 125,096 Cash and cash equivalents at beginning of year 150,111 102,021 Cash and cash equivalents at end of period $ 163,346 $ 227,117 Supplemental disclosures of cash flow information: Cash payments of interest $ 37,397 $ 48,911 Cash payments (refunds) of income taxes, net 30 (966) Supplemental schedule of noncash investing and financing activities: Loans exchanged for MBS, net- 47,262 Additions to loans resulting from the sale of real estate acquired in settlement of loans 7,307 8,453 Additions to real estate acquired in settlement of loans 19,147 29,994 Increase (decrease) of unrealized gain on securities available for sale, net of taxes (1,584) 2,289
See accompanying Notes to Consolidated Financial Statements. COAST SAVINGS FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Coast Savings Financial, Inc. (the "Company") is the holding company for Coast Federal Bank, Federal Savings Bank ("Coast" or the "Bank"). The unaudited consolidated financial statements of the Company and subsidiaries included herein reflect all adjustments, consisting only of normal recurring adjustments, which are in the opinion of management necessary to present a fair statement of the results for the interim periods indicated. Certain reclassifications have been made to the consolidated financial statements for 1995 to conform to the 1996 presentation. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations for the three months ended March 31, 1996, are not necessarily indicative of the results of operations to be expected for the remainder of the year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1995. 2. In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights ("SFAS 122"), which is an amendment to SFAS No. 65, Accounting for Certain Mortgage Banking Activities ("SFAS 65"). SFAS 122 amends SFAS 65 to remove the distinction of accounting for mortgage servicing rights resulting from originated loans and those resulting from purchased loans. Additionally, SFAS 122 requires that a mortgage banking enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. Effective January 1, 1996, Coast adopted SFAS No. 122. There was no material effect on the Company's financial condition as of March 31, 1996, or results of operations for the quarter then ended, resulting from the adoption of SFAS No. 122. COAST SAVINGS FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Cash and cash equivalents includes: March 31, 1996 1995 (In thousands) Cash and due from banks $145,602 $118,286 Federal funds sold 12,000 51,000 Repurchase agreements - 55,000 Commercial paper 5,744 2,831 $163,346 $227,117 COAST SAVINGS FINANCIAL, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company is the sole stockholder of Coast. Substantially all of the Company's consolidated revenues are derived from the operations of Coast, and Coast represented substantially all of the Company's consolidated assets and liabilities at March 31, 1996. Coast's business is that of a financial intermediary and consists primarily of attracting deposits from the general public and using such deposits, together with borrowings and other funds, to make mortgage loans secured by residential real estate located in California. At March 31, 1996, Coast operated 89 retail banking offices in California providing consumer banking services as well as residential real estate loans. Coast is subject to significant competition from other financial institutions, and is also subject to regulation by certain federal agencies and undergoes periodic examinations by those regulatory agencies. Results of Operations Net earnings for the first quarter of 1996 were $9.5 million compared to net earnings of $3.5 million for the first quarter of 1995. The increase in net earnings from 1995 to 1996 was due primarily to increased net interest income. For the first quarter of 1996 and 1995, earnings per share were $.50 and $.18 respectively, on both primary and fully diluted bases. COAST SAVINGS FINANCIAL, INC. Net interest income. The effect on net interest income of changes in interest rates and balances of interest-earning assets and interest-bearing liabilities is illustrated in the following table. Information is provided on changes for the periods indicated attributable to (i) changes in rates (changes in the weighted average rate multiplied by the prior period average portfolio balance), (ii) changes in volume (changes in the average portfolio balance multiplied by the prior period weighted average rate) and (iii) the combined effect of changes in rates and volume (changes in the weighted average rate multiplied by change in the average portfolio balance).
Three Months Ended March 31, 1996 versus Three Months Ended March 31, 1995 Amount of increase (decrease) due to change in: Average Average Average Rate Volume Rate/Vol. Total (In thousands) Interest Income: Loans $ 6,810 $(8,552) $(531) $(2,273) MBS 2,369 6,036 544 8,949 Investment securities (402) (346) 20 (728) Total interest income 8,777 (2,862) 33 5,948 Interest Expense: Deposits 4,149 2,941 157 7,247 Borrowings (2,080) (6,516) 431 (8,165) Total interest expense 2,069 (3,575) 588 (918) Change in net interest income $ 6,708 $ 713 $(555) $ 6,866
Interest income for the quarter ended March 31, 1996, increased by $5.9 million from the amount reported for the first quarter of 1995. This increase was caused by an increase in the rate earned on interest-earning assets of 36 basis points to 7.58%, offset in part by a decrease in the average balance of such assets totaling approximately $64 million. COAST SAVINGS FINANCIAL, INC. Interest expense recorded during the first quarter of 1996 decreased by $.9 million from the amount recorded during the corresponding quarter of 1995. This decrease resulted from a decrease in the average balance of interest-bearing liabilities of approximately $131 million, partially offset by an increase in the average rate paid on such liabilities of three basis points, to 6.06%. The decrease in the average balance of liabilities included a decrease in the average balance of borrowings of approximately $403 million offset in part by an increase in average deposits of approximately $272 million. Provision for loan losses. The provision for loan losses of $10.0 million for the first quarters of both 1996 and 1995 reflects management's continued concern over general economic conditions and property values in California. For a discussion of the general valuation allowance (the "GVA"), see "Loan Portfolio and Off-balance Sheet Risk Elements and Nonperforming Assets" below. Noninterest income. Noninterest income increased for the three months ended March 31, 1996, by $1.4 million over the amount recorded in the corresponding period of 1995 due primarily to increased fees on deposits related to increased checking account balances. (For further discussion of checking account balances, see "Capital Resources and Liquidity" below.). Noninterest expense. Noninterest expense for the quarter ended March 31, 1996, decreased by $1.7 million from the respective period of 1995. The reduction was due to a decrease of $3.1 millon in compensation expense, partially offset by increases of $.8 million in other general and administrative expenses and $.6 million in real estate operations, net. The decrease in compensation expense generally reflects reduced staffing levels. Income taxes. Income tax expense of $6.3 million and $2.3 million was recorded for the first quarter of 1996 and 1995, respectively. These represented accruals of federal income and California franchise taxes on adjusted pretax earnings. The "effective income tax rate" (the ratio of income tax expense to pretax earnings) was 40% for both quarters. Asset/Liability Management Substantially all of Coast's assets and liabilities are comprised of interest-earning assets including loans, MBS and short-term investments, and interest-bearing liabilities including deposits and borrowings. The risks associated with COAST SAVINGS FINANCIAL, INC. interest-earning assets can be generally categorized as credit risk, market risk and interest rate risk. Credit risk is, generally, the risk that a loan or other credit-related instrument will not be repaid in accordance with its terms, and is discussed below in the section entitled "Loan Portfolio and Off-balance Sheet Risk Elements and Nonperforming Assets." Market risk is, generally, the risk that the market value of an asset could decline in response to changes in various factors, including prevailing rates of interest, demand for that type of asset, and others. Interest rate risk is generally associated with the degree to which interest-earning assets and interest-bearing liabilities mature or reprice at different frequencies (e.g., maturities) and/or on different bases (e.g., indices to which specific assets or groups of assets are tied). In order to mitigate the impact of interest rate risk, management places a significant emphasis on seeking to match the maturities and repricing characteristics of Coast's interest-earning assets and interest-bearing liabilities ("financial assets" and "financial liabilities," respectively). COAST SAVINGS FINANCIAL, INC. Coast measures its exposure to interest rate risk using a variety of techniques. One commonly used measure of such exposure is the difference between the amounts of assets and liabilities maturing or repricing over various periods (the "maturity gap"). The following table illustrates the contractual maturities, as adjusted for estimates of prepayments and for frequency of rate changes ("Repricing Mechanisms"), of the financial assets and financial liabilities of the Company as of March 31, 1996. The table also reports the maturity gap between Coast's repricing or maturing assets and liabilities. The interest rate sensitivity of Coast's assets and liabilities illustrated in the following table could vary substantially if different assumptions were used or if actual experience differs from the assumptions utilized.
Over Over One Five Over Within to Five to Ten Ten One Year Years Years Years Total (Dollars in millions) Interest-earning assets: Cash and investment securities: Cash and due from banks $ 146 $ - $ - $ - $ 146 Investment securities 83 1 - 4 88 Loans and MBS: ARMs 7,148 171 - - 7,319 Fixed rate 70 117 60 20 267 FHLB stock 87 - - - 87 Total $7,534 $ 289 $ 60 $ 24 $7,907 Interest-bearing liabilities: Deposits: Checking accounts $ 691 $ - $ - $ - $ 691 Money market accounts 673 - - - 673 Certificates of deposit 4,504 339 43 - 4,886 Borrowings: FHLB advances 652 75 - - 727 Other 607 56 56 - 719 Total $7,127 $ 470 $ 99 $ - $7,696 Maturity gap $ 407 $ (181) $ (39) $ 24 $ 211 Cumulative maturity gap $ 407 $ 226 $ 187 $ 211 $ 211 Cumulative maturity gap as a percentage of total assets 5% 3% 2% 3% 3%
COAST SAVINGS FINANCIAL, INC. At March 31, 1996, Coast's estimated one-year gap between maturities or repricing of financial assets and financial liabilities was approximately a positive $407 million, representing 5% of total assets, compared to $562 million, or 7% of total assets, at December 31, 1995. The Company has matched interest rate sensitivities primarily through the origination of adjustable rate mortgage loans ("ARMs"), the sale of fixed rate mortgage loans and the acquisition of term funding. Except for the utilization of interest rate exchange agreements ("Swaps") from time to time, Coast has generally not utilized derivative financial instruments to manage interest rate or other risks. See discussion of Swaps below. Historically, Coast's cost of funds has closely matched the Eleventh District cost of funds index ("COFI"), with the result that increases in Coast's cost of funds are accompanied by increases in interest rates on its COFI-based loans and MBS. However, because of the inherent lag in the reset mechanism of these assets, Coast's interest rate spreads generally can be expected to increase as COFI falls and to decrease as COFI rises. During 1991 through 1993, Coast originated ARM products which are tied to the London Interbank Offered Rate ("LIBOR") index. This index is generally more responsive to changes in prevailing market rates of interest and, as a result, interest rates on ARMs tied to LIBOR generally respond more quickly to changes in market interest rates than do ARMs tied to COFI. With the increase in prevailing interest rates experienced during 1994, consumer demand for LIBOR-based ARMs substantially declined, and as a result, substantially all ARMs originated during 1995 and 1996 have been COFI-based products. As of March 31, 1996, Coast had $296.4 million (5%) of loans and $232.7 million (11%) of MBS tied to LIBOR, and $4.57 billion (82%) of loans and $1.80 billion (86%) of MBS tied to COFI included in the loan and MBS portfolios, which totaled $5.55 billion and $2.10 billion, respectively. Coast originated $226.7 million and $412.3 million of ARMs during the quarters ended March 31, 1996 and 1995, respectively. At March 31, 1996, ARMs and adjustable rate MBS totaled $5.31 billion and $2.07 billion, respectively, or a combined 97% of the Company's total loans and MBS. Coast's lending activity is focused on the origination of single family ARM loans on properties located within California. Coast does not currently lend or anticipate lending on other types of properties for the foreseeable future except to finance sales of foreclosed real estate or to facilitate loan assumptions as permitted by the provisions of the respective mortgage notes. COAST SAVINGS FINANCIAL, INC. Management determines the appropriate portfolio designation of loans receivable, MBS and investment securities at the time of acquisition. If management has the positive intent and the Company has the ability at the time of acquisition to hold such assets until maturity, they are classified as held to maturity and are carried at amortized historical cost. Assets that are to be held for indefinite periods of time and not necessarily held to maturity are classified as held or available for sale. Such assets include those which management intends to use as part of its asset/liability management strategy and which may be sold in response to changes in interest rates, resultant prepayment risk and other factors. MBS and investment securities identified as being available for sale are carried at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of income taxes. Loans identified as being held for sale are carried at the lower of amortized historical cost or fair value, with any required adjustment being reported in current operations. Sales of mortgage assets held or available for sale function primarily to fund new loan originations, manage interest rate risk and add to the loan servicing portfolio. This strategy is, however, limited, based upon other factors including the purchasers' investment limitations, general market and competitive conditions, mortgage loan demand and other factors. During the quarter ended March 31, 1996, Coast sold $46.8 million of mortgage loans from its held for sale portfolio. Coast is a party to off-balance sheet financial instruments containing certain types of risk, acquired in the normal course of business, in order to meet the borrowing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include Swaps which are considered derivative financial instruments held for purposes other than trading. Swaps generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying notional principal amounts. In that the credit exposure of these Swaps is limited to the potential default of the Swap counterparty, the potential credit risks associated with such Swaps are substantially less than the notional principal amounts of the Swaps. At March 31, 1996, Coast had $155 million of Swaps on which Coast paid a floating rate and received a fixed rate of interest. The Swaps were entered into during 1994 and have remaining maturities ranging from one to three months. The Swaps are comprised of $75 million based on LIBOR and $80 million based on COFI. The Swaps are matched with specific certificates of COAST SAVINGS FINANCIAL, INC. deposit and effectively convert the matched fixed rate deposits to floating rate liabilities that provide a discrete funding source directly matching portions of Coast's earning asset base (COFI- and LIBOR-based loans), and result in a fixed spread between the interest rates paid on the Swaps and the yield on the related portion of the loan portfolio. The following table summarizes certain information regarding Swaps outstanding at March 31, 1996.
Notional Weighted Average Type Amount Interest Rate Maturity Dates (Dollars in Paid Received thousands) Pay floating/ receive fixed $155,000 5.18 % 5.40 % April 1996 to June 1996
As described above, these Swaps were entered into for the purpose of converting the interest rate characteristics of certain liabilities; therefore, these are accounted for as hedges and there is no requirement to mark the values of the Swaps to market under generally accepted accounting principles. The fair values of Swaps represent the estimated amounts Coast would receive or pay to terminate the agreements, taking into consideration current interest rates. As of March 31, 1996, the fair value of the Swaps approximated of $1.2 million. The net effect of the Swaps, exclusive of interest on the related deposits, was to record $46 thousand and $3 thousand of interest expense during the first quarter of 1996 and 1995, respectively, which is included in interest expense on deposits in the accompanying consolidated statement of operations. Coast had pledged $2.4 million of MBS at March 31, 1996, to guarantee its performance under swap agreements. COAST SAVINGS FINANCIAL, INC. Loan Portfolio and Off-balance Sheet Risk Elements and Nonperforming Assets Coast defines nonperforming assets to include (i) loans on which it has ceased to accrue interest ("Nonaccrual Loans"), (ii) foreclosed real estate owned, and (iii) those loans whose terms have been modified such that the interest rates charged to the borrowers have been reduced to levels below the original contract rates and below market rates of interest at both the time of modification and the reporting date ("Modified Loans"). Following is a table which sets forth the components of nonperforming assets at the dates indicated. (There were no Modified Loans at March 31, 1996, or December 31, 1995.)
March 31, 1996 December 31,1995 (Dollars in thousands) Percent Percent Balance of Total Balance of Total Nonaccrual Loans: Single family residential $ 52,723 40% $ 43,792 39% Multifamily residential 25,247 19 25,646 23 Commercial and other 15,318 11 11,913 10 93,288 70 81,351 72 Foreclosed real estate owned: Single family residential 22,503 17 15,077 13 Multifamily residential 8,951 7 6,652 6 Commercial and other 8,545 6 9,967 9 39,999 30 31,696 28 Total nonperforming assets $133,287 100% $113,047 100%
COAST SAVINGS FINANCIAL, INC. Following is a table which sets forth the components of nonperforming assets at the dates indicated.
Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, 1996 1995 1995 1995 1995 1994 1994 (Dollars in millions) Nonaccrual Loans $ 93 $ 81 $ 81 $ 90 $ 82 $ 97 $ 134 Foreclosed real estate owned 40 32 39 39 51 44 74 Modified Loans - - 1 1 1 1 1 Total nonperforming assets $ 133 $ 113 $ 121 $ 130 $ 134 $ 142 $ 209 Total assets $8,240 $8,252 $8,440 $8,585 $8,540 $8,197 $8,128 Ratio of total nonperforming assets to total assets 1.62% 1.37% 1.43% 1.52% 1.57% 1.73% 2.57%
As of March 31, 1996, Coast's ratios of Nonaccrual Loans to total loans and nonperforming assets to total assets increased to 1.70% and 1.62%, respectively, from 1.49% and 1.37%, respectively, as of December 31, 1995. The increase in these ratios is due primarily to increased delinquencies and foreclosures of loans secured by single family residential real estate. In that the incidence of delinquencies and foreclosures is influenced by many variables beyond management's control, there can be no assurance that Coast will not experience increased levels of nonperforming assets. Effective January 1, 1994, the Company adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS 114"). SFAS 114 does not apply to large groups of smaller-balance, homogeneous loans that are collectively valued for impairment. A loan is impaired when, based on current information and events, a creditor will be unable to collect all amounts contractually due under a loan agreement. If a loan is determined to be impaired, a writedown is taken or an allowance is established based upon the difference between Coast's investment in the loan and the fair value of the loan's underlying collateral. Where impairment is considered to be permanent, a charge-off is recorded; where impairment may be temporary, an allowance is established. COAST SAVINGS FINANCIAL, INC. Subsequent to classification as impaired, the fair values of the impaired loans are periodically reviewed. If there is additional permanent impairment, a charge-off is recorded. If there is a change in the fair value of a loan that may be temporary, the allowance is adjusted accordingly. All such charge-offs, provisions and any related recoveries are recorded as adjustments to the general valuation allowance for loan losses. Coast's impaired loans totaled $142.7 million at March 31, 1996. For the quarters ended March 31, 1996 and 1995, the average investment in impaired loans was $138.9 million and $88.4 million, respectively. As of March 31, 1996, Nonaccrual Loans included $40.6 million of impaired loans. Impaired loans at March 31, 1996, included $85.5 million of loans for which valuation allowances of $13.8 million had been established and $71.0 million of loans for which no allowance was considered necessary. Interest income on impaired loans which are performing is recognized on the accrual basis and income on such loans totaled $2.5 million and $.3 million for the first quarters of 1996 and 1995, respectively. At March 31, 1996, Coast had letters of credit outstanding aggregating $385.9 million. The letters of credit were issued primarily in 1984 and 1985 to enhance the rating of $394.6 million of housing revenue bonds issued to finance the construction of multifamily residential projects. The credit risk involved in these letters of credit is essentially the same as that involved in making real estate loans. At March 31, 1996, the loans payable to the housing revenue bond trustee associated with two of the letters of credit, aggregating approximately $51 million, were in default. Coast has installed court-appointed receivers to manage the properties. In the event the defaults are not remedied by the borrowing entities and Coast forecloses on the properties, they would become components of Coast's foreclosed real estate owned and would increase nonperforming assets by approximately $51 million. Coast maintains a GVA to absorb credit losses related to its assets and off-balance sheet items. The GVA is reviewed and adjusted quarterly and based upon a number of factors, including asset classifications, economic trends, industry experience, industry and geographic concentrations, estimated collateral values, management's assessment of credit risk inherent in the portfolio, delinquency migration analysis, historical loss experience, ratio analysis and Coast's underwriting practices. Economic conditions, especially those affecting real estate markets, may change, which could result in the need for an increased GVA in future periods. In addition, regulatory COAST SAVINGS FINANCIAL, INC. agencies, as an integral part of their examination process, periodically review Coast's GVA. These agencies may require Coast to establish additional allowances based on their judgments of the information available at the time of the examination. At March 31, 1996, the GVA totaled $82 million and included $65 million allocated to loans and $17 million attributable to off-balance sheet items. The portion of the GVA attributable to off-balance sheet items is included in other liabilities in the accompanying consolidated statement of financial condition, and relates to the letters of credit discussed above and to loans sold with recourse. The following table sets forth the amount, allocation and activity in the GVA for the three months ended March 31, 1996.
Loans Commercial Off- Residential Real Estate Balance Real Estate Mortgage Sheet Mortgage and Other Items Total (In millions) GVA allocation at December 31, 1995 $ 48 $17 $17 $ 82 Additions charged to operations 10 - - 10 Recoveries 2 - - 2 Losses charged (11) (1) - (12) Transfers 1 (1) - - GVA allocation at March 31, 1996 $ 50 $15 $17 $ 82
Capital Resources and Liquidity Federal regulations currently require a savings institution to maintain a monthly average daily balance of liquid assets (including cash, certain time deposits, bankers' acceptances and specified United States government, state or federal agency obligations) equal to at least 5% of the average daily balance of its net withdrawable accounts and short-term borrowings during the preceding calendar month. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% of such accounts and borrowings depending upon economic conditions and the deposit flows of member institutions. Federal regulations also require each member institution to COAST SAVINGS FINANCIAL, INC. maintain a monthly average daily balance of short-term liquid assets (generally those having maturities of 12 months or less) equal to at least 1% of the average daily balance of its net withdrawable accounts and short-term borrowings during the preceding calendar month. Monetary penalties may be imposed for failure to meet these liquidity ratio requirements. Coast's liquidity and short-term liquidity ratios for the calculation period ended March 31, 1996, were 5.36% and 4.59%, respectively, which exceeded the applicable requirements. Principal repayments on and sales of loans and MBS have been a primary source of funds for Coast. For the three months ended March 31, 1996 and 1995, principal repayments on loans and MBS amounted to $185.9 million and $126.8 million, respectively, and proceeds from loan sales totaled $46.8 million and $.5 million, respectively, for the same periods. A primary use of funds was the origination of loans (net of refinances of loans in Coast's portfolios) of $214.3 million and $379.2 million for these two periods, respectively. At March 31, 1996, the total of approved commitments to originate loans amounted to $212.7 million. There were no commitments to sell loans, MBS or investment securities and there were no commitments to purchase loans, MBS or investment securities. At March 31, 1996, outstanding letters of credit totaled $385.9 million. Scheduled repayments of FHLB of San Francisco advances for the twelve months ending March 31, 1997, totaled $652.0 million. For the three months ended March 31, 1996 and 1995, Coast experienced net increases in deposits of $126.6 million and $134.8 million, respectively. These increases are primarily attributable to Coast's focused efforts to market its transaction accounts, which efforts resulted in increases of $59.0 million and $54.0 million in checking account balances during the first quarters of 1996 and 1995, respectively. Other potential sources of funds available to Coast include securities sold under agreements to repurchase, a line of credit with the FHLB of San Francisco and direct access to borrowings from the Federal Reserve System. At March 31, 1996, the amount of additional credit available from the FHLB of San Francisco was approximately $1.18 billion. In addition, the Company and Coast have access to the capital markets for issuing debt or equity securities; however, access can be limited from time to time by various factors including market conditions, credit ratings and general economic conditions. COAST SAVINGS FINANCIAL, INC. Under OTS capital regulations, Coast must meet three capital tests. First, the tangible capital requirement mandates that Coast's stockholder's equity less intangible assets (as defined) be at least 1.5% of adjusted total assets as defined in the regulation. Second, the core capital requirement currently mandates core capital to be at least 3% of adjusted total assets as defined in the regulation. Third, the risk-based capital requirement currently mandates that core capital plus supplementary capital as defined in the OTS capital regulations be at least 8% of risk-adjusted assets as defined therein. The following table reflects, in both dollars and ratios, Coast's regulatory capital position as of March 31, 1996, the minimum requirements at that date, and the amounts by which such capital exceeded the required amounts.
Minimum Actual Requirement Excess Amount Ratio Amount Ratio Amount Ratio (Dollars in millions) Risk-based $576 11.10% $415 8.00% $161 3.10% Core 457 5.58 246 3.00 211 2.58 Tangible 457 5.58 123 1.50 334 4.08
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") contains "prompt corrective action" provisions pursuant to which insured depository institutions are to be classified into one of five categories based primarily upon capital adequacy, ranging from "well capitalized" to "critically undercapitalized." The OTS regulations implementing these provisions define the five capital categories as follows: (i) a savings institution is "well capitalized" if it has a total risk- based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio (Tier 1 capital to total assets) of 6% or greater, has a core capital ratio of 5% or greater and is not subject to any written capital order or directive to meet and maintain a specific capital level or any capital measure; (ii) a savings institution is "adequately capitalized" if it has a total risk- based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater and has a core capital ratio of 4% or greater (3% for certain highly rated institutions); (iii) a savings institution is "undercapitalized" if it has a total risk- based capital ratio of less than 8% or has either a Tier 1 risk- based or a core capital ratio that is less than 4%; (iv) a COAST SAVINGS FINANCIAL, INC. savings institution is "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6%, or has either a Tier 1 risk-based or a core capital ratio that is less than 3%; and (v) a savings institution is "critically undercapitalized" if its "tangible equity" (defined in the prompt corrective action regulations to mean core capital plus cumulative perpetual preferred stock) is equal to or less than 2% of its total assets. The OTS also has authority, after an opportunity for a hearing, to downgrade a savings institution from "well capitalized" to "adequately capitalized," or to subject an "adequately capitalized" or "undercapitalized" savings institution to the supervisory actions applicable to the next lower category, for supervisory concerns. At March 31, 1996, Coast's regulatory capital exceeded the thresholds necessary to be considered well capitalized. On April 10, 1987, Coast acquired substantially all of the assets and liabilities of Central Savings and Loan Association from the Federal Savings and Loan Insurance Corporation ("FSLIC") in a supervisory-assisted transaction. As part of the transaction, Coast entered into a contractual agreement with the FSLIC under which the FSLIC made a cash contribution to Coast of approximately $299 million which, pursuant to the agreement, was to be reflected as a permanent addition to Coast's regulatory capital. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") eliminated the FSLIC and replaced it (and the Federal Home Loan Bank Board) for supervisory and regulatory purposes with the OTS. The OTS has taken the position that the FSLIC contribution should be classified as supervisory goodwill, thereby excluding it from regulatory capital. In June 1992, Coast filed an action in the United States Court of Federal Claims seeking monetary damages for breach of the contractual agreement with the FSLIC. No prediction can be made as to whether this lawsuit will be successful, or if successful, what damages might be awarded to Coast. In three cases with similar issues the Court of Federal Claims ruled in favor of the plaintiff thrift institutions on the issue of liability of the federal government for breach of contract. The Court of Appeals for the Federal Circuit, sitting en banc, affirmed the Court of Federal Claims ruling in these cases. The federal government was granted a review of the Court of Appeals decision by the United States Supreme Court. The Supreme Court heard oral arguments in April 1996 and a decision is anticipated in the second or third quarter of 1996. In November 1995, the FDIC reduced its deposit insurance premiums for commercial banks and other institutions which are members of the Bank Insurance Fund (the "BIF") to a range of from COAST SAVINGS FINANCIAL, INC. none to $.27 per $100 of deposits (subject to a statutory minimum of $2,000 in annual assessments), with a historical low average of approximately $.0043 per $100 of deposits, effective beginning with the semiannual period commencing January 1, 1996. The FDIC maintained the current range of deposit insurance premiums assessable against savings institutions, such as Coast, which are members of the Savings Association Insurance Fund (the "SAIF") at $.23 to $.31 per $100 of deposits. The current deposit rate premium disparity between BIF- insured institutions and SAIF-insured institutions resulting from the recently implemented BIF premium reduction places SAIF- insured institutions at a competitive disadvantage due to higher premium costs and may worsen the financial condition of the SAIF by leading to a shrinkage in its deposit base. Legislative efforts to assist the SAIF in attaining its required reserve level, and thereby permit SAIF deposit insurance premiums to be reduced to levels at or near those paid by BIF-insured institutions, have not been successful to date. Congress proposed, as part of the budget reconciliation bill submitted to and vetoed by the President in late 1995, a one-time, special assessment on all savings institutions to recapitalize the SAIF. The proposal would have required SAIF-insured institutions to pay a one-time special assessment (estimated to be between approximately 80 and 90 basis points on deposits) and would provide for a pro rata sharing by all federally insured institutions of the obligation, now borne entirely by SAIF- insured institutions, to pay the interest on the bonds that were issued by a specially created federal corporation for the purpose of funding the resolution of failed thrift institutions. If the proposed legislation were ultimately to become law, the special assessment would be reported in Coast's consolidated statement of operations in the quarter during which such legislation was finally enacted. Provisions that would eliminate the deduction for additions to bad debt reserves available to qualifying thrift institutions under existing provisions of the Internal Revenue Code were included in the budget reconciliation bill that was vetoed by President Clinton and have also been included in subsequent legislative proposals, including health care legislation which has been passed in differing forms by both Houses of Congress. While the ultimate enactment of the health care legislation is uncertain, the provisions of the legislation relating to thrift institution bad debt reserves are not thought to be a point of disagreement. The bills would generally require "recapture" (i.e. inclusion in taxable income) of the balance of such reserve accounts as of December 31, 1995, to the extent they exceed a COAST SAVINGS FINANCIAL, INC. base year amount (generally the balance of reserves as of December 31, 1987, reduced proportionately for any reduction in an institution's loan portfolio) in ratable installments over a six-year period. Coast's tax bad debt reserves at December 31, 1995, exceeded the base year amount by approximately $5.8 million and the related liability for recapture has been accrued. COAST SAVINGS FINANCIAL, INC. PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS On April 10, 1987, Coast acquired substantially all of the assets and liabilities of Central Savings and Loan Association from the Federal Savings and Loan Insurance Corporation ("FSLIC") in a supervisory-assisted transaction. As part of the transaction, Coast entered into a contractual agreement with the FSLIC under which the FSLIC made a cash contribution to Coast of approximately $299 million which, pursuant to the agreement, was to be reflected as a permanent addition to Coast's regulatory capital. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") eliminated the FSLIC and replaced it (and the Federal Home Loan Bank Board) for supervisory and regulatory purposes with the OTS. The OTS has taken the position that the FSLIC contribution should be classified as supervisory goodwill, thereby excluding it from regulatory capital. In June 1992, Coast filed an action in the United States Court of Federal Claims seeking monetary damages for breach of the contractual agreement with the FSLIC. No prediction can be made as to whether this lawsuit will be successful, or if successful, what damages might be awarded to Coast. In three cases with similar issues the Court of Federal Claims ruled in favor of the plaintiff thrift institutions on the issue of liability of the federal government for breach of contract. The Court of Appeals for the Federal Circuit, sitting en banc, affirmed the Court of Federal Claims ruling in these cases. The federal government was granted a review of the Court of Appeals decision by the United States Supreme Court. The Supreme Court heard oral arguments in April 1996 and a decision is anticipated in the second or third quarter of 1996. For further information regarding legal proceedings involving the Company, see the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Items 2 through 5 are not applicable or the answers are negative. COAST SAVINGS FINANCIAL, INC. PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits Required Exhibit Number Exhibit 10.1* 1996 Coast Savings Financial, Inc. Equity Incentive Plan 11.1 Computation of Earnings Per Share *Indicates employment or compensation agreement affecting executive officers and directors. Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements 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. COAST SAVINGS FINANCIAL, INC. (Registrant) Date: May 10, 1996 /s/ Ray Martin Ray Martin Chairman of the Board and Chief Executive Officer (Authorized Officer) Date: May 10, 1996 /s/ James F. Barritt James F. Barritt Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) COAST SAVINGS FINANCIAL, INC. EXHIBIT INDEX Sequentially Exhibit No. Description Numbered Page 10.1 1996 Coast Savings Financial, Inc. Equity Incentive Plan 11.1 Computation Of Earnings Per Share Exhibit 11.1 COAST SAVINGS FINANCIAL, INC. COMPUTATION OF EARNINGS PER SHARE
Three months ended March 31, 1996 1995 Fully Fully Primary Diluted Primary Diluted (In thousands except per share amounts) Net earnings applicable to common stock and common stock equivalents ("CSEs") $ 9,502 $ 9,502 $ 3,478 $ 3,478 Weighted average common shares outstanding 18,583 18,583 18,457 18,457 Dilutive CSEs on stock options 585 601 406 450 Weighted average shares 19,168 19,184 18,863 18,907 Net earnings per share of common stock $ .50 $ .50 $ .18 $ .18
EX-27 2
9 0000841074 COAST SAVINGS FINANCIAL INC 1000 3-MOS DEC-31-1996 JAN-1-1996 MAR-31-1996 145,602 0 12,000 0 343,638 1,919,495 1,930,091 5,551,609 65,000 8,239,880 6,250,070 1,240,210 118,252 205,988 0 0 186 425,174 8,239,880 111,168 5,190 34,624 150,982 71,286 96,706 54,276 10,000 0 41,471 15,837 9,502 0 0 9,502 .5 .5 2.72 93,288 9,807 0 0 82,000 12,000 2,000 82,000 82,000 0 0
EX-10 3 1996 COAST SAVINGS FINANCIAL, INC. EQUITY INCENTIVE PLAN 1. Purpose. The purpose of the 1996 Coast Savings Financial, Inc. Equity Incentive Plan is to promote and advance the interest of the Company and its shareholders by enabling the Bank to attract, retain and reward key employees and Non-Employee Directors and to strengthen the mutuality of interests between such employees and Non- Employee Directors and the Company's shareholders. The Plan is designed to meet this intent by offering equity-based incentive awards, thereby giving Plan participants a proprietary interest in pursuing the long-term growth, profitability and financial success of the Company. 2. Definitions. For purposes of the Plan, the following terms shall have the meanings set forth below: (a) "Award" or "Awards" means an award or grant made to a Participant under Sections 6 through 9, inclusive, of the Plan. (b) "Award Agreement" means a written agreement in such form as may from time to time be approved by the Committee, which Award Agreement shall set forth the terms and conditions of an Award under the Plan, and be duly executed by the Company and the Participant. (c) "Bank" means Coast Federal Bank, Federal Savings Bank, a federally chartered savings bank, or any successor corporation. (d) "Board" means the Board of Directors of the Company. (e) "Cause" for termination by the Bank means that the Committee has determined that (i) the Employee's refusal to follow written, lawful directions or the Employee's material failure to perform his or her duties, in either case, after the Employee has been given notice and a reasonable opportunity to cure; (ii) the Employee's material failure to comply with the Bank's policies; or (iii) the Employee's engaging in conduct which is or may be unlawful or disreputable, to the possible detriment of the Bank, any of its affiliates, or the Employee's own reputation; provided, however, that if the Employee's written employment agreement provides for a definition of cause or an analogous provision, it shall govern with respect to that Employee. (f) "Change in Control" means the acquisition by any person or entity of control of the Bank, or any entity controlling the Bank, within the meaning of Section 583.7 of the Regulations for Savings and Loan Holding Companies of the Office of Thrift Supervision, provided, however, that no change in control shall be deemed to occur in the event of any regulatory action (A) by the Director of the Office of Thrift Supervision or his or her designee, at the time the Federal Deposit Insurance Corporation or Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823(c)); or (B) by the Director of the Office of Thrift Supervision or his or her designee at the time such Director or his or her designee approves a supervisory merger to resolve problems related to the operation of the Bank or when the Bank is determined by such Director to be in an unsafe and unsound condition, or in the event of any merger, consolidation, or corporate reorganization in which the owners prior to said combination of the capital stock entitled to vote in the election of directors of the Board ("Voting Stock") of the Bank or any organization controlling the Bank receive 75% or more of the resulting entity's Voting Stock. Without limitation of the foregoing, a change in control shall be deemed to occur if any person or entity directly or indirectly acquires ownership, control, power to vote, or proxies representing more than 25 percent of the Voting Stock of the Bank or any entity controlling the Bank, or obtains control of the election of a majority of the directors of the Bank or any entity controlling the Bank. (g) "Code" means the Internal Revenue Code of 1986, as in effect from time to time, or any successor thereto, together with rules, regulations and interpretations promulgated thereunder. (h) "Committee" means the Compensation Committee of the Board, constituted as provided in Section 3 of the Plan, or any other committee appointed by the Board whose members meet the requirements for eligibility to serve set forth in Section 3 of the Plan and which is vested by the Board with responsibility for the administration of the Plan. (i) "Common Stock" means the Common Stock par value $0.01 per share of the Company or any security of the Company issued in substitution, exchange or lieu thereof. (j) "Company" means Coast Savings Financial, Inc. or any successor corporation. (k) "Director" means a member of the Board. (l) "Disability" means disability as determined by the Committee in accordance with standards and procedures similar to those under the Bank's long- term disability plan. (m) "Employee" means key employees (including officers who are members of the Board) of the Bank or any Subsidiary. (n) "Exchange Act" means the Securities Exchange Act of 1934, as amended and in effect from time to time, or any successor statute. (o) "Fair Market Value" of Common Stock means the closing price on the New York Stock Exchange - Composite Tape of such Common Stock on the date(s) in question, or, if the Common Stock shall not have been traded on any such date(s), the closing price on the New York Stock Exchange - Composite Tape on the first day prior thereto on which the Common Stock was so traded or if the Common Stock is not traded on the New York Stock Exchange, such other amount as may be determined by the Committee by any fair and reasonable means. Fair Market Value determined by the Committee in good faith shall be final, binding and conclusive on all parties. (p) "Incentive Stock Option" means any Stock Option that is specifically designated by the Committee as an "incentive stock option" within the meaning of section 422 of the Code. (q) "Non-Employee Director" means any Director who is not an Employee of the Company, the Bank or any Subsidiary. (r) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. (s) "Participant" means an Employee or Non-Employee Director to whom an Award has been made and is outstanding under the Plan. (t) "Performance Objectives" means specific targets and objectives established by the Committee using one or more of the following eight criteria: earnings per share of the Common Stock, return on average stockholders' equity of the Company, total stockholder return, return on average assets of the Company, net earnings of the Company, nonperforming assets ratio of the Company, general and administrative expenses of the Company and efficiency ratio of the Company. Performance Objectives may be absolute or may be based on the results of a peer group of comparable companies established by the Committee. Satisfaction of Performance Objectives shall be determined in accordance with generally accepted accounting principles, as utilized by the Company in its reports filed under the Exchange Act. (u) "Performance Period" means a period of not less than one nor more than ten consecutive Bank fiscal years for which Performance Objectives have been established. (v) "Plan" means this 1996 Coast Savings Financial, Inc. Equity Incentive Plan, as set forth herein and as it may be amended from time to time. (w) "Restriction Period" means the period of time a Participant must remain employed by the Bank or any of its Subsidiaries, in order for a Restricted Stock Award to vest. (x) "Restricted Stock Award" means an Award of shares of Common Stock granted pursuant to the provisions of Section 9 of the Plan which may be subject to restrictions which lapse over time with or without regard to Performance Objectives, as the Committee in its sole discretion shall determine. (y) "Retirement" means retirement from active employment with the Bank and its Subsidiaries at any age at which the Employee is entitled to an immediately commencing pension under any retirement plan of the Bank. (z) "Rule 16b-3" means Rule 16b-3 of the General Rules and Regulations of the Exchange Act (or any successor rule or regulation). (aa) "Spread" means the amount (not less than zero) by which the exercise price of a Stock Option exceeds the Fair Market Value of a share of Common Stock subject to the Stock Option. (bb) "Stock Appreciation Right" means an Award granted pursuant to the provisions of Section 8 of the Plan, entitling a Participant to receive an amount equal to (or if the Committee shall determine at the time of grant, less than) the excess of the Fair Market Value of a share of Common Stock on the date of exercise over the Fair Market Value of a share of Common Stock on the date of grant of the Stock Appreciation Right, multiplied by the number of shares of Common Stock with respect to which the Stock Appreciation Right shall have been exercised. (cc) "Stock Option" means an Award to purchase shares of Common Stock granted pursuant to the provisions of Sections 6 and 7 of the Plan. (dd) "Subsidiary" means any corporation (other than the Company or the Bank) in an unbroken chain of corporations beginning with the Company or the Bank if each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (ee) "Ten-Percent Stockholder" means an individual who "owns," as defined in section 424 of the Code, stock possessing more than ten percent of the total combined voting power of all classes of stock of: (i) the Company, (ii) the Bank, (iii) a Subsidiary, or (iv) a parent corporation of the Company. (ff) Window Period" means the period beginning on the third business day following the date of release of the financial data specified in paragraph (e)(l)(ii) of Rule 16b-3 and ending on the twelfth business day following such date. 3. Administration. (a) The Committee. To the extent required by Rule 16b-3, the Plan shall be administered by the Committee to be appointed from time to time by the Board and comprised of not less than two of the then members of the Board. To the extent required by Rule 16b-3, each Committee member must be a "disinterested person" as defined in Rule 16b-3. Unless the Board determines otherwise, the Committee shall be comprised solely of persons who qualify as "outside" directors for purposes of section 162(m)(4)(C)(i) of the Code. Members of the Committee shall serve at the pleasure of the Board and the Board may from time to time remove members from, or add members to, the Committee. A majority of the members of the Committee shall have the power to act for the Committee. Action approved in writing by a majority of the members of the Committee then serving shall be fully as effective as if the action had been taken by majority vote at a duly called meeting of the Committee, but only if each member of the Committee was given notice of such proposed action one day prior to such written approval. (b) Powers of the Committee. The Committee is authorized to construe and interpret the Plan, to promulgate, amend and rescind rules and regulations relating to the implementation of the Plan and to make all other determinations necessary or advisable for the administration of the Plan. Subject to the provisions of the Plan, the Committee shall have full authority, in its discretion, to determine the Employees to whom Awards shall be granted, the number of shares of Common Stock to be covered by each of the Awards, and the terms of any such Award. Any good faith determination, decision or action of the Committee in connection with the construction, interpreta- tion, administration, or application of the Plan shall be final, conclusive and binding upon all persons participating in the Plan and any person claiming under or through them. The Company shall effect the granting of Awards by execution of appropriate Award Agreements. No member of the Committee shall be liable for any good faith act or omission with respect to his or her service on the Committee. 4. Shares of Common Stock Subject to the Plan. (a) Maximum Number of Shares of Common Stock. The maximum number of shares of Common Stock as to which Awards may be granted under the Plan shall be five percent (5%) of the number of shares of Common Stock outstanding as of the first day of the Company's 1996 fiscal year, subject to adjustment, as provided in Section 14 of the Plan. For the purpose of computing the total number of shares of Common Stock available for Awards under the Plan, counted against this limit shall be the number of shares of Common Stock subject to issuance upon exercise or settlement of Awards, in each case determined as at the dates as of which such Awards are granted. If any Awards are forfeited, terminated or expire unexercised, the shares of Common Stock which were theretofore subject to such Awards shall again be available for Awards under the Plan to the extent of such forfeiture or expiration of such Awards. Common Stock which may be issued under the Plan may be either authorized and unissued shares or issued shares which have been reacquired by the Company. Fractional shares of Common Stock shall not be issued under the Plan. (b) Certain Limitations. The maximum number of shares of Common Stock with respect to which Stock Options and Stock Appreciation Rights may be granted during any fiscal year to any Employee shall not exceed 100,000 and the maximum number of shares of Common Stock with respect to which Restricted Stock Awards may be granted during any fiscal year to any Employee should not exceed 100,000; however, the maximum number of shares of Common Stock with respect to which Awards may be granted during any fiscal year to any Employee shall not exceed 100,000. 5. Eligibility. Awards may be granted from time to time to and the Employees as the Committee, in its discretion, shall determine. In making Awards, the Committee shall take into account the duties of prospective Awardees, their present and potential contributions to the success of the Company, the Bank and any of their Subsidiaries, and such other factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan. Non-Qualified Stock Options shall be granted automatically to Non-Employee Directors, as provided in Section 7 and constitute the only Award that may be granted to Non-Employee Directors under this Plan. 6. Stock Options. Stock Options granted under the Plan may be (i) Incentive Stock Options, (ii) Non-Qualified Stock Options or (iii) a combination of the foregoing. The Award Agreement shall designate the extent to which a Stock Option is an Incentive Stock Option or a Non-Qualified Stock Option. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the express provisions of the Plan, as the Committee shall deem desirable: (a) Grant. Stock Options may be granted alone, in addition to or in tandem with other Awards under the Plan. (b) Stock Option Price. The exercise price per share of Common Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant, but in no event shall the exercise price of a Stock Option be less than One Hundred Percent of the Fair Market Value of a share of the Common Stock on the date of the grant of such Stock Option. In addition, in the case of an Employee who is a Ten-Percent Shareholder at the time an Incentive Stock Option is granted, the exercise price of an Incentive Stock Option shall not be less than One Hundred Ten Percent of the Fair Market Value of the Common Stock on the date of the grant of such Incentive Stock Option. (c) Option Term. The term of each Stock Option shall be fixed by the Committee, except that such term shall not exceed ten years. In the case of a grant of an Incentive Stock Option to an Employee who is a Ten-Percent Shareholder at the time of grant, the term of an Incentive Stock Option shall not exceed five years. (d) Exercisability. A Stock Option shall be exercisable at such times and subject to such terms and conditions as shall be determined by the Committee at the date of grant. Except as provided in Section 12 of the Plan or in the relevant Award Agreement, no Stock Option may be exercised unless the holder thereof is at the time of such exercise in the employ of the Bank or a Subsidiary and has been continuously so employed since the date the Stock Option was granted. (e) Method of Exercise. A Stock Option may be exercised, in whole or in part, by giving written notice of exercise to the Bank specifying the number of shares of Common Stock to be purchased and any other information the Committee may prescribe. Such notice shall be accompanied by payment in full of the purchase price in cash or, if acceptable to the Committee in its sole discretion (and subject to the requirements of Rule 16b-3), in shares of Common Stock already owned by the Participant. No shares of Common Stock shall be issued until full payment has been made therefor. The Committee, in its sole discretion, may establish procedures whereby a Participant, subject to the requirements of Rule 16b-3, Regulation T, federal income tax laws, and other federal, state and local tax and securities laws, can exercise a Stock Option or a portion thereof without making a direct payment of the option price to the Bank. If the Committee so elects to establish a cashless exercise program, the Committee shall determine, in its sole discretion, and from time to time, such administrative procedures and policies as it deems appropriate and such procedures and policies shall be binding on any Participant wishing to utilize the cashless exercise program. (f) Special Rules for Incentive Stock Options. To the extent that the aggregate Fair Market Value (determined as of the options' grant) of the Common Stock with respect to which Incentive Stock Options first become exercisable by the Employee during any calendar year (under all such plans of the Employee's employer corporation and its parent, and Subsidiaries, if any), exceeds $100,000, the options shall not be an Incentive Stock Option. For purposes of the preceding sentence, Stock Options shall be taken into account in the order in which they were granted. Any Stock Option granted under the Plan which is intended to be an Incentive Stock Option, but which is in excess of the limitation set forth in this Section shall to that extent be a Non- Qualified Stock Option. Incentive Stock Options shall not be granted after the 10th anniversary of the Plan's adoption by the Board. 7. Automatic Stock Option Grants to Non-Employee Directors. Notwithstanding any other provision of the Plan, each Non-Employee Director shall receive on the day of the 1996 annual meeting of shareholders of the Company, a Non- Qualified Stock Option to purchase 5,000 shares of Common Stock provided that the Non-Employee Director continues in office after said annual meeting. Thereafter, during the term of the Plan, each newly elected Non-Employee Director will receive on the day of his or her initial election a Non-Qualified Stock Option to purchase 5,000 shares of Common Stock. Each such Non-Qualified Stock Option shall have a term of ten years and shall not be exercisable until such Non-Employee Director has completed one full year of service as a Non-Employee Director with the Company after the date on which the option was granted. Except as provided in Section 12 of the Plan, no Stock Option may be exercised by a Non-Employee Director unless the holder thereof is at the time of such exercise a member of the Board and has been continuously a member of the Board since the date such Non-Qualified Stock Option was granted. The price per share of Common Stock to be paid by the Non- Employee Director shall equal the Fair Market Value of one share of Common Stock on the date the Non-Qualified Option is granted and the purchase price of the shares of Common Stock as to which such an option is exercised shall be paid in cash, shares of Common Stock already owned by the Participant, or pursuant to any cashless exercise program established pursuant to Section 6(e). 8. Stock Appreciation Rights. The grant of Stock Appreciation Rights under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the express terms of the Plan, as the Committee shall deem desirable: (a) Grant. A Stock Appreciation Right may be granted in tandem with, in addition to or independent of a Stock Option or any other Award under the Plan. A Stock Appreciation Right in tandem with a Stock Option must be granted more than six months prior to the end of the term of the Stock Option. (b) Exercise. A Stock Appreciation Right may be exercised by a Participant in accordance with procedures established by the Committee. The Committee may also provide that a Stock Apprecia- tion Right shall be automatically exercised on one or more specified dates. A Stock Appreciation Right granted in tandem with a Stock Option will entitle the Participant, upon exercise of the Stock Appreciation Right to surrender all or part of the unexercised portion of that tandem Stock Option and to receive the Spread for the number of shares of Common Stock which could have been acquired under the surrendered Stock Option. Each Stock Appreciation Right granted in tandem with a Stock Option shall be exercisable to the extent, and only to the extent, the related Stock Option is exercisable. Each Stock Appreciation Right shall be for such term as the Committee may determine, not to exceed 10 years and may expire prior to the term of a tandem Stock Option. Each Stock Appreciation Right granted on a stand alone basis shall be exercisable to the extent, and for such term, as the Committee may determine. Except as provided in Section 12 of the Plan or in the relevant Award Agreement, no Stock Appreciation Right may be exercised unless the holder thereof is at the time of such exercise in the employ of the Bank or a Subsidiary and has been continuously so employed since the date the Stock Appreciation Right was granted. (c) Form of Payment. Payment upon exercise of a Stock Appreciation Right may be made in cash, in shares of Common Stock or any combination thereof, as the Committee shall determine. Any Stock Appreciation Right exercised on or subsequent to a Change in Control shall be paid in cash, however. (d) Special Rules for Stock Appreciation Rights Granted in Tandem with Incentive Stock Options. With respect to Stock Appreciation Rights granted in tandem with Incentive Stock Options, the following rules shall apply: (i) The Stock Appreciation Right shall not be exercisable unless the Spread on the related Incentive Stock Option is positive. (ii) In no event shall any amounts paid per share pursuant to the Stock Appreciation Right exceed the Spread on the date of exercise of the related Incentive Stock Option. (iii) The Stock Appreciation Right must expire no later than the last date on which the related Incentive Stock Option can be exercised. 9. Restricted Stock Awards. Restricted Stock Awards may be subject to restrictions which lapse over time. They may be granted with or without regard to Performance Objectives for a specific Performance Period. Restricted Stock Awards shall be subject to the following terms and conditions and may contain such additional terms and conditions, not inconsistent with the express provisions of the Plan, as the Committee shall deem desirable: (a) Restricted Stock Awards. A Restricted Stock Award is an Award of shares of Common Stock transferred to a Participant subject to such terms and conditions as the Committee deems appropriate, including, without limitation, restrictions on the sale, assignment, transfer or other disposi- tion of such shares and the requirement that the Participant forfeit such shares on termination of employment for specified reasons within a specified period of time. (b) Grants of Awards. Restricted Stock Awards may be granted under the Plan in such form and on such terms and conditions as the Committee may from time to time approve. Restricted Stock Awards may be granted alone, in addition to or in tandem with other Awards under the Plan. Subject to the terms of the Plan, the Committee shall determine the number of Restricted Stock Awards to be granted to a Participant and the Committee may impose different terms and conditions on any particular Restricted Stock Award made to any Participant. Each Participant receiving a Restricted Stock Award shall be issued a stock certificate for those shares of Common Stock. This certificate shall be registered in the name of such Participant, shall be accompanied by a stock power duly executed by such Participant, and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to the Award. This certificate shall be held in custody by the Company until the restrictions on it have lapsed or been removed. (c) Performance Objectives. If the Committee determines that a Restricted Stock Award is intended to qualify as performance-based compensation under section 162(m)(4)(C) of the Code, the Restricted Stock Award shall be subject to the attainment of Performance Objectives for a Performance Period. Specific Performance Objectives shall be established in writing no later than 90 days after the commencement of the Performance Period to which the Performance Objectives relate, but in no event after the first quarter of the Performance Period. In establishing the Performance Objectives, the Committee shall also establish a schedule setting forth the portion of the Restricted Stock Award which will be earned based on the degree of achievement of the Performance Objectives, as determined by the Committee. Except to the extent it would cause a Restricted Stock Award intended to qualify as performance-based compensation to fail so to qualify, the Committee may at any time adjust the Performance Objectives, any such schedule, change the way Performance Objectives are measured or shorten any Performance Period if it determines that conditions or the occurrence of events warrant such action. The Committee shall not have the discretion to increase a Restricted Stock Award which is intended to constitute performance-based compensation under the Code. (d) Restriction Period. In order for a Participant to vest in a Restricted Stock Award, the Participant must remain in the employment of the Bank or its Subsidiaries, subject to relief for specified reasons, for the Restriction Period set forth in the Award Agreement. During the Restriction Period, a Participant may not sell, assign, transfer, pledge, encumber or otherwise dispose of shares of Common Stock received under a Restricted Stock Award. The Committee, in its sole discretion, may provide for the lapse of restrictions in installments during the Restriction Period. Unless otherwise restricted by the provisions of Section 9(c), upon expiration of the applicable Restriction Period (or lapse of restrictions during the Restriction Period if the restrictions lapse in installments) the Participant shall be entitled to receive his or her Restricted Stock Award or portion thereof, as the case may be. If the Restricted Stock Award is intended to constitute performance-based compensation under the Code, as soon as practicable after the end of the applicable measurement period as determined by the Committee, the Committee shall determine the extent to which the Performance Objectives, if any, have been met and the extent to which Restricted Stock Awards are payable. (e) Performance Periods. The Committee may establish Performance Periods applicable to Restricted Stock Awards. There shall be no limitation on the number of Performance Periods established by the Committee and more than one Performance Period may encompass the same fiscal year. (f) Rights as a Shareholder. Subject to any restrictions set forth in the applicable Award Agreement, with respect to the shares of Common Stock received under a Restricted Stock Award, a Participant shall have all of the rights of a shareholder of the Company, including the right to vote the shares and the right to receive any cash dividends. Subject to any restrictions set forth in the applicable Award Agreement, stock dividends issued with respect to the shares covered by a Restricted Stock Award shall be treated as additional shares under the Restricted Stock Award and shall be subject to the same restrictions and other terms and conditions that apply to shares under the Restricted Stock Award with respect to which such dividends are issued. 10. Deferral Elections. The Committee in its sole discretion may permit a Participant to elect to defer his or her receipt of the payment of cash or the delivery of shares of Common Stock that would otherwise be due to such Participant by virtue of the earn out or exercise of an Award made under the Plan. If any such election is permitted, the Committee shall establish rules and procedures for such payment deferrals, including the possible (a) payment or crediting of reasonable interest or earnings on the deferred amounts, (b) the payment or crediting dividend equivalents on deferrals of Common Stock and (c) the election procedures a Participant must use. 11. Dividend Equivalents. Awards may, in the discretion of the Committee, earn dividend equivalents. The Participant may be credited with an amount equal to the amount of cash or stock dividends that would have been paid on the shares of Common Stock covered by such Award, to the extent outstanding on a dividend record date, had such covered shares been issued and outstanding on that dividend record date. The Committee shall establish rules and procedures governing the crediting of dividend equivalents, timing, form of payment and payment contingency rules, as it deems to be appropriate. 12. Termination of Employment. Except as otherwise provided in an Award Agreement, upon termination of a Participant's employment with the Bank or any of its Subsidiaries or a Non-Employee Director's service with the Company, the Participant (or in the case of death, the persons to whom the Award is transferred by will or the laws of descent and distribution) may exercise the Award during the following periods of time (but in no event after the normal expiration date of such Award) to the extent the Participant was entitled to exercise the Award at the date of termination: (i) in the case of death, Disability or Retirement, the Award shall remain exercisable for the term of the Award; (ii) in the case of termination for Cause, the Award shall immediately terminate and shall no longer be exercisable; and (iii) in the case of termination for any other reason, the Award shall remain exercisable for 90 days after the date of termination. To the extent the Award is not exercised within the foregoing periods of time, the Award shall automatically terminate at the end of the applicable period of time. 13. Non-transferability of Awards. No Award under the Plan, and no rights or interest therein, shall be assignable or transferable by a Participant except by will, the laws of descent and distribution or pursuant to a qualified domestic relations order, as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. During the life of a Participant, Stock Options and Stock Appreciation Rights are exercisable only by, and payments in settlement of Awards will be payable only to, the Participant or his or her legal representative. 14. Changes in Capitalization. (a) No Effect on Power to Make Changes in Capitalization. The existence of the Plan and the Awards granted hereunder shall not affect or restrict the right of the Board or the share- holders of the Company to make any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, to merge or consolidate the Company with another entity, issue bonds, debentures or preferred or prior preference stocks ahead of or affecting the Company's capital stock, to dissolve or liquidate the Company or to sell or transfer any part of its assets or business, or to engage in any other corporate act or proceeding. (b) Adjustments. Except with respect to Stock Options granted to Non-Employee Directors pursuant to Section 7 which shall be automatically adjusted pursuant to the second paragraph of this Section, in the event of changes in all of the outstanding shares of Common Stock by reason of stock dividends, stock splits, recapitalization, mergers, consolidations, combinations, or exchanges of shares, separations, reorganizations, liquidations or similar events, or in the event extraordinary cash or non-cash dividends are declared with respect to outstanding shares of Common Stock or other similar transactions, the number and class of shares of Common Stock available under the Plan in the aggregate, the number and class of shares of Common Stock subject to Awards theretofore granted, the number of Stock Appreciation Rights theretofore granted, applic- able purchase prices, applicable Performance Objectives for the Performance Periods not yet completed and performance levels related thereto, and all other applicable provisions, shall be equitably adjusted by the Committee, as determined by the Committee in its sole discretion. With respect to Stock Options granted to Non- Employee Directors pursuant to Section 7, the number of shares of Common Stock covered by the Plan, the number of shares of Common Stock covered by each outstanding Stock Option held by a Non- Employee Director and the exercise price of such Stock Option shall be automatically proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a subdivision or consolidation of shares of Common Stock or the payment of a stock dividend (but only of Common Stock) or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company. Any adjustments made pursuant to this Section may provide for the elimination of any fractional share of Common Stock which might otherwise become subject to an Award. 15. Change in Control. (a) Special Treatment. In the event of a Change in Control (i) all Stock Options or Stock Appreciation Rights then outstanding shall become fully exercisable as of the date of the Change in Control, whether or not then exercisable and (ii) all restrictions and conditions of all Restricted Stock Awards then outstanding shall be deemed satisfied as of the date of the Change in Control. Moreover, the Committee, in its sole discretion, may at any time, and subject to the terms and conditions as it may impose: (a) grant Awards that become exercisable only in the event of a Change in Control, (b) provide for Awards to be exercised automatically and only for cash in the event of a Change in Control, and (c) provide in advance or at the time of a Change in Control for cash to be paid in settlement of any Award in the event of a Change in Control. (b) Restrictions on Benefits. Notwithstanding the provisions of Section 15(a), the aggregate present value of all parachute payments payable to or for the benefit of a Participant, whether payable pursuant to the Plan (or otherwise) (excluding those payments made pursuant to an agreement with the Bank that specifically provides otherwise), shall be limited to three times the Participant's base amount less one dollar and, to the extent necessary, the special treatment described in clauses (i) and (ii) of Section 15(a) shall be reduced or eliminated by the Committee in order that this limitation not be exceeded; provided, however, that this provision shall not apply if the Employee's written employment agreement contains a comprehensive parachute provision with conflicting terms. For purposes of this Section, the terms "parachute payment," "base amount" and "present value" shall have the meanings assigned thereto under Code section 280G. It is the intention of this Section to avoid excise taxes on the Participant under Code section 4999 or the disallowance of a deduction to the Company or the Bank pursuant to Code section 280G. Acceptance of an Award constitutes the Employee's agreement to this Section of the Plan. 16. Amendment and Termination. The Board may amend or terminate the Plan at any time, but no amendment shall be made without the approval of the stockholders of the Company if stockholder approval under section 422 of the Code or Rule 16b-3 would be required or if it would change the material terms of performance goals that were previously approved by the Company's stockholders, within the meaning of Treasury Regulation Section 1.162-27(e)(4)(vi) or a successor provision (unless the Board determines that such approval is not necessary to avoid loss of a deduction under section 162(m) of the Code, such approval will not avoid such a loss of deduction or such approval is not advisable). The provisions set forth in Section 7 of this Plan (and any other Sections of this Plan that affect the formula award terms required to be specified in this Plan by Rule 16b-3) shall not be amended more than once every six months, except that the Plan may be amended to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. No amendment of the Plan or any Award granted under the Plan shall impair any Participant's rights, without his or her consent, under any Award theretofore granted under the Plan. 17. Miscellaneous. (a) Tax Withholding. The Bank shall have the right to deduct or withhold any taxes, including transfer taxes, of any kind required by law to be withheld with respect to such payments under the Plan or to take such other action as may be necessary in the opinion of the Bank to satisfy all obligations for the payment of such taxes, including requiring the Participant or his beneficiary or estate to pay any amount required to be withheld. If Common Stock is used to satisfy tax withholding, such Stock shall be valued based on the Fair Market Value when the tax withholding is required to be made. If the Employee disposes of shares of Common Stock acquired pursuant to an Incentive Stock Option in any transaction considered to be a disqualifying transaction under sections 421 and 422 of the Code, the Employee must give the Bank written notice of such transfer and the Bank shall have the right to deduct any taxes required by law to be withheld from any amounts otherwise payable to the Employee. The Committee may permit an Employee who is subject to Section 16(b) of the Exchange Act to satisfy his or her tax liability with respect to the exercise, vesting or settlement of an Award, by having the Bank withhold shares of Common Stock otherwise issuable upon the exercise, vesting or settlement of the Award if such Employee makes an irrevocable election, by way of a written statement in a form acceptable to the Committee, at least six (6) months before the date the Employee recognizes federal taxable income with respect to the receipt of such shares of Common Stock or during any Window Period. (b) No Right to Employment. Neither the adoption of the Plan nor the granting of any Award shall confer upon any employee of the Bank or any Subsidiary any right to continued employment with the Bank or any Subsidiary nor shall it interfere in any way with the right of the Bank or a Subsidiary to terminate the employment of any of its employees at any time, with or without Cause even if Awards will be forfeited as a result of employment termination. (c) Unfunded Plan. Except as provided in Section 17(d), the Plan shall be unfunded and neither the Company nor the Bank shall be required to segregate any assets that may at any time be represented by Awards under the Plan. No obligation of the Company or the Bank under the Plan or any Award shall be deemed to be secured by any pledge of, or other encumbrance on, any property of the Company or the Bank. (d) Payments to Trust. The Committee is authorized to cause to be established a trust agreement or several trust agreements or other funding vehicles whereunder the Committee may make payments of amounts due or to become due to Participants in the Plan. (e) Other Bank Benefit and Compensation Programs. Payments and other benefits received by a Participant under an Award made pursuant to the Plan shall not be deemed a part of a Participant's regular, recurring compensation for purposes of the termination, indemnity or severance pay law of any country and shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan or similar arrangement provided by the Company, the Bank or a Subsidiary unless expressly so provided by such other plan or arrangements, or except where the Committee expressly determines that inclusion of an Award or portion of an Award should be included to accurately reflect competitive compensation practices or to recognize that an award has been made in lieu of a portion of competitive annual cash compensation. Awards under the Plan may be made in combination with or in tandem with, or as alternatives to, grants, awards or payments under any other Company, Bank or Subsidiary plans. The Company, the Bank or any Subsidiary may adopt such other compensation programs and additional compensation arrangements as it deems necessary to attract, retain and reward employees for their service. (f) Securities Law Restrictions. No shares of Common Stock shall be issued under the Plan unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable Federal and state securities laws. Certificates for shares of Common Stock delivered under the Plan may be subject to such stock- transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed, and any applicable Federal or state securities law. The Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (g) Award Agreement. Each Participant receiving an Award under the Plan shall enter into an Award Agreement with the Company in a form specified by the Committee agreeing to the terms and conditions of the Award and such related matters as the Committee shall, in its sole discretion, determine. (h) Costs of Plan. The costs and expenses of administering the Plan shall be borne by the Bank. (i) Section 16. With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision under the Plan or action by the Committee fails to so comply, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Committee. (j) Governing Law. The Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of California without regard to the principles of the conflict of laws thereof. (k) Effective Date And Termination Date. The Plan shall be effective upon Board approval and adoption, subject to approval by the Company's shareholders at the 1996 annual meeting of shareholders and shall terminate ten years after the effective date. (l) Severability. In the event any provision or provisions of the Plan are held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be effected or impaired. THIS PAGE MUST BE KEPT AS THE LAST PAGE OF THE DOCUMENT. -----END PRIVACY-ENHANCED MESSAGE-----