Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-11113
PACIFIC CAPITAL BANCORP
(Exact Name of Registrant as Specified in its Charter)
California 95-3673456
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 E. Carrillo Street, Suite 300
Santa Barbara, California 93101
(Address of principal executive offices) (Zip Code)
(805) 564-6300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Name of Each Exchange on Which Registered
Common Stock, no par value Not Listed
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 12, 1999, based on the sales prices reported to the
registrant on that date of $22.875 per share:
Common Stock - $506,879,485*
*Based on reported beneficial ownership by all directors and executive officers
and the registrant's Employee Stock Ownership Plan; however, this determination
does not constitute an admission of affiliate status for any of these
stockholders.
As of March 12, 1999, there were 24,212,782 shares of the issuer's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's Proxy Statement
for the Annual Meeting of Shareholders on May 18, 1999 are incorporated by
reference into Parts I, II, and III.
INDEX Page
(in printed version)
PART I
Item 1. Business
(a) General Development of the Business 3
(b) Financial Information about Industry Segments 3
(c) Narrative Description of Business 3
(d) Financial Information about Foreign and Domestic
Operations and Export Sales 3
Item 2. Properties 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters
(a) Market Information 5
(b) Holders 5
(c) Dividends 5
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 81
PART III
Item 10. Directors and Executive Officers of the Registrant 82
Item 11. Executive Compensation 82
Item 12. Security Ownership of Certain Beneficial Owners
and Management 82
Item 13. Certain Relationships and Related Transactions 82
PART IV
Item 14. Exhibits, Financial Statements and Reports on
Form 8-K 83
Signatures 84
EXHIBIT INDEX 85
PART I
Item 1. Business
(a) General Development of the Business
Operations commenced as Santa Barbara National Bank with one office and 18
employees in 1960. In 1979, the Bank switched to a state charter and changed its
name to Santa Barbara Bank & Trust ("SBB&T"). Santa Barbara Bancorp ("SBB") was
formed in 1982. In 1998, SBB merged with Pacific Capital Bancorp ("PCB"). SBB
was the surviving company, but took the name Pacific Capital Bancorp. Unless
otherwise stated, "Company" refers to this consolidated entity and to its
subsidiary banks when the context indicates. "Bancorp" refers to the parent
company only.
SBB&T has grown to 27 banking offices with loan, trust and escrow offices.
Through 1988, banking activities were primarily centered in the southern coastal
region of Santa Barbara County. Two banking offices were added in the merger
with Community Bank of Santa Ynez Valley on March 31, 1989. In 1995, three
banking offices were opened in western Ventura County, a fourth office was added
in 1996, and a fifth in 1997. Five offices in northern Santa Barbara County were
added with the acquisition of First Valley Bank on March 31, 1997, and three
offices in the Santa Clara River Valley region of Ventura County were added with
the acquisition of Citizens State Bank on September 30, 1997. First National
Bank of Central California ("FNB"), a subsidiary of PCB, has 10 banking offices
in Monterey, Santa Cruz, Santa Clara, and San Benito Counties. The offices in
the latter two counties use the name South Valley National Bank, which was also
a subsidiary of PCB until it merged with FNB shortly before its merger with SBB.
A third subsidiary, Sanbarco Mortgage Corporation ("Sanbarco"), was formed in
1988. This subsidiary, which is now primarily involved in mortgage brokering
services and the servicing of brokered loans, was formerly known as SBBT Service
Corporation.
There is a fourth subsidiary, Pacific Capital Services Corporation, which is
inactive.
(b) Financial Information about Industry Segments
Information about industry segments is provided in Note 20 to the consolidated
financial statements.
(c) Narrative Description of Business
Bancorp is a bank holding company, which as described above, has two bank
subsidiaries and two non-bank subsidiaries, one of which is inactive. The
Bancorp on its own has a few operations, but these are very insignificant in
comparison to those of its subsidiary banks.
The banks offer a full range of commercial banking services to households,
professionals, and small- to medium-sized businesses. These include various
commercial, real estate and consumer loan, leasing and deposit products. The
banks offer other services like electronic fund transfers and safe deposit boxes
to both individuals and businesses. In addition, services like lockbox payment
servicing, foreign currency exchange, letters of credit, and cash management are
offered to business customers. The banks also offer trust and investment
services to individuals and businesses. These include acting as trustee or agent
for living and testamentary trusts, employee benefit trusts, and profit sharing
plans. Investment management and advisory services are also provided.
Competition For most of its banking products, the Company faces competition in
its market area from branches of most of the major California money center
banks, some of the statewide savings and loan associations, and other local
community banks and savings and loans. For some of its products, the Company
faces competition from other non-bank financial service companies, especially
securities firms.
Employees The Company's current workforce is approximately 1,000 full time
equivalent employees. Additional employees would be added if new opportunities
for geographic expansion should occur.
(d) Financial Information about Foreign and Domestic Operations and
Export Sales
The Company does not have any foreign business operations or export sales of its
own. However, it does provide financial services including wire transfers,
foreign currency exchange, letters of credit, and loans to other businesses
involved in foreign trade.
Item 2. Properties
The Company maintained its executive and administrative offices at leased
premises at 1021 Anacapa Street, Santa Barbara, California until February 20,
1999 when a fire destroyed the building. Temporarily, the headquarters are
located at 200 E. Carrillo St., Suite 300, Santa Barbara. There were few
customer activities conducted at the headquarters building and they were all
re-established and functional by the end of the first business day following the
fire. The Company had substantial insurance coverage for the contents of the
building (the owners had separate coverage for the building itself) and
unreimbursed costs are expected to be very minimal.
Of the 37 branch banking offices, all or a portion of 26 are leased. The
building used by the Real Estate, Consumer Lending and Escrow departments is
owned, and commercial office space is leased for Trust and Investment Services,
Information Technology, Leasing, Loan Servicing, and other administrative
offices.
Item 3. Legal Proceedings
There are no material legal proceedings pending.
Item 4. Submission of Matters to a Vote of Security Holders
The only matters submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report were (1) a proposal to approve
the merger of the SBB with PCB; (2) a proposal to eliminate cumulative voting of
common stock; and (3) a proposal to increase the number of directors by four to
provide for the appointment of new board members from PCB. All three proposals
were approved by the security holders.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
(a) Market Information
The Company's common stock is traded on The Nasdaq Stock Market under the symbol
SABB. At March 25, 1999, six independent brokerage firms were registered as
market makers in the Company's common stock. The following table presents the
high and low closing sales prices of the Company's common stock for each
quarterly period for the last two years as reported by The Nasdaq Stock Market:
1998 Quarters 1997 Quarters
---------------------------------------- ----------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
--------- --------- --------- --------- --------- --------- --------- ---------
Range of stock prices:
High $26.50 $34.38 $34.00 $27.88 $24.50 $24.19 $23.25 $16.00
Low $22.50 $22.00 $25.50 $22.13 $22.75 $19.63 $14.94 $13.82
(b) Holders
There were approximately 2,374 holders of stock as of March 12, 1999. This
number includes brokerage firms and other financial institutions which hold
stock in their name but actually owned by third parties. The Company is not
provided with the number or identities of these parties.
(c) Dividends
Dividends are currently declared four times a year, and the Company expects to
follow the same policy in the future. The following table presents cash
dividends declared per share for the last two years:
1998 Quarters 1997 Quarters
--------------------------------------- -------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
--------- --------- --------- --------- -------- --------- --------- --------
Cash dividends
declared $0.18 $0.18 $0.15 $0.15 $0.13 $0.13 $0.12 $0.12
The dividends paid to shareholders of the Company are funded primarily from
dividends received by Bancorp from the banks. Reference should be made to Note
17 of the Consolidated Financial Statements on page 72 for a description of
restrictions on the ability of the subsidiary banks to pay dividends to Bancorp.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the
Company's Consolidated Financial Statements and the accompanying notes presented
in Item 8.
(amounts in thousands except Increase
per share amounts) 1998 (Decrease) 1997 1996 1995 1994
----------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Interest income $ 193,516 $ 25,366 $ 168,150 $ 133,536 $ 120,866 $ 107,930
Interest expense 68,113 7,523 60,590 48,368 44,554 33,041
Net interest income 125,403 17,843 107,560 85,168 76,312 74,889
Provision for credit losses 9,123 623 8,500 4,949 10,451 6,736
Other operating income 35,972 7,472 28,500 22,102 20,671 15,955
Non-interest expense:
Staff expense 49,278 6,138 43,140 38,016 32,644 29,879
Other operating expense 54,432 16,583 37,849 31,300 28,677 26,757
Income before income taxes and
effect of accounting change 48,542 1,971 46,571 33,005 25,211 27,472
Provision for income taxes 18,975 2,687 16,288 11,301 8,185 8,296
Net income $ 29,567 ($716) $ 30,283 $ 21,704 $ 17,026 $ 19,176
DILUTED PER SHARE DATA: (1)
Average shares outstanding 24,447 259 24,188 24,228 24,123 23,907
Net income $1.21 ($0.04) $1.25 $0.90 $0.71 $0.80
Cash dividends declared $0.66 $0.17 $0.49 $0.36 $0.28 $0.26
FINANCIAL CONDITION:
Total assets $2,649,418 $292,313 $2,357,105 $1,920,759 $1,743,213 $1,555,365
Total deposits $2,329,676 $242,123 $2,087,553 $1,660,265 $1,519,528 $1,384,587
Long-term debt $ 42,900 $ 4,900 $ 38,000 $ 38,000 -- --
Total shareholders' equity $ 214,000 $ 23,276 $ 190,724 171,239 $ 161,550 $ 148,962
OPERATING AND CAPITAL RATIOS:
Average total shareholders'
equity to average total assets 8.41% (0.23%) 8.64% 9.47% 9.93% 9.64%
Rate of return on average:
Total assets 1.19% (0.24%) 1.43% 1.22% 1.08% 1.30%
Total shareholders' equity 14.19% (2.36%) 16.55% 12.91% 10.88% 13.45%
(1) Earnings per share are presented on a diluted basis.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management's discussion and analysis of the financial condition and results of
operation begins on the following page.
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following provides Management's comments on the financial condition and
results of operations of Pacific Capital Bancorp (formerly named Santa Barbara
Bancorp or "SBB") and its subsidiaries. Unless otherwise stated, the "Company"
refers to this consolidated entity and to its subsidiaries when the context
indicates. This discussion should be read in conjunction with the Company's
consolidated financial statements and the notes to the consolidated financial
statements that are presented on pages 46 through 80 of this Annual Report on
Form 10-K. "Bancorp" will be used to refer to the parent company only. "PCB"
will be used to refer to the former Pacific Capital Bancorp, which merged with
SBB at the end of 1998. SBB assumed the Pacific Capital Bancorp name. The
subsidiary banks are Santa Barbara Bank & Trust ("SBB&T") and First National
Bank of Central California ("FNB"). South Valley National Bank ("SVNB"), the
holding company of which merged with PCB in November 1996, itself merged with
FNB in October 1998 and operates under the same bank charter as FNB. Sanbarco
Mortgage Corporation ("Sanbarco") is a non-bank subsidiary of Bancorp primarily
involved in mortgage brokering and the servicing of brokered loans. The Company
also has an inactive subsidiary, Pacific Capital Services Corporation.
Terms with which the reader may not be familiar are printed in bold and defined
the first time they occur or are defined in a note on pages 40 and 41. The
discussion provides insight into Management's assessment of the operating trends
over the last several years and its expectations for 1999.
Such expressions of expectations are not historical in nature and are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are subject to risks
and uncertainties that may cause actual future results to differ materially from
those expressed in any forward-looking statement. Such risks and uncertainties
with respect to the Company include those related to the economic environment,
particularly in the regions in which the Company operates, the products and
pricing of competitive financial institutions, government regulation, government
monetary and fiscal policy, changes in prevailing interest rates, mergers and
acquisitions and the integration of the merged or acquired businesses, credit
quality, asset/liability management, and the availability of sources of
liquidity at a reasonable cost. This discussion is intended to assist readers of
the accompanying financial statements by providing information on the strategies
adopted by the Company to address these risks, and the results of these
strategies. These elements are addressed as they relate to the major asset and
liability components of the Company's balance sheets, and the major income and
expense categories of the Company's statements of income and to significant
changes among them.
Overview of the Earnings Performance
The reported earnings for the Company were $29.6 million in 1998, 2.36% under
the $30.3 million earned in 1997. Earnings per share were $1.21 compared with
$1.25 for 1997. 1998's reported earnings were significantly impacted by expenses
related to the merger of SBB with PCB. Exclusive of these merger expenses, the
Company's net operating income was a record $37.9 million, 25% over the $30.3
million earned in 1997. Exclusive of merger-related expense, diluted earnings
per share for the year 1998 were $1.55 compared to $1.25 for 1997.
Among the reasons for the substantial increase in net operating income were the
integration of eight new branch offices through the acquisition of First Valley
Bank ("FVB") in Lompoc and Citizens State Bank ("CSB") in Ventura County
(described in Note 19 to the consolidated financial statements), growth in the
tax refund anticipation loan ("RAL") and refund transfer ("RT") programs, and a
14.8% increase in Trust fees due to the strong stock market performance and new
customers. The merger with PCB is not part of the explanation for the increase
in earnings. Unlike the acquisitions of FVB and CSB, which were accounted for as
purchase transactions, the merger with PCB was accounted for as a
"pooling-of-interests." As a result, all amounts in this discussion and in the
consolidated financial statements have been restated to reflect the results of
operations of PCB as if the merger had occurred prior to the earliest period
presented. Therefore, any changes in financial condition or in the results of
operations cannot be ascribed to the merger itself, except for the costs to
implement the merger. Since the merger closed in late 1998, any merger savings
will start to be realized in 1999.
In addition to the growth resulting from the acquisitions of FVB and CSB, loans
and deposits in the Company's other market areas also grew during the last 12
months, generating additional net interest income. Overall, the loan categories
increased $271.4 million in the last 12 months, while deposits increased $242.1
million. Together with the net assets acquired in the two acquisitions and the
strong RAL program, this growth resulted in $17.8 million of additional net
interest income (the difference between interest income and interest expense) in
1998 compared to 1997. Noninterest income increased $7.5 million compared to
1997, with Trust and Investment Services fees up $1.5 million over the 1997
period and a variety of other service fees accounting for the balance of the
increase.
There were fewer noncurrent loans at the end of 1998 than a year ago, and the
ratio of noncurrent loans to total loans has decreased. While loans increased
during 1998 by 21%, the lower level of noncurrent loans permitted the Company to
increase the provision for credit losses other than refund anticipation loans by
only 9% from $3.9 million for 1997 to $4.2 million for 1998.
As would be expected with the growth in the Company's average assets and the
expansion into new market areas through acquisitions in 1997, there has also
been an increase in noninterest expenses. These include salary costs, occupancy,
marketing, and the amortization of goodwill from the FVB and CSB acquisitions.
However, exclusive of merger related expenses, the Company's operating
efficiency ratio, which measures how many cents of expense it takes to earn a
dollar of operating income, decreased from 57.2(cent) in 1997 to 55.2(cent) in
1998.
External Factors Impacting the Company
The major external factors impacting the Company include economic conditions,
regulatory considerations, and trends in the banking and financial services
industries.
Economic Conditions
From a national perspective, the most significant economic factors impacting the
Company in the last three years have been the steady growth in the economy and
the actions of the Federal Reserve Board ("the Fed") to manage the pace of that
growth. The Fed raised short-term interest rates to slow the pace and forestall
inflation in the early part of this three year period, and in the latter part it
lowered rates to keep economic activity up in the face of recession in many
other parts of the world. These changes impact the Company as market rates for
loans, investments and deposits respond to the Fed's actions.
The local economies in which the Company operates have continued to experience
growth similar to the trends occurring elsewhere in the country. In the region
served by SBB&T, new companies are being established and the business climate in
general is on the upswing. Tourism, which has long been important to the
communities in this market area, remains strong after some decline in the first
half of the year related to El Nino. In the last few years, medical
manufacturing and other "hi-tech" businesses have been growing. SBB&T expanded
its market areas in 1997 with the acquisitions of FVB and CSB and they now
encompass communities more oriented to agricultural enterprises. This has helped
to diversify the bank's customer base. In the region served by FNB and SVNB,
significant growth has occurred in South Santa Clara County in both housing and
in new businesses. This growth has been a result of the continued economic
expansion in the Silicon Valley, which is adjacent to the market area served by
SVNB. In the Monterey area, tourism has remained strong and in the Salinas
Valley, the agriculture-related industries continue to experience growth even in
light of some damage suffered from El Nino during the early months of 1998.
Regulatory Considerations
The Company is impacted by changes in the regulatory environment. Bancorp, as a
bank holding company, SBB&T, as a member of the Federal Reserve Bank (the
"FRB"), and Sanbarco, as a non-bank subsidiary of a bank holding company, are
all regulated by the FRB. FNB, as a nationally chartered bank, has the Office of
the Comptroller of the Currency (the "OCC") as its primary regulator. As a
state-chartered commercial bank, SBB&T is also regulated by the California
Department of Financial Institutions.
Changes in regulation impact the Company in different ways. The FRB requires
that banks maintain cash reserves equal to a percentage of their transaction
deposits. The FRB may increase or decrease the percentage of deposits that must
be held at the FRB to impact the amount of funds available to commercial banks
to lend to their customers as a means of stimulating or slowing economic
activity.
The Company and its subsidiary banks are also impacted by minimum capital
requirements. These rules are discussed below in the section entitled "Capital
Adequacy." The actions which the various banking agencies can take with respect
to financial institutions which fail to maintain adequate capital and comply
with other requirements are discussed below in the section titled "Regulation."
Competition
The Company faces competition from other financial institutions and from
businesses in other industries that have developed financial products. Banks
once had an almost exclusive franchise for deposit products and provided the
majority of business financing. With deregulation in the 1980's, other kinds of
financial institutions began to offer competing products. Also, increased
competition in consumer financial products has come from companies not typically
associated with the banking and financial services industry, such as AT&T,
General Motors and various software developers. Community banks, including the
Company, are working to offset this trend by developing new products that
capitalize on the service quality that a local institution can offer. Among
these are new loan and investment products. The latter are offered to the
Company's retail customers through the Trust & Investment Management Services
Divisions at each bank. The Company's primary competitors are different for each
specific product and market area. While this offers special challenges for the
marketing of our products, it offers protection from one competitor dominating
the Company in its market areas.
Risk Management
The Company sees the process of addressing the potential impacts of these
external factors as part of its management of risk. In addition to common
business risks such as disasters, theft, and loss of market share, the Company
is subject to special types of risk due to the nature of its business. New and
sophisticated financial products are continually appearing with different types
of risk which need to be defined and managed. Also, the risks associated with
existing products must be reassessed periodically. The Company cannot operate
risk-free and make a profit. Instead, the process of risk definition and
assessment allows the Company to select the appropriate level of risk for the
anticipated level of reward and then decide on the steps necessary to manage
this risk. The process of addressing these risks is led by the Company's
Director of Risk Management and the other members of its Senior Leadership Team.
The special risks related to financial products are credit risk and interest
rate risk. Credit risk relates to the possibility that a debtor will not repay
according to the terms of the debt contract. Credit risk is discussed in the
sections related to loans. Interest rate risk relates to the adverse impacts of
changes in interest rates. The types of interest rate risk will be explained in
the next section. The effective management of these risks is the backbone of the
Company's business strategy.
Interest Margin and Changes in the Relative Proportions of Assets and
Liabilities
The Company earns income from two sources. The primary source is through the
management of its financial assets and liabilities and the second is by charging
fees for services provided. The first involves functioning as a financial
intermediary. The Company accepts funds from depositors or other creditors and
then either lends the funds to borrowers or invests those funds in securities or
other financial instruments. Fee income is discussed in other sections of this
analysis, specifically in "Other Operating Income" and "Tax Refund Anticipation
Loans and Refund Transfers."
Net interest income is the difference between the interest and fees earned on
loans and investments (the Company's earning assets) and the interest expense
paid on deposits and other liabilities. The amount by which interest income will
exceed interest expense depends on two factors: (1) the volume or balance of
earning assets compared to the volume or balance of interest-bearing deposits
and liabilities, and (2) the interest rate earned on those interest earning
assets compared with the interest rate paid on those interest-bearing deposits
and liabilities. The Company's 1998 tax equivalent (Note B) net interest income
of $131.1 million was $18.4 million, or 16.3%, greater than 1997.
Net interest margin is net interest income expressed as a percentage of average
earning assets. It is used to measure the difference between the average rate of
interest earned on assets and the average rate interest that must be paid to
support those assets. To maintain its net interest margin, the Company must
manage the relationship between interest earned and paid. The Company's 1998 net
interest margin of 5.65% on a tax equivalent basis was slightly lower than
1997's net interest margin of 5.67%. As interest rates fell on earning assets
during the year because of actions by the Fed, the Company was not able to
reduce deposit rates quite as quickly. The net interest margin is subject to the
following types of risks that are related to changes in interest rates.
Market Risk Relating to Fixed-Rate Instruments
Market risk results from the fact that the market values of assets or
liabilities on which the interest rate is fixed will increase or decrease with
changes in market interest rates. If the Company invests funds in a fixed-rate
long-term security and then interest rates rise, the security is worth less than
a comparable security just issued because the older security pays less interest
than the newly issued security. If the older security had to be sold before
maturity, the Company would have to recognize a loss. Conversely, if interest
rates decline after a fixed-rate security is purchased, its value increases,
because it is paying at a higher rate than newly issued securities. The
fixed-rate liabilities of the Company, like certificates of deposit and
borrowings from the Federal Home Loan Bank ("FHLB"), also change in value with
changes in interest rates. As rates drop, they become more valuable to the
depositor and hence more costly to the Company. As rates rise, they become more
valuable to the Company. Therefore, while the value changes regardless of which
direction interest rates move, the adverse impacts of market risk to the
Company's fixed-rate assets are due to rising interest rates and for the
Company's fixed-rate liabilities they are due to falling rates. In general, for
a given change in interest rates, the amount of the change in value up or down
is larger for instruments with longer remaining maturities. Therefore, the
exposure to market risk to assets is lessened by managing the amount of
fixed-rate assets and by keeping maturities relatively short. However, these
steps must be balanced against the need for adequate interest income because
variable rate and shorter term fixed-rate securities generally earn less
interest than fixed-rate and longer term securities.
Note 14 to the consolidated financial statements discloses the carrying amounts
and fair values of the Company's financial assets and liabilities as of the end
of 1998 and 1997. There is a relatively small difference between the carrying
amount of the assets and their fair value due to credit quality issues. However,
the primary difference between the carrying amount and the fair value
essentially of the assets is a measure of how much more or less valuable the
Company's financial assets were to it at December 31, 1998 and 1997 than when
acquired because of changes in interest rates. The excess of financial assets'
fair values over carrying amounts at the end of 1998 was $21.5 million compared
with $21.3 million at the end of 1997.
Because the amount of fixed-rate liabilities is significantly less than the
fixed-rate assets, and because the average maturity is substantially less than
for the fixed-rate assets, the market risk is not as great. The difference
between the carrying amount and the fair value in the table in Note 14 shows the
impact of changing rates on the Company's fixed-rate liabilities. They are worth
$4.5 million more to customers or lenders at December 31, 1998 than they were
when issued because, on a weighted average basis, they are paying higher than
current market rates. However, this is much less than the $21.5 million by which
the fair value of the Company's assets exceeds their carrying amounts because
the assets also are paying higher rates than currently are available for
comparable assets.
Mismatch Risk
The second interest-related risk, mismatch risk, arises from the fact that when
interest rates change, the changes do not occur equally in the rates of interest
earned and paid because of differences in the contractual terms of the assets
and liabilities held. A difference in the contractual terms, a mismatch, can
cause adverse impacts on net interest income.
The Company has a large portion of its loan portfolio tied to the national prime
rate. If these rates are lowered because of general market conditions, e.g.,
other banks are lowering their lending rates, these loans will be repriced. If
the Company were at the same time to have a large proportion of its deposits in
long-term fixed-rate certificates, interest earned on loans would decline while
interest expense would remain at higher levels for a period of time. Therefore
net interest income would decrease immediately. A decrease in net interest
income could also occur with rising interest rates if the Company had a large
portfolio of fixed-rate loans and securities funded by deposit accounts on which
the rate is steadily rising.
This exposure to mismatch risk is managed by matching the maturities and
repricing opportunities of assets and liabilities. This may be done by varying
the terms and conditions of the products that are offered to depositors and
borrowers. For example, if many depositors want shorter-term certificates while
most borrowers are requesting longer-term fixed rate loans, the Company will
adjust the interest rates on the certificates and loans to try to match up
demand for similar maturities. The Company can then partially fill in mismatches
by purchasing securities or borrowing funds from the FHLB with the appropriate
maturity or repricing characteristics.
One of the means of monitoring this matching process is by use of a table like
Table 1, entitled "Interest Rate Sensitivity." The table shows the extent to
which the maturities or repricing opportunities of the major categories of
assets and liabilities are matched. This table is sometimes called a gap report,
because it shows the gap between assets and liabilities repricing or maturing in
each of a number of periods. The gap is stated in both dollars and as a percent
of total assets and is stated for both each individual period separately and
cumulatively as of the end of each period.
TABLE 1 -- Interest Rate Sensitivity
As of December 31, 1998 After three After six After one Noninterest
(in thousands) Within months months year but bearing or
three but within but within within After five nonrepricing
months six months one year five years years items Total
---------------------------------------------------------------------------------------------
Assets:
Loans (Note E) $ 823,491 $ 97,552 $ 106,129 $ 462,527 $ 86,835 $ (23,049) $ 1,553,485
Cash and due from banks -- -- -- -- -- 114,206 114,206
Federal funds sold 69,890 -- -- -- -- -- 69,890
Securities * 116,280 32,139 63,459 432,597 132,117 15,173 791,765
Money market instruments 19,888 -- -- -- -- -- 19,888
Other assets 1,567 -- -- -- -- 98,617 100,184
------------------------------------------------------------------------------ -------------
Total assets 1,031,116 129,691 169,588 895,124 218,952 204,947 2,649,418
------------------------------------------------------------------------------ -------------
Liabilities and
shareholders' equity:
Borrowed funds:
Repurchase agreements
and Federal funds
purchased 27,796 -- -- -- -- -- 27,796
Long-term debt and
other borrowings 3,500 2,500 5,000 32,900 -- 1,053 44,953
Interest bearing deposits:
Savings and interest-
bearing transaction
accounts 497,501 5,162 579,029 -- -- -- 1,081,692
Time deposits 297,943 188,812 196,825 63,680 2,458 -- 749,718
Demand deposits -- -- -- -- -- 498,266 498,266
Other liabilities 9,218 -- -- -- -- 23,775 32,993
Shareholders' equity -- -- -- -- -- 214,000 214,000
------------------------------------------------------------------------------ -------------
Total liabilities and
shareholders' equity 835,958 196,474 780,854 96,580 2,458 737,094 $ 2,649,418
------------------------------------------------------------------------------ =============
Interest rate-
sensitivity gap $ 195,158 $ (66,783) $(611,266) $ 798,544 $ 216,494 $(532,147)
==============================================================================
Gap as a percentage of
total assets 7.37% (2.52%) (23.07%) 30.14% 8.17% (20.09%)
Cumulative interest
rate-sensitivity gap $ 195,158 $ 128,375 $(482,891) $ 315,653 $ 532,147
Cumulative gap as a per-
centage of total assets 7.37% 4.85% (18.23%) 11.91% 20.09%
* Includes both Held-to-maturity and Available-for-sale securities
The first measuring period shown in the table covers assets and liabilities that
mature or reprice within the three months following December 31, 1998. This is
the most critical period because there is little time to correct a mismatch that
is having an adverse impact on income. For example, if the Company had a
significant negative gap--liabilities significantly exceeded assets--and
interest rates rose suddenly, the Company would have to wait for more than three
months before enough assets could be repriced to offset the higher expense on
the deposits. Alternatively, if the Company had a significant positive gap and
interest rates declined suddenly, the Company would have to wait for more than
three months before enough liabilities could be repriced to offset the reduction
of interest income.
As of year-end 1998, the Company had a small positive gap in this first period.
Assets exceeded liabilities by 7.37% of total assets. There is some
arbitrariness in the assignment to specific time periods of deposit accounts
that reprice at the option of the Company. For the purposes of this table, the
Company has made the assumption that some of the money market accounts will
reprice within three months, but this will be governed more by market conditions
than by contractual terms.
In the next period, after three months but within six months, there was a very
small excess of liabilities over assets, representing only 2.52% of total
assets.
For the third period, after six months but within one year, liabilities exceeded
assets by 23.07% of total assets, reflecting the current customer preference for
non-term or short-term deposits. The cumulative gap within one year of (18.23%)
of total assets is well within the Company's acceptable limits.
The periods of over one year are less critical because more steps can be taken
to mitigate the adverse effects of any interest rate changes.
A gap report is a first step in monitoring and managing interest rate risk by
showing mismatches in the maturities of assets and liabilities, but it is not
sufficient because it does not adequately address market risk and a third type
of interest rate risk.
Basis Risk
The third interest-related risk, basis risk, arises from the fact that interest
rates rarely change in a parallel or equal manner. The interest rates associated
with the various assets and liabilities differ in how often they change, the
extent to which they change, and whether they change sooner or later than other
interest rates. For example, while the repricing of a specific asset and a
specific liability may fall in the same period of the gap report, the interest
rate on the liability may rise one percent in response to rising market rates
while the asset increases only one-half percent. While evenly matched in the gap
report, the Company would suffer a decrease in net interest income. This
exposure to basis risk is the type of interest risk least able to be managed,
but is also the least dramatic. Avoiding concentration in only a few types of
assets or liabilities is the best means of increasing the chance that the
average interest received and paid will move in tandem. The wider
diversification means that many different rates, each with their own volatility
characteristics, will come into play.
Net Interest Income and Net Economic Value Simulations
To quantify the extent of all of these risks both in its current position and in
transactions it might take in the future, the Company uses computer modeling to
simulate the impact of different interest rate scenarios on net interest income
and on net economic value. Net economic value or the market value of portfolio
equity is defined as the difference between the market value of financial assets
and liabilities. These hypothetical scenarios include both sudden and gradual
interest rate changes, and interest rate changes in both directions. The Company
relies more on this modeling in reaching interest rate risk management decisions
than on gap reports.
The hypothetical impacts of sudden interest rate shocks applied to the Company's
asset and liability balances are modeled quarterly. The resulting shock reports
indicate how much of the Company's net interest income and net economic value
are "at risk" (deviation from the base level) from various sudden rate changes.
Although interest rates normally would not change in this manner, this exercise
is valuable in identifying risk exposures. The shock reports for the Company's
December 31, 1998 balances indicate that the Company's net interest income at
risk over a one year period and net economic value at risk from 2% shocks are
within normal expectations for such sudden changes.
Shocked by -2% Shocked by +2%
Net interest income (3.95%) +3.65%
Net economic value +2.43% (12.08%)
For the shock reports, the Company has made certain assumptions about the
duration of its non-maturity deposits that are important to determining net
economic value at risk. The Company engaged an outside consultant to gather and
study data on its non-maturity deposits, and the results of that study have been
incorporated into these latest models.
In addition to applying scenarios with sudden interest rate shocks, net interest
income simulations are prepared at least twice a year using three interest rate
projections provided by an outside economics data resource firm. The interest
rate projections selected are for most likely, declining and rising interest
rate scenarios. The three interest rate scenarios are applied to expected asset
and liability balances over the next year, and the resulting changes indicate
the amount of net interest income at risk.
The interest rate simulation reports are dependent upon the shape and volatility
of the interest rate scenarios selected and upon the assumptions of the rates
that would be paid on the Company's administered rate deposits as external
yields change. Reflecting the prevailing interest rate environment over the last
several years, the most recent interest rate scenarios selected continue to
project generally flatter yield curves (Note F) than normal, and neither the
declining nor rising interest rate scenarios reflect abrupt, significant
deviations from the most likely interest rate scenario.
Under these more realistic scenarios, the most recent interest rate simulations
indicate that the Company's net interest income at risk in 1999 is well within
normal expectations for the rising and declining interest rate scenarios. The
change in the average expected Fed funds rate is also shown to give perspective
as to the extent of the interest rate changes assumed by the two scenarios.
Declining Rates Rising Rates
Net interest income +0.68% (5.98%)
Change in average Fed funds rate (0.77%) +1.67%
Asset/Liability Management
The Company monitors asset and deposit levels, developments and trends in
interest rates, liquidity, capital adequacy and marketplace opportunities. It
responds to all of these to protect and enhance net interest income while
managing risks within acceptable levels as set by the Company's policies. In
addition, alternative business plans and contemplated transactions are analyzed
for their impact. This process, known as asset/liability management, is carried
out by changing the maturities and relative proportions of the various types of
loans, investments, deposits and other borrowings in the ways described above.
The Asset/Liability Committee for each bank's Board of Directors has overall
responsibility for asset/liability management.
As an example of this asset/liability management process, the Company determined
early in 1997 that it would need to take actions to manage the additional
interest rate risk that would result from the FVB acquisition. The cause of the
risk was that prior to the acquisition both FVB and SBB&T had negative gaps in
the first year. A plan was approved and executed that involved obtaining new CD
funds and selling Treasury Notes, thereby managing the additional interest rate
risk from the FVB acquisition. Of the $58.6 million of term Treasury Notes sold,
$30 million were first reclassified as available-for-sale. This reclassification
is permitted in the event of a major business combination to maintain the
Company's interest rate risk position.
Table 2, "Distribution of Average Assets, Liabilities and Shareholders' Equity
and Related Interest Income, Expense and Rates," sets forth the daily average
balances for the major asset and liability categories, the related income or
expense where applicable, and the resultant yield or cost attributable to the
average earning assets and interest-bearing liabilities. When comparing interest
yields and costs year to year, the use of average balances more accurately
reflects trends since these balances are not significantly impacted by
period-end transactions. The amount of interest earned or paid for the year is
also directly related to the average balances during the year and not to what
the balances happened to be on the last day of the year.
Changes in the dollar amount of interest earned or paid will vary from one year
to the next because of changes in the average balances ("volume") of the various
earning assets and interest-bearing liability accounts and changes in the
interest rates applicable to each category. Because of overall growth of the
Company, interest income, interest expense and net interest income are all
generally higher each year. The Company's tax equivalent net interest income of
$131.1 million during 1998 was $18.4 million, or 16.3%, greater than during
1997. Table 3, "Volume and Rate Variance Analysis of Net Interest Income,"
analyzes the 1998 and 1997 increases in net interest income in terms of the
impact of volume and rate changes on the major categories of assets and
liabilities from one year to the next.
As each of the major categories of assets and liabilities is discussed below,
there will be a description of the reason for significant changes in the
balances, how the changes impacted the net interest income and margin, and how
the categories fit into the overall asset/liability strategy for managing risk.
Whether the net interest margin increases or decreases depends on market
opportunities, how well the Company has managed interest rate risks, product
pricing policy, product mix, and external trends and developments.
As shown in Table 2, the net interest margin of 5.65% in 1998 was slightly lower
than the 5.67% net interest margin in 1997. This primarily reflects the
increased proportion of higher yielding loans and a non-volatile interest rate
environment during 1998. As rates fell on earning assets during the year because
of actions by the Fed, the Company was not able to reduce deposit rates quite as
quickly.
TABLE 2 -- Distribution of Average Assets, Liabilities, and Shareholders' Equity and Related Interest Income,
Expense, and Rates
(dollars in thousands) 1998 1997 1996
------------------------------- ----------------------------- ------------------------------
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------- ----------------------------- ------------------------------
Assets:
Loans (Note C):
Commercial $ 406,927 $ 41,865 10.29% $ 358,146 $ 35,623 9.95% $ 262,649 $ 26,038 9.91%
Real estate 801,194 72,083 9.00 673,948 62,111 9.22 532,689 49,677 9.33
Consumer 199,274 25,093 12.59 169,300 22,636 13.37 129,558 15,166 11.71
---------------------- ---------------------- --------------------
Total loans 1,407,395 139,041 9.88 1,201,394 120,370 10.02 924,896 90,881 9.83
---------------------- ---------------------- --------------------
Securities:
Taxable 589,723 35,512 6.02 447,254 27,381 6.12 442,645 26,143 5.91
Non-taxable 138,363 14,455 10.45 116,617 13,096 11.23 99,288 11,508 11.59
Equity 8,916 493 5.53 8,046 540 6.71 2,233 158 7.08
---------------------- ---------------------- --------------------
Total securities 737,002 50,460 6.85 571,917 41,017 7.17 544,166 37,809 6.95
---------------------- ---------------------- --------------------
Money market instruments:
Bankers' acceptances 15,543 937 6.03 72,090 4,134 5.73 67,330 3,800 5.64
Federal funds sold 158,095 8,653 5.47 129,814 7,136 5.50 92,936 4,934 5.31
Money market funds 2,950 162 5.49 12,148 663 5.46 9,556 500 5.23
---------------------- ---------------------- --------------------
Total money market
instruments 176,588 9,752 5.52 214,052 11,933 5.57 169,822 9,234 5.44
---------------------- ---------------------- --------------------
Total earning assets 2,320,985 199,253 8.58% 1,987,363 173,320 8.72% 1,638,884 137,924 8.42%
---------------------- ---------------------- --------------------
Non-earning assets 156,717 130,274 118,886
----------- ----------- -----------
Total assets $2,477,702 $2,117,637 $ 1,757,770
=========== =========== ===========
Liabilities and shareholders'
equity:
Borrowed funds:
Repurchase agreements and
Federal funds purchased $ 23,120 1,098 4.75% $ 31,767 1,510 4.75% $ 40,570 1,897 4.68%
Other borrowings 36,693 2,245 6.12 40,343 2,469 6.12 2,604 146 5.61
---------------------- ---------------------- --------------------
Total borrowed funds 59,813 3,343 5.59 72,110 3,979 5.52 43,174 2,043 4.73
---------------------- ---------------------- --------------------
Interest bearing deposits:
Savings and interest bearing
transaction accounts 1,018,149 26,209 2.57 945,582 25,825 2.73 883,116 25,170 2.85
Time deposits 726,983 38,561 5.30 561,615 30,786 5.48 390,038 21,155 5.42
---------------------- ---------------------- --------------------
Total interest bearing
deposits 1,745,132 64,770 3.71 1,507,197 56,611 3.76 1,273,154 46,325 3.64
---------------------- ---------------------- --------------------
Total interest bearing
liabilities 1,804,945 68,113 3.77% 1,579,307 60,590 3.84% 1,316,328 48,368 3.67%
--------- --------- --------
Demand deposits 439,569 339,018 263,491
Other liabilities 24,801 16,310 9,818
Shareholders' equity 208,387 183,002 168,133
----------- ----------- -----------
Total liabilities and
shareholders' equity $2,477,702 $2,117,637 $1,757,770
=========== =========== ===========
Interest income/earning assets 8.58% 8.72% 8.42%
Interest expense/earning assets 2.93 3.05 2.95
------- ------- -------
Net interest margin 131,140 5.65 112,730 5.67 89,556 5.47
Provision for credit losses
charged to operations/earning
assets 9,123 0.39 8,500 0.43 4,949 0.30
------- ------- -------
Net interest margin after
provision for credit losses on
tax equivalent basis 122,017 5.26% 104,230 5.24% 84,607 5.17%
======= ======= =======
Less: tax equivalent income
included in interest income
from non-taxable securities
and loans 5,737 5,170 4,388
--------- --------- ---------
Net interest income $116,280 $ 99,060 $ 80,219
========= ========= =========
There are always steps that the Company can take to increase its net interest
margin. These steps may include increasing the average maturity of its
securities portfolios because longer term instruments normally earn a higher
rate; emphasizing fixed-rate loans because they earn more than variable rate
loans; purchasing lower rated securities; and lending to less creditworthy
borrowers at a higher rate. However, as noted above, banking is a process of
balancing risks, and each of these alternative tactics involves more risk. The
first two involve more market risk, the second two more credit risk. Management
intends to continue to use a balanced approach. A fifth step as discussed on
page 29 is limiting the amount of nonearning assets.
TABLE 3 -- Volume and Rate Variance Analysis of Net Interest Income (Taxable
equivalent basis -- Note D)
(in thousands) 1998 over 1997 1997 over 1996
----------------------------------- ----------------------------------
Volume Rate Total Volume Rate Total
----------------------------------- ----------------------------------
Increase (decrease) in:
Interest income on:
Loans:
Commercial $ 4,852 $ 1,390 $ 6,242 $ 9,467 $ 118 $ 9,585
Real estate 11,727 (1,755) 9,972 13,173 (739) 12,434
Consumer 4,008 (1,551) 2,457 4,652 2,818 7,470
----------------------------------- ---------- -------- ---------
Total loans 20,587 (1,916) 18,671 27,292 2,197 29,489
----------------------------------- ----------------------------------
Securities:
Taxable 8,722 (591) 8,131 272 966 1,238
Non-taxable 2,442 (1,083) 1,359 2,009 (421) 1,588
Equity securities 58 (105) (47) 411 (29) 382
----------------------------------- ----------------------------------
Total securities 11,222 (1,779) 9,443 2,692 516 3,208
----------------------------------- ----------------------------------
Money market instruments:
Money market funds (502) 1 (501) 136 27 163
Bankers' acceptances (3,243) 46 (3,197) 269 65 334
Federal funds sold 1,555 (38) 1,517 1,958 244 2,202
----------------------------------- ----------------------------------
Total money market instruments (2,190) 9 (2,181) 2,363 336 2,699
----------------------------------- ----------------------------------
Total interest income 29,619 (3,686) 25,933 32,347 3,049 35,396
----------------------------------- ----------------------------------
Interest expense on:
Repurchase agreements and
Federal funds purchased (411) (1) (412) (412) 25 (387)
Other borrowings (223) (1) (224) 2,116 207 2,323
----------------------------------- ----------------------------------
Total borrowed funds (634) (2) (636) 1,704 232 1,936
----------------------------------- ----------------------------------
Interest bearing deposits:
Savings and interest bearing
transaction accounts 1,982 (1,598) 384 1,780 (1,125) 655
Time certificates of deposit 9,065 (1,290) 7,775 9,306 325 9,631
----------------------------------- ----------------------------------
Total interest bearing deposits 11,047 (2,888) 8,159 11,086 (800) 10,286
----------------------------------- ----------------------------------
Total interest expense 10,413 (2,890) 7,523 12,790 (568) 12,222
----------------------------------- ----------------------------------
Net interest margin $ 19,206 $ (796) $ 18,410 $19,557 $ 3,617 $23,174
=================================== ==================================
Securities
The major components of the earning asset base for 1998 were the securities
portfolios, the loan portfolio and the Company's holdings of money market
instruments. The Investment Committee has overall responsibility for the
management of the securities portfolios and the money market instruments. The
structure and detail within these portfolios are very significant to an analysis
of the financial condition of the Company. The loan and money market instrument
portfolios will be covered in later sections of this discussion.
Securities Portfolios
The Company classifies its securities into three portfolios, the "Liquidity
Portfolio" (available-for-sale), the "Discretionary Portfolio"
(available-for-sale), and the "Earnings Portfolio" (held-to-maturity).
The Liquidity Portfolio's primary mission is to provide liquidity to meet cash
flow needs. The portfolio consists of U.S. Treasury and agency securities. These
securities are purchased with maturities up to three years with an average
maturity of between one and two years.
The Discretionary Portfolio's primary missions are to provide income from
available funds, to hold earning assets that can be managed as part of overall
asset/liability management, and to support the development needs of communities
within the Bank's marketplace. The Discretionary Portfolio consists of U.S.
Treasury and agency securities, collateralized mortgage obligations ("CMOs"),
asset-backed securities (Note I), mortgage-backed securities, and municipal
securities.
The Earnings Portfolio's primary missions are to provide income from available
funds and to support the development needs of communities within the Bank's
marketplace. The Earnings Portfolio consists of long-term tax-exempt
obligations, and U.S. Treasury and agency securities. It is the Company's
current intention to allow existing securities in the Earnings Portfolio to
mature, then reposition the matured proceeds into either of the two
"available-for-sale" portfolios. Accordingly, the balance of the Earnings
Portfolio is expected to decline.
TABLE 4 -- Maturity Distribution and Yield Analysis of the Securities Portfolios
After one After five
As of December 31, 1998 One year year to years to Over Non-
(dollars in thousands) or less five years ten years ten years Maturity Total
---------------------------------------------------------------------------------------
Maturity distribution:
Available-for-sale:
U.S. Treasury obligations $ 56,520 $ 93,493 $ -- $ -- $ -- $ 150,013
U.S. agency obligations 44,016 133,477 -- -- -- 177,493
Collateralized mortgage
obligations 21,801 128,474 61,059 7,821 -- 219,155
Asset-backed securities 4,003 9,891 -- -- -- 13,894
State and municipal
securities 2,036 11,583 2,177 11,082 -- 26,878
Time deposits 477 -- -- -- -- 477
Equity securities -- -- -- -- 9,086 9,086
------------------------------------------------------------------------ ------------
Subtotal 128,852 376,919 63,236 18,903 9,086 596,996
---------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury obligations 22,686 35,186 -- -- -- 57,872
U.S. agency obligations 9,987 12,504 -- -- -- 22,491
Collateralized mortgage
obligations -- 715 -- -- -- 715
State and municipal
securities 14,258 49,300 10,973 39,160 -- 113,691
---------------------------------------------------------------------------------------
Subtotal 46,931 97,705 10,973 39,160 -- 194,769
---------------------------------------------------------------------------------------
Total $ 175,783 $ 474,624 $ 74,209 $ 58,063 $ 9,086 $ 791,765
=======================================================================================
Weighted average yield (Tax equivalent--Note B):
Available-for-sale:
U.S. Treasury obligations 5.97% 5.93% -- -- -- 5.95%
U.S. agency obligations 6.19% 5.69% -- -- -- 5.81%
Collateralized mortgage
obligations 6.31% 6.28% 6.29% 6.41% -- 6.29%
Asset-backed securities 6.27% 6.27% -- -- -- 6.27%
State and municipal
securities 6.27% 6.55% 6.68% 7.84% -- 7.24%
Time deposits 5.52% -- -- -- -- 5.51%
Equity securities -- -- -- -- 5.66% 5.66%
Weighted average 6.11% 5.99% 6.31% 7.25% 5.66% 6.09%
Held-to-maturity:
U.S. Treasury obligations 5.83% 5.94% -- -- -- 5.89%
U.S. agency obligations 7.08% 5.67% -- -- -- 6.30%
Collateralized mortgage
obligations -- 7.41% -- -- -- 7.41%
State and municipal
securities 10.95% 12.94% 11.97% 9.34% -- 10.91%
Weighted average 7.65% 9.45% 11.97% 9.34% -- 8.87%
Overall weighted average 6.52% 6.70% 7.14% 8.66% 5.66% 6.78%
Additional Purposes Served by the Securities Portfolios
The securities portfolios of the Company serve additional purposes: 1) to act as
collateraL for the deposits of public agencies and trust customers that must be
secured by certain securities owned by the Company; and 2) to support the
development needs of the communities within its marketplace.
Collateral: The legal requirements for securing specific deposits may only be
satisfied by pledging certain types of the Company's securities. A large
proportion of the deposits may be secured by state and municipal securities, but
some can only be secured by U.S. Treasury securities, so holding a minimum
amount of these securities will always be necessary.
Community Development: The Company searches actively for investments that
support the development needs of communities within its marketplace. During
1998, for example, the Company purchased three mortgage-backed securities
totaling $6 million that consisted of real estate loans to borrowers in its
market areas who have incomes of less than 80% of median area income. In 1998,
as in 1997, the Company also invested as a limited partner in an affordable
housing fund. The Company also holds several bonds of school districts within
its market areas as well as $6.0 million of Santa Barbara Housing Project
Mortgage Revenue Bonds; these bonds helped finance two housing projects in the
city of Santa Barbara that contain 610 units of affordable housing.
Amounts and Maturities of Securities
Table 4 sets forth the amounts and maturity ranges of the securities at December
31, 1998. Because much of the income from the securities included in the
Earnings Portfolio has the additional advantage of being tax-exempt because of
investment in state and municipal bonds, the tax equivalent weighted average
yields of the securities are shown. The average yields on the taxable securities
are significantly lower than the average rates earned from loans as shown in
Table 2. Because of this, securities are purchased for earnings only when loan
demand is weak.
Portfolio Turnover, Unrealized Gains and Losses, and Securities Losses
As shown in the accompanying Consolidated Statements of Cash Flows on page 50,
there is a relatively large turnover in the securities portfolios. The purchase
of relatively short-term securities for asset/liability management purposes, as
explained above, is part of the reason for the high turnover in the Company's
securities portfolios. The increased amount sold in 1996 was also due to the
following one-time situation. In late 1995, the Financial Accounting Standards
Board ("FASB") permitted holders of debt securities to review their
classification of securities as held-to-maturity or available-for-sale and to
reclassify them. The Company reclassified a substantial amount of its
held-to-maturity securities and sold $94 million of them in early 1996.
The Company does not have a trading portfolio. That is, it does not purchase
securities on the speculation that interest rates will decrease and thereby
allow subsequent sale at a gain. Instead, if the purposes mentioned above are to
be met, purchases must be made throughout interest rate cycles. Rather than
anticipate the direction of changes in interest rates, the Company's investment
practice is to purchase securities (other than for municipal securities) with
specific maturities so that the maturities be approximately equally spaced by
quarter within the portfolios.
Hedges, Derivatives, and Other Disclosures
The Company established policies and procedures in 1996 to permit limited types
and amounts of off-balance sheet hedges to help manage interest rate risk.
Although the Company did not utilize any off-balance sheet hedges in 1996, it
did enter into an interest rate option contract in January 1997 to protect
against the possibility of rapidly rising rates. While Management was not
predicting that interest rates would rise, the asset/liability modeling
indicated at the time that net interest income at risk from a significant rise
would be more than desired. The option contract had a notional amount of $50
million and covered a fifteen month period that began July 1, 1997 and ended on
October 1, 1998. The contract would have paid the Company the rate by which the
3-month LIBOR (Note J) index rate exceeded 7.0% up to a maximum of 1.5%.
Interest rates declined after the purchase and the Company simply amortized the
$90,000 cost over the fifteen month term.
The Company has not purchased any securities arising out of a highly leveraged
transaction, and its investment policy prohibits the purchase of any securities
of less than investment grade or so-called "junk bonds."
Market Instruments--Federal Funds Sold, Securities Purchased Under Agreements to
Resell, Bankers' Acceptances and Commercial Paper
Cash in excess of amounts immediately needed for operations is generally lent to
other financial institutions as Federal funds sold or securities purchased under
agreements to resell (for brevity termed "reverse repos"). Both transactions are
overnight loans. Federal funds sold are unsecured, reverse repos are secured.
Excess cash expected to be available for longer periods is generally used to
purchase short-term U.S. Treasury securities, bankers' acceptances (Note G), or
commercial paper. As a percentage of average earning assets, the amount of these
instruments tends to vary based on changes and differences in short-term market
rates. The amount is also impacted in the first quarter of the year by the large
cash flows associated with the tax refund loan and transfer programs.
In prior years, the Company purchased bankers' acceptances rather than
commercial paper because the yields were more attractive relative to the risk.
While the acceptances of only highly rated financial institutions are utilized,
acceptances have some amount of risk above that of U.S. Treasury securities.
Therefore, the Company required that there be a reasonable spread in the yields
between the bankers' acceptances and U.S. Treasury securities to justify the
assumption of that additional risk. The only banks issuing these instruments
that had both the high credit rating and sufficient incremental yield were
Japanese banks. During 1997, as economic troubles began to adversely impact the
ratings of the Japanese banks issuing these instruments, the Company reduced its
purchases and discontinued them after January 1998. The last acceptance matured
in July 1998.
In place of bankers' acceptances, in 1998 the Company began purchasing
commercial paper issued by highly rated domestic companies.
Loan Portfolio
Table 5 sets forth the distribution of the Company's loans at the end of each of
the last five years.
TABLE 5 -- Loan Portfolio Analysis by Category
(in thousands) December 31
1998 1997 1996 1995 1994
----------------------------------------------------------------------------
Real estate:
Residential $ 368,306 $ 276,014 $ 198,309 $ 169,500 $ 136,412
Nonresidential 477,120 433,835 351,289 287,455 244,249
Construction and development 109,764 57,571 47,743 62,490 71,866
Commercial, industrial,
and agricultural 362,262 298,986 269,904 224,648 226,148
Home equity lines 47,123 56,681 55,083 50,800 48,695
Consumer 123,730 99,943 66,595 52,031 48,318
Leases 78,627 72,970 69,817 4,254 2,376
Municipal tax-exempt obligations 9,286 7,931 8,658 7,573 7,831
Other 6,563 7,433 11,318 4,820 5,480
----------------------------------------------------------------------------
$ 1,582,781 $ 1,311,364 $ 1,078,716 $ 863,571 $ 791,375
============================================================================
Net deferred fees $ 4,624 $ 3,586 $ 3,351 $ 2,914 $ 2,832
The amounts shown in the table for each category are net of the deferred or
unamortized loan origination, extension, and commitment fees and origination
costs for loans in that category. The total amounts for these net fees are shown
at the bottom of the table. These deferred amounts are amortized over the lives
of the loans to which they relate.
The year-end balance for all loans had increased about $233 million from the end
of 1996 to the end of 1997 and increased about $271 million from the end of 1997
to the end of 1998. The reasons for the growth were economic recovery, the
expansion into the Ventura County market, the acquisition of a leasing
portfolio, and the $106.9 million in loans acquired in the FVB and CSB
acquisitions.
Residential mortgages showed the largest dollar growth in the last several
years. The Company offers a wide variety of loan types and terms to customers
along with very competitive pricing and 24 hour pre-approvals. These factors
have resulted in the Company becoming the largest retail originator of
residential mortgages in the Santa Barbara market area. The Company funded
$167.9 million in residential mortgages in 1998 and the Company increased its
portfolio by $92.3 million in 1998. In the early part of 1998, as in prior
years, most of the fixed-rate loans were sold to investors in the secondary
market. As discussed in the section of this discussion entitled "Interest Rate
Risk", the Company during 1998 decided to keep most of the fixed-rate loans it
previously would have sold. The steps the Company took to address the interest
rate risk resulting from holding these loans is also addressed in that section.
The Company has historically retained 1-4 family adjustable rate mortgage loans,
which generally have low initial "teaser" rates. While these loans have interest
rate "caps," all are repriced to a market rate of interest within a reasonable
time. A few loans have payment caps that would result in negative amortization
if interest rates rise appreciably.
Strong growth also occurred in the consumer loan categories in 1998 and 1997.
Consumer loans grew $33.3 million or 50% in 1997 and $23.8 million or 24% in
1998. This growth reflects an expanded product line and continued efforts to
make auto loans through dealers. During the last three years, the Company has
entered into indirect financing agreements with a number of automobile dealers
whereby the Company purchases loans dealers have made to customers. While
automobile dealers frequently provide financing to customers through
manufacturers' finance subsidiaries, some customers prefer loan terms that are
not included in the standard dealer packages. Other customers are purchasing
used cars not covered by the manufacturers' programs. Based on parameters agreed
to by the Company, the dealer makes the loan to the customer and then sells the
loan to the Company. This program is neither a factoring nor a flooring
arrangement. The individual customers, not the dealers, are the borrowers and
thus there is no large concentration of credit risk. In addition, there is a
review of underwriting practices of a dealer prior to acceptance into the
program. This is done to ensure process integrity and to protect the Company's
reputation. There were approximately $63.4 million of such loans included in the
consumer loan total above for December 31, 1998 as compared with $41.3 million
at December 31, 1997.
Commercial loan volumes experienced an increase of $63.3 million or 21% over the
prior year and construction and nonresidential real estate loans increased $95.5
million or 19%.
The same interest rate and liquidity risks that apply to securities are also
incurred in lending activity. Long-term fixed-rate loans are subject to market
risk. The table in Note 14 to the consolidated financial statements shows a very
small difference between the carrying amount of loans and their fair value. This
occurs because the majority of the loans held by the Company have floating rates
of interest. The floating rates are generally tied to the Company's base lending
rate or to another market rate indicator so that they may be repriced as
interest rates change. Loans that have fixed-rates generally have relatively
short maturities or amortize monthly which effectively lessens the market risk.
Table 6 shows the maturity of selected loan types outstanding as of December 31,
1998, and shows the proportion of fixed and floating rate loans for each type.
The table does not include residential and non-residential mortgage loans. Net
deferred loan origination, extension, and commitment fees are also not shown in
the table. There is no maturity or interest sensitivity associated with the fees
because they have been collected in advance.
TABLE 6 -- Maturities and Sensitivities of Selected
Loan Types to Changes in Interest Rates
Due after
(in thousands) Due in one one year to Due after
year or less five years five years
---------------------------------------------------
Commercial, industrial, and agricultural
Floating rate $ 272,272 $ -- $ --
Fixed rate 34,295 53,201 2,494
Real estate--construction and development
Floating rate 101,343 -- --
Fixed rate 468 1,863 6,090
Municipal tax-exempt obligations 9,286 -- --
---------------------------------------------------
$ 417,664 $ 55,064 $ 8,584
===================================================
The amortization and short maturities also help to maintain the liquidity of the
portfolio and reduce credit risk, but they result in lower interest income if
rates are falling. At present, except for the specific market risk incurred by
the decision to begin holding fixed-rate residential real estate (which are not
included in the table above), Management prefers to incur market risk from
longer maturities in the securities portfolios, and avoid such risk in the loan
portfolio.
Potential Problem Loans: Management has reasons to believe that certain
borrowers may not be able to repay their loans within the parameters of the
present repayment terms, even though, in some cases, the loans are current at
the time. These loans are regarded as potential problem loans, and a portion of
the allowance is allocated as discussed above to cover the Company's exposure to
loss should the borrowers indeed fail to perform according to the terms of the
notes. This class of loans does not include loans in a nonaccrual status or 90
days or more delinquent but still accruing, which are shown in Table 9.
At year-end 1998, these loans amounted to $25.8 million or 1.6% of the
portfolio. The corresponding amounts for 1997 and 1996 were $2.5 million or 0.2%
of the portfolio and $9.1 million or 0.8% of the portfolio, respectively. The
1998 amount is comprised of loans of all types.
Other Loan Portfolio Information
Other information about the loan portfolio that may be helpful to readers of the
financial statements follows.
Foreign Loans: The Company does not have nor has it ever had any foreign loans
in its loan portfolio.
Participations: Occasionally, the Company will sell or purchase a portion of a
loan to or from another bank. The usual reason that banks sell a portion of a
loan is to stay within their regulatory maximum limit for loans to any one
borrower. Occasionally, a portion of another bank's loan may be purchased by the
Company from another bank unable to lend the whole amount under its regulatory
lending limit to its borrower. However, this would be done only if the loan
represents a good investment for the Company. In these cases, the Company
conducts its own independent credit review and formal approval prior to
committing to purchase.
Loan to Value Ratio: The Company follows a policy of limiting the loan to
collateral value ratio for real estate construction and development loans.
Depending on the type of project, policy limits range from 60-90% of the
appraised value of the collateral. For permanent real estate loans, the policy
limits generally are 75% of the appraised value for commercial property loans
and 80% for residential real estate property loans. Mortgage insurance is
generally required on most residential real estate loans with a loan to value in
excess of 80%. Such loans, which can reach up to 90% loan to appraised value,
are strictly underwritten according to mortgage insurance standards. The above
policy limits are sometimes exceeded when the loan is being originated for sale
to another institution that does lend at higher ratios and the sale is
immediate, or when the exception is temporary, or when other special
circumstances apply. There are other specific loan to collateral limits for
commercial, industrial and agricultural loans which are secured by non-real
estate collateral. The adequacy of such limits is generally established based on
outside asset valuations and/or by an assessment of the financial condition and
cash flow of the borrower, and the purpose of the loan. Consumer loans which are
secured by collateral also have loan to collateral limits which are based on the
loan type and amount, the nature of the collateral, and other financial factors
on the borrower.
Loan Concentrations: The concentration profile of the Company's loans is
discussed in Note 18 to the accompanying consolidated financial statements.
Loan Sales and Mortgage Servicing Rights: The Company sells or brokers some of
the fixed-rate single family mortgage loans it originates as well as other
selected portfolio loans. These loans are made by the Company to accommodate the
borrower, but are sold if the loan characteristics are not favorable enough to
offset the market risk inherent in fixed-rate assets. Most of those sold are
sold "servicing released" and the purchaser takes over the collection of the
payments. However, some are sold with "servicing retained" and the Company
continues to receive the payments from the borrower and forwards the funds to
the purchaser. The Company earns a fee for this service. The sales are made
without recourse, that is, the purchaser cannot look to the Company in the event
the borrower does not perform according to the terms of the note. GAAP requires
companies engaged in mortgage banking activities to recognize the rights to
service mortgage loans for others as separate assets. For loans originated for
sale, a portion of the investment in the loan is ascribed to the right to
receive this fee for servicing and this value is recorded as a separate asset.
Tax Refund Anticipation Loan ("RAL") and Refund Transfer ("RT") Programs
As indicated in the overall summary at the beginning of this discussion, one of
the reasons for the upward trend in earnings has been the RAL and RT programs.
The Company is one of only three financial institutions to provide these
products on a national basis. The Company provides these services to taxpayers
that file their returns electronically. RALs are a loan product; RTs are
strictly an electronic transfer service.
For the RAL product, a taxpayer requests a loan through a tax preparer, with the
expected refund as the source of repayment. The application is subject to an
automated credit review process. If the application passes, the Company advances
to the taxpayer the amount of the refund due on the taxpayer's return up to
specified amounts based on certain criteria less the loan fee due to the
Company. Each taxpayer signs an agreement permitting the Internal Revenue
Service (the "IRS") to remit their refund to the Company instead of the taxpayer
to pay off the loan. Any amount due the taxpayer above the amount of the RAL is
sent by the Company to the taxpayer when received from the IRS. A fee is
withheld by the Company from the advance, but the fee is recognized as income
only after the loan is collected from the IRS payment. The fee varies based on
the amount of the loan, but it does not vary with the length of time the loan is
outstanding. Nonetheless, because the taxpayer must sign a loan document, the
fee is classified as interest income.
Losses are higher for RALs than for most other loan types because the IRS may
reject or partially disallow the refund. The tax preparers participating in the
program are located across the country and few of the taxpayers have any
customer relationships with the Company other than their RAL. Many taxpayers
make use of the service because they do not have a permanent mailing address at
which to receive their refund. Therefore, if a problem occurs with the return,
collection efforts may be less effective than with local customers.
The Company has taken several steps to minimize losses from these loans.
Preparers are screened before they are allowed to submit their electronic
filings, procedures have been defined for the preparers to follow to ensure that
the agreement signed by the taxpayer is a valid loan, and the preparers' IRS
reject rates are monitored very carefully. If a preparer's rejects are above
normal, he or she may be dropped from the program. If rejects are below
expectations, the preparer may be paid an incentive fee.
In addition, in 1996, the Company entered into cooperative agreements with the
other banks that would be making RALs. Under those agreements, if a taxpayer
owing money to one bank from a prior year applies for a loan from another bank,
the second bank repays the delinquent amount to the first bank before remitting
the refund to the taxpayer. As shown in Table 8, these cooperative agreements
have resulted in substantially higher rates of collection.
In 1998, the RAL program extended approximately $245 million in loans. Total net
charge-offs were $4.9 million or 2.01% of loans made. A significant portion of
the charged-off loans are expected to be collected in 1999 under the continuing
cooperative agreement between the banks providing this product.
The IRS closely scrutinizes returns where a major portion of the refund is based
on a claim for Earned Income Tax Credit ("EIC"). The Company does not lend on
those returns where EIC represents an overly large portion of the refund.
Nonetheless, many taxpayers not qualifying for loans still desire to receive
their refunds more quickly by having the refund sent electronically by the IRS
to the Company. The Company then prepares a check or authorizes the tax preparer
to issue a check to the taxpayer. The Company earned approximately $4.8 million,
$2.9 million, and $1.2 million in fees for 1998, 1997, and 1996 respectively for
this refund transfer service. There is no credit risk associated with the RT
product, because funds are not sent to the customer until received by the
Company from the IRS.
In 1998, the total pre-tax earnings for these programs was $4.7 million compared
with $3.6 million in 1997 and $2.1 million in 1996.
The balances outstanding during each tax filing season are included in the
average balance for consumer loans shown in Table 2, but there are no such loans
included in the Consolidated Balance Sheets as of December 31, 1998 and 1997,
because all loans not collected from the IRS are charged-off at June 30 of each
year. The fees earned on the loans are included in the accompanying Consolidated
Income Statements for 1998, 1997, and 1996 within interest and fees on loans.
The fees earned on the refund transfers are included in other service charges,
commissions, and fees.
The Company expects that the programs will be substantially larger in 1999 than
in prior years because of an exclusive agreement reached with a large group of
tax preparers.
Allowance for Credit Losses
Credit risk is inherent in the business of extending loans and leases to
individuals, partnerships, and corporations. The Company sets aside an allowance
or reserve for credit losses through charges to earnings. These charges are
shown in the Consolidated Income Statements as provision for credit losses. All
specifically identifiable and quantifiable losses are immediately charged off
against the allowance. However, for a variety of reasons, not all losses that
have occurred are immediately made known to the Company and of those that are
known, the full extent of the loss may not be able to be quantified. In this
discussion, "loans" include the lease contracts purchased and originated by the
Company.
Determination of the Adequacy of the Allowance for Credit Losses and the
Allocation Process
The Company formally determines the adequacy of the allowance on a quarterly
basis. This determination is based on the periodic assessment of the credit
quality or "grading" of loans. Loans are initially graded when originated. They
are re-graded as they are renewed, when there is a new loan to the same
borrower, when identified facts demonstrate heightened risk of nonpayment, or if
they become delinquent. Re-grading of larger problem loans will occur at least
quarterly. Confirmation of the quality of the grading process is obtained by
independent credit reviews conducted by firms specifically hired for this
purpose and by banking examiners.
After the first step of reviewing the gradings in the loan portfolio, the second
step is to allocate a portion of the allowance to groups of loans and individual
loans to cover Management's estimate of the loss that might exist in them.
Allocation is related to the grade and is done by the methods discussed below.
The last step is to compare the amounts allocated for estimated losses to the
current allowance. To the extent that the current allowance is insufficient to
cover the estimate of unidentified losses, Management records additional
provision for credit loss. If the allowance is greater than appears to be
required at that point in time, provision expense is adjusted accordingly.
The Components of the Allowance for Credit Losses
Consistent with generally accepted accounting principles ("GAAP") and with the
methodologies used in estimating the unidentified losses in the loan portfolio,
the allowance comprises several components.
First, the allowance includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS 114") and No. 118,
Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures ("SFAS 118"). The amount of this component is disclosed in Note 4 to
the consolidated financial statements that this discussion accompanies.
The second component is intended to provide for losses that have occurred in
large groups of smaller balance loans, the individual credit quality of which is
impracticable to re-grade at each period end. These loans would include 1-4
family residential real estate, installment and overdraft lines for consumers,
and loans to small businesses generally of $100,000 and less. The amount
allocated is determined by applying loss estimation factors to outstanding
loans. The loss factors are based primarily on the Company's historical loss
experience tracked over a three to five year period and accordingly will change
over time. Because historical loss experience varies for the different
categories of loans, the loss factors applied to each category also differ. In
addition, there is a greater chance that the Company has suffered a loss from a
loan that was graded less than satisfactory at its most recent grading than if
the loan was last graded satisfactory. Therefore, for any given category, a
larger loss estimation factor is applied to less than satisfactory loans than to
those that the Company last graded as satisfactory. The statistical component is
the sum of the allocations determined in this manner.
The third component is needed to address specific characteristics of individual
loans that are not addressed in the statistically determined historical loss
factors that would ordinarily apply. These characteristics might relate to a
variety of factors such as the size of the loan, the industry of the borrower,
or the terms of the loan. When situations warrant, Management will increase the
allocation above that which would be indicated by the applicable loss estimation
factor to an amount adequate to absorb the probable loss that has been incurred.
The specific component is made up of the sum of these specific allocations.
The Unallocated Component
The fourth or "unallocated" component of the allowance for credit losses is a
component that is not allocated to specific loans or groups of loans, but rather
is intended to absorb losses that may not be provided for by the other
components.
There are several primary reasons that the other components discussed above
might not be sufficient to absorb the losses present in portfolios, and the
unallocated portion of the allowance is used to provide for the losses that have
occurred because of them.
The first is that there are limitations to any credit risk grading process. The
volume of loans makes it impracticable to re-grade every loan every quarter.
Therefore, it is possible that some currently performing loans not recently
graded will not be as strong as their last grading and an insufficient portion
of the allowance will have been allocated to them. Grading and loan review often
must be done without knowing whether all relevant facts are at hand. Troubled
borrowers may deliberately or inadvertently omit important information from
reports or conversations with lending officers regarding their financial
condition and the diminished strength of repayment sources.
The second is that the loss estimation factors are based on historical loss
totals. As such, the factors may not give sufficient weight to such
considerations as the current general economic and business conditions that
affect the Company's borrowers and specific industry conditions that affect
borrowers in that industry. The factors might also not give sufficient weight to
current trends in credit quality and collateral values and the long duration of
the current business cycle. Specifically, in assessing how much unallocated
allowance needed to be provided at December 31, 1998, Management considered the
following:
o with respect to loans to the agriculture industry, Management considered the
effects on borrowers of the abnormal weather conditions commonly referred to
as "El Nino" and overseas market conditions for exported products;
o with respect to loans to the construction industry, Management considered the
market absorption rates for developed properties; the availability of
permanent financing to replace the construction loan; and construction
delays, increased costs, and financial difficulties of contractors,
subcontractors, and suppliers resulting from weather; and the significant
concentration in construction lending in the market area served by FNB;
o with respect to loans to borrowers who are influenced by trends in the local
tourist industry, Management considered the effects of "El Nino" as
demonstrated by the economic decline experienced in the first half of 1998 in
the Santa Barbara area;
o with respect to all loans, Management considered the potential for the merger
to cause disruption of the normal grading process through diversion of
efforts and attention, by the need to integrate different grading systems,
and by the need for the credit risk assessment process to encompass different
markets that could be influenced by unique factors.
Thirdly, neither the loss estimation factors nor the review of specific
individual loans give consideration to loan concentrations, yet this could
impact the magnitude of losses inherent in the portfolios. Specifically, as
disclosed in Note 18 to the consolidated financial statements, there are certain
concentrations with respect to geographical area, industry, and type of
collateral among the loans that the Company has outstanding. Because economic
factors could impact these borrowers as a group, losses inherent in the
portfolio could be greater and more volatile than would be expected if the
Company simply used the loss estimation factors.
Fourthly, the loss estimation factors do not give consideration to the seasoning
of the portfolios. Seasoning is relevant because losses are less likely to occur
in loans that have been performing satisfactorily for several years than in
loans that are more recent. In addition, while term loans have payments of
principal and interest scheduled usually for each month, most loans and lines of
credit in the commercial loan portfolio have short-term maturities and
frequently require payments of interest only until maturity. With a term loan, a
missed or late payment gives an immediate signal of a decline in credit quality.
Many of the Company's loans are commercial. Because they have shorter maturities
and lack regular principal amortization, the process of seasoning does not occur
and the signaling of the missed principal payment is not available.
Lastly, the loss estimation factors do not give consideration to the interest
rate environment. Most obviously, borrowers with floating-rate loans may be less
able to manage their debt service if interest rates rise. However, there can
also be an indirect impact. For example, a rise in interest rates may adversely
impact the amount of home mortgage lending. This will cause a reduction in the
amount of home building initiated by developers, and this will have an impact on
the credit quality of loans to building contractors in the commercial segment of
the portfolio.
Each of these considerations could be addressed by developing additional loss
estimation factors for smaller, discrete groups of loans. However, the factors
are used precisely so that the losses in smaller loans do not have to be
individually estimated. Adding additional factors becomes impracticable and with
the smaller groups, the factors themselves become less statistically valid. Even
for experienced reviewers, grading loans and estimating possible losses involves
a significant element of judgment regarding the present situation with respect
to individual loans and the portfolio as a whole. Therefore, Management regards
it as both a more practical and prudent practice to maintain the total allowance
at an amount larger than the sum of the amounts allocated as described above.
Allocation Table
Table 7 shows the amounts allocated for the last three years to each loan type
disclosed in Table 5. It also shows the percentage of balances for each loan
type to total loans. In general, it would be expected that those types of loans
which have historically more loss associated with them will have a
proportionally larger amount of the allowance allocated to them than do loans
which have less risk.
TABLE 7 -- Allocation of the Allowance for Credit Losses
(dollars in thousands) December 31, 1998 December 31, 1997 December 31, 1996
---------------------------------------------------------------------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
---------------------------------------------------------------------------------
Real estate:
Residential $ 1,258 23.3% $ 1,910 21.0% $ 855 18.4%
Nonresidential 4,005 30.1 4,413 33.1 2,898 32.6
Construction
and development 1,512 6.9 724 4.4 463 4.4
Commercial, industrial,
and agricultural 6,517 22.9 4,749 22.8 6,100 25.0
Home equity lines 533 3.0 620 4.3 555 5.1
Consumer 1,813 7.8 1,490 7.6 788 6.2
Leases 1,459 5.0 1,246 5.6 -- 6.5
Municipal tax-exempt
obligations -- 0.6 -- 0.6 -- 0.8
Other 1,029 0.4 7 0.6 127 1.0
Not specifically allocated 11,170 10,255 8,458
---------------------------------------------------------------------------------
Total allowance $ 29,296 100.0% $ 25,414 100.0% $ 20,244 100.0%
=================================================================================
Allowance for credit loss
as a percentage of
year-end loans 1.85% 1.94% 1.88%
Year-end loans $1,582,781 $1,311,364 $1,078,719
It would also be expected that the amount allocated for any particular type will
increase or decrease proportionately to both the changes in the loan balances
and to increases or decreases in the estimated loss in loans of that type. In
other words, changes in the risk profile of the various parts of the loan
portfolio should be reflected in the allowance allocated.
Residential loans increased from the end of 1997 to the end of 1998 by 33%. The
amount of allowance allocated to these loans decreased by 34%. The reasons for
this are first that most of the growth in residential loans occurred in 1-4
family properties, which historically have a relatively low loss rate and
secondly that during 1998, several larger residential loans for which losses
were expected to be recognized were instead paid in full.
Nonresidential loans had the same kind of change in allocation--the loan balance
was up from 1997 to 1998, but the allocation was lower. The reason for this is
that one relatively large loan was reclassified from nonaccrual status. There
had been a history for this loan of failure to pay according to the terms of the
loan, but during 1998, payments were made according to terms and the Company
significantly reduced its estimate of loss in the loan.
The increase in the allowance allocated to the other categories and to the not
specifically allocated or unallocated portion of the allowance is proportional
to the growth in the loan balances.
There is no allocation of allowance to RAL's at December 31 because all loans
unpaid are charged-off prior to year-end. At the bottom of the table is the
ratio of the allowance for credit losses to total loans for each year.
Credit Losses
Table 8, "Summary of Credit Loss Experience," shows the additions to,
charge-offs against, and recoveries for the Company's allowance for credit
losses. Also shown is the ratio of charge-offs to average loans for each of the
last five years. This ratio was adversely impacted in 1995 with the higher
charge-offs in the RAL program and in 1994 and 1995 by problems with several
large loan relationships at SBB&T related to commercial real estate.
TABLE 8 -- Summary of Credit Loss Experience
(dollars in thousands) Year Ended December 31
1998 1997 1996 1995 1994
--------------------------------------------------------------------------
Balance of the allowance for
credit losses at beginning of year $ 25,414 $ 20,244 $ 16,059 $ 16,680 $ 13,820
--------------------------------------------------------------------------
Charge-offs:
Real estate:
Residential 369 498 822 1,202 4
Non-residential 177 45 1,056 4,902 65
Construction and development -- -- -- -- 25
Commercial, industrial,
and agricultural 1,883 2,335 1,616 1,267 1,252
Home equity lines -- -- 264 156 340
Tax refund anticipation 7,221 5,946 1,123 4,402 3,030
Other consumer 1,598 724 457 523 493
--------------------------------------------------------------------------
Total charge-offs 11,248 9,548 5,338 12,452 5,209
--------------------------------------------------------------------------
Recoveries:
Real estate:
Residential 329 268 172 62 9
Non-residential 1,341 1,876 2,330 21 11
Construction and development -- -- -- -- 1
Commercial, industrial,
and agricultural 1,188 1,087 441 528 380
Home equity lines -- 326 28 109 50
Tax refund anticipation 2,288 1,524 1,437 383 672
Other consumer 861 343 166 277 210
--------------------------------------------------------------------------
Total recoveries 6,007 5,424 4,574 1,380 1,333
--------------------------------------------------------------------------
Net charge-offs 5,241 4,124 764 11,072 3,876
Allowance for credit losses recorded
in acquisition transactions -- 794 -- -- --
Provision for credit losses
refund anticipation loans 4,941 4,649 1,100 2,863 2,890
Provision for credit losses
all other loans 4,182 3,851 3,849 7,588 3,846
--------------------------------------------------------------------------
Balance at end of year $ 29,296 $ 25,414 $ 20,244 $ 16,059 $ 16,680
==========================================================================
Ratio of net charge-offs to
average loans outstanding 0.37% 0.34% 0.08% 1.34% 0.51%
Ratio of net charge-offs to
average loans outstanding
exclusive of RAL's 0.02% (0.03%) 0.12% 0.86% 0.20%
Average Loans $1,407,395 $1,201,394 $ 924,896 $ 826,083 $ 755,868
Average RAL's (9,169) (10,079) (2,040) (4,484) (8,616)
--------------------------------------------------------------------------
Average Loans, net of RAL's $1,398,226 $1,191,315 $ 922,856 $ 821,599 $ 747,252
==========================================================================
Net Charge-offs $ 5,241 $ 4,124 $ 764 $ 11,072 $ 3,876
RAL Net Charge-offs 4,933 4,422 (314) 4,019 2,358
--------------------------------------------------------------------------
Net Charge-offs, net of RAL's $ 308 $ (298) $ 1,078 $ 7,053 $ 1,518
==========================================================================
There are only two other banks in the country that have national RAL programs,
so the net charge-off ratios for the Company are not comparable with those of
other institutions unless the RAL net charge-offs are eliminated. The ratios of
the net charge-offs to average loans and losses exclusive of RALs for the years
of 1994 through 1998 are also shown. The corresponding ratios for the Company's
FDIC peers are 1.08% for 1998, 1.03% for 1997, 0.89% for 1996, 0.69% for 1995,
and 0.54% for 1994 (Note A).
The lower ratios experienced by the Company in 1996, 1997, and 1998 are due to
significantly higher levels of recovery than had occurred in prior years. With
these recoveries, the allowance for credit loss has been relatively high in
proportion to net charge-offs for these years. Management has considered this
ratio carefully and has concluded that it is appropriate given the nature of the
Company's loan portfolio as described above.
The Company's concentration in loans secured by real estate, specifically loans
secured by nonresidential properties, causes a higher level of credit risk than
would otherwise be the case. Large pools of loans made up of numerous smaller
loans tend to have consistent loss ratios. A group consisting of a smaller
number of larger loans in the same industry is statistically less consistent and
losses tend to occur at roughly the same time. For example, in 1995, when real
estate activity in the Company's market areas was at a low point, the Company's
non-RAL charge-offs were approximately one half of the beginning allowance for
credit loss. Because the amount of loss is not consistent period to period, the
estimate of loss and therefore the amount of allowance adequate to cover losses
inherent in the portfolio cannot be determined simply by reference to net
charge-offs in the prior year or years.
As noted above, recoveries have been significant in the last three years. With
the exception of recoveries of prior year tax refund loans (Note H), recoveries
in 1999 and subsequent years are expected to be substantially less than in the
last three years. This is because almost all of the loans of any significant
size that were charged-off in prior years and which the Company had a chance of
collecting have been collected.
The lower amount of charge-offs and higher levels of recoveries in the last
three years are also due to the improved economy. Federal banking regulators are
advising that it is likely that 1998 represented the top of the credit cycle.
Management realizes that the ratios of net charge-offs to loans seen in 1997 and
1998 are lower than may be experienced in future years.
Nonaccrual, Past Due, and Restructured Loans
Table 9 summarizes the Company's nonaccrual and past due loans for the last five
years.
TABLE 9 -- Nonaccrual and Past Due Loans
(dollars in thousands) December 31
1998 1997 1996 1995 1994
--------------------------------------------------------------------
Nonaccrual $ 8,148 $ 11,245 $ 8,591 $ 11,453 $ 9,609
90 days or more past due 78 855 1,437 656 2,024
Restructured Loans -- 174 279 513 147
--------------------------------------------------------------------
Total noncurrent loans $ 8,226 $ 12,274 $10,307 $ 12,622 $11,780
====================================================================
Total noncurrent loans as per-
centage of the total loan portfolio 0.52% 0.94% 0.96% 1.47% 1.49%
Allowance for credit losses as a percentage
of noncurrent loans 356% 207% 196% 127% 142%
Past Due Loans: Included in the amounts listed above as 90 days or more past due
are commercial and industrial, real estate, and a diversity of secured consumer
loans. These loans are well secured and in the process of collection. These
figures do not include loans in nonaccrual status.
Nonaccrual Loans: If there is reasonable doubt as to the collectibility of
principal or interest on a loan, the loan is placed in nonaccrual status, i.e.,
the Company stops accruing income from the interest on the loan and reverses any
uncollected interest that had been accrued but not collected. These loans may or
may not be collateralized. Collection efforts are being pursued on all
nonaccrual loans. Consumer loans are an exception to this reclassification
because they are charged-off if they become delinquent by more than 120 days if
unsecured and 150 days if secured. Nonetheless, collection efforts are still
pursued.
Restructured Loans: The Company's restructured loans have generally been
classified as nonaccrual even after the restructuring. Consequently, they have
been included with other nonaccrual loans in Table 9. The only restructured
loans the Company has had at the end of the last five years that have not been
classified as nonaccrual are reported in Table 9 on a separate line.
The trend from 1994 to mid-1995 was an increase in total noncurrent loans,
reaching a high of $15.4 million at the end of the second quarter of 1995.
Charge-offs, repayments by the borrowers, and strengthened credit
administration, review, and analysis functions account for the decrease to $10.3
million at year-end 1996. The total increased at the end of 1997 to $12.3
million because of noncurrent loans acquired in the FVB and CSB transactions,
but as a percentage of total loans, noncurrent loans slightly decreased. The
major change during 1998 was the reclassification of the large loan mentioned in
the section entitled "The Components of the Allowance for Credit Losses" out of
nonaccrual status but the total was reduced as well by rigorous collection
efforts.
Table 10 sets forth interest income from nonaccrual loans in the portfolio at
year-end that was not recognized.
TABLE 10 -- Foregone Interest
(in thousands) Year Ended December 31
1998 1997 1996
-----------------------------------
Interest that would have been recorded under original terms $ 905 $1,837 $1,503
Gross interest recorded 669 930 885
-----------------------------------
Foregone interest $ 236 $ 907 $ 618
===================================
Deposits
An important component in analyzing net interest margin is the composition and
cost of the deposit base. Net interest margin is improved to the extent that
growth in deposits can be focused in the lower cost core deposit accounts:
demand deposits, NOW accounts, and savings. The average daily amount of deposits
by category and the average rates paid on such deposits is summarized for the
periods indicated in Table 11.
TABLE 11 -- Detailed Deposit Summary
(dollars in thousands) Year Ended December 31
1998 1997 1996
-----------------------------------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
-----------------------------------------------------------------------------------
NOW accounts $ 278,176 1.11 % $ 246,545 1.08 % $ 210,114 1.11 %
Money market deposit accounts 552,760 3.40 526,282 3.53 516,350 3.61
Savings accounts 187,213 2.30 159,704 2.44 142,654 2.43
Time certificates of deposit for
less than $100,000 and IRA's 426,769 5.32 343,905 5.51 234,466 5.92
Time certificates of deposit for
$100,000 or more 300,215 5.28 230,240 5.42 168,854 4.71
--------------- --------------- ---------------
Interest-bearing deposits 1,745,133 3.71 % 1,506,676 3.76 % 1,272,438 3.64 %
Demand deposits 441,670 339,018 263,491
--------------- --------------- ---------------
$ 2,186,803 $ 1,845,694 $ 1,535,929
=============== =============== ===============
The average rate paid on all deposits, which had increased from 3.64% in 1996 to
3.76% in 1997, decreased in 1998 to 3.71%. The average rates that are paid on
deposits generally trail behind money market rates because financial
institutions do not try to change deposit rates with each small increase or
decrease in short-term rates. This trailing characteristic is stronger with time
deposits that pay a fixed rate for some specified term like certificates of
deposit than with deposit types that have administered rates. Administered rate
deposit accounts like NOW, money market deposit accounts ("MMDA"), and savings,
are those products which the institution can reprice at its option based on
competitive pressure and need for funds. With time deposit accounts, even when
new offering rates are established, the average rates paid during the quarter
are a blend of the rates paid on individual accounts. Only new accounts and
those that mature and are replaced will bear the new rate. There was some
decline in market rates in the latter part of 1998 and this is most apparent in
the decline in the rates paid for MMDA.
Generally, the Company offers higher rates on certificates of deposit in amounts
over $100,000 than for lesser amounts. It would be expected, therefore, that the
average rate paid on these large time deposits would be higher than the average
rate paid on time deposits with smaller balances. As may be noted in Table 11,
however, this has not been the case. There were two primary reasons for this
anomaly.
First, while steady, loan demand has not been particularly high in the
California economy. This has permitted the Company to fund the loan growth from
existing deposits. Without the need to generate new deposits to keep up with
loan growth, the Company has been reluctant to offer premium rates to encourage
large deposits that are not the result of stable customer relationships. If the
deposits are short-term and will be kept by the depositor with the Company only
while premium rates are paid, the Company must invest the funds in very
short-term assets, such as Federal funds. Since Federal funds sold earned less
than 5.5% during the last several years, the spread between the cost of premium
rate CD's and the earnings on the potential uses of the funds was very small.
Second, a significant portion of the under $100,000 time deposits are IRA
accounts. The Company pays a higher rate on these accounts than on other CD's.
These factors have served to maintain a higher average rate paid on the smaller
time deposits relative to the average rate paid on larger deposits.
Table 12 discloses the distribution of maturities of CD's of $100,000 or more at
the end of each of the last three years. While the total balances of these
accounts have increased, there is an obvious shortening of maturities. For the
reasons discussed above, the Company has been unwilling to commit to the higher
rates necessary for customers to want to choose longer term instruments.
TABLE 12 -- Maturity Distribution of Time
Certificates of Deposit of $100,000 or More
(in thousands) December 31
1998 1997 1996
--------------------------------------------------
Three months or less $ 166,562 $ 114,396 $ 73,789
Over three months through six months 74,518 68,385 43,287
Over six months through one year 65,355 75,386 43,308
Over one year 17,241 23,663 15,745
--------------------------------------------------
$ 323,676 $ 281,830 $ 176,129
==================================================
Securities Sold Under Agreements to Repurchase and Federal Funds Purchased
Securities sold under agreements to repurchase ("repos") are a form of borrowing
that is secured by some of the securities in the Company's portfolios. Some
banks use these agreements to borrow from other banks in order to provide
temporary liquidity. In contrast, the Company almost exclusively provides these
instruments in amounts over $100,000 to business customers for their cash
management. Most of the agreements are for terms of a few weeks to 90 days. Like
the rate paid on Federal funds purchased, the interest rate paid on repos is
tied to the Federal funds sold rate. Information about the balances and rates
paid is shown in Note 10 to the consolidated financial statements. The average
rate paid in 1998 of 4.44% was slightly lower than the 4.54% for 1997,
consistent with other market rates of interest in the last year. The average
balance for these arrangements varies with economic activity as these customers
have more or less cash to invest. The increased averages during 1998 and 1997
reflected the improved local economy and lower rates offered on deposit
products.
Federal funds purchased are a form of overnight borrowing from other banks. The
Company purchases funds each day to accommodate other local community banks on
the Central Coast that have excess cash to invest overnight. The related
interest expense is tied to the rate that the Company receives for its excess
cash sold as Federal funds to larger financial institutions. Information on the
balances and rates paid for these funds is also disclosed in Note 10 to the
consolidated financial statements. During the last three years, the Company has
occasionally purchased additional funds from money center banks to meet
liquidity needs, especially during the RAL season. Because these are overnight
borrowings, the average rate paid to various parties on any one day may vary
substantially from the average rate for the year. Typically, the Federal funds
rate is quite volatile on the last day of the year. This accounts for the high
rate paid on these funds the last day of both 1997 and 1996 compared to the
average for the year. The Company received correspondingly higher interest on
the Federal funds it sold those days. The lower rate at the end of 1998 compared
to the average rate for the year is due more to declining rates during the
latter part of the year than to abnormal rates on the last day.
Other Real Estate Owned
Real property owned by the Company that was acquired in foreclosure proceedings
is termed Other Real Estate Owned. As explained in Note 1 to the consolidated
financial statements, the Company held some properties at December 31, 1998 and
1997, but had written their carrying value down to zero to reflect the
uncertainty of realizing any proceeds from their disposal.
As part of the loan application process, the Company reviews all real estate
collateral for possible problems from contamination by hazardous waste. This is
reviewed again before any foreclosure proceedings are initiated.
Nonearning Assets
For a bank, nonearning assets are those assets like cash reserves, equipment,
and premises that do not earn interest. The ratio of nonearning assets to total
assets is watched carefully by Management because it represents the efficiency
with which funds are used. Tying up funds in nonearning assets either lessens
the amount of interest that may be earned or it requires the investment of the
smaller earning asset base in higher yielding but riskier assets to achieve the
same income level. Management believes that a low level of nonearning assets is
part of a prudent asset/liability management strategy to reduce volatility in
the earnings of the Company. The ratio of nonearning assets to total assets has
remained very low during the last three years with an average of 6.76% in 1996,
6.15% in 1997, and 6.33% in 1998. As a result of the two acquisitions noted
above, the Company recorded approximately $17 million in goodwill and
approximately $3 million in premises, equipment and other nonearning assets.
This addition to nonearning assets was offset by the implementation in December
1996 of a reclassification of a large proportion of the Company's transaction
accounts to nontransaction status. This has reduced the amount of cash reserves
that must be held against these accounts at the Fed where they do not earn
interest.
As of December 31, 1998, the average ratio of nonearning assets to total assets
for bank holding companies of comparable size was 10.74%. Using the Company's
average asset size and average rate of 5.52% earned in 1998 on money market
investments, having an extra 4.41% of assets earning interest meant the Company
had $113.9 million more in earning assets compared with its peers and earned
$6.3 million in pre-tax income on those assets. These additional earnings are
somewhat offset by higher lease expense, additional equipment cost, and
occasional losses taken on quick sales of foreclosed property. Overall, however,
Management believes that these steps give the Company an earnings advantage.
This efficient use of assets allows the Company to produce a given amount of
revenue with substantially less risk than its competition as additional deposits
or borrowings do not have to be obtained to fund the assets generating the
revenue.
Other Operating Income
Fees earned by the Trust and Investment Services Division remain the largest
component of other operating income, reaching $11.5 million in 1998. Fees
increased by $1,476,000 or 15% over 1997. The market value of assets under
administration on which the majority of fees are based increased from $1.8
billion at the end of 1997 to $2.0 billion at the end of 1998. Included within
total fees in 1998 were $1,227,000 for trusteeship of employee benefit plans and
$569,000 from the sales of mutual funds and annuities. The Company provides
assistance to customers to determine what investments would best match their
financial goals and helps the customers allocate their funds according to the
customers' risk tolerance and need for diversification. The funds and annuities
are not operated by the Company, but instead are managed by registered
investment companies. The Division also provides investment management services
to individuals and organizations.
Included within other service charges, commissions and fees are service fees
arising from the processing of merchants' credit card deposits, escrow fees, and
a number of other fees charged for special services provided to customers. A
significant source of income in this category is tax refund transfer fee income
which totaled $4.8 million in 1998. As explained in the previous discussion on
the tax refund programs, many of the taxpayers not qualifying for loans still
had their refunds sent by the IRS to the Company which then issued the refund
check more quickly than the IRS. The Company began earning substantial fees for
this service in 1995. Management expects that this will continue to provide a
significant source of income in 1999 and beyond.
The Company continues to work on increasing other income and fees due to its
importance as a potential contributor to profitability.
Other Operating Expense
Total other operating expenses have increased over the last three years as the
Company has grown. These expenses are often calculated as a proportion of total
assets as a means of comparing their level with other financial institutions. As
a percentage of average earning assets, these expenses have risen slightly in
1998 to 4.47% from 4.08% and 4.23% for 1997 and 1996 respectively.
While other operating expense decreased from 1996 to 1997 as a percentage of
average earning assets, there was an increase in the dollar amount of these
expenses. This increase is largely related to the nonrecurring expense incurred
in connection with the acquisitions of FVB and CSB. Most of these expenses
related to the acquisitions were recognized in 1997 while the Company benefited
for only three quarters of 1997 from the assets obtained from FVB and only one
quarter from the assets obtained from CSB.
The increase from 1997 to 1998 is primarily due to expenses related to the
merger with PCB. The Company incurred $11.7 million in other expenses for the
merger. The nature of these expenses is explained in the section of this
Discussion titled "Merger with Pacific Capital Bancorp". Nonetheless, the ratio
for 1998 is lower than the average ratio of 4.63% for its FDIC peer group for
1998. The fact that it is lower is notable for several reasons.
The first is that it is exceptional for a financial institution the size of the
Company to have such a large trust division. The expenses of this division
(approximately $5.4 million in 1998) are included in the general category of
other operating expenses (the numerator of the ratio), but the only earning
assets associated with the division (the denominator of the ratio) arise from
trust customer funds deposited with the Company, which averaged $47.9 million in
1998. All other assets administered by the division are not recorded as Company
assets because they are invested in securities of other companies or other
assets.
The second reason is the high proportion of premises that are leased rather than
owned by the Company. This results in increased lease expense, but, as noted
above, by not committing funds to the purchase of premises, the Company is able
to substantially increase its net interest income.
An alternative ratio to use in comparing the Company's expenses to those of
other financial institutions is the operating efficiency ratio. This ratio,
which takes into account the trust fee income and interest income available by
not owning premises, measures how much noninterest expense is spent in earning a
dollar of revenue. The Company spent 62.1 cents in 1998 for each dollar of
revenue compared to 56.0 cents for its FDIC peers. Without the merger expenses,
the Company's ratio would have been 55.2 cents. Along with the generation of
noninterest income, expense control has been set as a priority for 1999.
Within the whole category of other operating expense, salary and benefit
expenses have increased 29.6% from 1996 to 1998 compared to a 41.6% increase in
average earning assets for the same period. In most years the rate of increase
in staff is less than the rate of growth in the Company's assets (if the growth
in off-balance sheet fiduciary assets is also considered). The number of staff
has increased for several reasons. In addition to the eight new offices acquired
in the FVB and CSB transactions, eight new branch offices have been opened since
the start of 1994. It generally takes several years for new offices to attract
sufficient deposits to offset the personnel expense.
Net occupancy and equipment expense have increased from 1996 to 1998 by 29.4%
because of some branch office renovation, increases in lease expense, upgrading
of equipment to handle increased transaction volumes and to maintain
technological competitiveness, and the addition of new offices.
Capital Resources
Under current regulatory definitions, the Company is "well-capitalized," the
highest rating of the five categories defined under the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA").
Capital Adequacy Standards
The primary measure of capital adequacy for regulatory purposes is based on the
ratio of risk-based capital to risk weighted assets. This method of measuring
capital adequacy is meant to accomplish several ends: 1) to establish capital
requirements that are more sensitive to the differences in risk associated with
various assets; 2) to explicitly take into account off-balance sheet exposure in
assessing capital adequacy; and, 3) to minimize disincentives to holding liquid,
low-risk assets.
The Company, as a bank holding company, is required by the FRB to maintain a
risk-based capital ratio of at least 8.0%. At the end of 1998, the Company's
ratio was 11.7%. The minimum levels established by the FRB, the minimum levels
necessary to be considered well capitalized by regulatory definition and the
Company's ratios as of December 31, 1998 are presented in Note 17. It is
Management's intent to maintain capital in excess of the well capitalized
requirement. As of year-end all ratios exceed this threshold. SBB&T and FNB are
also required to maintain a risk-based capital ratio of 8.0%. SBB&T's ratio at
the end of 1998 was 10.6% and FNB's was 12.5%. Sanbarco has no minimum capital
requirements.
The risk-based capital ratio is strongly impacted by the management of the
securities portfolios because the U.S. Treasury securities are assigned a zero
risk weighting and other instruments in which the Company has often placed a
significant amount of funds such as U.S. agency securities, state and municipal
securities, Federal funds sold, and bankers' acceptances have a 20% risk
weighting.
The Company's ratio decreased from 15.8% for year-end 1996 to 11.7% for year-end
1998 as the result of the two acquisitions and the shift in the securities
portfolios to 20% risk weighted assets. The FVB and CSB acquisitions were
specifically structured so that only cash consideration was paid to their
shareholders in order that the earnings from the additional net assets would not
be diluted by the issuance of additional shares. Although total capital did not
change as a result of the purchase of FVB and CSB since the consideration paid
was cash only, Tier 1 capital and total risked-based capital were reduced by the
amount of goodwill recognized. The shift in the portfolio is the result of
reducing the proportion of Treasury securities in favor of agency securities and
CMOs to improve interest income.
Future Sources and Uses of Capital and Expected Ratios
The Company is trying to increase loans as a percentage of total assets in order
to increase net interest income. Except for most 1-4 family residential loans,
loans are risk-weighted at 100%. If Management's projections for loan growth are
reached in 1999, the Company's risk-based capital ratio should decrease.
However, Management intends and expects that the Company and the subsidiary
banks will continue to exceed the minimum standards for well capitalized
institutions because of sustained growth in capital resources.
Net income has provided $81.6 million in capital in the last three years. Of
this amount, $32.9 million, or 40.3% was distributed in dividends.
In addition to the capital generated from the operations of the Bank, over the
years a significant source of capital growth has been the exercise of employee
stock options. The extent of the growth from this source in any one year depends
on a number of factors, among them the current stock price in relation to the
price at the time options were granted and the number of options that would
expire if not exercised during the year.
The net increase to capital from the exercise of options is lessened by the
ability of employees to pay the exercise price of options by trading shares of
stock they already own, termed "swapping". In 1998, the increase to capital from
the exercise of options (net of shares surrendered as payment for exercises and
taxes) was $11,057,000 or 47.5% percent of the net growth in shareholders'
equity in that year. At December 31, 1998, there were approximately 1,098,243
options outstanding and exercisable at less than the current market price, with
an average exercise price of $7.23. This represents a potential addition to
capital of $7.9 million, if all options were exercised with cash. Because many
options are likely to be exercised by swapping, some amount less than the $7.9
million in new capital will result from the exercise of options, and the options
are likely to be exercised over a number of years.
Tender Offer and Other Share Repurchase
As disclosed in Note 9 to the accompanying consolidated financial statements, in
1997 the Company offered to purchase up to 1,000,000 shares of common stock duly
tendered by February 21, 1997. The number of shares tendered on that date were
130,494 or 0.9% of the then outstanding shares. The Company paid $15.00 per
share or approximately $2.0 million for the stock tendered, which was accounted
for as a retirement of shares and reduction of capital in 1997. As explained in
the tender offer, this action was taken: 1) to provide shareholders with larger
holdings an opportunity to sell shares if they had not been able to because the
market was not able to absorb larger blocks; and 2) because the significant
earnings growth over the last several years had resulted in an accumulation of
capital in excess of current and anticipated needs.
In prior years, the Company occasionally repurchased shares of its common stock
to offset the increased number of shares issued as a result of the exercise of
employee stock options. In 1998, because the merger with PCB was accounted for
as a pooling-of-interests, the Company suspended purchases at the initiation of
the merger discussions and repurchased only 150,000 shares compared to the
issuance of 807,000 shares resulting from the exercise of stock options.
There are no material commitments for capital expenditures or "off-balance
sheet" financing arrangements as of the end of 1998, except as reported in Note
18 to the consolidated financial statements. Legal limitations on the ability of
the subsidiary banks to declare dividends to the Bancorp are discussed in Note
17.
Regulation
The Company is strongly impacted by regulation. The Company and its subsidiaries
may engage only in lines of business that have been approved by their respective
regulators, and cannot open, close, or relocate offices without their approval.
Disclosure of the terms and conditions of loans made to customers and deposits
accepted from customers are both heavily regulated as to content. FDICIA became
effective in 1992. FDICIA required banks to meet new capitalization standards,
follow stringent outside audit rules, and establish stricter internal controls.
There were also new requirements to ensure that the Audit Committee of the Board
of Directors is independent.
The subsidiary banks are required by the provisions of the federal Community
Reinvestment Act ("CRA"), to make significant efforts to ensure that access to
banking services is available to every segment of the community. They are also
required to comply with the provision of various other consumer legislation and
regulations. The Company and the banks must file periodic reports with the
various regulators to keep them informed of their financial condition and
operations as well as their compliance with all the various regulations.
The FRB and the California Department of Financial Institutions conduct periodic
examinations of the Company and SBB&T to verify that the reporting is accurate
and to ascertain that the Company and the SBB&T are in compliance with
regulations.
The Federal banking agencies may take action against a bank holding company or a
bank should it find that the financial institution has failed to maintain
adequate capital. This action has usually taken the form of restrictions on the
payment of dividends to shareholders, requirements to obtain more capital from
investors, and restrictions on operations. The FDIC may also take action against
a bank which is not acting in a safe and sound manner. Given the strong capital
position and performance of the Company and the banks, Management does not
expect to be impacted by these types of restrictions in the foreseeable future.
Impact of Inflation
Inflation has been minimal for the last several years and has had little or no
impact on the financial condition and results of operations of the Company
during the periods discussed here.
Liquidity
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuations in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented in the market
place.
The Company's objective is to ensure adequate liquidity at all times by
maintaining liquid assets, by being able to raise deposits and liabilities, and
by having access to funds via capital markets. Having too little liquidity can
result in difficulties in meeting commitments and lost opportunities. Having too
much liquidity can result in less income because liquid assets usually do not
earn as high an interest rate as less liquid assets.
As indicated in the Consolidated Statements of Cash Flows, the principal sources
of cash for the Company have been interest payments received on loans and
investments, proceeds from the maturity or sale of securities and bankers'
acceptances, and the growth in deposits.
To manage the Company's liquidity properly, however, it is not enough merely to
have large cash inflows; they must be timed to coincide with anticipated cash
outflows. Also, the available cash on hand or cash equivalents must be
sufficient to meet the exceptional demands that can be expected from time to
time relating to natural catastrophes such as flood, earthquakes, and fire.
The Company manages its liquidity adequacy by monitoring and managing its
immediate liquidity, intermediate liquidity, and long term liquidity.
Immediate liquidity is the ability to raise funds today to meet today's cash
obligations. Sources of immediate liquidity include the prior day's Federal
funds sold position, unused Federal funds and repurchase agreement lines and
facilities extended by other banks and major brokers to the Company, access to
the Federal Home Loan Bank for short-term advances, and access to the Federal
Reserve Bank's Discount Window. The Company has established a target amount for
sources of available immediate liquidity. This amount is increased during
certain periods to accommodate any liquidity risks of special programs like
RALs.
Intermediate liquidity is the ability to raise funds during the next few months
to meet cash obligations over those next few months. Sources of intermediate
liquidity include maturities or sales of bankers' acceptances and securities,
term repurchase agreements, and term advances from the Federal Home Loan Bank.
The Company monitors the cash flow needs of the next few months and determines
that the sources are adequate to provide for these cash needs.
Long term liquidity is the ability to raise funds over the entire planning
horizon to meet cash needs anticipated due to strategic balance sheet changes.
Long term liquidity sources include initiating special programs to increase core
deposits in expanded market areas, reducing the size of securities portfolios,
taking long-term advances from the Federal Home Loan Bank, securitizing loans,
and accessing capital markets. The fixed-rate loans the Company borrowed from
the Federal Home Loan Bank to fund the purchase of the lease portfolio in 1996
and the retention of a portion of the 30-year fixed rate residential real estate
loans is an example of coordinating a source of long term liquidity with
asset/liability management. Had the Company used immediate or intermediate
sources of liquidity to fund these assets, the negative gap for the next three
months would have been larger, subjecting the Company to greater exposure from
rising interest rates.
Income Tax Expense
Income tax expense is the sum of two components, the current tax expense or
provision and the deferred expense or provision. Current tax expense is the
result of applying the current tax rate to taxable income.
The deferred tax provision is intended to account for the fact that income on
which the Company pays taxes with its returns differs from pre-tax income in the
accompanying Consolidated Income Statements. Some items of income and expense
are recognized in different years for income tax purposes than in the financial
statements. For example, the Company is only permitted to deduct from Federal
taxable income actual net loan charge-offs, irrespective of the amount of
provision for credit loss (bad debt expense) recognized in its financial
statements. This causes what is termed a "temporary difference" because
eventually, as loans are charged-off, the Company will be able to deduct for
taxes what has already been recognized as an expense in the financial
statements. Another example is the accretion of discount on certain securities.
For its financial statements, the Company recognizes income as the discount is
accreted. For its tax return, however, the Company can defer the recognition of
income until the cash is received at the maturity of the security. The first
example causes a deferred tax asset to be created because the Company has
recognized as an expense for its current financial statements an item that it
will be able to deduct from its taxable income in a future year. The second
example causes a deferred tax liability, because the Company has been able to
delay until a subsequent year the paying of tax on an item of current year
financial statement income.
The Company measures all of its deferred tax assets and liabilities at the end
of each year. The difference between the net asset or liability at the beginning
of the year and the end of the year is the deferred tax provision for the year.
Most of the Company's temporary differences involve recognizing substantially
more expenses in its financial statements than it has been allowed to deduct for
taxes, which results in a net deferred tax asset. Deferred tax assets are
dependent for realization on past taxes paid, against which they may be carried
back, or on future taxable income, against which they may be offset. If there
were a question about the Company's ability to realize the benefit from the
asset, then it would have to record a valuation allowance against the asset to
reflect the uncertainty. Given the amount and nature of the Company's deferred
assets, the past taxes paid, and the likelihood of future taxable income,
realization is assured and no valuation allowance is needed.
The amounts of the current expense and deferred benefit, the amounts of the
various deferred tax assets and liabilities, and the tax effect of the principal
temporary differences between taxable income and pre-tax financial statement
income are shown in Note 8 to the accompanying consolidated financial
statements.
To ensure that all corporations with substantial income for financial reporting
purposes ("book income") pay some Federal income tax, Congress established the
Alternative Minimum Tax ("AMT") as a second parallel tax system. Under AMT
provisions, there is a limitation on how great the difference may be between
book income and taxable income. If the difference is too great, a portion of the
book income not normally taxable is nonetheless added to taxable income and the
total is multiplied by the AMT tax rate for comparison with the regular tax
computation. The Company is required to pay the greater of the Federal tax
liability computed under the regular tax system or that computed using the
special rules of the AMT.
The Company has substantial differences between book income and taxable income
due to the temporary differences noted above and due to permanent differences
like the tax-exempt income from state and municipal securities. These
differences were not sufficient the last three years to trigger the AMT rate but
the Company did pay taxes under AMT in 1995. The extra tax paid under the AMT
calculation for 1995 was allowable as a credit against 1996 taxes. The lowest
effective tax rate for the Company occurs at the point that the regular tax
computation and the AMT computation result in the same tax amount. The Company
therefore tries to stay very close to this crossover point. In these
circumstances, the Company carefully considers the impact of new purchases of
tax-exempt securities and other transactions which might cause the AMT to come
into effect.
Common Stock Prices and Dividends
Stock prices and cash dividends declared for the last eight quarters are shown
on page 5. The Company's stock is listed on the Nasdaq National Market System.
The trading symbol is SABB. Stock prices represent trading activity through the
National Market System. Near the end of June 1997, the Company's stock was added
to the Russell 2000 stock index. As a number of index funds purchased the stock
to match the index, the volume and price increased rapidly for a short time.
The Board of Directors periodically increases the dividend rate in
acknowledgment that earnings have been increasing by a sufficient amount to
ensure adequate capital and also provide a higher return to shareholders. For
the years 1998, 1997, and 1996, the Company has declared cash dividends which
were 54.5%, 39.2%, and 40.0%, respectively, of its net income. The Company's
policy is to pay dividends of approximately 35%-40% of the last 12 months
earnings. Because earnings were significantly reduced in 1998 by the one-time
merger expenses, the ratio for 1998 is higher than usual. The most recent
information for the Company's peers shows an average payout ratio of 27.6%.
Merger with Pacific Capital Bancorp
On December 30, 1998, SBB completed its merger with PCB and assumed the name of
its merger partner to most clearly reflect the broad geography of the new
multi-bank organization.
Description of the Transaction: The agreement provided for PCB shareholders to
receive 1.935 shares of SBB stock in exchange for each of their shares. Based on
the closing price of SBB stock as of the date of the merger, the value of the
merger was approximately $216 million, 2.8 times the book value of PCB. The
former shareholders of SBB now hold approximately 64% of the Company and the
former shareholders of PCB now own approximately 36%. The transaction was
accounted for as a pooling of interests. As such, all financial results for
periods prior to the merger are reported as if the merger occurred at the
beginning of the earliest period presented.
Reasons for the Merger: The Company maintains a vision to build an enduring
franchise as THE independent community bank organization on the Central Coast of
California. In order to meet shareholder expectations and fulfill this vision,
the Company needs to average annual net income equating to 16% or more of
shareholders' equity. With the strong growth in income generated by many
community banks, it has become increasingly difficult for banks to grow earnings
as fast as capital. The opportunity to merge with a quality partner which has a
record of excellent historic earnings and strong future earnings potential fit
our vision and our financial objectives.
SBB&T has achieved a very high market share, consistently holding more deposits
in its traditional Santa Barbara market area than the next two largest financial
institutions combined. While SBB&T has always welcomed the opportunity to serve
new customers, efforts to increase earnings at the required pace by attempting
to substantially increase its market share in this market area would be
prohibitively expensive. Therefore the Company expanded into new market areas in
Northern Santa Barbara County and Western Ventura County both by opening new
offices and by the acquisition of FVB and CSB.
Expanding farther than this from its Santa Barbara headquarters requires that
the Company benefit from economies of scale to offset the costs of providing
support over the greater distance. New offices typically take several years to
generate the required asset base to become profitable and there is always
uncertainty as to whether this will occur even over time. The alternative is to
look to significant merger partners in high growth markets.
PCB had consistently excellent financial results and a low level of credit
losses. Additionally, both companies shared similar customer profiles, common
employee cultures, comparable operating philosophies, strong reputations for
delivering high quality customer service, and a long-standing commitment to
community service and involvement. After weighing the alternative means of
continuing to meet shareholder expectations for return on their investment and
the ratio of price paid to value received in this particular transaction, the
Management and Directors of SBB agreed that this transaction was an important
component of both meeting their vision and shareholders' expectations.
The combined company remains headquartered in Santa Barbara. The two former
subsidiaries of PCB, FNB and SVNB, merged into one bank shortly before the
merger with SBB. The subsidiary banks will continue to operate and serve their
customers in the same manner as before the merger. Management team members and
boards of directors of each bank will continue to work in their local markets,
ensuring local leadership, accountability and responsiveness. These are critical
elements in preserving the unique cultures and identities which have contributed
to the performance of each merger partner.
Costs to Effect the Merger: A variety of costs have been and will be incurred to
complete the merger. These include: (1) professional fees paid to accountants,
attorneys, consultants, and investment bankers; (2) expenses to fulfill or
cancel various employment and service contracts; and (3) costs to convert PCB's
data processing and other operational systems to the ones used by SBB. In 1998,
PCB and SBB incurred $8.3 million of these merger-related costs after taxes.
Costs incurred to actually consummate the merger, such as fees paid to
investment bankers, consultants, and attorneys to plan and negotiate the deal,
are not deductible for income tax purposes.
Implementation of the Merger: Administrative units and some operation support
units have already been combined. Integration of the data processing and teller
automation systems is expected to be completed by the end of the second quarter
of 1999. These steps will generate the merger savings that are expected to make
the transaction accretive to earnings per share in the first full operating year
for the combined company.
The Company's subsidiary banks differentiate themselves from other financial
institutions in their market areas by their high level of responsiveness to
customer needs. It is clearly recognized that the value of merger cost savings
would be compromised from the customer disaffection that would result if the
conversion process should in any way negatively impact service levels.
Therefore, the timetable for the integration has been carefully structured and
conservatively paced to ensure that the process is well executed and as
transparent as possible to customers, while still achieving necessary savings.
Market Areas After Merger: FNB maintains offices in Monterey, Salinas, Carmel,
Watsonville, and Soledad. Offices in Gilroy, Morgan Hill, Hollister, and San
Juan Bautista are operated under the name of SVNB. SBB&T has 27 offices in Santa
Barbara and Ventura Counties.
Year 2000 Project
The following is a summary of the exposure or risk the Company faces related to
the impact of the Year 2000 and the process the Company is using to address
these risks. A successful response to the Year 2000 or Century Date Change
problem has the highest priority among the Company's current projects. The
Company has initiated a comprehensive project to ensure success. The project
covers all areas of the Company's operations including data processing systems,
telecommunications and data networks, building facilities and security systems,
vendors and customers risk, contingency planning, and customer and shareholder
communications.
Reliance on Estimates and Assumptions
This section contains a number of forward-looking statements based on
significant estimates and assumptions. Among these are:
o the number of critical systems which must be evaluated, modified or
replaced, and tested,
o the extent of work necessary to modify critical systems that it is not
practicable to replace,
o the continued availability of internal and external resources,
o the cost of these resources,
o the time required to accomplish the tasks, and
o the cost of needed equipment.
However, additional information may come to light that will require changes to
these estimates and assumptions, and that actual results could differ.
Management believes it will be able to make the necessary modifications in
advance, however, failure to complete the modifications may have a material
adverse effect on us.
Reliance on the Computer Systems of Other Parties
By the nature of our business, we place a high degree of reliance on computer
systems of third parties, such as customers, vendors, and other financial and
governmental institutions. Although we are assessing the readiness of these
third parties and preparing contingency plans in the event that their systems
are not "compliant" (Note K), the failure of these third parties to modify their
systems in advance of December 31, 1999, may have a material adverse effect on
us.
Estimate of the Cost to Address Year 2000
Management estimates that the total cost of our Year 2000 project will be
approximately $2.5 million, of which a portion relates to capital expenditures
that will be capitalized and depreciated over their useful lives. The remaining
amount will be included in noninterest expense in the period incurred. As of
December 31, 1998, we had spent approximately $911,000 on our Year 2000 project.
Of this amount, $310,000 related to capital expenditures. The majority of the
estimated $1.6 million remaining to be spent is expected to be included in
various categories of noninterest expense during 1999.
Work on the project is being performed both by internal staff re-assigned from
less time-critical tasks and by consultants engaged by the Company. Of the $1.6
million to be included in noninterest expense, we have assumed that
approximately $1.3 million will be spent on salaries and consultants. This
assumes both that the actual amount of work to complete the project and the
actual mix between internal staff and consultants do not vary significantly from
Management's estimates.
The funding for the cost of our Year 2000 project is coming from normal
operating cash and we are staffing the project with external resources as well.
Estimated total costs could change further as analysis continues.
Project Phases
The Company has structured its response to the Year 2000 problem into five
phases: awareness, assessment, renovation, validation/certification, and
implementation.
Table 13 briefly describes each of these phases of the project and gives the
planned completion date, the actual completion date if finished or the
percentage of completion as of December 31, 1998 if not yet complete. As
measured by effort days planned and expended as of December 31, 1998, the
overall project was 79% complete.
TABLE 13 -- Year 2000 Summary Plan
Date of Actual
Date of Completion or
Planned Percentage of
Phase Description Completion Completion
Awareness Communication and June 30, 1997 June 30, 1997
survey efforts to
ensure that the
Board of Directors
and all employees
understood the
nature and
importance of the
Year 2000 problem
and the risks of
failing to
adequately address
the issue
Assessment Identify all of September 30, September 30,
the critical 1997 1997
systems in the
Company to
determine the
scope of the
necessary
response. For each
critical system
purchased from a
third-party
vendor, decide
whether the vendor
can provide the
Company with a
"compliant"
version of the
system
Renovation Make modifications December 1, 1998 93% Complete.
to test copies of
critical systems
or install
replacement
systems in test
environment
Validation/ Test modified or March 30, 1999 59% Complete.
Certification replaced system
Implementation Installation of June 30, 1999 59% Complete.
certified systems
into production
In the assessment phase, the Company assigned a priority to each system,
indicating the importance of the function to our continuing operation. This
assignment ensures that resources are delegated based on their relative
importance. We have prioritized projects as "Critical" and "Non-Critical".
Critical systems include those that are vital to providing a core customer
service like the loan and deposit data processing systems and those that are
essential to the financial condition of the Company like the systems that
support the wire transfers between the Company and other financial institutions.
Of the 117 systems identified by Management as critical, at December 31, 1998,
31 had been certified as compliant, 71 were expected to be compliant but testing
and certification was not complete, and for 15 the necessary modifications or
revisions had not yet been installed.
With the highly integrated systems used by the Company, testing cannot simply be
done on an individual basis. Instead, testing of systems must be conducted
together in a separate test computer environment where dates are set forward in
order to identify and correct prior to the actual end of the century.
The century date change does not only impact computer systems running banking or
financial applications. Some of the Company's building security and operations,
such as power management, ventilation, and building access are controlled by
special purpose microprocessors built into the equipment. All building
facilities are presently being evaluated, and we expect all systems using these
control to be confirmed as Year 2000 ready by June 1999.
We rely on customers, vendors, and governmental and other financial institutions
to undertake similar preparations for the Year 2000 so that their operations
will not be interrupted. Such interruption to customers could threaten their
ability to meet the terms of their debt service. For vendors, such interruptions
could limit their ability to provide essential services or supplies to the
Company. For governmental and other financial institutions, such interruption
could impact the Company's ability to process checks for its customers and to
obtain funds to meet its obligations.
Among customers, borrowers represent the most exposure to the Company. As of
December 31, 1998, the Company's loan officers and the independent company
engaged to do loan review have assessed the largest borrowers and others that
have been identified as possibly presenting higher than normal risk of default
by being unprepared for the century date change. Plans for these customers have
been developed to minimize the impact to the Company by their possible failure
to adequately address their Year 2000 situation.
In general, the Company has less leverage over vendors than customers. That is,
while the Company can require borrowers to supply information regarding their
readiness preparations for the century date change, it must rely on vendors to
volunteer information regarding their preparations. The Company has been
reviewing vendors of critical services and supplies and has included
consideration of alternate sources for these services and supplies in its
contingency planning. However, there are no available alternatives for some
suppliers, such as power distribution and local telephone companies. The Company
operates in the financial services industry which is highly regulated and so do
these vendors. The Company is consulting with these vendors regarding their
readiness as well as tracking the public information available on these vendors.
Management will use this information in its contingency planning.
The banking regulators have expended a great amount of effort to assist and
guide financial institutions through their readiness preparations. These
regulators are aware of the interdependent nature of the industry and the high
degree of reliance each institution places on the systems of other institutions.
This is especially the case in transaction settlement. This is the process
whereby one institution presents checks deposited with it by its customers that
are drawn on the accounts of another institution. Provisions are being made with
the FRB and other institutions functioning as a clearinghouse to test these
payment systems.
Of course, the Company has been working closely with vendors providing software
and data processing equipment as part of the process of ensuring both that the
Company's systems are compliant as of January 1, 2000 and that they can continue
to support their products beyond that date.
Risks Associated with Year 2000
The three principal risks associated with the Year 2000 problem are: (1) that
the Company will not have been able to successfully replace or modify its
critical systems; (2) that our operations are disrupted due to operational
failures of third parties; and (3) that borrowers and/or funds providers are
unable to repay their debts or provide us with funds as contracted due to an
interruption in their business.
The Company is fully able to respond to only the first of these risks and is
dependent on third parties to adequately address their own systems to mitigate
the other two. Based on the project steps outlined above, Management believes
the necessary replacements or modifications will be completed on schedule.
The consequences of the failure of third parties may jeopardize our operations
depending on the nature and duration of the failures. Like most businesses, the
most serious impact on our operations would result if basic services such as
telecommunications or electric power are interrupted beyond the January 1
holiday. Next in seriousness would be if payment settlement services provided by
other financial institutions and governmental agencies were interrupted for more
than a day or two.
As described above, the customer and funds provider assessments included the
development of plans to manage these risks.
Progress Assessment and Reporting
The manager of the Company's information technology division measures progress
on the project monthly and reports to the Company's senior leadership team.
Quarterly reports are made to the Board of Directors. The Company's risk
management division and the federal bank examiners regularly assess our Year
2000 preparations. Their reports are reviewed by the Board of Directors.
Contingency Plans
The Company is developing Year 2000 contingency plans. These plans will address
the actions we would take if: (1) it becomes apparent that the process of
replacing or modifying a system falls behind plan such that it is unlikely the
system will be compliant when needed; (2) if critical business functions cannot
be carried out in the normal manner after the century date change due to system
or supplier failure.
The development of these plans involves specifying hypothetical scenarios and
determining which scenarios are significant for each critical business unit.
Suggested courses of action are then formulated and tested for effectiveness.
The hypothetical scenarios must involve both system-wide or regional failures as
well as individual critical operating units. We expect to complete development
of these plans in June 1999.
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Management's Discussion and Analysis of Financial Condition and Results
of Operations
Note A
In various places throughout this discussion, comparisons will be made between
ratios for the Company and for its FDIC peers. For 1998, the peer group
generally is all FDIC banks with an asset size of $1 billion to $10 billion, and
the information set forth above is reported in or calculated from information
reported in the FDIC Quarterly Banking Profile, Fourth Quarter 1998, which is
the latest issue available. The publication does not report some of the
statistics cited in this report by the separate size-based peer groups. In these
instances, the figure cited is for all FDIC banks regardless of size.
The peer group information for the dividend payout ratio is reported in the Bank
Holding Company Performance Report received from the FRB for the 3rd Quarter of
1998.
Note B
For Tables 2 and 4, the yield on tax-exempt state and municipal securities has
been computed on a tax equivalent basis. To compute the tax equivalent yield for
these securities one must first add to the actual interest earned an amount such
that if the resulting total were fully taxed, the after-tax income would be
equivalent to the actual tax-exempt income. This tax equivalent income is then
divided by the average balance to obtain the tax equivalent yield. The dollar
amount of the adjustment is shown at the bottom of Table 2 as "Tax equivalent
income included in interest income from nontaxable securities and loans."
Note C
For purposes of Table 2, loans in a nonaccrual status are included in the
computation of average balances in their respective loan categories.
Note D
For purposes of the amounts in Table 3 relating to the volume and rate analysis
of net interest margin, the portion of the change in interest earned or paid
that is attributable to changes in rate is computed by multiplying the change in
interest rate by the prior year's average balance. The portion of the change in
interest earned or paid that is attributable to changes in volume is computed by
multiplying the change in average balances by the prior year's interest rate.
The portion of the change that is not attributable either solely to changes in
volume or changes in rate is prorated on a weighted basis between volume and
rate.
Note E
In Table 1, the net deferred loan origination, commitment, and extension fees
and the allowance for loan and lease losses are included in the column titled
"Noninterest-bearing or nonrepricing items."
Note F
A yield curve is a graphic representation of the relationship between the
interest rate and the maturity term of financial instruments. Generally,
interest rates on shorter maturity financial instruments are less than those for
longer term instruments. For example, at December 31, 1998, 1 year U.S. Treasury
notes sold at a price that yielded 4.52% while 30 year notes sold at a price
that yielded 5.09%. A line drawn that plots this relationship for a whole range
of maturities will be "steeper" when the rates on long-term maturities are
substantially higher than those on shorter term maturities. The curve is said to
be "flatter" when there is not as much of a difference.
Note G
While banker's acceptances generally result from the financing of a shipment of
goods between a particular purchaser and seller, in financial markets they
function as a negotiable short-term debt instrument.
Note H
In the tax refund loan program, most of the collections on prior year loans that
were charged-off come about when the taxpayer applies for a loan or transfer the
next year. The loan proceeds or transfer amount for the next year is reduced by
the amount of the unpaid loan. The Company has entered into cross-collection
agreements with the other two banks offering national programs to repay amounts
due from prior years should the taxpayer apply for a loan or transfer in a
subsequent year with one of the other different financial institutions.
Note I
A large number of home mortgage loans may be grouped together by a financial
institution into a pool. This pool may then be securitized and sold to
investors. The payments received from the borrowers on their mortgages are used
to pay the investors. The mortgage instruments themselves are the security or
backing for the investors and the securities are termed mortgage-backed.
Collateralized mortgage obligations are like mortgage-backed securities in that
they involve a pool of mortgages. However, payments received from the borrowers
are not equally paid to investors. Instead, investors purchase portions of the
pool that have different repayment characteristics. This permits the investor to
better time the cash flows that will be received.
Asset-backed securities are like mortgage-backed securities except that loans
other than mortgages are the source of repayment. For instance, these might be
credit card loans or auto loans.
Note J
LIBOR is an acronym for London Interbank Offering Rate. Originally a rate used
primarily in international banking, it is now commonly used as an index rate for
many financial transactions.
Note K
Systems that can successfully address the century date change are termed
"Year 2000 compliant."
Item 8. Financial Statements and Supplementary Data
Audited consolidated financial statements and related documents required by this
item are included in this Annual Report on Form 10-K on the pages (in the
printed version) indicated:
Management's Responsibility for Financial Reporting 43
Report of Independent Public Accountants--Arthur Andersen LLP 44
Independent Auditors' Report--KPMG LLP 45
Consolidated Balance Sheets as of December 31, 1998 and 1997 46
Consolidated Statements of Income for the years
ended December 31, 1998, 1997, and 1996 47
Consolidated Statements of Comprehensive Income for the
years ended December 31, 1998, 1997, and 1996 48
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998, 1997, and 1996 49
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996 50
Notes to Consolidated Financial Statements 51
The following unaudited supplementary data is included in this Annual Report on
Form 10-K on the page indicated:
Quarterly Financial Data 81
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The Management of Pacific Capital Bancorp (the "Company") is responsible for the
preparation, integrity, and fair presentation of the Company's annual
consolidated financial statements and related financial data contained in this
report. With the exception that some of the information in Management's
Discussion and Analysis of Financial Condition and Results of Operations is
presented on a tax-equivalent basis to improve comparability, all information
has been prepared in accordance with generally accepted accounting principles
and, as such, includes certain amounts that are based on Management's best
estimates and judgments.
The consolidated financial statements presented on pages 46 through 50 have been
audited by Arthur Andersen LLP, who have been given unrestricted access to all
financial records and related data, including minutes of all meetings of
shareholders, the Board of Directors, and committees of the Board. Management
believes that all representations made to Arthur Andersen LLP during the audit
were valid and appropriate.
Management is responsible for establishing and maintaining an internal control
structure over financial reporting. Two of the objectives of this internal
control structure are to provide reasonable assurance to Management and the
Board of Directors that transactions are properly authorized and recorded in our
financial records, and that the preparation of the Company's financial
statements and other financial reporting is done in accordance with generally
accepted accounting principles.
Management has made its own assessment of the effectiveness of the Company's
internal control structure over financial reporting as of December 31, 1998, in
relation to the criteria described in the report, Internal Control--Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
There are inherent limitations in the effectiveness of any internal control
structure, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to reliability of
financial statements. Furthermore, the effectiveness of any internal control
structure can vary with changes in circumstances. Nonetheless, based on its
assessment, Management believes that as of December 31, 1998, Pacific Capital
Bancorp's internal control structure was effective in achieving the objectives
stated above.
The Board of Directors is responsible for reviewing and monitoring the policies
and practices employed by Management in preparing the Company's financial
reporting. This is accomplished through its Audit Committee, which is comprised
of directors who are not officers or employees of the Company. The Committee
reviews accounting policies, control procedures, internal and independent audit
reports, and regulatory examination reports with Management, the Company's
internal auditors, and representatives of Arthur Andersen LLP. Both the
Company's internal auditors and the representatives of Arthur Andersen LLP have
full and free access to the Committee to discuss any issues which arise out of
their examinations without Management present.
David W. Spainhour William S. Thomas, Jr. Donald Lafler
President and Vice-Chairman and Senior Vice President and
Chief Executive Officer Chief Operating Officer Chief Financial Officer
Pacific Capital Bancorp Pacific Capital Bancorp Pacific Capital Bancorp
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors
of Pacific Capital Bancorp:
We have audited the accompanying consolidated balance sheets of Pacific Capital
Bancorp (a California corporation) and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, comprehensive income,
changes in shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of Pacific Capital Bancorp's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did not
audit the financial statements of Pacific Capital Bancorp for fiscal years prior
to its acquisition during 1998 by Santa Barbara Bancorp, in a transaction
accounted for as a pooling of interests, as discussed in Notes 1 and 19 to the
accompanying consolidated financial statements. Such statements are included in
the accompanying consolidated financial statements of Pacific Capital Bancorp
and reflect total assets of 32.4 percent for 1997 and net income of 33.5 percent
and 27.8 percent, respectively for 1997 and 1996, of the related consolidated
totals. These statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to amounts included for
Pacific Capital Bancorp prior to the merger, is based solely upon the report of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Pacific Capital Bancorp and Subsidiaries as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 5, 1999
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Capital Bancorp:
We have audited the accompanying consolidated balance sheet of the former
Pacific Capital Bancorp and subsidiaries (prior to its merger into Santa Barbara
Bancorp) (the Company) as of December 31, 1997 and the related consolidated
statements of income, shareholders' equity, and cash flows for the years ended
December 31, 1997 and 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the former Pacific
Capital Bancorp and subsidiaries (prior to its merger into Santa Barbara
Bancorp) as of December 31, 1997, and the results of their operations and their
cash flows for years ended December 31, 1997 and 1996, in conformity with
generally accepted accounting principles.
KPMG LLP
Mountain View, California
January 23, 1998
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) December 31
1998 1997
---------------------------------
Assets:
Cash and due from banks (Note 5) $ 114,206 $ 117,781
Federal funds sold 69,890 74,405
Money market funds 1,567 2,132
Total cash and cash equivalents 185,663 194,318
Securities (approximate market value of $808,388
in 1998 and $753,778 in 1997) (Note 2):
Held-to-maturity 194,769 229,037
Available-for-sale 596,996 508,642
Total securities 791,765 737,679
Bankers' acceptances and commercial paper 19,888 49,400
Loans (Note 3) 1,582,781 1,311,364
Less: allowance for credit losses (Note 4) 29,296 25,414
Net loans 1,553,485 1,285,950
Premises and equipment, net (Note 6) 29,916 28,926
Accrued interest receivable 15,944 15,682
Other assets (Notes 8 & 19) 52,757 45,150
---------------------------------
Total assets $2,649,418 $2,357,105
=================================
Liabilities:
Deposits (Note 7):
Noninterest bearing demand deposits $ 498,266 $ 440,400
Interest bearing deposits 1,831,410 1,647,153
Total deposits 2,329,676 2,087,553
Securities sold under agreements to repurchase
and Federal funds purchased (Note 10) 27,796 21,293
Long-term debt and other borrowings (Note 11) 44,953 39,000
Accrued interest payable and
other liabilities (Notes 8, 13, and 15) 32,993 18,535
---------------------------------
Total liabilities 2,435,418 2,166,381
---------------------------------
Commitments and contingencies (Note 18)
Shareholders' equity (Notes 9, 13 and 17):
Common stock -- no par value, $0.33 stated value; shares
authorized: 40,000; shares issued and outstanding:
24,209 in 1998 and 23,552 in 1997. 8,071 7,851
Surplus 95,498 88,454
Accumulated other comprehensive income (Note 1) 3,496 1,768
Retained earnings 106,935 92,651
---------------------------------
Total shareholders' equity 214,000 190,724
---------------------------------
Total liabilities and shareholders' equity $2,649,418 $2,357,105
=================================
The accompanying notes are an integral part of these consolidated balance sheets.
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for per share data) Year Ended December 31
1998 1997 1996
---------------------------------------------
Interest income:
Interest and fees on loans (Note 3) $ 138,414 $ 119,984 $ 90,636
Interest on securities:
U.S. Treasury obligations 14,436 15,229 17,091
U.S. agency obligations 7,023 4,669 6,193
State and municipal securities 9,345 8,312 7,365
Collateralized mortgage obligations 13,337 7,302 2,859
Asset-backed securities 716 181 --
Equity securities 493 540 158
Interest on Federal funds sold and securities
purchased under agreement to resell 8,653 7,136 4,934
Interest on money market funds 162 663 500
Interest on bankers' acceptances 937 4,134 3,800
---------------------------------------------
Total interest income 193,516 168,150 133,536
---------------------------------------------
Interest expense:
Interest on deposits (Note 7) 64,770 56,582 46,298
Interest on securities sold under agreements
to repurchase and Federal funds purchased
(Note 10) 1,098 1,512 1,897
Interest on long-term debt and other
borrowings (Note 11) 2,245 2,496 173
---------------------------------------------
Total interest expense 68,113 60,590 48,368
---------------------------------------------
Net interest income 125,403 107,560 85,168
Provision for credit losses (Notes 1 and 4) 9,123 8,500 4,949
---------------------------------------------
Net interest income after provision for credit losses 116,280 99,060 80,219
---------------------------------------------
Other operating income:
Service charges on deposit accounts 9,116 8,090 7,026
Trust fees (Note 1) 11,461 9,985 8,441
Other service charges, commissions and fees
(Note 12) 13,964 9,365 6,270
Net gain (loss) on sales and calls of securities
(Notes 1, 2, and 8) 214 (395) (799)
Other income 1,217 1,455 1,164
---------------------------------------------
Total other operating income 35,972 28,500 22,102
---------------------------------------------
Other operating expense:
Salaries and other compensation (Note 16) 40,178 34,334 30,398
Employee benefits (Notes 13 and 15) 9,100 8,806 7,618
Net occupancy expense (Notes 6 and 18) 8,308 7,567 6,661
Equipment rental, depreciation and
maintenance (Note 6) 6,965 5,380 5,141
Other operating expense (Note 12) 39,159 24,902 19,498
---------------------------------------------
Total other operating expense 103,710 80,989 69,316
---------------------------------------------
Income before provision for income taxes 48,542 46,571 33,005
Provision for income taxes (Note 8) 18,975 16,288 11,301
---------------------------------------------
Net income $ 29,567 $ 30,283 $ 21,704
=============================================
Basic earnings per share (Note 16) $ 1.24 $ 1.29 $ 0.92
Diluted earnings per share (Note 16) $ 1.21 $ 1.25 $ 0.90
The accompanying notes are an integral part of these consolidated statements.
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands) Year Ended December 31
1998 1997 1996
----------------------------------
Net income $29,567 $30,283 $21,704
----------------------------------
Other comprehensive income, net of tax (Note 8) -
Unrealized gain (loss) on securities:
Unrealized holding gains (losses) arising during period 1,809 1,699 (724)
Reclassification adjustment for (gains) losses
included in net income (81) 232 374
----------------------------------
Other comprehensive income, net of tax expense
(benefit) of $1,254, $1,401 and $(254) for the years
ended December 31, 1998, 1997 and 1996 respectively 1,728 1,931 (350)
----------------------------------
Comprehensive income $31,295 $32,214 $21,354
==================================
The accompanying notes are an integral part of these consolidated statements.
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
(in thousands except for per Other
share data) Common Stock Comprehensive Retained
Shares Amount Surplus Income Earnings Total
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 22,894 $7,631 $81,040 $ 187 $ 72,672 $161,530
Activity for 1996:
Exercise of employee
stock options (Note 9) 230 77 1,364 -- -- 1,441
Retirement of
common stock (Note 9) (422) (140) (5,447) -- -- (5,587)
5% stock dividend, including
payment of fractional shares 376 125 5,223 -- (5,372) (24)
Repurchase of dissenter shares (1) -- (11) -- -- (11)
Cash dividends declared
at $0.36 per share -- -- -- -- (7,464) (7,464)
Changes in unrealized gain
(loss) on securities
available-for-sale -- -- -- (350) -- (350)
Net income -- -- -- -- 21,704 21,704
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 23,077 7,693 82,169 (163) 81,540 171,239
Activity for 1997:
Exercise of employee
stock options (Note 9) 370 123 2,742 -- -- 2,865
Retirement of
common stock (Note 9) (289) (96) (5,326) -- -- (5,422)
5% stock dividend, including
payment of fractional shares 394 131 8,869 -- (9,040) (40)
Cash dividends declared
at $0.49 per share -- -- -- -- (10,132) (10,132)
Changes in unrealized gain
(loss) on securities
available-for-sale -- -- -- 1,931 -- 1,931
Net income -- -- -- -- 30,283 30,283
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 23,552 7,851 88,454 1,768 92,651 190,724
Activity for 1998:
Exercise of employee
stock options (Note 9) 807 270 10,787 -- -- 11,057
Retirement of
common stock (Note 9) (150) (50) (3,743) -- -- (3,793)
Cash dividends declared
at $0.66 per share -- -- -- -- (15,283) (15,283)
Changes in unrealized gain
(loss) on securities
available-for-sale -- -- -- 1,728 -- 1,728
Net income -- -- -- -- 29,567 29,567
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 24,209 $8,071 $95,498 $3,496 $106,935 $214,000
==================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31
Increase (decrease) in cash and cash equivalents (Note 1): 1998 1997 1996
----------------------------------------
Cash flows from operating activities:
Net income $ 29,567 $ 30,283 $ 21,704
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 7,033 5,196 3,141
Provision for credit lease losses 9,123 8,500 4,949
Net origination of loans available for sale -- (4,702) (1,945)
Gain on sale of loans (21) (11) (27)
Provision (benefit) for deferred income taxes 1,060 (1,946) (2,508)
Net recovery on other real estate owned (118) 87 (52)
Net amortization of discounts and premiums for
securities and bankers' acceptances (3,412) (4,449) (2,524)
Net change in deferred loan origination fees and costs 346 570 159
Increase in accrued interest receivable (1,037) (4,790) (640)
(Decrease) increase in accrued interest payable (131) 52 3,916
Net (gain) loss on sales and calls of securities (214) 395 799
(Decrease) increase in service fees and other income receivable (259) 123 796
Increase (decrease) in income taxes payable 5,804 (1,478) 94
Other operating activities 9,174 365 3,127
----------------------------------------
Net cash provided by operating activities 56,915 28,195 30,989
----------------------------------------
Cash flows from investing activities:
Purchase of common stock of First Valley
Bank and Citizens State Bank (Note 19) -- (42,270) --
Proceeds from sales, calls, and maturities
of securities (Note 2) 227,464 236,319 293,381
Purchase of securities (Note 2) (276,619) (359,036) (351,363)
Proceeds from sale or maturity of bankers' acceptances 63,358 170,415 256,025
Purchase of bankers' acceptances and commercial paper (34,452) (155,084) (182,139)
Net increase in loans made to customers (276,803) (126,207) (215,752)
Disposition of property from defaulted loans 264 1,799 1,670
Purchase or tax credit investment (3,688) -- --
Purchase or investment in premises and equipment (6,841) (7,150) (3,619)
----------------------------------------
Net cash used in investing activities (307,317) (281,214) (201,797)
----------------------------------------
Cash flows from financing activities:
Net increase in deposits 242,123 212,404 140,740
Net increase (decrease) in borrowings
with maturities of 90 days or less 6,503 (14,167) (18,035)
Cash received in connection with branch acquisition -- 24,694 --
Net increase in other borrowings 4,900 -- 37,791
Proceeds from issuance of common stock (Note 9) 4,919 2,825 1,417
Payments to retire common stock (Note 9) (3,791) (5,422) (5,587)
Dividends paid (12,907) (9,668) (7,072)
----------------------------------------
Net cash provided by financing activities 241,747 210,666 149,254
----------------------------------------
Net decrease in cash and cash equivalents (8,655) (42,353) (21,554)
Cash and cash equivalents at beginning of period 194,318 197,426 218,980
Cash and cash equivalents acquired in acquisitions -- 39,245 --
----------------------------------------
Cash and cash equivalents at end of period $ 185,663 $ 194,318 $ 197,426
========================================
Supplemental disclosure:
Interest paid during the year $ 68,020 $ 61,528 $ 49,325
Income taxes paid during the year $ 15,505 $ 16,269 $ 13,259
Non-cash additions to other real estate owned (Note 1) $ 236 $ 220 $ 2,126
Transfer from retained earnings to common stock
due to stock dividends $ -- $ 9,000 $ 5,348
The accompanying notes are an integral part of these consolidated statements.
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Pacific Capital Bancorp ("Bancorp") is a bank holding company organized under
the laws of California. Bancorp is the surviving corporation resulting from the
merger on December 30, 1998 of Santa Barbara Bancorp ("SBB") and the former
Pacific Capital Bancorp ("PCB"). The merger was accounted for as a pooling of
interests. Accordingly, all historical financial information has been restated
as if the merger had been in effect for all periods presented. The merger
transaction involved the issuance of 8.8 million shares of the Bancorp's stock
in exchange for all the outstanding shares of PCB. To recognize its newly
expanded market areas, Bancorp assumed the name Pacific Capital Bancorp.
Together with its subsidiaries, the consolidated entity is referred to in these
notes as "the Company."
Nature of Operations
Through its two principal subsidiaries, Santa Barbara Bank & Trust ("SBB&T") and
First National Bank of Central California ("FNB"), which are collectively
referred to as "the banks," the Company provides a full range of commercial
banking services to individuals and business enterprises. The banking services
include making commercial, leasing, consumer, and commercial and residential
real estate loans. Deposits are accepted for checking, interest-bearing checking
("NOW"), money-market, savings, and time accounts. The banks offer safe deposit
boxes, travelers checks, money orders, foreign exchange services, and cashiers
checks. In addition to the services provided at both banks, FNB offers Small
Business Administration guaranteed loans to its customers and SBB&T provides
escrow services to its customers. A wide range of wealth management services are
offered through SBB&T's Trust and Investment Services division. Authority to
provide trust services has been approved for FNB. The offices of SBB&T are
located in Santa Barbara County and in western Ventura County. Offices of FNB
are located in the counties of Monterey and Santa Cruz. Offices in southern
Santa Clara County and San Benito County are maintained under the name South
Valley National Bank, an affiliate of FNB.
The Company's third subsidiary is Sanbarco Mortgage Company. Its primary
business activities are directed to brokering commercial real estate loans and
servicing those loans for a fee. While these activities are not material in
relation to the consolidated financial position or results, they were organized
into a separate company to limit possible exposure to the banks.
A fourth subsidiary, Pacific Capital Services Corporation, is inactive.
Basis of Presentation
The accounting and reporting policies of the Company and its subsidiaries are in
accordance with generally accepted accounting principles ("GAAP") and conform to
practices within the banking industry. The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions are eliminated.
The preparation of consolidated financial statements in accordance with GAAP
requires Management to make certain estimates and assumptions which affect the
amounts of reported assets and liabilities as well as contingent assets and
liabilities as of the date of these financial statements. These estimates and
assumptions also affect the reported amounts of revenues and expenses during the
reporting period(s). Although Management believes these estimates and
assumptions to be reasonably accurate, actual results may differ.
Securities
The Company purchases securities with funds that are not needed for immediate
liquidity purposes and have not been lent to customers. These securities are
classified either as held-to-maturity or available-for-sale. This classification
is made at the time of purchase. Only those securities that the Company both
intends to hold until its maturity and is able to hold until maturity may be
classified as held-to-maturity. Securities that might be sold prior to maturity
because of interest rate changes, to meet liquidity needs, or to better match
the repricing characteristics of funding sources are classified as
available-for-sale. If the Company were to purchase securities principally for
the purpose of selling them in the near term for a gain, they would be
classified as trading securities. The Company holds no securities that should be
classified as trading securities.
The Company's securities that are classified as held-to-maturity are carried at
"amortized historical cost". This is the purchase price increased by the
accretion of discounts or decreased by the amortization of premiums using the
effective interest method. Discount is the excess of the face value of the
security over the cost. Premium is the excess of cost over the face value of the
security. Discount is accreted and premium is amortized over the period to
maturity of the related securities, or to an earlier call date, if appropriate.
There is no recognition of unrealized gains or losses for these securities.
The interest income from securities that are classified as available-for-sale is
recognized in the same manner as for securities that are classified as
held-to-maturity, including the accretion of discounts and the amortization of
premiums. However, unlike the securities that are classified held-to-maturity,
securities classified available-for-sale are reported on the consolidated
balance sheets at their fair value. Changes in the fair value of these
securities are not recognized as a gain or loss in the Company's statements of
income, but are instead reported on the consolidated balance sheets as a
separate component of equity captioned "Accumulated other comprehensive income",
net of the tax effect. The changes in fair value are included as elements of
comprehensive income in the consolidated statements of comprehensive income.
Loans and Interest and Fees on Loans
Loans are carried at amounts advanced to the borrowers less principal payments
collected. Interest on loans is accrued on a simple interest basis. Loan
origination and commitment fees, offset by certain direct loan origination
costs, are deferred and recognized over the contractual life of the loan as an
adjustment to the interest earned. The net unrecognized fees represent unearned
revenue, and they are reported as reductions of the loan principal outstanding,
or as additions to the loan principal if the deferred costs are greater than
deferred fees.
Nonaccrual Loans: When a borrower is not making payments as contractually
required by the note, the Company must decide whether it is appropriate to
continue to accrue interest. Generally speaking, loans are placed in a
nonaccrual status, i.e. the Company stops accruing or recognizing interest
income on the loan when the loan has become delinquent by more than 90 days. The
Company may decide that it is appropriate to continue to accrue interest on some
loans more than 90 days delinquent if they are well secured by collateral and
are in the process of collection. Such loans are categorized as nonperforming
loans.
When a loan is placed in a nonaccrual status, any accrued but uncollected
interest for the loan is written off against interest income from other loans of
the same type in the period in which the status is changed. No further interest
income is recognized until all recorded amounts of principal are recovered in
full or until circumstances have changed such that payments are again
consistently received as contractually required.
Impaired Loans: A loan is identified as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreement. Because this definition is very similar to that of a
nonaccrual loan, most impaired loans will be classified as nonaccrual. However,
there are some loans that are termed as impaired because of doubt regarding
collectibility of interest and principal according to the contractual terms, but
which are presently both fully secured by collateral and are current in their
interest and principal payments. These impaired loans are not classified as
nonaccrual. Under generally accepted accounting principles, the term "impaired"
only applies to certain types or classes of loans and therefore, there are some
nonaccrual loans which are not categorized as impaired.
Allowance for Credit Losses
If a borrower's financial condition becomes such that he or she is not able to
fully repay a loan or lease obligation extended by the Company, a loss to the
Company has occurred. When the Company has determined that such a loss has
occurred, the principal amount of the loan, or a portion thereof, is charged-off
against established allowance so that the value of the Company's assets are not
overstated by retaining an uncollectible loan at its outstanding balance.
However, it is understood that, for a variety of reasons, there are losses
inherent but unrecognized in these credit portfolios.
GAAP, banking regulations, and sound banking practices require that the Company
record an estimate of these unrecognized losses in the form of an allowance for
credit losses. The allowance is increased by the provision for credit losses
which is a charge to income in the current period. The allowance is decreased by
the charge-off of loans net of any recoveries of loans previously charged-off.
The allowance for credit losses consists of several components. The first is
that portion of the allowance specifically allocated to those loans that are
categorized impaired under provisions of Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS
114"). The remaining components include a statistically allocated portion, a
specifically allocated portion, and an unallocated portion. These components are
reported together in the allowance for credit losses in the accompanying
consolidated balance sheets and in Note 4. Each of these components of the
allowance for credit losses is maintained at a level considered adequate to
provide for inherent losses that can reasonably be anticipated. However, the
allowance is based on estimates, and ultimate losses may vary from the current
estimates. These estimates are reviewed periodically and, as adjustments become
necessary, they are reported as provisions against earnings in the periods in
which they become known.
Under GAAP, the Company is permitted to determine the valuation allowance for
impaired loans on a loan-by-loan basis or by aggregating loans with similar risk
characteristics. Because the number of loans classified as impaired is
relatively small and because special factors apply to each, the Company
determines the valuation allowance for impaired loans on a loan-by-loan basis.
The amount of the valuation allowance allocated to any particular impaired loan
is determined by comparing the recorded investment in each loan with its value
measured by one of three methods: (1) by discounting estimated future cash flows
at the effective interest rate; (2) by observing the loan's market price if it
is of a kind for which there is a secondary market; or (3) by valuing the
underlying collateral. A valuation allowance is established for any amount by
which the recorded investment exceeds the value of the impaired loan. If the
value of the loan, as determined by one of the above methods, exceeds the
recorded investment in the loan, no valuation allowance for that loan is
established.
The statistical component of the allowance is intended to provide for losses
that occur in large groups of smaller balance loans, the individual credit
quality of which is impracticable to review at each period end. The amount of
this component is determined by applying loss estimation factors to outstanding
loans and leases. The loss factors are based primarily on the Company's
historical loss experience and may therefore change over time. Because
historical loss experience differs for the various categories of credits, the
loss estimation factors applied to each category also differ.
There are a number of credits for which an allowance computed by application of
the appropriate loss estimation factor would not adequately provide for the
unconfirmed loss inherent in the credit. This might occur for a variety of
reasons such as the size of the credit, the industry of the borrower, or the
terms of the credit. In these situations, Management will increase the
allocation to an amount adequate to absorb the probable loss that will be
incurred. The specific component is made up of the sum of these specific
allocations.
The unallocated component of the allowance for credit losses is intended to
absorb other losses that may not be covered by the other components. For
example, the historical loss estimation factors used for statistical allocation
may not give sufficient weight to such considerations as the current general
economic and business conditions that affect the Company's borrowers and
specific industry conditions that affect borrowers in that industry. The factors
might also not give sufficient weight to current trends in credit quality and
collateral values and the duration of the current business cycle. Lastly, the
factors are not derived in a manner that considers loan volumes and
concentrations and seasoning of the loan portfolio.
Complete information on the financial condition of the borrower and the current
disposal value of any collateral is not generally available at the time an
estimation of the loss must be made. This introduces significant uncertainty in
the estimation process used to determine the adequacy of specific allocations.
Income Taxes
The Company is required to use the accrual method of accounting for tax return
purposes as well as for financial reporting purposes. However, there are several
items of income and expense that are recognized in different periods for tax
return purposes than for financial reporting purposes. Appropriate provisions
have been made in the financial statements for deferred taxes in recognition of
these temporary differences.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is charged against income over the estimated useful
lives of the assets. For most assets with longer useful lives, accelerated
methods of depreciation are used in the early years, switching to the
straight-line method in later years. Assets with shorter useful lives are
generally depreciated by straight-line method. Leasehold improvements are
amortized over the terms of the leases or the estimated useful lives of the
improvements, whichever is shorter. Generally, the estimated useful lives of
other items of premises and equipment are as follows:
Buildings and improvements 5-40 years
Furniture and equipment 2-7 years
Electronic equipment 3 years
Trust Fees
Trust fees for most services are based on the market value of customer assets,
and an estimate of the fees is accrued monthly. Fees for unusual or infrequent
services are recognized when the fee can be determined.
Earnings Per Share
Earnings per share for all periods presented in the Consolidated Statements of
Income are computed based on the weighted average number of shares outstanding
during each year retroactively restated for stock dividends and stock splits.
Diluted earnings per share include the effect of common stock equivalents for
the Company, which include only shares issuable on the exercise of outstanding
options. A reconciliation of the computation of basic earnings per share and
diluted earnings per share is presented in Note 16.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, Federal funds sold, and securities purchased under agreements to
resell. Federal funds and securities purchased under agreements to resell are
one-day transactions, after which the Company's funds are returned the next day.
Postretirement Health Benefits
The Company provides eligible retirees with postretirement health care and
dental benefit coverage. These benefits are also provided to the spouses and
dependents of retirees on a shared cost basis. Benefits for retirees and spouses
are subject to deductibles, copayment provisions, and other limitations. The
expected cost of such benefits is charged to expense during the years that the
employees render service to the Company and thereby earn their eligibility for
benefits.
In 1998, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits. Because this statement related only to the disclosure
of information, there was no material impact to the financial condition or
results of operations of the Company.
Other Real Estate Owned
Other real estate owned ("OREO") represents real estate acquired through
foreclosure or deed in lieu of foreclosure. OREO is carried at the lower of the
outstanding balance of the loan before acquisition or the fair value of the OREO
less estimated costs to sell. If the outstanding balance of the loan is greater
than the fair value of the OREO less estimated disposal costs at the time of the
acquisition, the difference is charged-off against the allowance for credit
losses. Any senior debt to which OREO is subject is included in the carrying
amount of the property and an offsetting liability is reported along with other
borrowings.
During the time the property is held, all related operating or maintenance costs
are expensed as incurred and additional decreases in the fair value are charged
to other operating expense by establishing valuation allowances in the period in
which they become known. Expenditures related to improvements are capitalized to
the extent that they are realizable through increases in the fair value of the
properties. Increases in the fair value may be recognized as reductions of OREO
operating expense to the extent that they represent recoveries of amounts
previously written-down. Increases in market value in excess of the fair value
at the time of foreclosure are recognized only when the property is sold.
At December 31, 1998 and 1997, the Company held real estate properties that had
been acquired through foreclosure, but the value of the property and the
estimated disposal costs were so uncertain that no amount is reported on the
balance sheet for that date.
Stock-Based Compensation
GAAP permits companies to use either of two alternative accounting methods to
recognize stock based compensation. Under the first accounting method, if
options are granted at an exercise price equal to the market value of the stock
at the time of the grant, no compensation expense is recognized. The Company
follows this accounting method, which it believes better reflects the motivation
for its issuance of stock options, namely, that they are incentives for future
performance rather than compensation for past performance. Under the second
accounting method, issuers record compensation expense over the period they are
expected to be outstanding prior to exercise, expiration, or cancellation. The
amount of compensation expense recognized over this term is the "fair value" of
the options at the time of the grant as determined by an option pricing model.
The option pricing model attributes fair value to the options based on the
length of their term, the volatility of the stock price in past periods, and
other factors. Under this method, the issuer recognizes compensation expense
regardless of whether the officer or director exercised the options. Pro forma
disclosures of net income and earnings per share under this method are presented
in Note 16.
Derivative Financial Instruments
Interest rate swaps and interest rate caps and floors may be used to manage the
Company's exposure to interest rate risks. These instruments are specifically
allocated to the assets or liabilities being managed and are recorded in the
financial statements at cost. Net interest income or expense, including premiums
paid or received, is recognized over the effective period of the contract and
reported as an adjustment to interest income or expense.
Goodwill
In connection with the acquisitions of First Valley Bank ("FVB") and Citizens
State Bank ("CSB") described in Note 19, the Company recognized the excess of
the purchase price over the estimated fair value of the assets received and
liabilities assumed as goodwill. The goodwill is being amortized on the
straight-line method over 15 years. The unamortized carrying amount of the
goodwill recorded for each acquisition is periodically reviewed by Management in
order to determine if facts and circumstances suggest that it is not
recoverable. This is determined based on expected undiscounted cash flows from
the net assets of the acquired entity, and consequently goodwill for the entity
would be reduced by the estimated cash flow deficiency.
Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 requires that
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Net income is one component
of comprehensive income. The other components of comprehensive income are
revenues, expenses, gains, and losses that under GAAP impact the Company's
capital accounts but are not recognized in net income. Based on the Company's
current activities, other components of comprehensive net income consist only of
changes in the unrealized gains or losses on securities that are classified as
available-for-sale.
The amounts of comprehensive income for the three years ended December 31, 1998,
1997 and 1996 are reported in the Consolidated Statements of Comprehensive
Income. The net change in the cumulative total of the components of other
comprehensive income that are included in equity are reported in the
Consolidated Statements of Changes in Shareholders' Equity for the three years
ended December 31, 1998, 1997 and 1996.
Segment Reporting
The Company adopted Statement of Financial Accounting Standard No. 131,
Disclosures About Segments of an Enterprise and Related Information ("SFAS
131"), in its 1998 annual report. This statement adopts a new model for segment
reporting, called the "management approach". The management approach is based on
the segments within a company used by the chief operating decision maker for
making operating decisions and assessing performance. Reportable segments are to
be based on such factors as products and services, geography, legal structure,
management structure or any manner by which a company's management distinguishes
major operating units. For purposes of SFAS 131, Management has determined that
the Company has seven reportable segments: Wholesale Lending, Retail Lending,
Branch Activities, Fiduciary, Tax Refund Processing, Northern Region and the All
Other. The segment reporting disclosure is discussed in Note 20.
Recent Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, Accounting for Derivative Instruments and
Hedging Activities ("SFAS 133"). This standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, which triggers
specific accounting treatment based on the type of hedge that exists. The
Company must adopt SFAS 133 no later than the first quarter of 2000, but may
adopt earlier. The Company has not yet determined when it will adopt the
statement. Because it does not now hold nor expect to hold in the foreseeable
future a significant number of derivative instruments, Management does not
anticipate that adoption will result in any material impact to the Company's
financial position or results of operations.
Accounting for Business Combinations
The merger of SBB with PCB is being accounted for as a pooling of interests.
Under this method of accounting for a business combination, the assets and
liabilities of the two parties are added together for each year presented in the
financial statements. The effect of this presentation is to report as if the
merger had occurred as of the beginning of the earliest period presented. The
assets and liabilities are combined at the amounts carried in the predecessor
company records; there is no restatement to their fair market value, and
consequently no goodwill recognized.
The acquisition of FVB and CSB were accounted for by the purchase method of
accounting for business combinations. Under this method, the assets and
liabilities of the acquired company are combined with the acquirer as of the
date of the acquisition to their fair market value. Any difference between the
net value of the assets and liabilities and the purchase price is recorded as
goodwill. Goodwill is amortized against future earnings. The results of
operations of the acquired company are included with those of the acquirer only
from the transaction date forward.
Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to be comparable with classifications used in the 1998 financial statements.
2. Securities
A summary of securities owned by the Company at December 31, 1998 and 1997, is
as follows:
December 31, 1998 December 31, 1997
----------------------------------------------- -------------------------------------------
(in thousands) Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
----------------------------------------------- -------------------------------------------
Held-to-maturity:
U.S. Treasury obligations $ 57,872 $ 946 $ -- $ 58,818 $ 80,714 $ 410 $ (85) $ 81,039
U.S. agency obligations 22,491 218 -- 22,709 32,474 115 (106) 32,483
Mortgage-backed securities 715 22 (4) 733 966 40 (5) 1,001
State and
municipal securities 113,691 15,483 (42) 129,132 114,211 15,879 (149) 129,941
Other securities -- -- -- -- 672 -- -- 672
--------------------------------------------- -------------------------------------------
194,769 16,669 (46) 211,392 229,037 16,444 (345) 245,136
--------------------------------------------- -------------------------------------------
Available-for-sale:
U.S. Treasury obligations 147,378 3,112 -- 150,490 220,761 1,101 -- 221,862
U.S. agency obligations 175,780 1,798 (85) 177,493 54,950 117 (56) 55,011
Collateralized
mortgage obligations 217,823 1,634 (302) 219,155 199,485 1,701 (43) 201,143
Asset-backed securities 13,849 45 -- 13,894 4,000 8 -- 4,008
State and
municipal securities 26,333 564 (19) 26,878 17,734 177 (2) 17,909
Equity securities 9,086 -- -- 9,086 8,709 -- -- 8,709
--------------------------------------------- -------------------------------------------
590,249 7,153 (406) 596,996 505,639 3,104 (101) 508,642
--------------------------------------------- -------------------------------------------
$785,018 $ 23,822 $(452) $808,388 $734,676 $ 19,548 $(446) $753,778
============================================= ===========================================
The amortized cost and estimated fair value of debt securities at December 31,
1998 and 1997, by contractual maturity, are shown in the next table. Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
December 31, 1998 December 31, 1997
---------------------------------- ----------------------------------
(in thousands) Held-to- Available- Held-to- Available-
Maturity for-Sale Total Maturity for-Sale Total
---------------------------------- ----------------------------------
Amortized cost:
In one year or less $ 46,931 $ 128,259 $175,190 $ 40,160 $ 66,783 $ 106,943
After one year through five years 97,704 371,370 469,074 136,193 300,367 436,560
After five years through ten years 10,973 62,809 73,782 11,819 22,453 34,272
After ten years 39,161 18,725 57,886 40,865 107,327 148,192
Equity securities -- 9,086 9,086 -- 8,709 8,709
---------------------------------- ----------------------------------
$ 194,769 $ 590,249 $785,018 $ 229,037 $ 505,639 $ 734,676
================================== ==================================
Estimated market value:
In one year or less 47,222 128,853 176,075 40,109 66,894 107,003
After one year through five years 103,525 376,919 480,444 142,635 301,854 444,489
After five years through ten years 13,664 63,236 76,900 14,618 23,441 38,059
After ten years 46,981 18,902 65,883 47,774 107,744 155,518
Equity securities -- 9,086 9,086 -- 8,709 8,709
---------------------------------- ----------------------------------
$ 211,392 $ 596,996 $808,388 $ 245,136 $ 508,642 $ 753,778
================================== ==================================
The proceeds received from sales or calls of debt securities and the gross gains
and losses that were recognized for the years ended December 31, 1998 and 1997
are shown in the next table.
(in thousands) 1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
Gross Gross Gross Gross Gross Gross
Proceeds Gains Losses Proceeds Gains Losses Proceeds Gains Losses
-------------------------------- -------------------------------- --------------------------------
Held-to-maturity:
Sales $ 7,490 $ 8 $ -- $ 7,734 $ -- $ (1) $ -- $ -- $ --
Calls $ 1,670 $ 2 $ (20) $ 2,418 $ -- $ -- $ 3,317 $ 55 $ --
Available-for-sale:
Sales $ 61,450 $349 $(144) $ 117,003 $ 54 $(471) $ 190,448 $ 6 $(860)
Calls $ 51,149 $ 12 $ -- $ 22,273 $ -- $ -- $ 961 $ -- $ --
After a significant business combination, GAAP permits a company to reclassify
as available-for-sale securities that at the time of purchase were classified as
held-to-maturity if that action will maintain the holder's interest rate risk
profile. The maturity characteristics of the FVB portfolio were such that when
combined with the Company's portfolio, risks from changes in interest rates were
not within the Company's acceptable risk parameters. Therefore, the Company
reclassified some of its held-to-maturity securities to available-for-sale as a
consequence of the FVB acquisition and subsequently sold them.
SBB&T and FNB are members of the Federal Reserve Bank. As a condition of
membership, they are required to purchase Federal Reserve Bank ("FRB") stock.
The amount of stock required to be held is based on their capital accounts.
Subsequently, as the banks' capital has increased, they have been required to
purchase additional shares. SBB&T also acquired the shares owned by Citizens
State Bank in the transaction described in Note 19. In 1996, SBB&T became a
member of the Federal Home Loan Bank ("FHLB"), purchasing stock as required of
members. The FRB and FHLB stock are reported as equity securities. Since the
stock has no maturity, it is classified as available-for-sale, even though the
Bank is required to hold the stock so long as it maintains its membership in
these organizations.
Securities with a book value of approximately $255.0 million at December 31,
1998 and $168.9 million at December 31, 1997 were pledged to secure public
funds, trust deposits and other borrowings as required or permitted by law.
3. Loans
The loan portfolio consists of the following:
1998 1997
--------------------------
Real estate loans:
Residential $ 368,306 $ 276,014
Non-residential 477,120 433,835
Construction and development 109,764 57,571
Commercial, industrial, and agricultural 362,262 298,986
Home equity lines 47,123 56,681
Consumer 123,730 99,943
Leases 78,627 72,970
Municipal tax-exempt obligations 9,286 7,931
Other 6,563 7,433
--------------------------
$ 1,582,781 $1,311,364
==========================
The amounts above are shown net of deferred loan origination, commitment, and
extension fees of $4,624,000 for 1998 and $3,586,000 for 1997.
Impaired Loans
The table below discloses information about the loans classified as impaired and
the valuation allowance related to them:
(in thousands) December 31
1998 1997
------------------------------
Loans identified as impaired $ 3,286 $ 7,130
Impaired loans for which a valuation
allowance has been determined $ 1,574 $ 2,852
Impaired loans for which no valuation
allowance has been determined $ 1,712 $ 4,278
Amount of valuation allowance $ 98 $ 599
Year Ended December 31
1998 1997
------------------------------
Average amount of recorded investment
in impaired loans for the year $ 5,229 $ 6,133
Interest recognized during the year for
loans identified as impaired at year-end $ -- $ 540
Interest received in cash during the year for
loans identified as impaired at year-end $ 132 $ 540
As indicated in Note 1, a valuation allowance is established for an impaired
loan when the fair value of the loan is less than the recorded investment. As
shown above, no valuation allowance has been determined for the loans totaling
$1.7 million at December 31, 1998 for which market value exceeds the recorded
investment. The valuation allowance amounts disclosed above are included in the
allowance for credit loss reported in the balance sheets for December 31, 1998
and 1997 and in the following note.
Refund Anticipation Loans
The Company makes tax refund anticipation loans ("RAL's"). Taxpayers desiring to
receive their income tax refunds early borrow from the Company. The loans are
repaid when the Internal Revenue Service later sends the refund to the Company.
The funds advanced are generally repaid within several weeks. Therefore,
processing costs represent the major cost of the loan rather than the cost of
funds as for other loan types. Because of their short duration, the Company
cannot recover the processing costs through interest calculated over the term of
the loan. Consequently, the Company has a tiered fee schedule for this service
that varies by the amount of funds advanced based on the increased credit rather
than the length of time that the loan is outstanding. Nonetheless, the fees are
reported in the statements of income as interest income, and totaled $6,818,000
for 1998, $7,422,000 for 1997, and $3,030,000 for 1996. The loans are all made
during the tax filing season of January through April of each year. Any loans
for which repayment has not been received within 90 days from the expected
payment date are charged off. Consequently, there were no RAL's included in the
above table of outstanding loans at December 31, 1998 or 1997.
4. Allowance for Credit Losses
The following summarizes the changes in the allowance for credit losses:
(in thousands) Year Ended December 31
1998 1997 1996
--------------------------------------------
Balance, beginning of year $25,414 $20,244 $16,059
Tax refund anticipation loans:
Provision for credit losses 4,941 4,649 1,100
Recoveries on loans previously charged-off 2,288 1,524 1,437
Loans charged-off (7,221) (5,946) (1,123)
All other loans:
Allowance for credit loss recorded in
acquisition transaction -- 794 --
Provision for credit losses 4,182 3,851 3,849
Recoveries on loans previously charged-off 3,719 3,900 3,137
Loans charged-off (4,027) (3,602) (4,215)
--------------------------------------------
Balance, end of year $29,296 $25,414 $20,244
============================================
The ratio of losses to total loans for the RAL's is higher than for other loans.
For RAL's, the provision for credit loss, the loans charged-off, and the loans
recovered are reported separately from the corresponding amounts for all other
loans.
5. Cash and Due From Banks
All depository institutions are required by law to maintain reserves with the
Federal Reserve Bank ("FRB") on transaction deposits. Amounts vary each day as
the FRB permits banks to meet this requirement by maintaining the specified
amount as an average balance over a two week period. In addition, the banks must
maintain sufficient balance to cover checks written by bank customers that have
been deposited at other banks. The average daily cash reserve balances
maintained by SBB&T and FNB at the FRB totaled approximately $22.6 million in
1998 and $24.7 million in 1997.
6. Premises and Equipment
Premises and equipment consist of the following:
(in thousands) December 31
1998 1997
----------------------------
Land $ 5,025 $ 5,025
Buildings and improvements 19,147 19,009
Leasehold improvements 9,150 8,490
Furniture and equipment 35,594 30,188
----------------------------
Total cost 68,916 62,712
Accumulated depreciation
and amortization (39,000) (33,786)
----------------------------
Net book value $29,916 $28,926
============================
Depreciation and amortization on fixed assets included in other operating
expenses totaled $5,848,000 in 1998, $4,459,000 in 1997, and $3,141,000 in 1996.
7. Deposits
Deposits and the related interest expense consist of the following:
Interest Expense for the
(in thousands) Balance as of December 31 Year Ended December 31
1998 1997 1998 1997 1996
---------------------------- --------------------------------
Noninterest bearing deposits $ 498,266 $ 440,400 $ -- $ -- $ --
Interest bearing deposits:
NOW accounts 298,352 285,402 3,091 2,667 2,340
Money market deposit accounts 568,010 510,879 18,804 18,596 18,660
Other savings deposits 215,330 195,793 5,156 4,533 4,143
Time certificates of $100,000
or more 323,676 278,911 21,731 12,298 7,751
Other time deposits 426,042 376,168 15,988 18,488 13,404
---------------------------- --------------------------------
$2,329,676 $2,087,553 $64,770 $56,582 $46,298
============================ ================================
8. Income Taxes
The provisions (benefits) for income taxes related to operations and the tax
benefit related to stock options that is credited directly to shareholders'
equity are as follows:
(in thousands) Year Ended December 31
1998 1997 1996
-------------------------------------------
Federal:
Current $ 15,930 $ 13,380 $ 10,081
Deferred (2,466) (2,134) (2,662)
-------------------------------------------
13,464 11,246 7,419
-------------------------------------------
State:
Current 5,837 5,673 4,533
Deferred (326) (631) (651)
-------------------------------------------
5,511 5,042 3,882
-------------------------------------------
Total tax provision $ 18,975 $ 16,288 $ 11,301
===========================================
Reduction in taxes payable associated with
exercises of stock options $ (4,934) $ (3,694) $ (1,242)
The current provision for income taxes includes $90,000 for realized net
securities gains and credits of $166,000 and $336,000 related to realized net
securities losses for 1998, 1997, and 1996, respectively.
Although not affecting the total provision, actual income tax payments may
differ from the amounts shown as current as a result of the final determination
as to the timing of certain deductions and credits.
The total tax provision differs from the Federal statutory rate of 35 percent
for the reasons shown in the following table.
Year Ended December 31
1998 1997 1996
--------------------------------------
Tax provision at Federal statutory rate 35.0% 35.0% 35.0%
Interest on securities exempt from Federal taxation (7.5) (6.9) (8.7)
State income taxes, net of Federal income tax benefit 8.1 6.9 7.1
ESOP dividends deductible as an expense for tax purposes (0.8) (0.7) (0.7)
Goodwill amortization 1.3 0.7 --
Merger related costs 3.5 -- 1.0
Other, net (0.5) -- 0.5
--------------------------------------
Actual tax provision 39.1% 35.0% 34.2%
======================================
As disclosed in the following table, deferred tax assets as of December 31, 1998
and 1997, totaled $11,741,000 and $11,113,000, respectively. These amounts are
included within other assets on the balance sheet. The deferred tax provision or
benefit disclosed in the first table of this note is equal to the sum of the
changes in the tax effects of the temporary differences. The changes in the tax
effects for the principal temporary differences for the years ending December
31, 1998 and 1997 are also disclosed in the following table.
Tax Tax
(in thousands) Components Effect Components Acquired Effect Components
1998 1998 1997 Components 1997 1996
-----------------------------------------------------------------------
Deferred tax assets:
Allowance for credit losses $12,042 $1,935 $10,107 $ 51 $2,252 $ 7,804
State taxes 1,253 (535) 1,788 -- 489 1,299
Loan fees 307 (326) 633 -- (74) 707
Depreciation 572 379 193 (1,258) 404 1,047
Postretirement benefits 780 98 682 -- 49 633
Other real estate owned 42 25 17 -- 3 14
Nonaccrual interest 352 (279) 631 -- 135 496
Accrued salary continuation plan 1,904 1,904 -- -- -- --
Change in control payments 1,239 1,239 -- -- -- --
Other 658 158 500 481 (354) 373
-----------------------------------------------------------------------
19,149 4,598 14,551 (726) 2,904 12,373
Valuation allowance -- -- -- -- -- --
-----------------------------------------------------------------------
Total deferred tax assets 19,149 4,598 14,551 (726) 2,904 12,373
-----------------------------------------------------------------------
Deferred tax liabilities:
Loan costs 1,262 393 869 -- 222 647
Accretion on securities 153 (58) 211 (16) (206) 433
Federal effect of state tax asset 1,192 602 590 (74) 198 466
Other 1,550 1,084 466 -- (75) 541
-----------------------------------------------------------------------
Total deferred tax liabilities 4,157 2,021 2,136 (90) 139 2,087
-----------------------------------------------------------------------
Net deferred tax asset
before unrealized gains and
losses on securities 14,992 2,577 12,415 (636) 2,765 10,286
Unrealized (gains) and losses
on securities (3,251) (1,302) 114
-----------------------------------------------------------------------
Net deferred tax asset $11,741 $2,577 $11,113 $ (636) $2,765 $10,400
=======================================================================
As mentioned in Note 1, the net unrealized gain or loss on securities that are
available for sale is included as a component of equity. This amount is reported
net of the related tax effect. The tax effect is a deferred tax asset if there
is a net unrealized loss and a deferred tax liability if there is a net
unrealized gain. However, because changes in the unrealized gains or losses are
not recognized either in net income nor in taxable income, they do not represent
temporary differences. Consequently, the change in the tax effect of the net
unrealized gain or loss is not included as a component of deferred tax expense
or benefit, and there is no entry in the columns labeled "Tax Effect" in the
table above for the change.
The deferred tax assets and liabilities that were assumed in the acquisitions of
FVB and CSB in 1997 are due to temporary differences that arose from the
operations of those companies prior to their acquisition. Because the results of
those operations are included in the financial statements of the Company only
from the date of acquisition, the Company's deferred tax provision or benefit is
not impacted by assuming them. Therefore, they are also shown separately from
the changes in deferred tax assets and liabilities that are reflected in the
deferred tax benefits in the first table of this note.
The Company is permitted to recognize deferred tax assets only to the extent
that they are able to be used to reduce amounts that have been paid or will be
paid to tax authorities. This is reviewed each year by Management by comparing
the amount of the deferred tax assets with amounts paid in the past that might
be recovered by carryback provisions in the tax code and with anticipated
taxable income expected to be generated from operations in the future. If it
does not appear that the deferred tax assets are usable, a valuation allowance
is established to acknowledge their uncertain value. Management believes a
valuation allowance is not needed to reduce any deferred tax asset because there
is sufficient taxable income within the carryback periods to realize all
material amounts.
9. Shareholders' Equity
Subsequent to the merger of SBB with PCB, the Company has seven stock option
plans. These plans offer key employees and directors an opportunity to purchase
shares of the Company's common stock.
Four of the plans were established by SBB prior to the merger. The first is the
Directors Stock Option Plan established in 1996. Only non-qualified options may
be granted under this plan. The second is the Restricted Stock Option Plan for
employees established in January, 1992. Either incentive or non-qualified
options may be granted under this plan. Under the original provisions of these
plans, stock acquired by the exercise of options granted under the plans could
not be sold for five years after the date of the grant or for two years after
the date options are exercised, whichever is later. In 1998, the Board of
Directors of the Company eliminated this provision.
The third and fourth plans were established in 1983 and 1986 for employees and
directors, respectively. All options approved under these plans have been
granted as non-qualified options, and the plans are active now only for the
exercise of options held by employees and directors.
All options outstanding in these plans were granted with an option price set at
100% of the market value of the Company's common stock on the date of the grant.
The grants for most of the employee options specify that they are exercisable in
cumulative 20% annual installments and will expire five years from the date of
grant. The Board has granted some options which are exercisable in cumulative
10% annual installments and expire ten years from the date of grant. The options
granted under the directors' plan are exercisable after six months.
The option plans permit employees and directors to pay the exercise price of
options they are exercising and the related tax liability with shares of Company
stock they already own. The owned shares are surrendered to the Company at
current market value. Shares with a current market value of $2,602,000,
$4,282,000, and $2,099,000 were surrendered in the years ended December 31,
1998, 1997, and 1996, respectively. These surrendered shares are netted against
the new shares issued for the exercise of stock options in the Consolidated
Statements of Changes in Shareholders' Equity.
PCB had established three stock option plans. The first plan was established by
PCB in 1984. By the terms of this plan, either incentive or nonqualified options
were granted at an exercise price no less than the fair market value stock at
the time of the grant. Options granted under the plan vested at a rate
determined by PCB's Board of Directors and expired no later than 10 years after
the date of grant. All options authorized under this plan were granted and for
several years the plan had been active only for the exercise of options held by
employees.
The second plan is the Directors Stock Option Plan established in 1991. By the
terms of this plan, nonqualified options could be granted at an exercise price
equal to the fair market value stock at the time of the grant. Options granted
under the plan began to vest 6 months after the date of grant and expire no
later than 10 years after the date of grant.
The third plan is the 1994 Stock Option Plan. By the terms of this plan, either
incentive or nonqualified options could be granted at an exercise price equal to
the fair market value of the stock at the time of the grant. Options granted
under the plan began to vest 6 months after the date of grant ratably over 4
years and expire no later than 10 years after the date of grant.
New options will not be granted under these last two plans. Options will instead
now only be granted under the Company's 1996 and 1992 plans. The merger
agreement between SBB and PCB provided for the number of options granted and the
exercise prices for those options to be adjusted by the exchange ratio
applicable to the outstanding stock of PCB.
The following table presents information relating to all of the stock option
plans as of December 31, 1998, 1997, and 1996 (adjusted for stock splits and
stock dividends).
Per Share
Options Price Ranges
------------- ------------------
1998
Granted 124,476 $23.44 to $28.71
Exercised 998,709 $5.17 to $23.44
Cancelled and expired 38,909 $6.33 to $28.00
Outstanding at end of year 1,615,414 $5.17 to $28.71
Range of expiration dates 3/14/99 to 11/9/08
Exercisable at end of year 1,098,243 $5.17 to $28.25
Shares available for future grant 647,641
1997
Granted 879,209 $13.88 to $23.44
Exercised 590,769 $4.61 to $18.25
Cancelled and expired 58,393 $4.61 to $20.66
Outstanding at end of year 2,528,556 $5.17 to $23.44
Exercisable at end of year 1,585,090 $5.17 to $18.25
1996
Granted 885,443 $9.88 to $14.25
Exercised 751,791 $4.61 to $9.92
Cancelled and expired 6,946 $5.17 to $11.57
Outstanding at end of year 2,298,509 $4.61 to $14.25
Exercisable at end of year 1,456,540 $4.61 to $12.82
In January 1997, the Company offered to purchase about 6.6% of the then
outstanding shares of common stock from its shareholders. Adjusted for the stock
split declared by the Board of Directors in January of 1998, the terms of the
tender offer allowed for the Company to purchase up to 1,000,000 shares of
common stock duly tendered to it. The offer was not conditioned on any minimum
number of shares being tendered. In response to the offer, 130,494 shares at a
price of $15.00, net to the seller of stock were tendered at a cost to the
Company of $1,957,410.
10. Securities Sold Under Agreements to Repurchase and Federal Funds Purchased
The Company enters into certain transactions, the legal form of which is a sale
of securities under an agreement to repurchase at a later date at a set price.
The substance of these transactions is a secured borrowing by the Company. The
Bank also purchased Federal funds from correspondent banks. The following
information is presented concerning these transactions:
(dollars in thousands) Repurchase Agreements Federal Funds Purchased
Year Ended December 31 Year Ended December 31
1998 1997 1996 1998 1997 1996
-----------------------------------------------------------------------------
Weighted average interest
rate at year-end 3.75% 4.57% 4.29% 4.50% 6.25% 5.75%
Weighted average interest
rate for the year 4.44% 4.54% 4.40% 5.22% 5.29% 5.14%
Average outstanding
for the year $13,884 $22,659 $25,428 $ 9,236 $ 9,149 $15,142
Maximum outstanding
at any month-end
during the year $18,772 $32,216 $31,142 $16,400 $21,485 $35,271
Amount outstanding
at end of year $17,996 $14,813 $23,155 $ 9,800 $ 6,480 $10,335
Interest expense $ 616 $ 1,028 $ 1,118 $ 482 $ 484 $ 779
11. Long-term Debt and Other Borrowings
As part of the Company's asset and liability management strategy, fixed rate
term advances were borrowed from the FHLB. As of December 31, 1998, total
outstanding balances to the FHLB were $42,900,000 and the quarterly principal
payments are $2,500,000.
Also included in other borrowings are $1 million of Treasury Tax and Loan demand
notes issued to the U.S. Treasury and miscellaneous other borrowings.
During the course of 1998 and 1997, the Company borrowed funds for liquidity
purposes from the discount window at the Federal Reserve Bank.
12. Other Operating Income and Expense
Significant items included in amounts reported in the Consolidated Statements of
Income for the years ended December 31, 1998, 1997, and 1996 for other service
charges, commissions, and fees are listed in the table below. The refund
transfer fees are earned for the electronic transmission of tax refunds to
customers to facilitate earlier receipt of their refund.
(in thousands) Year Ended December 31
1998 1997 1996
-----------------------------------
Income items:
Merchant credit card processing $3,952 $ 3,200 $2,619
Refund transfer fees 4,821 2,943 1,243
Loan broker fees 1,369 636 282
ATM fees 746 491 351
Expense items:
Consultant expense $7,575 $ 3,364 $2,891
Settlement of salary contracts 3,329 -- --
Change of control payments 2,702 -- --
Marketing expense 3,028 2,990 2,338
Merchant credit card clearing fees 2,878 2,116 1,763
Software expense 2,171 1,559 1,158
Telephone and wires 2,090 1,681 1,120
Supplies and sundries 1,508 1,671 1,187
Postage and freight 1,335 1,140 992
Amortization of goodwill 1,402 762 16
Armored car services 693 571 410
Charitable contributions 441 681 740
Net (benefit) cost of operating foreclosed real estate (72) (195) 277
The table above also discloses the largest items included in other operating
expense. Most of the categories of expense, especially consultants, marketing
expense, and the amortization of goodwill, increased in 1997 compared to 1996
because of additional activity related to the acquisition of FVB and CSB.
Consultants include the Company's independent accountants, attorneys, and other
management consultants used for special projects. A similar increase in
consulting expense occurred in 1998 compared to 1997 because of the merger with
PCB.
13. Employee Benefit Plans
Both SBB and PCB had an Employee Stock Ownership Plan ("ESOP") and each also had
a second profit sharing plan. The plans were not combined as of December 31,
1998.
The SBB ESOP was initiated in January 1985. As of December 31, 1998 the ESOP
held 1,365,547 shares at an average cost of $5.875 per share.
SBB's profit sharing plan has two components. The Salary Savings Plan component
is authorized under Section 401(k) of the Internal Revenue Code. An employee may
defer up to 10% of pre-tax salary in the plan up to a maximum dollar amount set
each year by the Internal Revenue Service. The Company matches 100% of the first
3% of the employee's compensation that the employee elects to defer and 50% of
the next 3%, but not more than 4.5% of the employee's total compensation. In
1998, 1997, and 1996 the employer's matching contributions were $1,036,000,
$856,000, and $663,000, respectively. The other component is the Incentive &
Investment Plan. It was established in 1966, and permits contributions by the
Company to be invested in various mutual funds chosen by the employees.
SBB's practice was to make total contributions to the two plans equal to the
smaller of (1) 10% of pre-tax profits prior to this employer contribution, or
(2) the amount deductible in the Company's current year tax return. Deductions
for contributions to qualified plans are limited to 15% of eligible
compensation. In 1998 and 1997, the deductible amount was the limiting factor
for the contribution. After providing for the matching contribution to the
Salary Savings Plan, the remaining contribution may be made either to the ESOP
or to the Incentive & Investment Plan.
Total contributions by SBB to the above profit sharing plans were $2,310,000 in
1998, $2,799,000 in 1997, and $2,259,000 in 1996.
The PCB ESOP was initiated in 1986. PCB made contributions to its ESOP in an
amount determined by its Board of Directors. PCB made contributions of $400,000,
$400,000, and $275,000 for the years ended December 31, 1998, 1997, and 1996,
respectively. As of December 31, 1998 this plan held 239,684 shares of the
Company's stock at an average cost of $13.79 per share.
PCB also maintained a 401(k) plan under which it made contributions matching
deferrals made by its employees. The contributions amounted to $79,000, $70,000,
and $71,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
The Company intends to merge the PCB ESOP and 401(k) plans into SBB's plans as
soon as practicable.
14. Disclosures about Fair Value of Financial Instruments
GAAP requires companies to disclose the fair value of those financial
instruments for which it is practicable to estimate that value and the methods
and significant assumptions used to estimate those fair values. This must be
done irrespective of whether or not the instruments are recognized on the
balance sheets of the Company.
There are several factors which users of these financial statements should keep
in mind regarding the fair values disclosed in this note. First, there are
uncertainties inherent in the process of estimating the fair value of financial
instruments. Secondly, the Company must exclude from its estimate of the fair
value of deposit liabilities any consideration of its on-going customer
relationships which provide stable sources of investable funds.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents
The face value of cash, Federal funds sold, and securities purchased under
agreements to resell are their fair value.
Securities and money market instruments
For securities, bankers' acceptances and commercial paper, fair value equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities. As
explained in Note 1, securities classified as available-for-sale are carried at
fair value.
Loans
The fair value of loans is estimated by discounting the future contractual cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. These
contractual cash flows are adjusted to reflect estimates of uncollectible
amounts.
Deposit liabilities
The fair value of demand deposits, money market accounts, and savings accounts
is the amount payable on demand as of December 31 of each year. The fair value
of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
Repurchase agreements, Federal funds purchased, and other borrowings
For short-term instruments, the carrying amount is a reasonable estimate of
their fair value. For FHLB advances, the only component of debt not considered
short-term, the fair value is estimated using rates currently quoted by the FHLB
for advances of similar remaining maturities.
Commitments to extend credit, standby letters of credit, and financial
guarantees written
The fair value of guarantees and letters of credit is based on fees currently
charged for similar agreements. The Company does not believe that its loan
commitments have a fair value within the context of this note because generally
fees have not been charged, the use of the commitment is at the option of the
potential borrower, and the commitments are being written at rates comparable to
current market rates. The carrying amount and estimated fair values of the
Company's financial instruments as of December 31, 1998 and 1997 are as follows:
As of December 31, 1998 As of December 31, 1997
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
-------------------------------------------------------------
Financial assets:
Cash and due from banks $ 114,206 $ 114,206 $ 117,781 $ 117,781
Federal funds sold 69,890 69,890 74,405 74,405
Money market funds 1,567 1,567 2,132 2,132
Securities available-for-sale 596,996 596,996 508,642 508,642
Securities held-to-maturity 194,769 211,392 229,037 245,136
Bankers' acceptances and
commercial paper 19,888 19,924 49,400 49,362
Net loans 1,553,485 1,558,344 1,285,950 1,291,152
Total financial assets $2,550,801 $2,572,319 $2,267,347 $2,288,610
Financial liabilities:
Deposits $2,329,676 $2,333,224 $2,087,553 $2,089,679
Repurchase agreements,
Federal funds purchased,
and other borrowings 72,749 73,680 60,293 60,544
Total financial liabilities $2,402,425 $2,406,904 $2,147,846 $2,150,223
Unrecognized financial
instruments:
Interest rate option contract $ -- $ -- $ 60 $ --
Commitments to
extend credit $ -- $ -- $ -- $ --
Standby letters of credit $ -- $ 21,782 $ -- $ 24,909
15. Other Postretirement Benefits
Under the provisions of the Retiree Health Plan (the "Plan"), all eligible
retirees may purchase health insurance coverage through the Company. The cost of
this coverage is that amount which the Company pays under the basic coverage
plan provided for current employees. Based on a formula involving date of
retirement, age at retirement, and years of service prior to retirement, the
Plan provides that the Company will contribute a portion of the cost for the
retiree, varying from 60% to 100% at the time the employee retires, with the
stipulation that the cost of the portion paid by the Company shall not increase
by more than 5% per year. The Company recognizes the net present value of the
estimated future cost of providing health insurance benefits to retirees under
the Retiree Health Plan as those benefits are earned rather than when paid. The
Accumulated Postretirement Benefit Obligation
The commitment the Company has made to provide these benefits results in an
obligation that must be recognized in the financial statements. This obligation,
the accumulated postretirement benefit obligation ("APBO"), is the actuarial net
present value of the obligation for fully eligible plan participants' expected
postretirement benefits plus the portion of the expected postretirement benefit
obligation for other active plan participants attributed to service as an
employee.
This obligation must be re-measured each year because it changes with each of
the following factors: 1) the number of employees working for the Company; 2)
the average age of the employees working for the Company; 3) increases in
expected health care costs; and 4) prevailing interest rates. In addition,
because the obligation is measured on a net present value basis, the passage of
each year brings the eventual payment of benefits closer, and therefore causes
the obligation to increase. The following tables disclose the reconciliation of
the beginning and ending balances of the APBO, the reconciliation of beginning
and ending balances of the fair value of the plan assets, and the funding status
of the Plan as of December 31, 1998, 1997, and 1996:
(in thousands) Year Ended December 31
1998 1997 1996
--------------------------------------------
Benefit obligation, beginning of year $(3,666) $(3,153) $(3,279)
Service cost (274) (188) (200)
Interest cost (253) (223) (227)
Actuarial (losses) gains (28) (159) 485
Benefits paid 51 57 68
--------------------------------------------
Benefit obligation, end of year (4,170) (3,666) (3,153)
--------------------------------------------
Fair value of Plan assets, beginning of year 4,081 3,208 2,559
Actual return on Plan assets 265 895 285
Employer contribution 191 35 432
Benefits paid (51) (57) (68)
--------------------------------------------
Fair value of Plan assets, end of year 4,486 4,081 3,208
--------------------------------------------
Funded Status 316 415 55
Unrecognized net actuarial gain (771) (848) (317)
Unrecognized prior service cost 2 4 5
--------------------------------------------
Accrued benefit cost $ (453) $ (429) $ (257)
============================================
Costs of $453,000 for December 31, 1998 and $429,000 for December 31, 1997 are
included within the category for accrued interest payable and other liabilities
in the consolidated balance sheets.
The Components of the Net Periodic Postretirement Benefit Cost
Each year the Company recognizes a portion of the change in the APBO. This
portion is called the net periodic postretirement benefit cost (the "NPPBC").
The NPPBC, included with the cost of other benefits in the Consolidated
Statements of Income, is made up of several components as shown in the next
table.
(in thousands) Year Ended December 31
1998 1997 1996
-----------------------------------
Service cost $ 274 $ 188 $ 200
Interest cost 253 223 227
Return on assets 279) (205) (175)
Amortization cost (34) 1 1
-----------------------------------
Net periodic postretirement cost $ 214 $ 207 $ 253
===================================
The first component is service cost, which is the net present value of the
portion of the expected postretirement benefit obligation for active plan
participants attributed to service for the year. The second is interest cost,
which is the increase in the APBO that results from the passage of another year.
That is, because the benefit obligation for each employee is one more year
closer to being paid, the net present value increases. The third component,
return on assets, is the income earned on any investments that have been set
aside to fund the benefits. This return is an offset to the first two
components.
The fourth component, amortization cost, arises because significant estimates
and assumptions about interest rates, trends in health care costs, plan changes,
employee turnover, and earnings on assets are used in measuring the APBO each
year. Actual experience may differ from the estimates and assumptions may change
resulting in experience gains and losses for increases or decreases in the APBO
or the value of plan assets. The rates used and the amortization of these
experience gains and losses are discussed in the next section of this note.
At the time it implemented the statement, the Company fully recognized the net
present value of the benefits earned by employees for prior service. Had the
Company not recognized this amount, a portion of it would be included in the
NPPBC as a fifth component.
The Use of Estimates and the Amortization of Experience Gains and Losses
The following table discloses the assumed rates that have been used for the
factors that may have a significant impact on the APBO.
1998 1997 1996
-------------------------------------------
Discount rate 6.60% 7.04% 7.22%
Expected return on plan assets 7.00% 7.00% 7.00%
Health care inflation rate 5.00% 5.00% 5.00%
The discount rate is used to compute the present value of the APBO. It is
selected each year by reference to the current rates of investment grade
corporate bonds. Higher discount rates result in a lower APBO at the end of the
year and the NPPBC to be recognized for the following year, while lower rates
raise both.
While the discount rate has fluctuated with market rates, the Company has
continued to use 7% as its estimate of the long-term rate of return on plan
assets. The APBO is a long-term liability of 30 years or more. The 7% rate is
the assumed average earning rate over an equally long investment horizon. If the
rate of return is greater than this estimate, the Company will have what is
termed an experience gain.
As noted above, the Retiree Health Plan provides for the Company's contribution
for insurance premiums to be limited to an annual increase of 5%. Should
insurance premiums increase at a higher rate, the retirees will need to
contribute a larger portion of the total premium cost. Therefore, 5% has been
set as the assumed cost trend rate for health care. Because of this limitation,
an increase in the actual cost of health care will have no impact on the APBO.
If costs rise at a lesser rate, the Company will have an experience gain.
Rather than the whole amount of the experience gains or losses being recognized
in the year after they arise, SFAS 106 provides for them to be recognized
through amortization over the average remaining service lives of the employees.
Amortization over time is used because many of these changes may be partially or
fully reversed in subsequent years as further changes in experience and/or
assumptions occur. At December 31, 1998 and December 31, 1997, the Company had
unamortized or unrecognized gains of $771,000 and $848,000, respectively. These
amounts are reported in the first table of this note.
Funding of the Retiree Health Plan
Employers are allowed wide discretion as to whether and how they set aside funds
to meet the obligation they are recognizing. Under the provisions of the current
Internal Revenue Code, only a portion of this funding may be deducted by the
employer. The funded status of the plan is shown in the first table as the
amount by which the plan assets exceed the APBO.
The Company established a Voluntary Employees' Beneficiary Association ("VEBA")
to hold the assets that will be used to pay the benefits for participants of the
plan other than key executive officers. Most of the plan assets have been
invested in insurance policies on the lives of various employees of the Company.
The current funding policy of the Company is to contribute assets to the VEBA at
least sufficient to pay the costs of current medical premiums of retirees and
the costs of the life insurance premiums. Proceeds from the life insurance
policies payoffs will fund benefits and premiums in the future. As of December
31, 1998, the VEBA was overfunded by $758,000. The APBO related to the key
employees of $443,000 is totally unfunded.
16. Earnings Per Share and Stock-Based Compensation
The following table presents a reconciliation of basic earnings per share and
diluted earnings per share. The denominator of the diluted earnings per share
ratio includes the effect of dilutive securities. The only securities
outstanding that are potentially dilutive are the stock options reported in Note
9. The number of options assumed to be exercised is computed using the "Treasury
Stock Method." This method assumes that all options with an exercise price lower
than the end of period stock price have been exercised and that the proceeds
from the assumed exercise and the tax benefit received for the difference
between the market price and the exercise price would be used for market
repurchases of shares.
Under the method implemented by the Company, no compensation expense is recorded
if stock options are granted to employees at an exercise price equal to the
market value of the stock at the time of the grant.
Basic Diluted
(amounts in thousands other than per share amounts) Earnings Earnings
Per Share Per Share
----------- ------------
For the Year Ended December 31, 1998
Numerator--net income $ 29,567 $29,567
Denominator--weighted average shares outstanding 23,886 23,886
Plus: net shares issued in assumed stock options exercises 561
Diluted denominator 24,447
Earnings per share $ 1.24 $ 1.21
For the Year Ended December 31, 1997
Numerator--net income $30,283 $30,283
Denominator--weighted average shares outstanding 23,510 23,510
Plus: net shares issued in assumed stock options exercises 678
Diluted denominator 24,188
Earnings per share $ 1.29 $ 1.25
For the Year Ended December 31, 1996
Numerator--net income $ 21,704 $21,704
Denominator--weighted average shares outstanding 23,585 23,585
Plus: net shares issued in assumed stock options exercises 643
Diluted denominator 24,228
Earnings per share $ 0.92 $ 0.90
Had the Company recognized compensation expense over the expected life of the
options based on their fair market value as discussed in Note 1, the Company's
pro forma salary expense, net income, and earnings per share for the years ended
December 31, 1998, 1997 and 1996 would have been as follows:
(in thousands) Year Ended December 31
1998 1997 1996
--------------------------------------------
Salary expense:
As reported $40,178 $34,334 $30,398
Pro forma $41,314 $35,765 $31,101
Net income:
As reported $29,567 $30,283 $21,704
Pro forma $28,909 $29,449 $21,295
Earnings per share:
As reported $ 1.21 $ 1.25 $ 0.90
Pro forma $ 1.18 $ 1.22 $ 0.88
Diluted average shares 24,447 24,189 24,227
17. Regulatory Capital Requirements
The Company and its subsidiary banks are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements as specified by the regulatory framework for prompt
corrective action could cause the regulators to initiate certain mandatory or
discretionary actions that, if undertaken, could have a direct material effect
on the Company's financial statements.
The table below sets forth the actual capital amounts and ratios for the Company
and for the banks as of December 31, 1998 and 1997. It also shows the minimum
amounts and ratios that they must maintain under the regulatory requirements to
meet the standard of adequately capitalized and the minimum amounts and ratios
required to meet the regulatory standards of "well capitalized".
Tier I and Tier II (or total) capital as well as risk-weighted assets are all
defined in the regulations. However, the capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
As shown in the table below, as of December 31, 1998, both the Company and each
of the banks are well capitalized under the regulatory framework.
Bancorp is the parent company and sole owner of the banks. However, there are
legal limitations on the amount of dividends which may be paid by the banks to
Bancorp. The dividends from SBB&T needed by Bancorp to pay for the acquisitions
of FVB and CSB exceeded the amount allowable without prior approval of the
California Department of Financial Institutions ("CDFI"). As part of its
approval of the acquisitions, the CDFI approved the excess distributions. During
1998, it also approved other dividends from SBB&T to Bancorp to fund quarterly
cash dividends to Bancorp shareholders and for other incidental purposes.
As described in Note 19, after purchasing FVB and CSB, Bancorp merged the assets
(including the recognized goodwill) and liabilities of the acquired banks into
the SBB&T. To SBB&T, this represented a contribution of capital from its parent.
Consequently, even though $42.3 million in dividends had been paid to the parent
company, its capital balances were restored with the contribution. The net
effect on the SBB&T's capital position was a decrease in the retained earnings
component of capital and an identical increase in the surplus component.
(dollars in thousands) Pacific Capital Minimums for
Bancorp Capital Adequacy Minimums to be
Actual Purposes Well-Capitalized
-----------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------
As of December 31, 1998
Total Tier I & Tier II Capital
(to Risk Weighted Assets) $ 215,242 11.7% $ 147,143 8.0% $ 183,929 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 192,434 10.5% $ 73,571 4.0% $ 110,357 6.0%
Tier I Capital
(to Average Assets) $ 192,434 7.4% $ 103,510 4.0% $ 129,388 5.0%
Risk Weighted Assets $1,839,286
Average Assets $2,587,755
As of December 31, 1997
Total Tier I & Tier II Capital
(to Risk Weighted Assets) $ 188,176 12.6% $ 119,332 8.0% $ 149,165 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 169,449 11.4% $ 59,666 4.0% $ 89,499 6.0%
Tier I Capital
(to Average Assets) $ 169,449 7.4% $ 91,622 4.0% $ 114,527 5.0%
Risk Weighted Assets $1,491,647
Average Assets $2,290,544
18. Commitments and Contingencies
The Company leases several office locations and substantially all of the office
leases contain multiple five-year renewal options and provisions for increased
rentals, principally for property taxes and maintenance. As of December 31,
1998, the minimum rentals under non-cancelable leases for the next five years
and thereafter are shown in the following table.
(in thousands) Year Ended December 31 There-
1999 2000 2001 2002 2003 after Total
--------------------------------------------- --------- ---------
Non-cancellable
lease expense $3,340 $2,629 $2,151 $1,411 $1,180 $2,869 $13,580
Total net rentals for premises included in other operating expenses are
$4,021,000 in 1998, $3,444,000 in 1997, and $3,147,000 in 1996.
The Company leases space from a partnership in which a director has an interest.
The original terms of the lease were negotiated with the assistance of two
independent, outside appraisers, and the lease was approved by the Board of
Directors of the Company. The Company exercised its option to renew the lease in
1989. In 1994, the Company renegotiated the lease to receive other rights such
as additional lease option periods and a right of first refusal to purchase the
building if it is offered for sale. The nominal monthly rent increased to obtain
these benefits, but the actual outlay was reduced in order for the Company to be
reimbursed for advancing the partnership's share of seismic improvements made to
the leased property in 1994. The above schedule of lease commitments includes
the terms of the current agreement. Management believes the terms of the revised
lease are comparable with terms which would have been available from
unaffiliated third parties at the time the negotiations occurred and the terms
were approved by the Board of Directors.
In order to meet the financing needs of its customers in the normal course of
business, the Company is a party to financial instruments with "off-balance
sheet" risk. These financial instruments consist of commitments to extend credit
and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. The Company
has not usually charged fees in connection with loan commitments. Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. The Company charges a fee for
these letters of credit.
The standby letters of credit involve, to varying degrees, exposure to credit
risk in excess of the amounts recognized in the consolidated balance sheets.
This risk arises from the possibility of the failure of the customer to perform
according to the terms of a contract that would cause a draw on the standby
letter of credit by a third party. To minimize the risk, the Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The decision as to whether collateral
should be required is based on the circumstances of each specific commitment or
conditional obligation. Because of these practices, Management does not
anticipate that any significant losses will arise from such draws.
Changes in market rates of interest for those few commitments and undisbursed
loans which have fixed rates of interest represent a possible cause of loss by
the contractual requirement to lend money at a rate that is no longer as great
as the market rate at the time the loan is funded. To minimize this risk, if
rates are quoted in a commitment, they are generally stated in relation to the
Company's base lending rate which varies with prevailing market interest rates.
Fixed-rate loan commitments are not usually made for more than three months.
The maximum exposure to credit risk is represented by the contractual notional
amount of those instruments. As of December 31, 1998 and 1997, the contractual
notional amounts of these instruments are as follows:
(in thousands) December 31
1998 1997
-----------------------------
Standby letters of credit $ 21,782 $ 24,909
Loan commitments 115,401 177,994
Undisbursed loans 63,888 59,069
Unused consumer credit lines 71,544 59,073
Unused credit lines 146,514 130,347
-----------------------------
$419,129 $451,392
=============================
Since many of the commitments are expected to expire without being drawn upon,
the amounts in the table do not necessarily represent future cash requirements.
With the exception of the RAL program mentioned in Note 3, the Company has
concentrated its lending activity almost exclusively with customers in the
primary market areas of its subsidiary banks. The merger has introduced some
geographical diversity as each market area now represents only a portion of the
whole Company. The business customers are in widely diversified industries, and
there is a large consumer component to the portfolio. The Company monitors
concentrations within four broad categories: industry, geography, product, and
collateral. One significant concentration in the loan portfolio is represented
by loans collateralized by real estate; the nature of this collateral, however,
is quite varied: 1-4 family residential, multifamily residential, and commercial
buildings of various kinds. As the economy along the central coast shows
vitality, the underlying value of real estate continues to improve. The Company
has considered this concentration in evaluating the adequacy of the allowance
for credit loss.
The Company has a trust department that has fiduciary responsibility for the
assets that it holds on behalf of its trust customers. These assets are not
owned by the Company and accordingly are not reflected in the accompanying
consolidated balance sheets.
The Company is involved in various litigation of a routine nature which is being
handled and defended in the ordinary course of the Company's business. In the
opinion of Management, the resolution of this litigation will not have a
material impact on the Company's financial position.
19. Mergers and Acquisitions
On December 30, 1998, the Company issued 8,756,668 shares of common stock in
exchange for all of the outstanding stock of PCB, a holding company for FNB and
its affiliate SVNB.
The transaction was accounted for as a pooling-of-interest, and accordingly, the
accompanying consolidated financial statements for 1997 and for 1996 have been
restated to include the accounts of Pacific Capital Bancorp for all periods
presented. Total revenues and net income for the separate companies for the
periods preceding the acquisition were as follows:
1998 1997 1996
-----------------------------------------
Total Revenues
Santa Barbara Bancorp $164,532 $140,485 $109,273
Former Pacific Capital 64,742 56,560 47,164
-----------------------------------------
Total $229,274 $197,045 $ 34
=========================================
Net Income
Santa Barbara Bancorp $ 24,379 $ 20,136 $ 15,665
Former Pacific Capital 5,188 10,147 6,039
-----------------------------------------
Total $ 29,567 $ 30,283 $ 21,704
=========================================
On March 31, 1997, the Company acquired all the outstanding stock of FVB for
$26.1 million in cash. Immediately prior to the close, FVB had $123.0 million in
assets and $108.0 million in liabilities.
On September 30, 1997, the Company acquired all the outstanding stock of CSB for
$16.2 million in cash. Immediately prior to the close, CSB had $93.3 million in
assets and $84.3 million in liabilities.
Both acquisitions were accounted for under purchase accounting, with assets and
liabilities recorded at their estimated fair market value at the time of the
acquisition. The excess of the purchase price over the net assets is recorded as
goodwill. Goodwill amortized during the year ended December 31, 1998 totaled
approximately $1,185,000. The Company issued no stock in connection with these
acquisitions. The following table shows estimated fair market value of the
assets and liabilities of the two banks, the purchase price paid, and the
resulting goodwill.
(in thousands) FMV of FMV of
Assets Liabilities Purchase Intangibles
Acquired Assumed Price Recorded
------------------------------------------------------------------
First Valley Bank $124,967 $109,139 $26,100 $10,272
Citizens State Bank 92,974 84,320 16,170 7,516
------------------------------------------------------------------
Total $217,941 $193,459 $42,270 $17,788
==================================================================
The branches of FVB and CSB were immediately merged into SBB&T on April 1, 1997
and October 1, 1997, respectively. Under the provisions of purchase accounting,
the results of operations of the acquired entity are included in the financial
statements of the acquirer only from the date of the acquisition forward.
Therefore, the consolidated financial statements of the Company as of December
31, 1995 and 1996, and for each of the two years then ended do not include any
amounts related to FVB or CSB. The 1997 consolidated financial statements of the
Company include the assets and liabilities acquired in the transactions and
results of operations from April 1, 1997 for FVB and from October 1, 1997 for
CSB.
The following table presents an unaudited pro forma combined summary of
operations of the Company, FVB, and CSB for the years ended December 31, 1997,
and 1996, as if the acquisitions had been effective January 1, 1996.
(dollars in thousands) Year Ended December 31
1997 1996
--------------------------
Interest income $174,337 $146,787
Interest expense 63,119 54,221
--------------------------
Net interest income 111,218 92,566
Provision for credit losses 8,380 4,849
Noninterest income 29,391 23,810
Noninterest expense 86,261 77,708
--------------------------
Income before provision for income taxes 45,968 33,819
Provision for income taxes 16,618 12,832
--------------------------
Net income $ 29,350 $ 20,987
==========================
Basic earnings per share $ 1.25 $ 0.89
Weighted average shares assumed
to be outstanding 23,510 23,585
Diluted earnings per share $ 1.21 $ 0.87
Weighted average shares assumed
to be outstanding 24,188 24,228
The information in the table above combines the historical results of the
Company, FVB, and CSB after giving effect to the amortization of goodwill and
exclusion of an estimated amount of earnings from the consideration paid to the
shareholders of FVB and CSB using the average rate received during the years for
Federal funds sold. No attempt has been made to eliminate the immaterial
intercompany transactions which occurred, nor has an attempt been made to
eliminate the duplicated administrative costs. The figures included in the table
for pro forma combined diluted earnings per share are based on the pro forma
combined net income in the table and the actual average common shares and share
equivalents. Because the consideration paid to the shareholders of FVB and CSB
consisted entirely of cash, the average shares and share equivalents outstanding
are identical to those reported in Note 16.
This unaudited combined pro forma summary of operations is intended for
informational purposes only and is not necessarily representative of the future
results of the Company or of the results of the Company that would have occurred
had the acquisitions actually been transacted on January 1, 1995.
20. Segment Reporting
While the Company's products and services are all of the nature of commercial
banking, the Company has seven reportable segments. There are six specific
segments: Wholesale Lending, Retail Lending, Branch Activities, Fiduciary, Tax
Refund Processing, and the Northern Region. The remaining activities of the
Company are reported in a segment titled "All Other".
Factors Used to Identify Reportable Segments
The Company first uses geography as a factor in distinguishing three operating
segments. The discrete market areas served by SBB&T and by FNB (including its
affiliate SVNB) distinguish them as units for which performance must be viewed
separately. The tax refund program serves customers throughout the United
States, and the lack of a defined market area for these programs distinguishes
it from other banking activities.
SBB&T is further disaggregated into additional segments. The factors used for
this disaggregation relate to products and services resulting in segments for
Wholesale Lending, Retail Lending, Branch Activities (deposits), and Fiduciary
(trust services). This level of disaggregation for SBB&T reflects its specific
management structure in which loan and deposit products are handled by different
organizational units. In contrast to this, FNB and its affiliate, SVNB, have an
organizational structure that generally places both loan and deposit products in
the individual branches.
Types and Services from Which Revenues are Derived
Wholesale Lending: Business units in this segment make loans to medium-sized
businesses and their owners. Loans are made for the purchase of business assets,
working capital lines, investment, the development and construction of
nonresidential or multi-family residential property. Letters of credit are also
offered to customers both to facilitate commercial transactions and as
performance bonds.
Retail Lending: Business units in this segment do small business lending and
leasing, consumer installment loans, home equity lines, and 1-4 family
residential mortgages.
Branch Activities: The business of this segment is primarily centered on deposit
products, but also includes safe deposit box rentals, foreign exchange,
electronic fund transfers, and other ancillary services to businesses and
individuals.
Tax Refund Program: The loan and transfer products provided in this segment are
described in Note 3.
Fiduciary: This segment provides trust and investment services to its customers.
The Trust and Investment Services Division may act as both custodian and manager
of trust accounts as directed by the trust document. In addition to securities
and other liquid assets, the division also manages real estate held in trust.
The division also sells third-party mutual funds and annuities to customers.
Northern Region: This segment derives its revenues from banking services
provided by FNB and its affiliate SVNB. These include the same type of loan and
deposit products described for the first three segments described above. In
addition, FNB provides Small Business Administration guaranteed loans to its
customers. This segment also derives revenues from securities in FNB's
securities portfolios.
All Other: This segment consists of other business lines and support units. The
administrative support units include the Company's executive administration,
data processing, marketing, credit administration, human resources, legal and
benefits, and finance and accounting. The primary revenues are from SBBT's
securities portfolios.
Charges and Credits for Funds and Income from the Investment Portfolios
As noted above, there is a significant difference between the organizational
structures of FNB and SBB&T, with the same business units providing loans and
deposits at FNB and separate business units handling them at SBB&T. This means
that as a segment, the Northern Region is self-contained from a funding
standpoint. That is, the one segment obtains its own funds from its depositors
and lends its own funds to its borrowers. In contrast with this, SBB&T has one
primary segment which provides the funds, Branch Activities, while the lending
segments utilize the funds. To give a fair picture of profitability at the
segment level for the SBB&T segments, it is therefore necessary to charge the
lending segments for the cost of the funds they use while crediting the Branch
Activities segment for the funds it provides.
The securities portfolios of each bank are used to provide liquidity to the bank
as a whole and to earn income from funds received from depositors that are in
excess of the amounts lent to borrowers. The interest rates applicable to
securities are lower than for loans because there is little or no credit risk.
Foregoing the higher rates earned by loans is, in a sense, a cost of maintaining
the necessary liquidity, and an opportunity cost for being unable to generate
sufficient loans to make full use of the available funds. From the standpoint of
measuring the performance of the Northern Region, the loans and deposits of
which are organizationally integrated, it is most appropriate to include the
income from the FNB securities portfolios with the operating segment. Because
the Northern Region is self-contained from a funding standpoint, within the
segment as a whole, there are no credits or charges for funds.
Because in the SBB&T segments, the uses of funds other than investments and the
provision of funds are in separate segments, there is no one unit to which it is
appropriate to charge the liquidity and opportunity costs. Instead, each segment
that uses funds through lending or investing is charged for its funds and the
Branch Activities segment is credited for the funds it provides.
Measure of Profit or Loss
In assessing the performance of each segment, the chief executive officer
reviews the segment's contribution before tax. Taxes are excluded because the
Company has permanent tax differences (see Note 8) which do not apply equally to
all segments. In addition, a net-of-tax contribution would reflect changes in
tax rates which are not linked to performance of a segment.
Specific Segment Disclosure
The following table presents information for each segment regarding assets,
profit or loss, and specific items of revenue and expense that are included in
that measure of segment profit or loss as reviewed by the chief operating
decision maker.
(in thousands) Branch Retail Wholesale Northern All
Activities Lending Lending RAL Fiduciary Region Other Total
--------------------------------------------------------------------------------------------------
Year Ended
December 31, 1998
Revenues from
external customers $ 8,389 $ 43,568 $46,899 $11,638 $ 11,915 $ 63,974 $ 48,842 $ 235,225
Intersegment revenues 75,808 -- -- 991 2,354 -- 11,107 90,260
--------------------------------------------------------------------------------------------------
Total revenues $84,197 $ 43,568 $46,899 $12,629 $ 14,269 $ 63,974 $ 59,949 $ 325,485
==================================================================================================
Profit (Loss) $91,663 $ 9,262 $16,885 $5,512 $ 7,900 $ 20,662 $ (7,345) $ 144,539
Interest income 24 42,156 45,273 6,818 -- 60,680 44,302 199,253
Interest expense 44,754 4 4 -- -- 20,593 2,758 68,113
Internal charge for funds 725 25,841 23,936 625 2,247 -- 36,886 90,260
Depreciation 1,982 236 142 71 213 1,570 1,634 5,848
Total assets 12,532 530,481 520,614 (324) 3,104 840,027 742,984 2,649,418
Capital expenditures -- -- -- -- -- 744 6,093 6,837
Year Ended
December 31, 1997
Revenues from
external customers $ 7,182 $ 34,559 $38,968 $10,299 $ 10,258 $ 56,124 $ 44,430 $ 201,820
Intersegment revenues 66,803 -- -- 655 3,230 -- 10,687 81,375
--------------------------------------------------------------------------------------------------
Total revenues $73,985 $ 34,559 $38,968 $10,954 $ 13,488 $ 56,124 $ 55,117 $ 283,195
==================================================================================================
Profit (Loss) $80,044 $ 5,657 $12,353 $ 4,099 $ 7,285 $ 18,260 $ 5,418 $ 133,116
Interest income 25 33,427 38,097 7,421 -- 53,179 41,171 173,320
Interest expense 40,215 -- -- -- -- 17,385 2,990 60,590
Internal charge for funds 609 20,572 21,830 559 2,970 -- 34,835 81,375
Depreciation 1,689 221 81 38 144 1,301 985 4,459
Total assets 15,382 420,332 437,310 (324) 1,963 756,899 725,543 2,357,105
Capital expenditures -- -- -- -- -- 853 13,402 14,255
Year Ended
December 31, 1996
Revenues from
external customers $ 5,982 $ 21,681 $34,247 $ 4,204 $ 8,745 $ 46,928 $ 38,239 $ 160,026
Intersegment revenues 61,731 -- -- 475 5,159 -- 2,326 69,691
--------------------------------------------------------------------------------------------------
Total revenues $67,713 $ 21,681 $34,247 $ 4,679 $ 13,904 $ 46,928 $ 40,565 $ 229,718
==================================================================================================
Profit (Loss) $79,457 $ 7,064 $10,852 $ 2,438 $ 8,990 $ 11,714 $(13,431) $ 107,084
Interest income 10 20,946 33,824 3,030 -- 43,822 36,292 137,924
Interest expense 34,118 -- -- -- -- 13,319 931 48,368
Internal charge for funds 550 9,736 16,928 114 4,115 -- 38,248 69,691
Depreciation 1,120 98 57 24 119 1,074 649 3,141
Total assets 8,501 309,521 357,100 (99) 1,876 612,389 631,471 1,920,759
Capital expenditures -- -- -- -- -- 2,855 642 3,497
The following table reconciles total revenues and profit for the segments to
total revenues and pre-tax income, respectively, in the consolidated financial
statements.
(in thousands) Year Ended December 31
1998 1997 1996
-----------------------------------------
Total revenues for reportable segments $325,485 $283,195 $229,718
Elimination of intersegment revenues (90,260) (81,375) (69,691)
Elimination of taxable equivalent adjustment (5,737) (5,170) (4,388)
-----------------------------------------
Total consolidated revenues $229,488 $196,650 $155,639
=========================================
Total profit or loss for reportable segments $144,539 $133,116 $107,084
Elimination of intersegment revenues (90,260) (81,375) (69,691)
Elimination of taxable equivalent adjustment (5,737) (5,170) (4,388)
-----------------------------------------
Income before income taxes $ 48,542 $ 46,571 $ 33,005
=========================================
For purposes of performance measurement and therefore for the segment disclosure
above, income from tax-exempt securities, loans, and leases are reported on a
fully taxable equivalent basis. Under this method of disclosure, the income
disclosed is increased to that amount which, if taxed, would result in the
amount included in the financial statements.
Fixed assets used by the Northern Region segment are included in its asset
totals. Fixed assets used by the other segments are all recorded as assets of
the All Other segment. Depreciation expense of these assets is charged to the
segment that uses them.
The Company has no operations in foreign countries to require disclosure by
geographical area. The Company has no single customer generating 10% or more of
total revenues.
For the Company, the process of disaggregation is somewhat arbitrary. Many of
the Company's customers do business with more than one segment. Because the
Company uses relationship pricing whereby the customer may be given a favorable
price on one product because the other products that he or she makes use of are
very profitable for the Company. To the extent that these products are in
different segments as defined above, one segment may be sacrificing
profitability to another for the sake of the overall customer relationship.
21. Pacific Capital Bancorp
The condensed financial statements of the Bancorp are presented on the following
two pages.
PACIFIC CAPITAL BANCORP
(Parent Company Only)
Balance Sheets
(in thousands)
December 31
1998 1997
-------------------------
Assets
Cash $ 2,176 $ 1,494
Investment in and advances to subsidiaries 205,362 184,720
Loans, net 2,966 259
Premises and equipment, net 3,507 3,500
Other assets 12,591 5,407
-------------------------
Total assets $226,602 $195,380
=========================
Liabilities
Dividends payable $ 4,358 $ 1,982
Other liabilities 8,244 2,674
-------------------------
Total liabilities 12,602 4,656
-------------------------
Equity
Common stock 8,071 7,851
Surplus 95,498 88,454
Unrealized gain on securities available-for-sale 3,496 1,768
Retained earnings 106,935 92,651
-------------------------
Total shareholders' equity 214,000 190,724
-------------------------
Total liabilities and shareholders' equity $226,602 $195,380
=========================
PACIFIC CAPITAL BANCORP
(Parent Company Only)
Income Statements
(in thousands)
Year Ended December 31
1998 1997 1996
---------------------------------------------
Equity in earnings of subsidiaries:
Undistributed $18,914 $ 6,211 $ 9,459
Dividends 18,575 24,744 13,175
Interest income 181 43 142
Other income 601 -- --
Other operating expense (13,006) (1,744) (1,601)
Income tax benefit 4,302 1,029 529
---------------------------------------------
Net income $29,567 $30,283 $21,704
=============================================
PACIFIC CAPITAL BANCORP
(Parent Company Only)
Statements of Cash Flows
(in thousands)
Year Ended December 31
1998 1997 1996
-------------------------------------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $29,567 $30,283 $21,704
Adjustments to reconcile net income to net
cash used in operations:
Equity in undistributed net income
of subsidiaries (37,489) (30,955) (22,634)
Increase in other assets (7,739) (4,409) (421)
Increase in other liabilities 8,611 2,209 154
-------------------------------------------
Net cash used in operating activities (7,050) (2,872) (1,197)
-------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in loans (2,238) 834 110
Capital expenditures -- (386) (1,157)
Capital contribution to subsidiary -- (125) (25)
Purchase of capital stock of First Valley
Bank and Citizens State Bank -- (42,270) --
Distributed earnings of subsidiaries 18,575 57,066 13,175
-------------------------------------------
Net cash provided by investing activities 16,337 15,119 12,103
-------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 8,094 2,779 1,409
Payments to retire common stock (3,792) (5,468) (5,587)
Dividends paid (12,907) (9,668) (7,075)
-------------------------------------------
Net cash used in financing activities (8,605) (12,357) (11,253)
-------------------------------------------
Net increase (decrease) in cash and cash equivalents 682 (110) (347)
Cash and cash equivalents at beginning of period 1,494 1,604 1,951
===========================================
Cash and cash equivalents at end of period $ 2,176 $ 1,494 $ 1,604
===========================================
Supplemental disclosures:
Non-cash investing and financing activities:
Transfer from retained earnings to common
stock due to stock dividend $ -- $ 9,000 $ 5,348
Quarterly Financial Data (Unaudited)
1998 Quarters 1997 Quarters
------------------------------------------------ ------------------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
----------- ----------- ----------- ------------ ----------- ----------- ----------- -----------
Interest income $49,645 $47,184 $46,021 $ 50,666 $43,847 $40,708 $40,075 $43,520
Interest expense 17,227 17,543 16,761 16,582 16,661 15,400 14,923 13,606
Net interest income 32,418 29,641 29,260 34,084 27,186 25,308 25,152 29,914
Provision for
credit losses 1,095 1,095 984 5,949 610 1,073 1,975 4,842
Noninterest income 7,779 8,243 8,259 11,691 7,327 6,650 6,802 7,721
Noninterest expense 35,261 23,267 22,479 22,703 23,029 20,037 18,813 19,110
Income before
income taxes 3,841 13,522 14,056 17,123 10,874 10,848 11,166 13,683
Income taxes 2,430 5,078 5,065 6,402 3,678 3,820 3,986 4,804
Net income $ 1,411 $ 8,444 $ 8,991 $ 10,721 $ 7,196 $ 7,028 $ 7,180 $ 8,879
Net earnings per share:
Basic $0.06 $0.35 $0.38 $0.45 $0.31 $0.30 $0.30 $0.38
Diluted $0.06 $0.34 $0.37 $0.44 $0.29 $0.29 $0.30 $0.37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is incorporated herein by reference to the
Company's definitive Proxy Statement for the annual meeting to be held May 18,
1999 ("Proxy Statement"), pages 4-6 and 8.
Item 11. Executive Compensation
The information required by Item 11 is incorporated herein by reference to the
Company's Proxy Statement, pages 10-18.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated herein by reference to the
Company's Proxy Statement, pages 8-10.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated herein by reference to the
Company's Proxy Statement, page 33.
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K
(a)1. FINANCIAL STATEMENTS
The listing of financial statements required by this item is set
forth in the index for Item 8 of this report.
(a)2. FINANCIAL STATEMENTS SCHEDULES
The listing of supplementary financial statement schedules required
by this item is set forth in the index for Item 8 of this report.
(a)3. EXHIBITS
The listing of exhibits required by this item is set forth in the
Exhibit Index on page 85 of this report. Each management contract or
compensatory plan or arrangement required to be filed as an exhibit
to this report is listed under Item 10.1 "Compensation Plans and
Agreements," in the Exhibit Index.
(b) REPORTS ON FORM 8-K
One report on Form 8-K was filed during the fourth quarter of the
fiscal year ended December 31, 1998. The Company's Year 2000
readiness was reported on Form 8-K filed with the Commission on
December 3, 1998.
(c) EXHIBITS
See exhibits listed in "Exhibit Index" on page 85 of this report.
(d) FINANCIAL STATEMENT SCHEDULES
There are no financial statement schedules required by Regulation
S-X that have been excluded from the annual report to shareholders.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed by the
undersigned, thereunto duly authorized.
Pacific Capital Bancorp
By /s/ David W. Spainhour 4/6/99
David W. Spainhour date
President
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
/s/ Donald M. Anderson 4/6/99 /s/ David W. Spainhour 4/6/99
Donald M. Anderson date David W. Spainhour date
Chairman of the Board President
Director Director
/s/ William S. Thomas 4/6/99 /s/ Donald Lafler 4/6/99
William S. Thomas, Jr. date Donald Lafler date
Vice Chairman Senior Vice President
Chief Operating Officer Chief Financial Officer
/s/ Frank H. Barranco, M.D. 4/6/99 /s/ Edward E. Birch 4/6/99
Frank H. Barranco, M.D. date Edward E. Birch date
Director Director
/s/ Richard M. Davis 4/6/99 /s/ Anthony Guntermann 4/6/99
Richard M. Davis date Anthony Guntermann date
Director Director
/s/ Dale E. Hanst 4/6/99 /s/ Harry B. Powell 4/6/99
Dale E. Hanst date Harry B. Powell date
Director Director
/s/ Terrill F. Cox 4/6/99 /s/ Susan Trescher 4/6/99
Terrill F. Cox date Susan Trescher date
Director Director
/s/ D. Vernon Horton 4/6/99 /s/ Clayton C. Larson 4/6/99
D. Vernon Horton date Clayton C. Larson date
Vice Chairman Vice Chairman
/s/ William H. Pope 4/6/99 /s/ Roger C. Knopf 4/6/99
William H. Pope date Roger C. Knopf date
Director Director
EXHIBIT INDEX TO PACIFIC CAPITAL BANCORP FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Exhibit
Number Description *
2. Agreement and Plan of Reorganization by and between Santa Barbara Bancorp
and Pacific Capital Bancorp dated July 20, 1998 (1)
3. Articles of incorporation and bylaws:
3.1 Certificate of Restatement of Articles of Incorporation of Pacific
Capital Bancorp dated January 27, 1999. (2)
3.2 Amended and Restated Bylaws of Pacific Capital Bancorp effective
January 26, 1999. (2)
10. Material contracts
10.1 Compensation Plans and Agreements:
10.1.1 Pacific Capital Bancorp Amended and Restated Restricted
Stock Option Plan as amended effective December 17,
1996. (3)
10.1.1.1 Pacific Capital Bancorp Restricted Stock Option
Agreement (Incentive Stock Option). (3)
10.1.1.2 Pacific Capital Bancorp Restricted Stock Option
Agreement (Nonstatutory Stock Option -
5 Year). (3)
10.1.1.3 Pacific Capital Bancorp Restricted Stock Option
Agreement (Nonstatutory Stock Option -
10 Year). (3)
10.1.1.4 Pacific Capital Bancorp Restricted Stock Option
Agreement (Incentive Reload Option). (3)
10.1.1.5 Pacific Capital Bancorp Restricted Stock Option
Agreement (Non-statutory Reload Option). (3)
10.1.2 Pacific Capital Bancorp Directors Stock Option Plan
(incorporated by reference to Exhibit 4.2 to Post-
Effective Amendment No. One to Santa Barbara Bancorp's
Registration Statement on Form S-8, filed on June 13,
1995, Registration No. 33-48724).
10.1.3 Pacific Capital Bancorp Stock Option Plan (incorporated
by reference to Exhibit 4.2 to Santa Barbara Bancorp's
Registration Statement on Form S-8, filed on October 28,
1991, Registration No. 33-43560).
10.1.4 Pacific Capital Bancorp Incentive & Investment and
Salary Savings Plan, as amended and restated effective
January 1, 1998.**
10.1.5 Pacific Capital Bancorp Employee Stock Ownership Plan
and Trust, as amended and restated effective January 1,
1998.**
10.1.6 Santa Barbara Bank & Trust Key Employee Retiree Health
Plan incorporated by reference to Exhibit 10.1.8 to
Santa Barbara Bancorp's Annual Report on Form 10-K (File
No. 0-11113) for fiscal year ended December 31, 1993).
10.1.6.1 First Amendment to Santa Barbara Bank & Trust Key
Employee Retiree Health Plan. (5)
10.1.6.2 Second Amendment to Santa Barbara Bank & Trust
Key Employee Retiree Health Plan. (5)
10.1.7 Santa Barbara Bank & Trust Retiree Health Plan (Non-Key
Employees) (incorporated by reference to Exhibit 10.1.9
to Santa Barbara Bancorp's Annual Report on Form 10-K
(File No. 0-11113) for the fiscal year ended December
31, 1993).
10.1.7.1 First Amendment to Santa Barbara Bank & Trust
Retiree Health Plan (Non-Key Employees). (5)
10.1.7.2 Second Amendment to Santa Barbara Bank & Trust
Retiree Health Plan (Non-Key Employees). (5)
10.1.8 Trust Agreement of Santa Barbara Bank & Trust Voluntary
Beneficiary Association. (5)
10.1.8.1 First Amendment to Trust Agreement of Santa
Barbara Bank & Trust Voluntary Beneficiary
Association. (4)
10.1.9 Santa Barbara Bancorp 1996 Directors Stock Option Plan,
as amended March 24, 1998. **
10.1.9.1 Santa Barbara Bancorp 1996 Directors Stock Option
Agreement. (3)
10.1.9.2 Santa Barbara Bancorp 1996 Directors Stock Option
Agreement (Reload Option). (3)
10.1.11 Pacific Capital Bancorp Directors' Stock Option Plan and
Form of Stock Option Agreement (incorporated by
reference to Exhibit 10.25 to Pacific Capital Bancorp's
Annual Report on Form 10-K (File No. 0-13528) for the
fiscal year ended December 31, 1991).
10.1.12 Pacific Capital Bancorp 1984 Stock Option Plan and Forms
of Agreements as amended to date (incorporated by
reference to Exhibit 10.27 to Pacific Capital Bancorp's
Annual Report on Form 10-K (File No. 0-13528) for the
fiscal year ended December 31, 1991).
10.1.13 Pacific Capital Bancorp 1994 Stock Option Plan, as
amended, and Forms of Incentive and Non-Qualified Stock
Option Agreements (incorporated by reference to Exhibit
4 to Pacific Capital Bancorp's Amendment No. 1 to
Registration Statement on Form S-8 (Registration No.
33-83848) filed on November 15, 1994).
10.1.14 Pacific Capital Bancorp 401(k) Profit Sharing Plan. (7)
10.1.15 Employment Agreement dated November 20, 1996 between
South Valley National Bank and Brad L. Smith (9) ***
10.1.16 Employment Agreement dated August 26, 1997 between
Pacific Capital Bancorp and Clayton C. Larson (10) ***
10.1.17 Employment Agreement dated August 26, 1997 between
Pacific Capital Bancorp and D. Vernon Horton (10) ***
10.1.18 Employment Agreement dated August 26, 1997 between
Pacific Capital Bancorp and Dennis A. DeCius (10) ***
10.1.19 Employment Agreement dated August 26, 1997 between
Pacific Capital Bancorp and Dale R. Diederick (10) ***
10.1.20 Amended and Restated Executive Salary Continuation
Agreement dated September 23, 1997 between Pacific
Capital Bancorp and Clayton C. Larson (10) ***
10.1.21 Amended and Restated Executive Salary Continuation
Agreement dated September 23, 1997 between Pacific
Capital Bancorp and D. Vernon Horton (10) ***
10.1.22 Amended and Restated Executive Salary Continuation
Agreement dated September 23, 1997 between Pacific
Capital Bancorp and Dennis A. DeCius (10) ***
10.1.23 Amended and Restated Executive Salary Continuation
Agreement dated September 23, 1997 between Pacific
Capital Bancorp and Dale R. Diederick (10) ***
10.1.24 Pacific Capital Bancorp Management Retention Plan
as amended through January 11, 1999**
10.2 Consolidated Agreement dated December 17, 1991 by and between First
National Bank of Central California and Unisys with Equipment Sale
Agreement, Software License Agreement and Product License Agreement
by and between First National Bank of Central California and
Information Technology, Inc. (6)
13. Portions of Annual Report to Security Holders
21. Subsidiaries of the registrant
23. Consents of Experts and Counsel
23.1 Consent of Arthur Andersen LLP with respect to financial statements
of the Registrant
23.2 Consent of KPMG LLP with respect to financial statements of the
Registrant
27. Financial Data Schedules
27.1998 Financial Data Schedule for 1998
27.1997 Restated Financial Data Schedule for 1997
27.1996 Restated Financial Data Schedule for 1996
The Financial Data Schedules for 1997 and 1996 are restated to reflect the
pooling of interests described in Note 1 to the accompanying Financial
Statements.
Shareholders may obtain a copy of any exhibit by writing to:
Clare McGivney, Corporate Services Administrator
Pacific Capital Bancorp
P.O. Box 1119
Santa Barbara, CA 93102
* Effective December 30, 1998, Santa Barbara Bancorp and Pacific Capital
Bancorp merged and contemporaneously with effectiveness of the merger,
Santa Barbara Bancorp, the surviving entity, changed its corporate name to
Pacific Capital Bancorp. Documents identified as filed by Santa Barbara
Bancorp prior to December 30, 1998 were filed by Santa Barbara Bancorp.
Documents identified as filed by Pacific Capital Bancorp prior to December
30, 1998 were filed by Pacific Capital Bancorp as it existed prior to the
merger.
** Filed herewith.
*** Agreements were terminated effective December 30, 1998 upon the merger of
Santa Barbara Bancorp with Pacific Capital Bancorp.
The Exhibits listed below are incorporated by reference to the specified filing.
(1) Filed as Appendix A to Proxy Statement filed by Santa Barbara Bancorp in
Amendment No. 1 to Registration Statement on Form S-4 (registration
No. 333-64093) filed November 4, 1998.
(2) Filed as Exhibits 4.1 and 4.2 to the Registration Statement on Form S-8 of
Pacific Capital Bancorp (Registration No. 333-74831) filed March 18, 1999.
(3) Filed as Exhibits 10.1.1 through 10.1.1.5 and 10.1.10 through 10.1.10.2 to
Annual Report on Form 10-K of Santa Barbara Bancorp (File No.0-11113) for
fiscal year ended December 31, 1996.
(4) Filed as an Exhibit to Annual Report on Form 10-K of Santa Barbara Bancorp
(File No.0-11113) for fiscal year ended December 31, 1995
(5) Filed as an Exhibit to Annual Report on Form 10-K of Santa Barbara Bancorp
(File No.0-11113) for the fiscal year ended December 31, 1997.
(6) Filed as Exhibits 10.23 through 10.34 to the Annual Report of Pacific
Capital Bancorp on Form 10-K (File No. 0-13528) for the fiscal year ended
December 31, 1991.
(7) Filed as Exhibits to the Annual Report on Form 10-K of Pacific Capital
Bancorp (File No. 0-13528) for the fiscal year ended December 31, 1994.
(8) Filed as Exhibits to the Annual Report on Form 10-K of Pacific Capital
Bancorp (File No. 0-13528) for the fiscal year ended December 31, 1995.
(9) Filed as an Exhibit to the Annual Report on Form 10-K of Pacific Capital
Bancorp (File No. 0-13528) for the fiscal year ended December 31, 1996.
(10) Filed as Exhibits to the Quarterly Report on Form 10-Q of Pacific Capital
Bancorp (File No. 0-13528) for the fiscal quarter ended September 30,
1997.
EXHIBIT 10.1.4
PACIFIC CAPITAL BANCORP
AMENDED AND RESTATED
INCENTIVE & INVESTMENT AND SALARY SAVINGS PLAN
January 1, 1998
PACIFIC CAPITAL BANCORP
INCENTIVE & INVESTMENT AND SALARY SAVINGS PLAN
THIS AMENDED AND RESTATED INCENTIVE & INVESTMENT AND SALARY SAVINGS PLAN is
made and entered into, effective on the date set forth below, by SANTA BARBARA
BANK & TRUST, a California corporation, as "Employer" for periods prior to
January 1, 1999 (for such periods, the "Employer") and PACIFIC CAPITAL BANCORP,
a California corporation formerly known as "Santa Barbara Bancorp," as
"Employer" for periods on an after January 1, 1999 (for such periods, the
"Employer"), with reference to the following facts:
RECITALS:
A. PACIFIC CAPITAL BANCORP, a California corporation ("Parent") owns all
the outstanding shares of the capital stock of SANTA BARBARA BANK & TRUST, a
California corporation (the "Bank").
B. Effective January 1, 1966, the Bank established the "Santa Barbara Bank
& Trust Incentive & Investment Plan (the "Prior Plan") to recognize the
contributions made to the Bank's successful operation by its employees and for
the exclusive benefit of its eligible employees.
C. Effective January 1, 1989, the Bank amended and restated the Prior Plan
to reflect certain changes in the law and in the operation of the Plan and to
rename the Plan the "Incentive & Investment and Salary Savings Plan" (as so
amended, the "Plan").
D. Since the date of that most recent amendment and restatement, (i) there
have been certain changes in the laws applicable to the Plan, (ii) the Employer
has adopted certain amendments to the Plan to reflect changes in the operation
of the Plan, and (iii) the Employer has acquired certain wholly owned
subsidiaries.
E. The Employer desires to adopt this Amended and Restated Plan document in
order to incorporate all prior amendments to the Plan, to reflect the current
provisions of law applicable to the Plan, and to reward and provide incentives
for all employees of Employer and each of its Affiliated Employers.
NOW, THEREFORE, the Employer hereby amends and restates the Plan in its
entirety to provide as follows:
1. DEFINITIONS
1.1 "Act" means the Employee Retirement Income Security Act of 1974, as it
may be amended from time to time.
1.2 "Administrator" means the person designated by the Employer pursuant to
Section 2.4 to administer the Plan on behalf of the Employer.
1.3 "Affiliated Employer" means any corporation which is a member of a
controlled group of corporations (as defined in Code Section 414(b)) which
includes the Employer; any trade or business (whether or not incorporated) which
is under common control (as defined in Code Section 414(c)) with the
-1-
Employer; any organization (whether or not incorporated) which is a member of an
affiliated service group (as defined in Code Section 414(m)) which includes the
Employer; and any other entity required to be aggregated with the Employer
pursuant to Regulations under Code Section 414(o).
1.4 "Aggregate Account" means, with respect to each Participant, the value
of all accounts maintained on behalf of a Participant, whether attributable to
Employer or Employee contributions, subject to the provisions of Section 2.2.
1.5 "Anniversary Date" means December 31st.
1.6 "Beneficiary" means the person to whom a share of a deceased
Participant's total account is payable, subject to the restrictions of Sections
6.2 and 6.6, below.
1.7 "Code" means the Internal Revenue Code of 1986, as amended or replaced
from time to time.
1.8 "Compensation" with respect to any Participant means such Participant's
wages as defined in Code Section 3401(a) and all other payments of compensation
by the Employer (in the course of the Employer's trade or business) for a Plan
Year for which the Employer is required to furnish the Participant a written
statement under Code Sections 6041(d), 6051(a)(3) and 6052. Compensation must be
determined without regard to any rules under Code Section 3401(a) that limit the
remuneration included in wages based on the nature or location of the employment
or the services performed (such as the exception for agricultural labor in Code
Section 3401(a)(2)).
1.8.1 For purposes of this Section, the determination of Compensation
shall be made by (a) including amounts which are contributed by the Employer
pursuant to a salary reduction agreement and which are not includible in the
gross income of the Participant under Code Sections 125, 402(a)(8), 402(h),
403(b) or 457, and Employee contributions described in Code Section 414(h)(2)
that are treated as Employer contributions, and (b) excluding any taxable income
arising by reason of the Participant's exercise of options to purchase the
capital stock of Employer or any Affiliated Employer.
1.8.2 For a Participant's initial year of participation, Compensation
shall be recognized as of such Employee's effective date of participation
pursuant to Section 3.3.
1.8.3 For the Plan Years beginning on or after January 1, 1994, the
annual Compensation of each Employee taken into account under this Plan shall
not exceed the One Hundred Fifty Thousand Dollars ($150,000), as adjusted by the
Internal Revenue Service for cost of living increases in accordance with Code
Section 401(a)(17)(B).
A. The cost of living adjustment in effect for a calendar year
applies to any period which begins in that calendar year, does not exceed twelve
months, and for which Compensation is required to be determined (the
"determination period"). If a determination period consists of fewer than twelve
(12) months, then the annual compensation limit for such period shall be
$150,000 (or such greater amount determined in accordance with Code Section
401(a)(17)(B)), multiplied by a fraction, the numerator of which is the number
of months in such determination period, and the denominator of which is twelve
(12). For the Plan Years beginning on or after January 1, 1994, any reference in
this Plan to the limitation under Code Section 401(a)(17)(B) shall mean such
$150,000 limit (as adjusted pursuant to Code Section 401(a)(17)(B)) set forth in
this Section 1.8.3.
-2-
B. If an Employee's benefits accruing in any Plan Year are
determined by reference to the Employee's Compensation for any determination
period commencing prior to such Plan Year, then the Compensation for such prior
determination period shall be subject to the $150,000 limit (as adjusted
pursuant to Code Section 401(a)(17)(B)) in effect for that prior determination
period. For any such determination period beginning prior to the first day of
the first Plan Year beginning on or after January 1, 1994, the annual
compensation limit under this Section 1.8.3 shall be $150,000.
1.8.4. If, in connection with the adoption of this amendment and
restatement, the definition of Compensation has been modified, then, for Plan
Years prior to the Plan Year which includes the adoption date of this amendment
and restatement, Compensation means compensation determined pursuant to the Plan
then in effect.
1.9 "Contract" or "Policy" means any life insurance policy, retirement
income or annuity policy, or annuity contract (group or individual) issued
pursuant to the terms of the Plan.
1.10 "Deferred Compensation" with respect to any Participant means the
amount of the Participant's total Compensation which has been contributed to the
Plan in accordance with the Participant's deferral election pursuant to Section
4.2 excluding any such amounts distributed as excess "annual additions" pursuant
to Section 4.10.1.
1.11 "Early Retirement Date" means the first day of the month (prior to the
Normal Retirement Date) coinciding with or following the date on which a
Participant or Former Participant attains age 55 ("Early Retirement Age") and
has completed at least 20 years of service with the Employer. A Participant
shall become fully Vested upon satisfying this requirement if still employed at
his Early Retirement Age. A Former Participant who terminates employment after
satisfying such 20-year service requirement and who thereafter attains age 55
shall be entitled to receive his benefits under this Plan.
1.12 "Elective Contribution" means the Employer's contributions to the Plan
that are made pursuant to the Participant's deferral election provided in
Section 4.2, below. In addition, any Employer Qualified Non-Elective
Contribution made pursuant to Section 4.6 shall be considered an Elective
Contribution for purposes of the Plan. Any such contributions deemed to be
Elective Contributions shall be subject to the requirements of Sections 4.2.2
and 4.2.3 and shall further be required to satisfy the discrimination
requirements of Regulation 1.401(k)-l(b)(3), the provisions of which are
specifically incorporated herein by reference.
1.13 "Eligible Employee" means any Employee, except that:
1.13.1 Employees who are Leased Employees within the meaning of Code
Sections 414(n)(2) and 414(o)(2) shall not be eligible to participate in this
Plan.
1.13.2 Employees of Affiliated Employers shall not be eligible to
participate in this Plan unless such Affiliated Employers have specifically
adopted this Plan in writing.
1.14 "Employee" means any person who is employed by the Employer or an
Affiliated Employer, but excludes any person who is an independent contractor.
Employee shall include Leased Employees within the meaning of Code Sections
414(n)(2) and 414(o)(2) unless such Leased Employees are covered by a plan
described in Code Section 414(n)(5) and such Leased Employees do not constitute
more than 20% of the recipient's non-highly compensated work force.
-3-
1.15 "Employer" means (a) for Plan Years commencing prior to January 1,
1999, SANTA BARBARA BANK & TRUST, a California corporation, and (b) for Plan
Years commencing on or after January 1, 1999, PACIFIC CAPITAL BANCORP, a
California corporation, and any successor which shall maintain this Plan; and
any predecessor which has maintained this Plan. The Employer is a corporation,
with principal offices in the State of California.
1.16 "Excess Aggregate Contributions" means, with respect to any Plan Year,
the excess of the aggregate amount of the voluntary Employee contributions made
pursuant to Section 4.12, Excess Contributions recharacterized as voluntary
Employee contributions pursuant to Section 4.6.1 and any qualified non-elective
contributions or elective deferrals taken into account pursuant to Section 4.7.3
on behalf of Highly Compensated Participants for such Plan Year, over the
maximum amount of such contributions permitted under the limitations of Section
4.7.1, below.
1.17 "Excess Contributions" means, with respect to a Plan Year, the excess
of Elective Contributions made on behalf of Highly Compensated Participants for
the Plan Year over the maximum amount of such contributions permitted under
Section 4.5.1, below. Excess Contributions, including amounts recharacterized
pursuant to Section 4.6.1(C), below, shall be treated as an "annual addition"
pursuant to Section 4.9.1, below.
1.18 "Excess Deferred Compensation" means, with respect to any taxable year
of a Participant, the excess of the aggregate amount of such Participant's
Deferred Compensation and the elective deferrals pursuant to Section 4.2.6 below
actually made on behalf of such Participant for such taxable year, over the
dollar limitation provided for in Code Section 402(g), which is incorporate
herein by reference. Excess Deferred Compensation shall be treated as an "annual
addition" pursuant to Section 4.9.2, below, when contributed to the Plan unless
distributed to the affected Participant not later than the next succeeding April
15th following the close of the Participant's taxable year. Additionally, for
purposes of Sections 2.2 and 4.4.4, below, Excess Deferred Compensation shall
continue to be treated as Employer contributions even if distributed pursuant to
Section 4.2.6, below. However, Excess Deferred Compensation of Non Highly
Compensated Participants is not taken into account for purposes of Section
4.5.1, above, to the extent such Excess Deferred Compensation occurs pursuant to
Section 4.2.4, below.
1.19 "Fiduciary" means any person who (a) exercises any discretionary
authority or discretionary control respecting management of the Plan or
exercises any authority or control respecting management or disposition of its
assets, (b) renders investment advice for a fee or other compensation, direct or
indirect, with respect to any monies or other property of the Plan or has any
authority or responsibility to do so, or (c) has any discretionary authority or
discretionary responsibility in the administration of the Plan, including, but
not limited to, the Trustee, the Employer and its representative body, and the
Administrator.
1.20 "Fiscal Year" means each period of 12 months commencing on January 1st
and ending on December 31st.
1.21 "Forfeiture" means that portion of a Participant's Account that is not
Vested, and occurs on the earlier of (a) the distribution of the entire Vested
portion of the Participant's Account, or (b) the last date of the Plan Year in
which the Participant incurs five (5) consecutive 1-Year Breaks in Service.
Furthermore, for purposes of the foregoing clause (a), in the case of a
Terminated Participant whose Vested Benefit is zero, such Terminated Participant
shall be deemed to have received a distribution of the Participant's Vested
Benefit upon his termination of employment. Restoration of such amount shall
occur pursuant to Section 6.4, below. In addition, the term "Forfeiture" also
shall include such amounts that are deemed to be Forfeitures pursuant to any
other provisions of this Plan.
-4-
1.22 "Former Participant" means a person who has been a Participant, but
who has ceased to be a Participant for any reason.
1.23 "415 Compensation" with respect to any Participant means such
Participant's wages as defined in Code Section 3401(a) and all other payments of
compensation by the Employer (in the course of the Employer's trade or business)
for a Plan Year for which the Employer is required to furnish the Participant a
written statement under Code Sections 6041(d), 6051(a)(3) and 6052, and
effective with the Plan Years beginning on or after January 1, 1998, shall
include (a) all "Elected Deferrals" (as defined in Code Section 402(g)(3), and
(b) any other amount which is contributed or deferred at the election of the
Employee that is not includable in the gross income of the Employee by reason of
Code Section 125 or 457. "415 Compensation" must be determined without regard to
any rules under Code Section 3401(a) that limit the remuneration included in
wages based on the nature or location of the employment or the services
performed (such as the exception for agricultural labor in Code Section
3401(a)(2)). If, in connection with the adoption of this amendment and
restatement, the definition of "415 Compensation" has been modified, then, for
Plan Years prior to the Plan Year which includes the adoption date of this
amendment and restatement, "415 Compensation" means compensation determined
pursuant to the Plan then in effect.
1.24 "414(s) Compensation" means "415 Compensation" paid during a Plan Year
plus, for the Plan Years commencing prior to January 1, 1998, the Participant's
Elective Contributions attributable to Deferred Compensation recharacterized as
voluntary Employee contributions pursuant to Section 4.6(a). The amount of
"414(s) Compensation" with respect to any Participant shall include "414(s)
Compensation" for the entire twelve (12) month period ending on the last day of
such Plan Year, except that "414(s) Compensation" shall only be recognized for
that portion of the Plan Year during which an Employee was a Participant in the
Plan.
1.24.1 For purposes of this Section, the determination of "414(s)
Compensation" shall be made by including amounts which are contributed by the
Employer pursuant to a salary reduction agreement and which are not includible
in the gross income of the Participant under Code Sections 125, 402(a)(8),
402(h), 403(b) or and 457, Employee contributions described in Code Section
414(h)(2) that are treated as Employer contributions.
1.24.2 In addition to other limitations set forth in this Plan, and
notwithstanding any other provision of this Plan to the contrary, for Plan Years
beginning on or after January 1, 1994, the annual Compensation of each Employee
taken into account under this Plan shall not exceed $150,000, as adjusted by the
Internal Revenue Service pursuant to Code Section 401(a)(17)(B). The cost of
living adjustment in effect for a calendar year applies to any period which
begins in that year, does not exceed twelve (12) months, and for which
Compensation is being determined (the "determination period"). If a
determination period consists of fewer than twelve (12) months, then the
limitation in effect under this Section 1.25.2 shall be equal to such $150,000
amount (as adjusted pursuant to Code Section 401(a)(17)(B)), multiplied by a
fraction, the numerator of which is the number of months in such determination
period, and the denominator of which is twelve (12). For Plan Years beginning on
or after January 1, 1994, any reference in this Plan to the limitation under
Code Section 401(a)(17) shall mean the annual compensation limit described in
this Section 1.25.2. If an Employee's benefits accruing in a Plan Year are
determined by reference to the Employee's Compensation for any prior
determination period, then the Compensation for that prior determination period
shall be subject to the limit in effect under Code Section 401(a)(17) for that
prior determination period. For this purpose, for any determination period
beginning prior to the first day of the first Plan Year beginning on or after
January 1, 1994, the annual compensation limit shall be $150,000.
-5-
1.24.3 If, in connection with the adoption of this amendment and
restatement, the definition of "414(s) Compensation" has been modified, then,
for Plan Years prior to the Plan Year which includes the adoption date of this
amendment and restatement, "414(s) Compensation" means compensation determined
pursuant to the Plan then in effect.
1.25 "Highly Compensated Employee" means an Employee who either (a) during
the current Plan Year or the immediately preceding Plan Year, was a "five
percent owner" (as defined in Section 1.32.3C, below), or (b) for the preceding
year, either (i) received 415 Compensation from the Employer in excess of Eighty
Thousand Dollars ($80,000) (as such amount is adjusted from time-to-time
pursuant to Code Section 414(g)(1), or (ii) in accordance with an election by
the Employer to apply this clause (b)(ii) of this Section 1.25 for any Plan
Year, was in the "Top Paid Group" of Employees for such preceding year. For Plan
Years beginning after December 31, 1996, and prior to January 1, 1998, the
determination of "415 Compensation" under this Section 1.25 shall be made by
including amounts that otherwise would be excluded from a Participant's gross
income by reason of the application of Code Sections 125, 402(e)(3),
402(h)(1)(B) and, in the case of Employer contributions made pursuant to a
salary reduction agreement, by including amounts that would otherwise be
excluded from a Participant's gross income by reason of the application of Code
Section 403(b).
1.26 "Highly Compensated Former Employee" means a former Employee who had a
separation year prior to the "determination year" and was a Highly Compensated
Employee in the year of separation from service or in any "determination year"
after attaining age 55. Notwithstanding the foregoing, an Employee who separated
from service prior to 1987 will be treated as a Highly Compensated Former
Employee only if during the separation year (or year preceding the separation
year) or any year after the Employee attains age 55 (or the last year ending
before the Employee's 55th birthday), the Employee either received "415
Compensation" in excess of $50,000 or was a "five percent owner." For purposes
of this Section, "determination year," "415 Compensation" and "five percent
owner" shall be determined in accordance with Section 1.26. Highly Compensated
Former Employees shall be treated as Highly Compensated Employees. The method
set forth in this Section for determining who is a "Highly Compensated Former
Employee" shall be applied on a uniform and consistent basis for all purposes
for which the Code Section 414(q) definition is applicable.
1.27 "Highly Compensated Participant" means any Highly Compensated Employee
who is eligible to participate in the Plan.
1.28 "Hour of Service" means (a) each hour for which an Employee is
directly or indirectly compensated or entitled to compensation by the Employer
for the performance of duties during the applicable computation period; (b) each
hour for which an Employee is directly or indirectly compensated or entitled to
compensation by the Employer (irrespective of whether the employment
relationship has terminated) for reasons other than performance of duties (such
as vacation, holidays, sickness, jury duty, disability, lay-off, military duty
or leave of absence) during the applicable computation period (c) each hour for
which back pay is awarded or agreed to by the Employer without regard to
mitigation of damages. These hours will be credited to the Employee for the
computation period or periods to which the award or agreement pertains rather
than the computation period in which the award, agreement or payment is made.
The same Hours of Service shall not be credited both under (a) or (b), as the
case may be, and under (c).
1.28.1 Notwithstanding the above, (i), no more than 501 Hours of
Service are required to be credited to an Employee on account of any single
continuous period during which the Employee performs no duties (whether or not
such period occurs in a single computation period); (ii) an hour for which an
Employee is directly or indirectly paid, or entitled to payment, on account of a
period during
-6-
which no duties are performed is not required to be credited to the Employee if
such payment is made or due under a plan maintained solely for the purpose of
complying with applicable worker's compensation, or unemployment compensation,
or disability insurance laws; and (iii) Hours of Service are not required to be
credited for a payment which solely reimburses an Employee for medical or
medically-related expenses incurred by the Employee.
1.28.2 For purposes of this Section 1.28, a payment shall be deemed to
be made by or due from the Employer regardless of whether such payment is made
by or due from the Employer directly or indirectly through, among others, a
trust fund or insurer to which the Employer contributes or pays premiums and
regardless of whether contributions made or due to the trust fund, insurer, or
other entity are for the benefit of particular Employees or are on behalf of a
group of Employees in the aggregate.
1.28.3 An Hour of Service must be counted for the purpose of
determining a Year of Service, a year of participation for purposes of accrued
benefits, a 1-Year Break in Service, and employment commencement date (or
re-employment commencement date). In addition, Hours of Service will be credited
for employment with other Affiliated Employers. The provisions of Department of
Labor regulations 2530.200b-2(b) and (c) are incorporated herein by reference.
1.29 "Income" means the income allocable to "excess amounts" which shall
equal the sum of the allocable gain or loss for the "applicable computation
period" and the allocable gain or loss for the period between the end of the
"applicable computation period" and the date of distribution ("gap period"). The
income allocable to "excess amounts" for the "applicable computation period" and
the "gap period" is calculated separately and is determined by multiplying the
income for the "applicable computation period" or the "gap period" by a
fraction. The numerator of the fraction is the "excess amount" for the
"applicable computation period". The denominator of the fraction is the total
"account balance" attributable to "Employer contributions" as of the end of the
"applicable computation period" or the "gap period", reduced by the gain
allocable to such total amount for the "applicable computation period" or the
"gap period" and increased by the loss allocable to such total amount for the
"applicable computation period" or the "gap period". The provisions of this
Section shall be applied:
1.29.1 For purposes of Section 4.2.6, by substituting:
A. "Excess Deferred Compensation" for "excess amounts";
B. "taxable year of the Participant" for "applicable computation
period";
C. "Deferred Compensation" for "Employer contributions"; and
D. "Participant's Elective Account" for "account balance".
1.29.2 For purposes of Section 4.6.1, by substituting:
A. "Excess Contributions" for "excess amount";
B. "Plan Year" for "applicable computation period";
C. "Elective Contributions" for "Employer contributions"; and
D. "Participant's Elective Account" for "account balance".
-7-
1.29.3 For purposes of Section 4.8.1, by substituting:
A. "Excess Aggregate Contributions" for "excess amounts";
B. "Plan Year" for "applicable computation period";
C. "Employer matching contributions made pursuant to Section
4.1(b) and any qualified non-elective contributions or elective deferrals taken
into account pursuant to Section 4.7(c)" for "Employer contributions"; and
D. "Participant's Account" for "account balance".
1.29.4 In lieu of the "fractional method" described above, a "safe
harbor method" may be used to calculate the allocable income for the "gap
period". Under such "safe harbor method", allocable Income for the "gap period"
shall be deemed to equal ten percent (10%) of the Income allocable to "excess
amounts" for the "applicable computation period" multiplied by the number of
calendar months in the "gap period". For purposes of determining the number of
calendar months in the "gap period", a distribution occurring on or before the
fifteenth day of the months shall be treated as having been made on the last day
of the preceding months and a distribution occurring after such fifteenth day
shall be treated as having been made on the first day of the next subsequent
month.
1.29.5 Income allocable to any distribution of Excess Deferred
Compensation on or before the last day of the taxable year of the Participant
shall be calculated from the first day of the taxable year of the Participant to
the date on which the distribution is made pursuant to either the "fractional
method" or the "safe harbor method".
1.30 "Investment Manager" means an entity that (a) has the power to manage,
acquire, or dispose of Plan assets and (b) acknowledges fiduciary responsibility
to the Plan in writing. Such entity must be a person, firm, or corporation
registered as an investment adviser under the Investment Advisers Act of 1940, a
bank, or an insurance company.
1.31 "Key Employee" means an Employee as defined in Code Section 416(i) and
the Regulations thereunder. Generally, any Employee or former Employee (as well
as each of his Beneficiaries) is considered a Key Employee if he, at any time
during the Plan Year that contains the "Determination Date" or any of the
preceding four (4) Plan Years, has been included in one of the following
categories:
1.31.1 An officer of the Employer (as that term is defined within the
meaning of the Regulations under Code Section 416) having annual "415
Compensation" greater than 50 percent of the amount in effect under Code Section
415(b)(1)(A) for any such Plan Year.
1.31.2 One of the ten employees having annual "415 Compensation" from
the Employer for a Plan Year greater than the dollar limitation in effect under
Code Section 415(c)(1)(A) for the calendar year in which such Plan Year ends and
owning (or considered as owning within the meaning of Code Section 318) both
more than one-half percent interest and the largest interests in the Employer.
1.31.3 A "five percent owner" of the Employer. "Five percent owner"
means any person who owns (or is considered as owning within the meaning of Code
Section 318) more than five percent (5%) of the outstanding stock of the
Employer or stock possessing more than five percent (5%) of the total combined
voting power of all stock of the Employer or, in the case of an unincorporated
business,
-8-
any person who owns more than five percent (5%) of the capital or profits
interest in the Employer. In determining percentage ownership hereunder,
employers that would otherwise be aggregated under Code Sections 414(b), (c),
(m) and (o) shall be treated as separate employers.
1.31.4 A "one percent owner" of the Employer having an annual "415
Compensation" from the Employer of more than $150,000. "One percent owner" means
any person who owns (or is considered as owning within the meaning of Code
Section 318) more than one percent (1%) of the outstanding stock of the Employer
or stock possessing more than one percent (1%) of the total combined voting
power of all stock of the Employer or, in the case of an unincorporated
business, any person who owns more than one percent (1%) of the capital or
profits interest in the Employer. In determining percentage ownership hereunder,
employers that would otherwise be aggregated under Code Sections 414(b), (c),
(m) and (o) shall be treated as separate employers.
A. However, in determining whether an individual has "415
Compensation" of more than $150,000, "415 Compensation" from each employer
required to be aggregated under Code Sections 414(b), (c), (m) and (o) shall be
taken into account.
B. For purposes of this Section, the determination of "415
Compensation" shall be made by including amounts that would otherwise be
excluded from a Participant's gross income by reason of the application of Code
Sections 125, 402(a)(8), 402(h)(1)(B) and, in the case of Employer contributions
made pursuant to a salary reduction agreement, by including amounts that would
otherwise be excluded from a Participant's gross income by reason of the
application of Code Section 403(b).
1.32 "Late Retirement Date" means the Anniversary Date coinciding with or
next following a Participant's actual Retirement Date after having reached his
Normal Retirement Date.
1.33 "Leased Employee" means any person (other than an Employee of the
recipient) who pursuant to an agreement between the recipient and any other
person ("leasing organization") has performed services for the recipient (or for
the recipient and related persons determined in accordance with Code Section
414(n)(6)) on a substantially full time basis for a period of at least one year,
and such services are performed under primary direction or control by the
recipient. Contributions or benefits provided a Leased Employee by the leasing
organization which are attributable to services performed for the recipient
employer shall be treated as provided by the recipient employer. A Leased
Employee shall not be considered an Employee of the recipient if:
1.33.1 Such employee is covered by a money purchase pension plan
providing: (a) a non-integrated employer contribution rate of at least 10% of
compensation, as defined in Code Section 415(c)(3), but including amounts
contributed pursuant to a salary reduction agreement which are excludable from
the employee's gross income under Code Sections 125, 402(a)(8), 402(h) or
403(b); (b) immediate participation; and (c) full and immediate vesting; and
1.33.2 Leased Employees do not constitute more than 20% of the
recipient's non- highly compensated work force.
1.34 "Non-Elective Contribution" means the Employer's contributions to this
Plan excluding, however, contributions made pursuant to the Participant's
deferral election provided for in Section 4.2, below, and any "Qualified
Non-Elective Contribution".
-9-
1.35 "Non-Highly Compensated Participant" means any Participant who is
neither a Highly Compensated Employee nor a Family Member.
1.36 "Non-Key Employee" means any Employee or former Employee (and the
Beneficiaries of such persons) who is not a Key Employee.
1.37 "Normal Retirement Age" means the Participant's 65th birthday.
1.38 "Normal Retirement Date" means the Anniversary Date coinciding with or
next following the Participant's Normal Retirement Age.
1.39 "1-Year Break in Service" means a period of 12 consecutive calendar
months beginning on the date the Employee terminates service with the Employer
and ending on the first anniversary of such date during which the Employee does
not perform an Hour of Service for the Employer. Further, solely for the purpose
of determining whether a Participant has incurred a 1-Year Break in Service,
Hours of Service shall be recognized for "authorized leaves of absence" and
"maternity and paternity leaves of absence." Years of Service and 1-Year Breaks
in Service shall be measured on the same computation period.
1.39.1 An Employee shall not be deemed to have incurred a 1-Year Break
in Service if he completes an Hour of Service within 12 months following the
last day of the month during which his employment terminated.
1.39.2 "Authorized leave of absence" means an unpaid, temporary
cessation from active employment with the Employer pursuant to an established
nondiscriminatory policy, whether occasioned by illness, military service, or
any other reason.
1.39.3 A "maternity or paternity leave of absence" means, for Plan
Years beginning after December 31, 1984, an absence from work for any period by
reason of the Employee's pregnancy, birth of the Employee's child, placement of
a child with the Employee in connection with the adoption of such child, or any
absence for the purpose of caring for such child for a period immediately
following such birth or placement. For this purpose, Hours of Service shall be
credited for the computation period in which the absence from work begins, only
if credit therefore is necessary to prevent the Employee from incurring a 1-
Year Break in Service, or, in any other case, in the immediately following
computation period.
1.40 "Participant" means any Eligible Employee who participates in the Plan
as provided in Sections 3.2 and 3.3, and has not for any reason become
ineligible to participate further in the Plan.
1.41 "Participant's Account" means the account established and maintained
by the Administrator for each Participant with respect to the Participant's
total interest in the Plan resulting from the Employer's Non-Elective
Contributions. A separate accounting shall be maintained with respect to that
portion of the Participant's account attributable to Employer matching
contributions made pursuant to Section 4.1.1B, below, and Employer discretionary
contributions made pursuant to Section 4.1.1C, below.
1.42 "Participant's Combined Account" means the total aggregate amount of
each Participant's Elective account and the Participant's account.
1.43 "Participant's Elective Account" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest in the Plan resulting from the Employer's Elective Contributions. A
separate accounting shall be maintained with respect to that portion of the
-10-
Participant's Elective Account attributable to Elective Contributions pursuant
to Section 4.2 and any Employer Qualified Non-Elective Contributions.
1.44 "Plan" means this PACIFIC CAPITAL BANCORP Amended and Restated
Incentive & Investment and Salary Savings Plan, as amended from time to time.
For periods prior to January 1, 1999, this Plan shall be known as the "SANTA
BARBARA BANK & TRUST" "Incentive & Investment and Salary Savings Plan."
1.45 "Plan Year" means (a) for periods prior to April 1, 1993, the
Employer's accounting year of 12 months commencing on April 1st of each year and
ending the following March 31st; (b) for the period after March 31, 1993, and
prior to January 1, 1994, the nine-month period from April 1, 1993, through
December 31, 1993, and (c) for periods after December 31, 1993, each period of
12 months commencing on January 1 and ending on December 31.
1.46 "Qualified Non-Elective Contribution" means the Employer's
contributions to the Plan that are made pursuant to Section 4.6. Such
contributions shall be considered an Elective Contribution for the purposes of
the Plan and used to satisfy the "Actual Deferral Percentage" tests. In
addition, the Employer's contributions to the Plan that are made pursuant to
Section 4.8.7, below, which are used to satisfy the "Actual Contribution
Percentage" tests shall be considered Qualified Non-Elective Contributions and
be subject to the provisions of Sections 4.2.2, below and 4.2.3, below.
1.47 "Qualified Voluntary Employee Contribution Account" means the account
established and maintained by the Administrator for each Participant with
respect to such Participant's total interest in the Plan resulting from the
Participant's tax-deductible Qualified Voluntary Employee Contributions made
pursuant to Section 4.14, below.
1.48 "Regulation" means the Income Tax Regulations as promulgated by the
Secretary of the Treasury or his delegate, and as amended from time to time.
1.49 "Retired Participant" means a person who has been a Participant, but
who has become entitled to retirement benefits under the Plan.
1.50 "Retirement Date" means the date as of which a Participant retires
whether such retirement occurs on a Participant's Normal Retirement Date, Early
or Late Retirement Date.
1.51 "Super Top Heavy Plan" means a plan described in Section 2.2.2.
1.52 "Terminated Participant" means a person who has been a Participant,
but whose employment has been terminated other than by death or retirement.
1.53 "Top Heavy Plan" means a plan described in Section 2.2.1.
1.54 "Top Heavy Plan Year" means a Plan Year commencing after December 31,
1983 during which the Plan is a Top Heavy Plan.
-11-
1.55 "Top Paid Group" means the top 20 percent of Employees who performed
services for the Employer during the applicable year, ranked according to the
amount of "415 Compensation" received from the Employer during such year. All
Affiliated Employers shall be taken into account as a single employer, and
Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2)
shall be considered Employees unless such Leased Employees are covered by a plan
described in Code Section 414(n)(5) and are not covered in any qualified plan
maintained by the Employer. Employees who are non-resident aliens and who
received no earned income (within the meaning of Code Section 911(d)(2)) from
the Employer constituting United States source income within the meaning of Code
Section 86(a)(3) shall not be treated as Employees.
1.55.1 Additionally, for the purpose of determining the number of
active Employees in any year, the following additional Employees shall also be
excluded; however, such Employees shall still be considered for the purpose of
identifying the particular Employees in the Top Paid Group:
A. Employees with less than six (6) months of service;
B. Employees who normally work less than 17 1/2 hours per week;
C. Employees who normally work less than six (6) months during a
year; and
D. Employees who have not yet attained age 21.
1.55.2 In addition, if ninety percent (90%) or more of the Employees
of the Employer are covered under agreements the Secretary of Labor finds to be
collective bargaining agreements between Employee representatives and the
Employer, and the Plan covers only Employees who are not covered under such
agreements, then Employees covered by such agreements shall be excluded from
both the total number of active Employees as well as from the identification of
particular Employees in the Top Paid Group.
1.55.3 The foregoing exclusions set forth in this Section 1.55.3 shall
be applied on a uniform and consistent basis for all purposes for which the Code
Section 414(q) definition is applicable.
1.56 "Total and Permanent Disability" means a physical or mental condition
of a Participant resulting from bodily injury, disease, or mental disorder which
renders the Participant incapable of continuing in gainful occupation and which
condition constitutes a "total disability" under the Social Security Act.
1.57 "Trustee" means the person or entity named as trustee in any separate
trust forming a part of this Plan, and any successors.
1.58 "Trust Fund" or "Trust" means the assets of the separate trust forming
a part of this Plan, as the same shall exist from time to time.
1.59 "Vested" means the nonforfeitable portion of any account maintained on
behalf of a Participant.
1.60 "Voluntary Contribution Account" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest in the Plan resulting from the
-12-
Participant's nondeductible voluntary contributions made pursuant to Section
4.12. Amounts recharacterized as voluntary Employee contributions pursuant to
Section 4.6.1, below, shall remain subject to the limitations of Sections 4.2.2,
and 4.2.3, below. Therefore, a separate accounting shall be maintained with
respect to that portion of the Voluntary Contribution Account attributable to
voluntary Employee contributions made pursuant to Section 4.12, below.
1.61 "Year of Service" means the computation period of twelve (12)
consecutive months, herein set forth, during which an Employee has at least
1,000 Hours of Service.
1.61.1 Eligibility. For purposes of eligibility for participation, the
initial computation period shall begin with the date on which the Employee first
performs an Hour of Service. The participation computation period beginning
after a 1-Year Break in Service shall be measured from the date on which an
Employee again performs an Hour of Service. The participation computation period
shall shift to the Plan Year which includes the anniversary of the date on which
the Employee first performed an Hour of Service. An Employee who is credited
with the required Hours of Service in both the initial computation period (or
the computation period beginning after a 1-Year Break in Service) and the Plan
Year which includes the anniversary of the date on which the Employee first
performed an Hour of Service, shall be credited with two (2) Years of Service
for purposes of eligibility to participate.
1.61.2 Vesting. For vesting purposes, the computation period shall be
the Plan Year, including periods prior to the Effective Date of the Plan.
1.61.3 Other. For all other purposes, the computation period shall be
the Plan Year.
1.61.4 Prior Service. There shall be recognized as "Years of Service"
under this Plan all Years of Service by the Employee with any entity acquired by
the Employer if the terms and conditions of such acquisition expressly require
that such prior Years of Service be credited as such under this Plan. For
purposes of this Section 1.61.4, an entity shall be deemed to be acquired by the
Employer if (a) that entity is merged into the Employer, or (b) the Employer
purchases or otherwise acquires at least eighty percent (80%) of the outstanding
voting equity interests in such entity, or (iii) the Employer acquires
substantially all the assets of such entity."
1.61.5 Affiliated Employer. All Years of Service with any Affiliated
Employer shall be recognized.
2. TOP HEAVY AND ADMINISTRATION
2.1 Top Heavy Plan Requirements. For any Top Heavy Plan Year, the Plan
shall provide the special vesting requirements of Code Section 416(b) pursuant
to Section 6.4 of the Plan and the special minimum allocation requirements of
Code Section 416(c) pursuant to Section 4.4 of the Plan.
2.2 Determination of Top Heavy Status.
2.2.1 This Plan shall be a Top Heavy Plan for any Plan Year
commencing. after December 31, 1983 in which, as of the Determination Date, (a)
the Present Value of Accrued Benefits of Key Employees and (b) the sum of the
Aggregate Accounts of Key Employees under this Plan and all plans of an
Aggregation Group, exceeds sixty percent (60%) of the Present Value of Accrued
Benefits and the
-13-
Aggregate Accounts of all Key and Non-Key Employees under this Plan and all
plans of an Aggregation Group.
A. If any Participant is a Non-Key Employee for any Plan Year, but
such Participant was a Key Employee for any prior Plan Year, such Participant's
Present Value of Accrued Benefit and/or Aggregate Account balance shall not be
taken into account for purposes of determining whether this Plan is a Top Heavy
or Super Top Heavy Plan (or whether any Aggregation Group which includes this
Plan is a Top Heavy Group).
B. In addition, for Plan Years beginning after December 31, 1984,
if a Participant or Former Participant has not performed any services for any
Employer maintaining the Plan at any time during the five year period ending on
the Determination Date, any accrued benefit for such Participant or Former
Participant shall not be taken into account for the purposes of determining
whether this Plan is a Top Heavy or Super Top Heavy Plan.
2.2.2 This Plan shall be a Super Top Heavy Plan for any Plan Year
commencing after December 31, 1983, in which, as of the Determination Date, (a)
the Present Value of Accrued Benefits of Key Employees and (b) the sum of the
Aggregate Accounts of Key Employees under this Plan and all plans of an
Aggregation Group, exceeds ninety percent (90%) of the Present Value of Accrued
Benefits and the Aggregate Accounts of all Key and Non-Key Employees under this
Plan and all plans of an Aggregation Group.
2.2.3 A Participant's Aggregate Account as of the Determination Date
is the sum of:
A. His Participant's Elective Account balance as of the most
recent valuation occurring within a twelve (12) month period ending on the
Determination Date.
B. An adjustment for any contributions due as of the Determination
Date. Such adjustment shall be the amount of any contributions actually made
after the valuation date but due on or before the Determination Date, except for
the first Plan Year when such adjustment shall also reflect the amount of any
contributions made after the Determination Date that are allocated as of a date
in that first Plan Year.
C. Any Plan distributions made within the Plan Year that includes
the Determination Date or within the four (4) preceding Plan Years. However, in
the case of distributions made after the valuation date and prior to the
Determination Date, such distributions are not included as distributions for top
heavy purposes to the extent that such distributions are already included in the
Participant's Aggregate Account balance as of the valuation date.
Notwithstanding anything herein to the contrary, all distributions, including
distributions made prior to January 1, 1984, and distributions under a
terminated plan which if it had not been terminated would have been required to
be included in an Aggregation Group, will be counted. Further, distributions
from the Plan (including the cash value of life insurance policies) of a
Participant's account balance because of death shall be treated as a
distribution for the purposes of this section.
D. Any Employee contributions, whether voluntary or mandatory.
However, amounts attributable to tax deductible qualified voluntary employee
contributions shall not be considered to be a part of the Participant's
Aggregate Account balance.
-14-
E. With respect to unrelated rollovers and plan-to-plan transfers
(ones which are both initiated by the Employee and made from a plan maintained
by one employer to a plan maintained by another employer), if this Plan provides
the rollovers or plan-to-plan transfers, it shall always consider such rollovers
or plan-to-plan transfers as a distribution for the purposes of this Section. If
this Plan is the plan accepting such rollovers or plan-to-plan transfers, it
shall not consider such rollovers or plan-to-plan transfers as part of the
Participant's Aggregate Account balance. However, rollovers or plan-to-plan
transfers accepted prior to January 1, 1984, shall be considered as part of the
Participant's Aggregate Account balance.
F. With respect to related rollovers and plan-to-plan transfers
(ones either not initiated by the Employee or made to a plan maintained by the
same employer), if this Plan provides the rollover or plan-to-plan transfer, it
shall not be counted as a distribution for purposes of this Section. If this
Plan is the plan accepting such rollover or plan-to-plan transfer, it shall
consider such rollover or plan-to-plan transfer as part of the Participant's
Aggregate Account balance, irrespective of the date on which such rollover or
plan-to-plan transfer is accepted.
G. For the purposes of determining whether two employers are to be
treated as the same employer in Paragraphs E and F, above, all employers
aggregated under Code Section 414(b), (c), (m) and (o) are treated as the same
employer.
2.2.4 "Aggregation Group" means either a Required Aggregation Group or
a Permissive Aggregation Group as hereinafter determined.
A. In determining a Required Aggregation Group hereunder, each
plan of the Employer in which a Key Employee is a participant in the Plan Year
containing the Determination Date or any of the four preceding Plan Years, and
each other plan of the Employer which enables any plan in which a Key Employee
participates to meet the requirements of Code Sections 401(a)(4) or 410, will be
required to be aggregated. Such group shall be known as a Required Aggregation
Group. In the case of a Required Aggregation Group, each plan in the group will
be considered a Top Heavy Plan if the Required Aggregation Group is a Top Heavy
Group. No plan in the Required Aggregation Group will be considered a Top Heavy
Plan if the Required Aggregation Group is not a Top Heavy Group.
B. The Employer may also include any other plan not required to be
included in the Required Aggregation Group, provided the resulting group, taken
as a whole, would continue to satisfy the provisions of Code Sections 401(a)(4)
and 410. Such group shall be known as a Permissive Aggregation Group. In the
case of a Permissive Aggregation Group, only a plan that is part of the Required
Aggregation Group will be considered a Top Heavy Plan if the Permissive
Aggregation Group is a Top Heavy Group. No plan in the Permissive Aggregation
Group will be considered a Top Heavy Plan if the Permissive Aggregation Group is
not a Top Heavy Group.
C. Only those plans of the Employer in which the Determination
Dates fall within the same calendar year shall be aggregated in order to
determine whether such plans are Top Heavy Plans.
D. An Aggregation Group shall include any terminated plan of the
Employer if it was maintained within the last five (5) years ending on the
Determination Date.
E. "Determination Date" means (a) the last day of the preceding
Plan Year, or (b) in the case of the first Plan Year, the last day of such Plan
Year.
-15-
F. In the case of a defined benefit plan, the Present Value of
Accrued Benefit for a Participant other than a Key Employee, shall be as
determined using the single accrual method used for all plans of the Employer
and Affiliated Employers, or if no such single method exists, using a method
which results in benefits accruing not more rapidly than the slowest accrual
rate permitted under Code Section 411(b)(1)(C). The determination of the Present
Value of Accrued Benefit shall be determined as of the most recent valuation
date that falls within or ends with the 12-month period ending on the
Determination Date except as provided in Code Section 416 and the Regulations
thereunder for the first and second plan years of a defined benefit plan.
G. "Top Heavy Group" means an Aggregation Group in which, as of
the Determination Date, (i) the sum of (a) the Present Value of Accrued Benefits
of Key Employees under all defined benefit plans included in the group, plus (b)
the Aggregate Accounts of Key Employees under all defined contribution plans
included in the group, exceeds (ii) sixty percent (60%) of a similar sum
determined for all Participants.
2.3 Powers and Responsibilities of the Employer.
2.3.1 The Employer shall be empowered to appoint and remove the
Trustee and the Administrator from time to time as it deems necessary for the
proper administration of the Plan to assure that the Plan is being operated for
the exclusive benefit of the Participants and their Beneficiaries in accordance
with the terms of the Plan, the Code, and the Act.
2.3.2 The Employer shall establish a "funding policy and method,"
i.e., it shall determine whether the Plan has a short run need for liquidity
(e.g., to pay benefits) or whether liquidity is a long run goal and investment
growth (and stability of same) is a more current need, or shall appoint a
qualified person to do so. The Employer or its delegate shall communicate such
needs and goals to the Trustee, who shall coordinate such Plan needs with its
investment policy. The communication of such a "funding policy and method" shall
not, however, constitute a directive to the Trustee as to investment of the
Trust Funds. Such "funding policy and method" shall be consistent with the
objectives of this Plan and with the requirements of Title I of the Act.
2.3.3 The Employer shall periodically review the performance of any
Fiduciary or other person to whom duties have been delegated or allocated by it
under the provisions of this Plan or pursuant to procedures established
hereunder. This requirement may be satisfied by formal periodic review by the
Employer or by a qualified person specifically designated by the Employer,
through day-to-day conduct and evaluation, or through other appropriate ways.
2.4 Designation of Administrative Authority. The Employer shall appoint one
or more Administrators. Any person, including, but not limited to, the Employees
of the Employer, shall be eligible to serve as an Administrator. Any person so
appointed shall signify his acceptance by filing written acceptance with the
Employer. An Administrator may resign by delivering his written resignation to
the Employer or be removed by the Employer by delivery of written notice of
removal, to take effect at a date specified therein, or upon delivery to the
Administrator if no date is specified. The Employer, upon the resignation or
removal of an Administrator, shall promptly designate in writing a successor to
this position. If the Employer does not appoint an Administrator, the Employer
will function as the Administrator.
2.5. Allocation and Delegation of Responsibilities. If more than one person
is appointed as Administrator, the responsibilities of each Administrator may be
specified by the Employer and accepted in writing by each Administrator. In the
event that no such delegation is made by the Employer, the
-16-
Administrators may allocate the responsibilities among themselves, in which
event the Administrators shall notify the Employer and the Trustee in writing of
such action and specify the responsibilities of each Administrator. The Trustee
thereafter shall accept and rely upon any documents executed by the appropriate
Administrator until such time as the Employer or the Administrators file with
the Trustee a written revocation of such designation.
2.6. Powers and Duties of the Administrator. The primary responsibility of
the Administrator is to administer the Plan for the exclusive benefit of the
Participants and their Beneficiaries, subject to the specific terms of the Plan.
2.6.1 The Administrator shall administer the Plan in accordance with
its terms and shall have the power and discretion to construe the terms of the
Plan and to determine all questions arising in connection with the
administration, interpretation, and application of the Plan. Any such
determination by the Administrator shall be conclusive and binding upon all
persons. The Administrator may establish procedures, correct any defect, supply
any information, or reconcile any inconsistency in such manner and to such
extent as shall be deemed necessary or advisable to carry out the purpose of the
Plan; provided, however, that any procedure, discretionary act, interpretation
or construction shall be done in a nondiscriminatory manner based upon uniform
principles consistently applied and shall be consistent with the intent that the
Plan shall continue to be deemed a qualified plan under the terms of Code
Section 401(a), and shall comply with the terms of the Act and all regulations
issued pursuant thereto. The Administrator shall have all powers necessary or
appropriate to accomplish his duties under this Plan.
2.6.2 The Administrator shall be charged with the duties of the
general administration of the Plan, including, but not limited to, the
following:
A. The discretion to determine all questions relating to the
eligibility of Employees to participate or remain a Participant hereunder and to
receive benefits under the Plan;
B. To compute, certify, and direct the Trustee with respect to the
amount and the kind of benefits to which any Participant shall be entitled
hereunder;
C. To authorize and direct the Trustee with respect to all
nondiscretionary or otherwise directed disbursements from the Trust;
D. To maintain all necessary records for the administration of
the Plan;
E. To interpret the provisions of the Plan and to make and publish
such rules for regulation of the Plan as are consistent with the terms hereof;
F. To determine the size and type of any Contract to be purchased
from any insurer, and to designate the insurer from which such Contract shall be
purchased;
G. To compute and certify to the Employer and to the Trustee from
time to time the sums of money necessary or desirable to be contributed to the
Plan;
H. To consult with the Employer and the Trustee regarding the
short and long-term liquidity needs of the Plan in order that the Trustee can
exercise any investment discretion in a manner designed to accomplish specific
objectives;
-17-
I. To prepare and implement a procedure to notify Eligible
Employees that they may elect to have a portion of their Compensation deferred
or paid to them in cash;
J. To assist any Participant regarding his rights, benefits, or
elections available under the Plan.
2.7 Records and Reports. The Administrator shall keep a record of all
actions taken and shall keep all other books of account, records, and other data
that may be necessary for proper administration of the Plan and shall be
responsible for supplying all information and reports to the Internal Revenue
Service, Department of Labor, Participants, Beneficiaries and others as required
by law.
2.8 Appointment of Advisers. The Administrator may appoint counsel,
specialists, advisers, and other persons as the Administrator or the Trustee
deems necessary or desirable in connection with the administration of this Plan.
2.9 Information From Employer. To enable the Administrator to perform his
functions, the Employer shall supply full and timely information to the
Administrator on all matters relating to the Compensation of all Participants,
their Hours of Service, their Years of Service, their retirement, death,
disability, or termination of employment, and such other pertinent facts as the
Administrator may require; and the Administrator shall advise the Trustee of
such of the foregoing facts as may be pertinent to the Trustee's duties under
the Plan. The Administrator may rely upon such information as is supplied by the
Employer and shall have no duty or responsibility to verify such information.
2.10 Payment of Expenses. All expenses of administration may be paid out of
the Trust Fund unless paid by the Employer. Such expenses shall include any
expenses incident to the functioning of the Administrator, including, but not
limited to, fees of accountants, counsel, and other specialists and their
agents, and other costs of administering the Plan. Until paid, the expenses
shall constitute a liability of the Trust Fund. However, the Employer may
reimburse the Trust Fund for any administration expense incurred.
2.11 Majority Actions. Except where there has been an allocation and
delegation of administrative authority pursuant to Section 2.5, if there shall
be more than one Administrator, they shall act by a majority of their number,
but may authorize one or more of them to sign all papers on their behalf.
2.12 Claims Procedure. Claims for benefits under the Plan may be filed with
the Administrator on forms supplied by the Employer. Written notice of the
disposition of a claim shall be furnished to the claimant within 90 days after
the application is filed. In the event the claim is denied, the reasons for the
denial shall be specifically set forth in the notice in language calculated to
be understood by the claimant, pertinent provisions of the Plan shall be cited,
and, where appropriate, an explanation as to how the claimant can perfect the
claim will be provided. In addition, the claimant shall be furnished with an
explanation of the Plan's claims review procedure.
2.13 Claims Review Procedure. Any Employee, former Employee, or Beneficiary
of either, who has been denied a benefit by a decision of the Administrator
pursuant to Section 2.12, above, shall be entitled to request the Administrator
to give further consideration to his claim by filing with the Administrator (on
a form which may be obtained from the Administrator) a request for a hearing.
Such request, together with a written statement of the reasons why the claimant
believes his claim should be allowed, shall be filed with the Administrator no
later than 60 days after receipt of the written notification provided for in
Section 2.12, above.
-18-
2.13.1 The Administrator shall then conduct a hearing within the next
60 days, at which the claimant may be represented by an attorney or any other
representative of his choosing and at which the claimant shall have an
opportunity to submit written and oral evidence and arguments in support of his
claim. At the hearing (or prior thereto upon five (5) business days' written
notice to the Administrator) the claimant or his representative shall have an
opportunity to review all documents in the possession of the Administrator which
are pertinent to the claim at issue and its disallowance. Either the claimant or
the Administrator may cause a court reporter to attend the hearing and record
the proceedings. In such event, a complete written transcript of the proceedings
shall be furnished to both parties by the court reporter. The full expense of
any such court reporter and such transcripts shall be borne by the party causing
the court reporter to attend the hearing.
2.13.2 A final decision as to the allowance of the claim shall be made
by the Administrator within 60 days of receipt of the appeal (unless there has
been an extension of 60 days due to special circumstances, provided the delay
and the special circumstances occasioning it are communicated to the claimant
within the 60 day period). Such communication shall be written in a manner
calculated to be understood by the claimant and shall include specific reasons
for the decision and specific references to the pertinent Plan provisions on
which the decision is based.
3. ELIGIBILITY
3.1 Conditions of Eligibility.
3.1.1 Subject to Sections 3.1.2 and 3.1.3, below, each Eligible
Employee who commences employment prior to January 1, 1990, and has attained age
16 shall be eligible to participate hereunder as of the date he has satisfied
such requirements. Each Eligible Employee who commences employment with the
Employer after December 31, 1989, and prior to January 1, 1991, and who has
completed one (1) Year of Service and has attained age 16 shall be eligible to
participate hereunder as of the date he has satisfied such requirements. Each
Eligible Employee who commences employment with the Employer after December 31,
1990, and who has completed one (1) Year of Service and has attained age 18
shall be eligible to participate hereunder as of the date he has satisfied such
requirements.
3.1.2 Notwithstanding the provisions of Section 3.1.1, above,
effective July 1, 1994, each Eligible Employee who has attained age 18 and
completed ninety (90) days of employment with the Employer shall be eligible to
(a) make Deferred Compensation contributions to the Plan in accordance with
Section 4.2, below, and (b) receive Employer's Matching Contributions with
respect to such Deferred Compensation in accordance with Section 4.1.1B, below;
provided, such Eligible Employee shall not be eligible to receive an allocation
of the discretionary Employer's Non-Elective Contribution under Section 4.1.1C,
below, until such Eligible Employee has completed one (1) Year of Service with
the Employer in accordance with Section 3.1.1, above, and commenced
participation in accordance with Section 3.1.3, below.
3.1.3 An Eligible Employee who has satisfied the participation
requirements of this Section 3.1 shall commence participation in the Plan at the
time specified in Section 3.3, below.
3.2 Application for Participation. In order to become a Participant
hereunder, each Eligible Employee shall make application to the Employer for
participation in the Plan and agree to the terms hereof. Upon the acceptance of
any benefits under this Plan, such Employee shall automatically be deemed to
have made application and shall be bound by the terms and conditions of the Plan
and all amendments hereto.
-19-
3.3 Effective Date of Participation. An Eligible Employee shall become a
Participant effective as of the first day of the first calendar month commencing
after the Eligible Employee has satisfied the eligibility requirements of
Section 3.1, above, provided said Employee was still employed as of such date
(or if not employed on such date, as of the date of rehire if a 1-Year Break in
Service has not occurred). In the event an Employee who is not a member of an
eligible class of Employees becomes a member of an eligible class, such Employee
will participate immediately if such Employee would have otherwise previously
become a Participant.
3.4 Determination of Eligibility. The Administrator shall determine the
eligibility of each Employee for participation in the Plan based upon
information furnished by the Employer. Such determination shall. be conclusive
and binding upon all persons, as long as the same is made pursuant to the Plan
and the Act. Such determination shall be subject to review per Section 2.13,
above.
3.5 Termination of Eligibility.
3.5.1 In the event a Participant shall go from a classification of an
Eligible Employee to an ineligible Employee, such Former Participant shall
continue to vest in his interest in the Plan for each Year of .Service completed
while a noneligible Employee, until such time as his Participant's Account shall
be forfeited or distributed pursuant to the terms of the Plan. Additionally, his
interest in the Plan shall continue to share in the earnings of the Trust Fund.
3.5.2 In the event a Participant is no longer a member of an eligible
class of Employees and becomes ineligible to participate but has not incurred a
1-Year Break in Service, such Employee will participate immediately upon
returning to an eligible class of Employees. If such Participant incurs a 1-Year
Break in Service, eligibility will be determined under the break in service
rules of the Plan.
3.6 Omission of Eligible Employee. If, in any Plan Year, any Employee who
should be included as a Participant in the Plan is erroneously omitted and
discovery of such omission is not made until after a contribution by his
Employer for the year has been made, the Employer shall make a subsequent
contribution with respect to the omitted Employee in the amount which the said
Employer would have contributed with respect to him had he not been omitted.
Such contribution shall be made regardless of whether or not it is deductible in
whole or in part in any taxable year under applicable provisions of the Code.
3.7 Inclusion of Ineligible Employee. If, in any Plan Year, any person who
should not have been included as a Participant in the Plan is erroneously
included and discovery of such incorrect inclusion is not made until after a
contribution for the year has been made, the Employer shall not be entitled to
recover the contribution made with respect to the ineligible person regardless
of whether or not a deduction is allowable with respect to such contribution. In
such event, the amount contributed with respect to the ineligible person shall
constitute a Forfeiture (except for Deferred Compensation which shall be
distributed to the ineligible person) for the Plan Year in which the discovery
is made.
3.8 Election Not to Participate. An Employee may, subject to the approval
of the Employer, elect voluntarily not to participate in the Plan. The election
not to participate must be communicated to the Employer, in writing, at least
thirty (30) days before the beginning of a Plan Year.
-20-
4. CONTRIBUTION AND ALLOCATION
4.1 Formula For Determining Employer's Contribution.
4.1.1 For each Plan Year, the Employer shall contribute to the Plan
the sum of the following amounts:
A. The amount of the total salary reduction elections of all
Participants made pursuant to Section 4.2, below, which amount shall be deemed
to be an Employer's Elective Contribution.
B. On behalf of each Participant who is eligible to share in
matching contributions for the Plan Year, a matching contribution equal to the
sum of (i) one-hundred percent (100%) of that portion of the Participant's
Deferred Compensation up to three percent (3.0%) of the Participant's
Compensation, plus (ii) fifty percent (50%) of that portion of the Participant's
Deferred Compensation in excess of three percent (3.0%) of Compensation and up
to six percent (6.0%) of Compensation; provided, in no event shall the amount of
the matching contribution under this Section 4.1(b) on behalf of any Participant
in any Plan Year exceed four and one-half percent (4.5%) of the Participant's
Compensation for the Plan Year. The aggregate matching contribution under this
Section 4.1.1 shall be deemed to be an Employer Non-Elective Contribution.
C. Such amount, if any, which the Employer in its discretionary
elects to contribute, which amount shall be deemed to be an Employer's
Non-Elective Contribution.
4.1.2 Notwithstanding the foregoing, however, the Employer's
contributions for any Plan Year shall not exceed the maximum amount allowable as
a deduction to the Employer under the provisions of Code Section 404. All
contributions by the Employer shall be made in cash or in such property as is
acceptable to the Trustee.
4.1.3 Notwithstanding the foregoing, to the extent necessary to
provide the top heavy minimum allocations, the Employer shall make a
contribution even if it exceeds the amount which is deductible under Code
Section 404.
4.2 Participant's Salary Reduction Election.
4.2.1 Each Participant may elect to defer his Compensation which would
have been received in the Plan Year, but for the deferral election, by up to ten
percent (10%). A deferral election (or modification of an earlier election) may
not be made with respect to Compensation which is currently available on or
before the date the Participant executed such election. The amount by which
Compensation is reduced shall be that Participant's Deferred Compensation and be
treated as an Employer Elective Contribution and allocated to that Participant's
Elective Account.
4.2.2 The balance in each Participant's Elective Account shall be
fully Vested at all times and shall not be subject to Forfeiture for any reason.
4.2.3 Amounts held in the Participant's Elective Account may not be
distributable earlier than:
A. A Participant's termination of employment or death;
-21-
B. A Participant's attainment of age 59 1/2;
C. The termination of the Plan without the establishment or
existence of a "successor plan," as that term is described in Regulation
1.401(k)-l(d)(3);
D. The date of disposition by the Employer to an entity that is
not an Affiliated Employer of substantially all of the assets (within the
meaning of Code Section 409(d)(2)) used in a trade or business of such
corporation if such corporation continues to maintain this Plan after the
disposition with respect to a Participant who continues employment with the
corporation acquiring such assets;
E. The date of disposition by the Employer or an Affiliated
Employer who maintains the Plan of its interest in a subsidiary (within the
meaning of Code Section 409(d)(3)) to an entity which is not an Affiliated
Employer but only with respect to a Participant who continues employment with
such subsidiary; or
F. The proven financial hardship of a Participant, subject to the
limitations of Section 6.10, below.
4.2.4 For each Plan Year beginning after December 31, 1987, a
Participant's Deferred Compensation made under this Plan and all other plans,
contracts or arrangements of the Employer maintaining this Plan shall not
exceed, during any taxable year of the Participant, the limitation imposed by
Code Section 402(g), as in effect at the beginning of such taxable year. if such
dollar limitation is exceeded, a Participant will be deemed to have notified the
Administrator of such excess amount which shall be distributed in a manner
consistent with 4.2.6, below. The dollar limitation shall be adjusted annually
pursuant to the method provided in Code Section 415(d) in accordance with
Regulations.
4.2.5 In the event a Participant has received a hardship distribution
from his Participant's Elective Account pursuant to Section 6.11 or pursuant to
Regulation 1.401(k)-l(d)(2)(iv)(B) from any other plan maintained by the
Employer, then such Participant shall not be permitted to elect to have Deferred
Compensation contributed to the Plan on his behalf for a period of twelve (12)
months following the receipt of the distribution. Furthermore, the dollar
limitation under Code Section 402(g) shall be reduced, with respect to the
Participant's taxable year following the taxable year in which the hardship
distribution was made, by the amount of such Participant's Deferred
Compensation, if any, pursuant to this Plan (and any other plan maintained by
the Employer) for the taxable year of the hardship distribution.
4.2.6 If a Participant's Deferred Compensation under this Plan
together with any elective deferrals (as defined in Regulation 1.402(g)-l(b))
under another qualified cash or deferred arrangement (as defined in Code Section
401(k)), a simplified employee pension (as defined in Code Section 408(k)), a
salary reduction arrangement (within the meaning of Code Section 3121(a)(5)(D)),
a deferred compensation plan under Code Section 457, or a trust described in
Code Section 501(c)(18) cumulatively exceed the limitation imposed by Code
Section 402(g) (as adjusted annually in accordance with the method provided in
Code Section 415(d) pursuant to Regulations) for such Participant's taxable
year, the Participant may, not later than March 1 following the close of the
Participant's taxable year, notify the Administrator in writing of such excess
and request that his Deferred Compensation under this Plan be reduced by an
amount specified by the Participant.
A. In such event, the Administrator may direct the Trustee to
distribute such excess amount (and any Income allocable to such excess amount)
to the Participant not later than the first April 15th following the close of
the Participant's taxable year. Distributions in accordance with this section
-22-
may be made for any taxable year of the Participant which begins after December
31, 1986. Any distribution of less than the entire amount of Excess Deferred
Compensation and Income shall be treated as a pro rata distribution of Excess
Deferred Compensation and Income. The amount distributed shall not exceed the
Participant's Deferred Compensation under the Plan for the taxable year.
B. Any distribution on or before the last day of the Participant's
taxable year must satisfy each of the following conditions: (1) the distribution
must be made after the date on which the Plan received the Excess Deferred
Compensation; (2) the Participant shall designate the distribution as Excess
Deferred Compensation; and (3) the Plan must designate the distribution as a
distribution of Excess Deferred Compensation.
4.2.7 Notwithstanding Section 4.2.6, above, a Participant's Excess
Deferred Compensation shall be reduced, but not below zero, by any distribution
and/or recharacterization of Excess Contributions pursuant to Section 4.6.1,
above, for the Plan Year beginning with or within the taxable year of the
Participant.
4.2.8 All amounts allocated to a Participant's Elective Account may be
treated as a Directed Investment Account pursuant to Section 4.13.
4.2.9 Employer Elective Contributions made pursuant to this Section
may be segregated into a separate account for each Participant in a federally
insured savings account, certificate of deposit in a bank or savings and loan
association, money market certificate, or other short-term debt security
acceptable to the Trustee until such time as the allocations pursuant to Section
4.4 have been made.
4.2.10 The Employer and the Administrator shall implement the salary
reduction elections provided for herein in accordance with the following:
A. A Participant may commence making elective deferrals to the
Plan only after first satisfying the eligibility and participation requirements
specified in Section 3. However, the Participant must make his initial salary
deferral election within a reasonable time, not to exceed thirty (30) days,
after entering the Plan pursuant to Section 3.3. If the Participant fails to
make an initial salary deferral election within such time, then such Participant
may thereafter make an election in accordance with the rules governing
modifications. The Participant shall make such an election by entering into a
written salary reduction agreement with the Employer and filing such agreement
with the Administrator. Such election shall initially be effective beginning
with the pay period following the acceptance of the salary reduction agreement
by the Administrator, shall not have retroactive effect and shall remain in
force until revoked.
B. A Participant may modify a prior election during the Plan Year
and concurrently make a new election by delivering notice with the Administrator
within a reasonable time before the pay period for which such modification is to
be effective. However, modifications to a salary deferral election shall only be
permitted quarterly, during election periods established by the Administrator
prior to the first day of each Plan Year quarter. Any modification shall not
have retroactive effect and shall remain in force until revoked.
C. A Participant may elect to prospectively revoke his salary
reduction agreement in its entirety once in each calendar quarter by delivering
notice of revocation to the Employer or its designee at such times as are
designated by the Employer. Such revocation shall become effective as of the
beginning of the first pay period coincident with or next following the
expiration of the notice period. Furthermore, the termination of the
Participant's employment, or the cessation of participation for any
-23-
reason, shall be deemed to revoke any salary reduction agreement then in effect,
effective immediately following the close of the pay period within which such
termination or cessation occurs.
4.3 Time of Payment of Employer's Contribution. The Employer shall
generally pay to the Trustee its contribution to the Plan for each Plan Year
within the time prescribed by law, including extensions of time, for the filing
of the Employer's federal income tax return for the Fiscal Year. However, (a)
Employer Elective Contributions accumulated through payroll deductions shall be
paid to the Trustee as of the earliest date on which such contributions can
reasonably be segregated from the Employer's general assets, but in any event
within seven (7) days after the date on which such amounts would otherwise have
been payable to the Participant in cash, and (b) effective January 1, 1999, the
Employer matching contribution pursuant to Section 4.1.1B, above, shall be
contributed to the Plan on a monthly basis. The provisions of Department of
Labor regulations 2510.3-102 are incorporated herein by reference. Furthermore,
any additional Employer contributions which are allocable to the Participant's
Elective Account for a Plan Year shall be paid to the Plan no later than the
twelve-month period immediately following the close of such Plan Year.
4.4 Allocation of Contribution and Earnings.
4.4.1 The Administrator shall establish and maintain an account in the
name of each Participant to which the Administrator shall credit as of each
Anniversary Date all amounts allocated to each such Participant as set forth
herein.
4.4.2 The Employer shall provide the Administrator with all
information required by the Administrator to make a proper allocation of the
Employer's contributions for each Plan Year. Within a reasonable period of time
after the date of receipt by the Administrator of such information, the
Administrator shall allocate such contribution as follows:
A. With respect to the Employer's Elective Contribution made
pursuant to Section 4.1.1A, above, to each Participant's Elective Account in an
amount equal to each such Participant's Deferred Compensation for the year;
B. With respect to the Employer's Non-Elective Contribution made
pursuant to Section 4.1.1B, above, to each Participant's Account in accordance
with Section 4.1.1B, above. Any Participant actively employed during the Plan
Year shall be eligible to share in the matching contribution for the Plan Year.
C. With respect to the Employer's Non-Elective Contribution made
pursuant to Section 4.1.1C, above, to each Participant's Account in the same
proportion that each such Participant's Compensation for the year bears to the
total Compensation of all Participants for such year. Only Participants who have
completed a Year of Service during the Plan Year and are actively employed on
the last day of the Plan Year shall be eligible to share in the discretionary
contribution for the year.
4.4.3 As of each Anniversary Date any amounts which became Forfeitures
since the last Anniversary Date shall first be made available to reinstate
previously-forfeited account balances of Former Participants, if any, in
accordance with Section 6.4.9, below. The remaining Forfeitures, if any, shall
be used to reduce the contribution of the Employer hereunder for the Plan Year
in which such Forfeitures occur in the following manner:
-24-
A. Forfeitures attributable to Employer matching contributions
made pursuant to Section 4.1.1B, above, shall be used to reduce the Employer's
contribution for the Plan Year in which such Forfeitures occur.
B Forfeitures attributable to Employer discretionary contributions
made pursuant to Section 4.1.1C, above, shall be used to reduce the Employer's
contribution for the Plan Year in which such Forfeitures occur.
4.4.4 For any Top Heavy Plan Year, Non-Key Employees not otherwise
eligible to share in the allocation of contributions as provided above, shall
receive the minimum allocation provided for in Section 4.4.8, below, if eligible
pursuant to the provisions of Section 4.4.10, below.
4.4.5 Participants who are not actively employed on the last day of
the Plan Year due to Retirement (Early, Normal, or Late), Total and Permanent
Disability, or death shall share in the allocation of contributions for that
Plan Year only if otherwise eligible in accordance with this Section 4.4.
4.4.6 As of each Anniversary Date or other valuation date, before the
current valuation period allocation of Employer contributions, any earnings or
losses (net appreciation or net depreciation) of the Trust Fund shall be
allocated in the same proportion that each Participant's and Former
Participant's nonsegregated accounts bear to the total of all Participant's and
Former Participant's nonsegregated accounts as of such date. Participant's
transfers from other qualified plans and voluntary contributions deposited in
the general Trust Fund shall share in any earnings and losses (net appreciation
or net depreciation) of the Trust Fund in the same manner provided above. Each
segregated account maintained on behalf of a Participant shall be credited or
charged with its separate earnings and losses.
4.4.7 Participant's accounts shall be debited for any insurance or
annuity premiums paid, if any, and credited with any dividends received on
insurance contracts.
4.4.8 Notwithstanding the foregoing, for any Top Heavy Plan Year, the
sum of the Employer's contributions allocated to the Participant's Elective
Account of each Employee shall be equal to at least three percent (3%) of such
Employee's "415 Compensation" (reduced by contributions and forfeitures, if any,
allocated to each Employee in any defined contribution plan included with this
plan in a Required Aggregation Group). However, if (a) the sum of the Employer's
contributions allocated to the Participant's Elective Account of each Key
Employee for such Top Heavy Plan Year is less than three percent (3%) of each
Key Employee's "415 Compensation" and (b) this Plan is not required to be
included in an Aggregation Group to enable a defined benefit plan to meet the
requirements of Code Section 401(a)(4) or 410, the sum of the Employer's
contributions allocated to the Participant's Elective Account of each Employee
shall be equal to the largest percentage allocated to the Participant's Elective
Account of any Key Employee. However, in determining whether a Non-Key Employee
has received the required minimum allocation, such Non-Key Employee's Deferred
Compensation shall not be taken into account. However, no such minimum
allocation shall be required in this Plan for any Employee who participates in
another defined contribution plan subject to Code Section 412 providing such
benefits included with this Plan in a Required Aggregation Group.
4.4.9 For purposes of the minimum allocations set forth above, the
percentage allocated to the Participant's Elective Account of any Key Employee
shall be equal to the ratio of the sum of the Employer's contributions allocated
on behalf of such Key Employee divided by the "415 Compensation" for such Key
Employee.
-25-
4.4.10 For any Top Heavy Plan Year, the minimum allocations set forth
above shall be allocated to the Participant's Elective Account of all Employees
who are Participants and who are employed by the Employer on the last day of the
Plan Year, including Employees who have (a) failed to complete a Year of
Service; and (b) declined to make mandatory contributions (if required) or, in
the case of a cash or deferred arrangement, elective contributions to the Plan.
4.4.11 For the purposes of this Section, for Plan Years beginning on
or after January 1, 1994, the annual Compensation of each Employee taken into
account under this Plan shall not exceed $150,000, as adjusted by the Internal
Revenue Service pursuant to Code Section 401(a)(17)(B). The cost of living
adjustment in effect for a calendar year applies to any period which begins in
that year, does not exceed twelve (12) months, and for which Compensation is
being determined (the "determination period"). If a determination period
consists of fewer than twelve (12) months, then the limit in effect under this
Section 4.4.7(B) shall be equal to such $150,000 amount (as adjusted pursuant to
Code Section 401(a)(17)(B)), multiplied by a fraction, the numerator of which is
the number of months in such determination period, and the denominator of which
is twelve (12). For Plan years beginning on or after January 1, 1994, any
reference in this Plan to the limitation under Code Section 401(a)(17) shall
mean the annual Compensation limit described in this Section 4.4.11. If an
Employee's benefits accruing in a Plan Year are determined by reference to the
Employee's Compensation for any prior determination period, then the
Compensation for that prior determination period shall be subject to the limit
in effect under Code Section 401(a)(17) for that prior determination period. For
this purpose, for any determination period beginning prior to the first day of
the first Plan Year beginning on or after January 1, 1994, the annual
compensation limit shall be $150,000.
4.4.12 Notwithstanding anything herein to the contrary, Participants
who terminated employment for any reason during the Plan Year shall share in the
salary reduction contributions made by the Employer for the year of termination
without regard to the Hours of Service credited.
4.4.13 If a Former Participant is reemployed after five (5)
consecutive 1-Year Breaks in Service, then separate accounts shall be maintained
as follows: (a) one account for nonforfeitable benefits attributable to prebreak
service; and (b) one account representing his status in the Plan attributable to
post-break service.
4.4.14 Notwithstanding anything to the contrary, if this is a Plan
that would otherwise fail to meet the requirements of Code Sections 410(b)(1) or
410(b)(2)(A)(i) and the Regulations thereunder because Employer contributions
would not be allocated to a sufficient number or percentage of Participants for
a Plan Year, then the following rules shall apply:
A. The group of Participants eligible to share in the Employer's
contribution for the Plan Year shall be expanded to include the minimum number
of Participants who would not otherwise be eligible as are necessary to satisfy
the applicable test specified above. The specific Participants who shall become
eligible under the terms of this section shall be those who are actively
employed on the last day of the Plan Year and, when compared to similarly
situated Participants, have completed the greatest number of Hours of Service in
the Plan Year.
B. If after application of Paragraph A, above, the applicable test
is still not satisfied, then the group of Participants eligible to share in the
Employer's contribution for the Plan Year shall be further expanded to include
the minimum number of Participants who are not actively employed on the last day
of the Plan Year as are necessary to satisfy the applicable test. The specific
Participants who shall become eligible to share shall be those Participants,
when compared to similarly situated Participants,
-26-
who have completed the greatest number of Hours of Service in the Plan Year
before terminating employment.
C. Nothing in this Section 4.4.14 shall permit the reduction of a
Participant's accrued benefit. Therefore any amounts that have previously been
allocated to Participants may not be reallocated to satisfy these requirements.
In such event, the Employer shall make an additional contribution equal to the
amount such affected Participants would have received had they been included in
the allocations, even if it exceeds the amount which would be deductible under
Code Section 404. Any adjustment to the allocations pursuant to this section
shall be considered a retroactive amendment adopted by the last day of the Plan
Year.
4.5 Actual Deferral Percentage Tests.
4.5.1 For each Plan Year beginning after December 31, 1986, the annual
allocation derived from Employer Elective Contributions to a Participant's
Elective Account shall satisfy one of the following tests:
A. The "Actual Deferral Percentage" for the Highly Compensated
Participant group shall not be more than the "Actual Deferral Percentage" of the
Non-Highly Compensated Participant group multiplied by 1.25; or
B. The excess of the "Actual Deferral Percentage" for the Highly
Compensated Participant group over the "Actual Deferral Percentage" for the
Non-Highly Compensated Participant group shall not be more than two percentage
points. Additionally, the "Actual Deferral Percentage" for the Highly
Compensated Participant group shall not exceed the "Actual Deferral Percentage"
for the Non-Highly Compensated Participant group multiplied by 2. The provisions
of Code Section 401(k)(3) and Regulation 1.401(k)-1(b) are incorporated herein
by reference.
Notwithstanding, the foregoing, for Plan Years beginning after December 31,
1988, in order to prevent the multiple use of the alternative method described
in Paragraph B, above, and in Code Section 401(m)(9)(A), any Highly Compensated
Participant eligible to make elective deferrals pursuant to Section 4.2 and to
make Employee contributions or to receive matching contributions under this Plan
or under any other plan main tained by the Employer or an Affiliated Employer
shall have his actual contribution ratio reduced pursuant to Regulation
1.401(m)-2, the provisions of which are incorporated herein by reference.
4.5.2 For the purposes of this Section 4.5, the term "Actual Deferral
Percentage" means, with respect to the Highly Compensated Participant group and
Non-Highly Compensated Participant group for a Plan Year, the average of the
ratios, calculated separately for each Participant in such group, of the amount
of Employer Elective Contributions allocated to each Participant's Elective
Account for such Plan Year, to such Participant's "414(s) Compensation" for such
Plan Year. The actual deferral ratio for each Participant and the "Actual
Deferral Percentage" for each group shall be calculated to the nearest
one-hundredth of one percent for Plan Years beginning after December 31, 1988.
Employer Elective Contribu tions allocated to each Non-Highly Compensated
Participant's Elective Account shall be reduced by Excess Deferred Compensation
to the extent such excess amounts are made under this Plan or any other plan
maintained by the Employer.
4.5.3 For the purpose of determining the actual deferral ratio of a
Highly Compensated Employee who is subject to the Family Member aggregation
rules of Code section 414(q)(6)
-27-
because such Participant is either a "five percent owner" of the Employer or one
of the ten (10) Highly Compensated Employees paid the greatest "415
Compensation" during the year, the following shall apply:
A. The combined actual deferral ratio for the family group (which
shall be treated as one Highly Compensated Participant) shall be determined by
aggregating Employer Elective Contributions and "414(s) Compensation" of all
eligible Family members (including Highly Compensated Participants). However, in
applying the $200,000 limit to "414(s) Compensation," for Plan Years beginning
after December 31, 1988, Family Members shall include only the affected
Employee's spouse and any lineal descendants who have not attained age 19 before
the close of the Plan Year. Notwithstanding the foregoing, with respect to Plan
Years beginning prior to January 1, 1990, compliance with the Regulations then
in effect shall be deemed to be compliance with this section.
B. The Employer Elective Contributions and "414(s) Compensation"
of all Family Members shall be disregarded for purposes of determining the
"Actual Deferral Percentage" of the Non-Highly Compensated Participant group
except to the extent taken into account in Paragraph A, above.
C. If a Participant is required to be aggregated as a member of
more than one family group in a plan, all Participants who are members of those
family groups that include the Participant are aggregated as one family group in
accordance with Paragraph (A) and (B), above.
4.5.4 For the purposes of Sections 4.5.1 and 4.6, a Highly Compensated
Participant and a Non-Highly Compensated Participant shall include any Employee
eligible to make a deferral election pursuant to Section 4.2, whether or not
such deferral election was made or suspended pursuant to Section 4.2.
4.5.5 For the purposes of this Section and Code Sections 401(a)(4),
410(b) and 401(k), if two or more plans which include cash or deferred
arrangements are considered one plan for the purposes of Code Section 401(a)(4)
or 410(b) (other than Code Section 410(b)(2)(A)(ii)as in effect for Plan Years
beginning after December 31, 1988), the cash or deferred arrangements included
in such plans shall be treated as one arrangement.
A. In addition, two or more cash or deferred arrangements may be
considered as a single arrangement for purposes of determining whether or not
such arrangements satisfy Code Sections 401(a)(4), 410(b) and 401(k). In such a
case, the cash or deferred arrangements included in such plans and the plans
including such arrangements shall be treated as one arrangement and as one plan
for purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(k).
Plans may be aggregated under this Section 4.5.5 only if they have the same plan
year.
B. Notwithstanding the above, for Plan Years beginning after
December 31, 1988, an employee stock ownership plan described in Code Section
4975(e)(7) or 409 may not be combined with this Plan for purposes of determining
whether the employee stock ownership plan or this Plan satisfies this Section
and Code Sections 401(a)(4), 410(b) and 401(k).
4.5.6 For the purposes of this Section 4.5, if a Highly Compensated
Participant is a Participant under two or more cash or deferred arrangements
(other than a cash or deferred arrangement which is part of an employee stock
ownership plan as defined in Code Section 4975(e)(7) or 409 for Plan Years
beginning after December 31, 1988) of the Employer or an Affiliated Employer,
all such , cash or deferred arrangements shall be treated as one cash or
deferred arrangement for the purpose of determining the actual deferral ratio
with respect to such Highly Compensated Participant. However, for Plan Years
-28-
beginning after December 31, 1988, if the cash or deferred arrangements have
different plan years, this section shall be applied by treating all cash or
deferred arrangements ending with or within the same calendar year as a single
arrangement.
4.6 Adjustment to Actual Deferral Percentage Tests. In the event that the
initial allocations of the Employer's Elective Contributions made pursuant to
Section 4.4 do not satisfy one of the tests set forth in Section 4.5.1, above,
for Plan Years beginning after December 31, 1986, the Administrator shall adjust
Excess Contributions pursuant to the options set forth below:
4.6.1 On or before the fifteenth day of the third month following the
end of each Plan Year, the Highly Compensated Participant having the highest
actual deferral ratio shall have his portion of Excess Contributions distributed
to him and/or at his election recharacterized as a voluntary Employee
contribution pursuant to Section 4.12 until one of the tests set forth in
Section 4.5.1, above, is satisfied, or until his actual deferral ratio equals
the actual deferral ratio of the Highly Compensated Participant having the
second highest actual deferral ratio. This process shall continue until one of
the tests set forth in Section 4.5.1, above, is satisfied.
A. For each Highly Compensated Participant, the amount of Excess
Contributions is equal to the Elective Contributions on behalf of such Highly
Compensated Participant (determined prior to the application of this section)
minus the amount determined by multiplying the Highly Compensated Participant's
actual deferral ratio (determined after application of this section) by his
"414(s) Compensation." However, in determining the amount of Excess
Contributions to be distributed and/or recharacterized with respect to an
affected Highly Compensated Participant as determined herein, such amount shall
be reduced by any Excess Deferred Compensation previously distributed to such
affected Highly Compensated Participant for his taxable year ending with or
within such Plan Year.
B. With respect to the distribution of Excess Contributions
pursuant to this Section 4.6.1, such distribution: (i) may be postponed but not
later than the close of the Plan Year following the Plan Year to which they are
allocable; (ii) shall be adjusted for Income; and (iii) shall be designated by
the Employer as a distribution of Excess Contributions (and Income).
C. With respect to the recharacterization of Excess Contributions
pursuant to this Section 4.6.3, such recharacterized amounts:
(1) Shall be deemed to have occurred on the date on which the
last of those Highly Compensated Participants with Excess Contributions to be
recharacterized is notified of the recharacterization and the tax consequences
of such recharacterization;
(2) Shall not exceed the amount of Deferred Compensation on
behalf of any Highly Compensated Participant for any Plan Year;
(3) Shall be treated as voluntary Employee contributions for
purposes of Code Section 401(a)(4) and Regulation 1.401(k)-l(b). However, for
purposes of Sections 2.2 and 4.4.4, above, recharacterized Excess Contributions
continue to be treated as Employer contributions that are Deferred Compensation.
For Plan Years beginning after December 31, 1988, Excess Contributions
recharacterized as voluntary Employee contributions shall continue to be
nonforfeitable and subject to the same distribution rules provided for in
Section 4.2.3, above;
-29-
(4) Are not permitted if the amount recharacterized plus
voluntary Employee contributions actually made by such Highly Compensated
Participant, exceed the maximum amount of voluntary Employee contributions
(determined prior to application of Section 4.7.1) that such Highly Compensated
Participant is permitted to make under the Plan in the absence of
recharacterization; and
(5) Shall be adjusted for Income.
D. Any distribution and/or recharacterization of less than the
entire amount of Excess Contributions shall be treated as a pro rata
distribution and/or recharacterization of Excess Contributions and Income.
E. The determination and correction of Excess Contributions of a
Highly Compensated Participant whose actual deferral ratio is determined under
the family aggregation rules shall be accomplished by reducing the actual
deferral ratio as required herein, and the Excess Contributions for the family
unit shall then be allocated among the Family members in proportion to the
Elective Contributions of each Family Member that were combined to determine the
group actual deferral ratio. Notwithstanding the foregoing, with respect to Plan
Years beginning prior to January 1, 1990, compliance with the Regulations then
in effect shall be deemed to be compliance with this section.
4.6.2 Within twelve (12) months after the end of the Plan Year, the
Employer may make a special Qualified Non-Elective Contribution on behalf of
Non-Highly Compensated Participants in an amount sufficient to satisfy one of
the tests set forth in Section 4.5.1, above. Such contribution shall be
allocated to the Participant's Elective Account of each Non-Highly Compensated
Participant in the same proportion that each Non-Highly Compensated
Participant's Compensation for the year bears to the total Compensation of all
Non-Highly Compensated Participants.
4.6.3 If during a Plan Year the projected aggregate amount of Elective
Contributions to be allocated to all Highly Compensated Participants under this
Plan would, by virtue of the tests set forth in Section 4.5.1, above, cause the
Plan to fail such tests, then the Administrator may automatically reduce
proportionately or in the order provided in Section 4.6.1, above, each affected
Highly Compensated Participant's deferral election made pursuant to Section 4.2,
above, by an amount necessary to satisfy one of the tests set forth in Section
4.5.1, above.
4.7 Actual Contribution Percentage Tests.
4.7.1 The "Actual Contribution Percentage" for Plan Years beginning
after December 31, 1986 for the Highly Compensated Participant group shall not
exceed the greater of:
A. 125 percent of such percentage for the Non-Highly Compensated
Participant group; or
B. The lesser of 200 percent of such percentage for the Non-Highly
Compen sated Participant group, or such percentage for the Non-Highly
Compensated Participant group plus 2 percentage points. However, for Plan Years
beginning after December 31, 1988, to prevent the multiple use of the
alternative method described in this section and Code Section 401(m)(9)(A), any
Highly Compensated Participant eligible to make elective deferrals pursuant to
Section 4.2 or any other cash or deferred arrangement maintained by the Employer
or an Affiliated Employer and to make Employee contributions or to receive
matching contributions under this Plan or under any other plan maintained by the
Employer or
-30-
an Affiliated Employer shall have his actual contribution ratio reduced pursuant
to Regulation 1.401(m)-2. The provisions of Code Section 401(m) and Regulations
1.401(m)-l(b) and 1.401(m)-2 are incorporated herein by reference.
4.7.2 For the purposes of this Section and Section 4.8, the "Actual
Contribution Percentage" for a Plan Year means, with respect to the Highly
Compensated Participant group and Non- Highly Compensated Participant group, the
average of the ratios (calculated separately for each Participant in each group)
of:
A. The sum of voluntary Employee contributions made pursuant to
Section 4.12 and Excess Contributions recharacterized as voluntary Employee
contributions pursuant to Section 4.6.1, above, on behalf of each such
Participant for such Plan Year; to
B. The Participant's "414(s) Compensation" for such Plan Year.
4.7.3 For purposes of determining the "Actual Contribution Percentage"
and the amount of Excess Aggregate Contributions pursuant to Section 4.8.3, the
Administrator may elect to take into account, with respect to Employees eligible
to have voluntary Employee contributions pursuant to Section 4.12 allocated to
their accounts, elective deferrals (as defined in Regulation 1.402(g)-l(b)) and
qualified non-elective contributions (as defined in Code Section 401(m)(4)(C))
contributed to any plan maintained by the Employer. Such elective deferrals and
qualified non-elective contributions shall be treated as Employer matching
contributions subject to Regulation 1.401(m)-l(b)(5) which is incorporated
herein by reference. However, for Plan Years beginning after December 31, 1988,
the Plan Year must be the same as the plan year of the plan to which the
elective deferrals and the qualified non-elective contributions are made.
4.7.4 For the purpose of determining the actual contribution ratio of
a Highly Compensated Employee who is subject to the Family Member aggregation
rules of Code Section 414(q)(6) because such Employee is either a "five percent
owner" of the Employer or one of the ten (10) Highly Compensated Employees paid
the greatest "415 Compensation" during the year, the following shall apply:
A. The combined actual contribution ratio for the family group
(which shall be treated as one Highly Compensated Participant) shall be
determined by aggregating voluntary Employee contributions made pursuant to
Section 4.12, Excess Contributions recharacterized as voluntary Employee
contributions pursuant to Section 4.6.1 and "414(s) Compensation" of all
eligible Family Members (including Highly Compensated Participants). However, in
applying the $200,000 limit to "414(s) Compensation" for Plan Years beginning
after December 31, 1988, Family Members shall include only the affected
Employee's spouse and any lineal descendants who have not attained age 19 before
the close of the Plan Year. Notwithstanding the foregoing, with respect to Plan
Years beginning prior to January 1, 1990, compliance with the Regulations then
in effect shall be deemed to be compliance with this section.
B. The voluntary Employee contributions made pursuant to Section
4.12, Excess Contributions recharacterized as voluntary Employee contributions
pursuant to Section 4.6.1, above, and "414(s) Compensation" of all Family
Members shall be disregarded for purposes of determining the "Actual
Contribution Percentage" of the Non-Highly Compensated Participant group except
to the extent taken into account in Section (1) above.
C. If a Participant is required to be aggregated as a member of
more than one family group in a plan, all Participants who are members of those
family groups that include the Participant are aggregated as one family group in
accordance with Paragraphs (A) and (B), above.
-31-
4.7.5 For purposes of this Section and Code Sections 401(a)(4), 410(b)
and 401(m), if two or more plans of the Employer to which matching
contributions, Employee contributions, or both, are made are treated as one plan
for purposes of Code Sections 401(a)(4) or 410(b) (other than the average
benefits test under Code Section 410(b)(2)(A)(ii) as in effect for Plan Years
beginning after December 31, 1988), such plans shall be treated as one plan. In
addition, two or more plans of the Employer to which matching contributions,
Employee contributions, or both, are made may be considered as a single plan for
purposes of determining whether or not such plans satisfy Code Sections
401(a)(4), 410(b) and 401(m). In such a case, the aggregated plans must satisfy
this Section and Code Sections 401(a)(4), 410(b) and 401(m) as though such
aggregated plans were a single plan. Plans may be aggregated under this Section
4.7.5 for Plan Years beginning after December 31, 1988, only if they have the
same plan year. Notwithstanding the foregoing, for Plan Years beginning after
December 31, 1988, an employee stock ownership plan described in Code Section
4975(e)(7) or 409 may not be aggregated with this Plan for purposes of
determining whether the employee stock ownership plan or this Plan satisfies
this Section and Code Sections 401(a)(4), 410(b) and 401(m).
4.7.6 If a Highly Compensated Participant is a Participant under two
or more plans (other than an employee stock ownership plan as defined in Code
Section 4975(e)(7) or 409 for Plan Years beginning after December 31, 1988)
which are maintained by the Employer or an Affiliated Employer to which matching
contributions, Employee contributions, or both, are made, all such contributions
on behalf of such Highly Compensated Participant shall be aggregated for
purposes of determining such Highly Compensated Participant's actual
contribution ratio. However, for Plan Years beginning after December 31, 1988,
if the plans have different plan years, this section shall be applied by
treating all plans ending with or within the same calendar year as a single
plan.
4.7.7 For purposes of Sections 4.7.1 and 4.8, above, a Highly
Compensated Participant and Non-Highly Compensated Participant shall include any
Employee eligible to have voluntary Employee contributions pursuant to Section
4.12 (whether or not voluntary Employee contributions are made), below,
allocated to his account for the Plan Year.
4.8 Adjustment To Actual Contribution Percentage Tests.
4.8.1 In the event that, for Plan Years beginning after December 31,
1986, the "Actual Contribution Percentage" for the Highly Compensated
Participant group exceeds the "Actual Contribution Percentage" for the
Non-Highly Compensated Participant group pursuant to Section 4.7.1, above, the
Administrator (on or before the fifteenth day of the third month following the
end of the Plan Year, but in no event later than the close of the following Plan
Year) shall direct the Trustee to distribute to the Highly Compensated
Participant having the highest actual contribution ratio, his portion of Excess
Aggregate Contributions (and Income allocable to such contributions) until
either one of the tests set forth in Section 4.7.1, above, is satisfied, or
until his actual contribution ratio equals the actual contribution ratio of the
Highly Compensated Participant having the second highest actual contribution
ratio. This process shall continue until one of the tests set forth in Section
4.7.1, above, is satisfied.
4.8.2 Any distribution of less than the entire amount of Excess
Aggregate Contributions (and Income) shall be treated as a pro rata distribution
of Excess Aggregate Contributions and Income. Distribution of Excess Aggregate
Contributions shall be designated by the Employer as a distribution of Excess
Aggregate Contributions (and Income).
4.8.3 For each Highly Compensated Participant, the amount of Excess
Aggregate Contributions is equal to the voluntary Employee contributions made
pursuant to Section 4.12, Excess
-32-
Contributions recharacterized as voluntary Employee contributions pursuant to
Section 4.6.1, above, and any qualified non-elective contributions or elective
deferrals taken into account pursuant to Section 4.7.3, above, on behalf of the
Highly Compensated Participant (determined prior to the application of this
section) minus the amount determined by multiplying the Highly Compensated
Participant's actual contribution ratio (determined after application of this
section) by his "414(s) Compensation." The actual contribution ratio must be
rounded to the nearest one-hundredth of one percent for Plan Years beginning
after December 31, 1988. In no case shall the amount of Excess Aggregate
Contribution with respect to any Highly Compensat ed Participant exceed the
amount of voluntary Employee contributions made pursuant to Section 4.12, Excess
Contributions recharacterized as voluntary Employee contributions pursuant to
Section 4.6.1, above, and any qualified non-elective contributions or elective
deferrals taken into account pursuant to Section 4.7.3, above, on behalf of such
Highly Compensated Participant for such Plan Year.
4.8.4 The determination of the amount of Excess Aggregate
Contributions with respect to any Plan Year shall be made after first
determining the Excess Contributions, if any, to be treated as voluntary
Employee contributions due to recharacterization for the plan year of any other
qualified cash or deferred arrangement (as defined in Code Section 401(k))
maintained by the Employer that ends with or within the Plan Year or which are
treated as voluntary Employee contributions due to recharacterization pursuant
to Section 4.6.1, above.
4.8.5 If the determination and correction of Excess Aggregate
Contributions of a Highly Compensated Participant whose actual contribution
ratio is determined under the family aggrega tion rules, then the actual
contribution ratio shall be reduced and the Excess Aggregate Contributions for
the family unit shall be allocated among the Family Members in proportion to the
sum of voluntary Employee contributions made pursuant to Section 4.12, Excess
Contributions recharacterized as voluntary Employee contributions pursuant to
Section 4.6.1, above, and any qualified non-elective contributions or elective
deferrals taken into account pursuant to Section 4.7.3, above, of each Family
member that were combined to determine the group actual contribution ratio.
Notwithstanding the foregoing, with respect to Plan Years beginning prior to
January 1, 1990, compliance with the Regulations then in effect shall be deemed
to be compliance with this section.
4.8.6 If during a Plan Year the projected aggregate amount of
voluntary Employee contributions and Excess Contributions to be recharacterized
as voluntary Employee contributions to be allocated to all Highly Compensated
Participants under this Plan would, by virtue of the tests set forth in Section
4.7.1, above, cause the Plan to fail such tests, then the Administrator may
automatically reduce proportionately or in the order provided in Section 4.8.1,
above, each affected Highly Compensated Participant's projected share of such
contributions by an amount necessary to satisfy one of the tests set forth in
Section 4.7.1, above.
4.8.7 Notwithstanding the above within twelve (12) months after the
end of the Plan Year, the Employer may make a special Qualified Non-Elective
Contribution on behalf of Non-Highly Compensated Participants in an amount
sufficient to satisfy one of the tests set forth in Section 4.7.1, above. Such
contribution shall be allocated to the Participant's Elective Account of each
Non-Highly Compensated Participant in the same proportion that each Non-Highly
Compensated Participant's Compensation for the year bears to the total
Compensation of all Non-Highly Compensated Participants. A separate accounting
shall be maintained for the purpose of excluding such contributions from the
"Actual Deferral Percentage" tests pursuant to Section 4.5.1, above.
-33-
4.9 Maximum Annual Additions.
4.9.1 Notwithstanding any provision in this Plan to the contrary, the
maximum "annual additions" credited to a Participant's accounts for any
"limitation year" shall equal the lesser of: (a) $30,000 (or, if greater,
one-fourth of the dollar limitation in effect under Code Section 415(b)(1)(A))
or (b) twenty-five percent (25%) of the Participant's "415 Compensation" for
such "limitation year." For any short "limitation year," the dollar limitation
in clause (a) above shall be reduced by a fraction, the numerator of which is
the number of full months in the short "limitation year" and the denominator of
which is twelve (12).
4.9.2 For purposes of applying the limitations of Code Section 415,
"annual additions" means the sum credited to a Participant's accounts for any
"limitation year" of (a) Employer contributions, (b) Employee contributions for
"limitation years" beginning after December 31, 1986, (c) forfeitures, (d)
amounts allocated, after March 31, 1984, to an individual medical account, as
defined in Code Section 415(1)(2) which is part of a pension or annuity plan
maintained by the Employer and (e) amounts derived from contributions paid or
accrued after December 31, 1985, in taxable years ending after such date, which
are attributable to post-retirement medical benefits allocated to the separate
account of a key employee (as defined in Code Section 419A(d)(3)) under a
welfare benefit plan (as defined in Code Section 419(e)) maintained by the
Employer; provided, however, the "415 Compensation" percentage limitation
referred to in Section 4.9.1(b) above shall not apply to any contribution for
medical benefits (within the meaning of Code Section 419A(f)(2)) after
separation from service which is otherwise treated as an "annual addition," or
any amount otherwise treated as an "annual addition" under Code Section
415(1)(1).
4.9.3 For purposes of applying the limitations of Code Section 415,
the transfer of funds from one qualified plan to another is not an "annual
addition." In addition, the following are not Employee contributions for the
purposes of Section 4.9.2(b): (a) Rollover contributions (as defined in Code
Sections 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3)); (b) Repayments of loans
made to a Participant from the Plan; (c) Repayments of distributions received by
an Employee pursuant to Code Section 411(a)(7)(B) (cash-outs); (d) repayments of
distributions received by an Employee pursuant to Code Section 411(a)(3)(D)
(mandatory contributions); and (e) Employee contributions to a simplified
employee pension excludable from gross income under Code Section 408(k)(6).
4.9.4 For purposes of applying the limitations of Code Section 415,
the "limitation year" shall be the Plan Year.
4.9.5 The dollar limitation under Code Section 415(b)(1)(A) stated in
Section 4.9.1(a), above, shall be adjusted annually as provided in Code Section
415(d) pursuant to the Regulations. The adjusted limitation is effective as of
January 1st of each calendar year and is applicable to "limitation years" ending
with or within that calendar year.
4.9.6 For the purpose of this Section 4.9, all qualified defined
benefit plans (whether terminated or not) ever maintained by the Employer shall
be treated as one defined benefit plan, and all qualified defined contribution
plans (whether terminated or not) ever maintained by the Employer shall be
treated as one defined contribution plan.
4.9.7 For the purpose of this Section, if the Employer is a member of
a controlled group of corporations, trades or businesses under common control
(as defined by Code Section 1563(a) or
-34-
Code Section 414(b) and (c) as modified by Code Section 415(h)), is a member of
an affiliated service group (as defined by Code Section 414(m)), or is a member
of a group of entities required to be aggregated pursuant to Regulations under
Code Section 414(o), all Employees of such Employers shall be considered to be
employed by a single Employer.
4.9.8 For the purpose of this Section, if this Plan is a Code Section
413(c) plan, all Employers of a Participant who maintain this Plan will be
considered to be a single Employer.
4.9.9 If a Participant participates in:
A. More than one defined contribution plan maintained by the
Employer which have different Anniversary Dates, the maximum "annual additions"
under this Plan shall equal the maximum "annual additions" for the "limitation
year" minus any "annual additions" previously credited to such Participant's
accounts during the "limitation year."
B. Both a defined contribution plan subject to Code Section 412
and a defined contribution plan not subject to Code Section 412 maintained by
the Employer which have the same Anniversary Date, "annual additions" will be
credited to the Participant's accounts under the defined contribution plan
subject to Code Section 412 prior to crediting "annual additions" to the
Participant's accounts under the defined contribution plan not subject to Code
Section 412.
C. More than one defined contribution plan not subject to Code
Section 412 maintained by the Employer which have the same Anniversary Date, the
maximum "annual additions" under this Plan shall equal the product of (1) the
maximum "annual additions" for the "limitation year" minus any "annual
additions" previously credited under Paragraphs (A) or (b) of this Section
4.4.9, multiplied by (2) a fraction (i) the numerator of which is the "annual
additions" which would be credited to such Participant's accounts under this
Plan without regard to the limitations of Code Section 415 and (ii) the
denominator of which is such "annual additions" for all plans. described in this
Section.
4.9.10 For Plan Years beginning on or before December 31, 1999:
A. If an Employee is (or has been) a Participant in one or more
defined benefit plans and one or more defined contribution plans maintained by
the Employer, the sum of the defined benefit plan fraction and the defined
contribution plan fraction for any "limitation year" may not exceed 1.0.
B. The defined benefit plan fraction for any "limitation year" is
a fraction, the numerator of which is the sum of the Participant's projected
annual benefits under all the defined benefit plans (whether or not terminated)
maintained by the Employer, and the denominator of which is the lesser of 125
percent of the dollar limitation determined for the "limitation year" under Code
Sections 415(b) and (d) or 140 percent of the highest average compensation,
including any adjustments under Code Section 415(b); provided, if the
Participant was a Participant as of the first day of the first "limitation year"
beginning after December 31, 1986, in one or more defined benefit plans
maintained by the Employer which were in existence on May 6, 1986, the
denominator of this fraction will not be less than 125 percent of the sum of the
annual benefits under such plans which the Participant had accrued as of the
close of the last "limitation year" beginning before January 1, 1987,
disregarding any changes in the terms and conditions of the plan after May 5,
1986. The preceding sentence applies only if the defined benefit plans
individually and in the aggregate satisfied the requirements of Code Section 415
for all "limitation years" beginning before January 1, 1987.
-35-
C. The defined contribution plan fraction for any "limitation
year" is a fraction, the numerator of which is the sum of the annual additions
to the Participant's Account under all the defined contribution plans (whether
or not terminated) maintained by the Employer for the current and all prior
"limitation years" (including the annual additions attributable to the
Participant's nondeductible Employee contributions to all defined benefit plans,
whether or not terminated, maintained by the Employer, and the annual additions
attributable to all welfare benefit funds, as defined in Code Section 419(e),
and individual medical accounts, as defined in Code Section 415(1)(2),
maintained by the Employer), and the denominator of which is the sum of the
maximum aggregate amounts for the current and all prior "limitation years" of
service with the Employer (regardless of whether a defined contribution plan was
maintained by the Employer).
(1) The maximum aggregate amount in any "limitation years" is
the lesser of 125 percent of the dollar limitation determined under Code
Sections 415(b) and (d) in effect under Code Section 415(c)(1)(A) or 35 percent
of the Participant's Compensation for such year.
(2) If the Employee was a Participant as of the end of the
first day of the first "limitation year" beginning after December 31, 1986, in
one or more defined contribution plans maintained by the Employer which were in
existence on May 6, 1986, the numerator of this fraction will be adjusted if the
sum of this fraction and the defined benefit fraction would otherwise exceed 1.0
under the terms of this Plan. Under the adjustment, an amount equal to the
product of (1) the excess of the sum of the fractions over 1.0 times (2) the
denominator of this fraction, will be permanently subtracted from the numerator
of this fraction. The adjustment is calculated using the fractions as they would
be computed as of the end of the last "limitation year" beginning before January
1, 1987, and disregarding any changes in the terms and conditions of the Plan
made after May 5, 1986, but using the Code Section 415 limitation applicable to
the first "limitation year" beginning on or after January 1, 1987. The annual
addition for any "limitation year" beginning before January 1, 1987 shall not be
recomputed to treat all Employee contributions as annual additions.
D. Notwithstanding the foregoing, for any "limitation year" in
which the Plan is a Top Heavy Plan, 100 percent shall be substituted for 125
percent in Paragraphs B and C, above, unless the extra minimum allocation is
being provided pursuant to Section 4.4. However, for any "limitation year" in
which the Plan is a Super Top Heavy Plan, 100 percent shall be substituted for
125 percent in any event.
4.9.11 Notwithstanding anything contained in this Section to the
contrary, the limitations, adjustments and other requirements prescribed in this
Section shall at all times comply with the provisions of Code Section 415 and
the Regulations thereunder, the terms of which are specifically incorporated
herein by reference.
4.10 Adjustment For Excessive Annual Additions.
4.10.1 For purposes of this Section 4.10, the term:
A. "Excess Amount" shall mean, for each Participant in each
limitation year, the excess, if any, of (i) the "annual additions" which would
be credited to the Participant's account under the terms of this Plan without
regard to the limitations of Code Section 415, over (ii) the maximum "annual
additions" permitted by Code Section 415, as determined pursuant to Section 4.9,
above.
B. "Section 415 Suspense Account" shall mean an unallocated
account equal to the sum of "excess amounts" for all Participants in the plan
during the limitation year, determined after
-36-
such excess amounts have been reallocated to all Participants to the extent
permitted by Section 415 in accordance with the provisions of Section 4.10.2,
below. the amount allocated to the Section 415 Suspense Account shall not share
in any earnings or losses of the Trust Fund.
4.10.2 If the "annual additions" under this Plan would cause the
maximum "annual additions" permitted under this Plan to be exceeded for any
Participant, including by reason of (i) the allocation of Forfeitures, (ii) a
reasonable error in estimating a Participant's Compensation, (iii) a reasonable
error in determining the amount of elective deferrals (within the meaning of
Code Section 402(g)(3)) that may be made with respect to any Participant under
the limits imposed on such deferrals, or (iv) other facts and circumstances to
which Treasury Regulations Section 1.415-6(b)(6) shall be applicable, then the
Administrator shall:
A. Allocate and reallocate such excess amounts to other
Participants in accordance with Section 4.4, above, but subject to the limits on
"annual additions" imposed by Section 4.9, above;
B. Allocate to the Section 415 Suspense Account any "excess
amount" remaining after application of Paragraph A, above; and
C. Allocate and reallocate the amount in the Section 415 Suspense
Account in the next limitation year (and, if the amount in that Section 415
Suspense Account is not fully allocated in the next limitation year, then in
succeeding limitation years) to all Participants in the Plan before any Employer
or Employee contribution which would constitute annual additions are made to the
Plan for such limitation year, and reduce Employer contributions to the Plan for
such limitation year by the amount of the Section 415 Suspense Account allocated
and reallocated during such limitation year.
D. The Plan may not distribute excess amounts, other than
voluntary Employee contributions, to Participants or Former Participants.
4.11 Transfers From Qualified Plans.
4.11.1 With the consent of the Administrator, amounts may be
transferred from other qualified plans (the "Rollover Funds") by Participants,
provided that the trust from which such funds are transferred permits the
transfer to be made and the transfer will not jeopardize the tax exempt status
of the Plan or Trust or create adverse tax consequences for the Employer. The
amounts transferred may be set up in a separate account herein referred to as a
"Participant's Rollover Account." All Rollover Funds shall be fully Vested at
all times and shall not be subject to Forfeiture for any reason.
4.11.2 Each Participant's Rollover Funds shall be held by the Trustee
pursuant to the provisions of this Plan and may not be withdrawn by, or
distributed to the Participant, in whole or in part, except as provided in
Sections 4.11.3 and 4.11.4, below.
4.11.3 Except as permitted by Regulations (including Regulation
1.411(d)-4), amounts attributable to elective contributions (as defined in
Regulation 1.401(k)-l(g)(3)), including amounts treated as elective
contributions, which are transferred from another qualified plan in a
plan-to-plan transfer shall be subject to the distribution limitations provided
for in Regulation 1.401(k)-l(d).
4.11.4 At Normal Retirement Date, or such other date when the
Participant or his Beneficiary shall be entitled to receive benefits, the fair
market value of the Participant's Rollover Funds
-37-
shall be used to provide additional benefits to the Participant or his
Beneficiary. Any distributions of amounts held in a Participant's Rollover Funds
shall be made in a manner which is consistent with and satisfies the provisions
of Section 6.5, including, but not limited to, all notice and consent
requirements of Code Section 411(a)(11) and the Regulations thereunder.
Furthermore, such amounts shall be considered as part of a Participant's benefit
in determining whether an involuntary cash-out of benefits without Participant
consent may be made.
4.11.5 The Administrator may direct that employee transfers made after
a valuation date be segregated into a separate account for each Participant in a
federally insured savings account, certificate of deposit in a bank or savings
and loan association, money market certificate, or other short term debt
security acceptable to the Trustee until such time as the allocations pursuant
to this Plan have been made, at which time they may remain segregated or be
invested as part of the general Trust Fund, to be determined by the
Administrator.
4.11.6 All Rollover Funds held in accounts under this Plan may be
treated as if those funds were held in a Directed Investment Account pursuant to
Section 4.13.
4.11.7 For purposes of this Section, the term "qualified plan" shall
mean any tax qualified plan under Code Section 401(a). The term "amounts
transferred from other qualified plans" shall mean: (a) amounts transferred to
this Plan directly from another qualified plan; (b) lump-sum distributions
received by an Employee from another qualified plan which are eligible for tax
free rollover to a qualified plan and which are transferred by the Employee to
this Plan within sixty (60) days following his receipt thereof; (c) amounts
transferred to this Plan from a conduit individual retirement account provided
that the conduit individual retirement account has no assets other than assets
which (1) were previously distributed to the Employee by another qualified plan
as a lump-sum distribution (2) were eligible for tax-free rollover to a
qualified plan and (3) were deposited in such conduit individual retirement
account within sixty (60) days of receipt thereof and other than earnings on
said assets; and (d) amounts distributed to the Employee from a conduit
individual retirement account meeting the requirements of clause (c) above, and
transferred by the Employee to this Plan within sixty (60) days of his receipt
thereof from such conduit individual retirement account.
4.11.8 Prior to accepting any transfers to which this Section applies,
the Administrator may require the Employee to establish that the amounts to be
transferred to this Plan meet the requirements of this Section and may also
require the Employee to provide an opinion of counsel satisfactory to the
Employer that the amounts to be transferred meet the requirements of this
Section.
4.11.9 This Plan shall not accept any direct or indirect transfers (as
that term is defined and interpreted under Code Section 401(a)(11) and the
Regulations thereunder) from a defined benefit plan, money purchase plan
(including a target benefit plan), stock bonus or profit sharing plan which
would otherwise have provided for a life annuity form of payment to the
Participant.
4.11.10 Notwithstanding anything herein to the contrary, a transfer
directly to this Plan from another qualified plan (or a transaction having the
effect of such a transfer) shall only be permitted if it will not result in the
elimination or reduction of any "Section 411(d)(6) protected benefit" as
described in Section 8.1, below.
-38-
4.12 Directed Investment Account.
4.12.1 The Administrator, in its sole discretion, may determine that
all Participants be permitted to direct the Trustee as to the investment of all
or a portion of the Vested interest in any one or more of their individual
account balances. If such authorization is given, Participants may, subject to a
procedure established by the Administrator and applied in a uniform
nondiscriminatory manner, direct the Trustee in writing to invest the Vested
portion of their account in specific assets, specific funds or other investments
permitted under the Plan and the directed investment procedure. That portion of
the Vested account of any Participant so directing will thereupon be considered
a Directed Investment Account, which shall not share in Trust Fund earnings.
4.12.2 A separate Directed Investment Account shall be established for
each Participant who has directed an investment. Transfers between the
Participant's regular account and his Directed Investment Account shall be
charged and credited as the case may be to each account. The Directed Investment
Account shall not share in Trust Fund earnings, but it shall be charged or
credited as appropriate with the net earnings, gains, losses and expenses as
well as any appreciation or depreciation in market value during each Plan Year
attributable to such account.
4.13 Qualified Voluntary Employee Contributions. Any voluntary employee
contribution made in cash after December 31, 1981, attributable to taxable years
ending before January 1, 1987, shall be treated as a "Qualified Voluntary
Employee Contribution" within the meaning of Code Section 219(e)(2) as it
existed prior to the enactment of the Tax Reform Act of 1986, and held in a
separate Qualified Voluntary Employee Contribution Account.
4.13.1 The balance in each Participant's Qualified Voluntary Employee
Contribution Account shall be fully Vested at all times and shall not be subject
to Forfeiture for any reason.
4.13.2 A Participant may, upon written request delivered to the
Administrator, make withdrawals from his Qualified Voluntary Employee
Contribution Account. Any distribution shall be made in a manner which is
consistent with and satisfies the provisions of Section 6.5, including, but not
limited to, all notice and consent requirements of Code Section 411(a)(11) and
the Regulations thereunder.
4.13.3 At Normal Retirement Date, or such other date when the
Participant or the Participant's Beneficiary shall be entitled to receive
benefits, the fair market value of the Qualified Voluntary Employee Contribution
Account shall be used to provide additional benefits to the Participant or the
Participant's Beneficiary.
4.13.4 Unless the Administrator directs Qualified Voluntary Employee
Contributions made pursuant to this Section be segregated into a separate
account for each Participant in a federally-insured savings account, certificate
of deposit in a bank or savings and loan association, money market certificate
or other short-term debt security acceptable to the Trustee, they shall be
invested as part of the general Trust Fund and share in earnings and losses.
4.13.5 All amounts allocated to a Qualified Voluntary Employee
Contribution Account may be treated as a Directed Investment Account pursuant to
Section 4.12, above.
4.14 USERRA. Notwithstanding any provision of this Plan to the contrary,
contributions, benefits, and service credit with respect to "qualified military
service" (as defined in Section 414(u) of the Code) will be provided in
accordance with Code Section 414(u).
-39-
5. VALUATIONS
5.1 Valuation Of The Trust Fund. The Administrator shall direct the
Trustee, as of each Anniversary Date, and at such other date or dates deemed
necessary by the Administrator, herein called "valuation date," to determine the
net worth of the assets comprising the Trust Fund as it exists on the "valuation
date." In determining such net worth, the Trustee shall value the assets
comprising the Trust Fund at their fair market value as of the "valuation date"
and shall deduct all expenses for which the Trustee has not yet obtained
reimbursement from the Employer or the Trust Fund.
5.2 Method Of Valuation. In determining the fair market value of securities
held in the Trust Fund which are listed on a registered stock exchange, the
Administrator shall direct the Trustee to value the same at the prices they were
last traded on such exchange preceding the close of business on the "valuation
date." If such securities were not traded on the "valuation date," or if the
exchange on which they are traded was not open for business on the "valuation
date," then the securities shall be valued at the prices at which they were last
traded prior to the "valuation date." Any unlisted security held in the Trust
Fund shall be valued at its bid price next preceding the close of business on
the "valuation date," which bid price shall be obtained from a registered broker
or an investment banker. In determining the fair market value of assets other
than securities for which trading or bid prices can be obtained, the Trustee may
appraise such assets itself, or in its discretion, employ one or more appraisers
for that purpose and rely on the values established by such appraiser or
appraisers.
6. DETERMINATION AND DISTRIBUTION OF BENEFITS
6.1 Determination Of Benefits Upon Retirement. Every Participant may
terminate his employment with the Employer and retire for the purposes hereof on
his Normal Retirement Date or Early Retirement Date. However, a Participant may
postpone the termination of his employment with the Employer to a later date, in
which event the participation of such Participant in the Plan, including the
right to receive allocations pursuant to Section 4.4, shall continue until his
Late Retirement Date. Upon a Partici pant's Retirement Date or attainment of his
Normal Retirement Date without termination of employment with the Employer, or
as soon thereafter as is practicable, the Trustee shall distribute all amounts
credited to such Participant's Elective Account in accordance with Section 6.5.
6.2 Determination Of Benefits Upon Death.
6.2.1 Upon the death of a Participant before his Retirement Date or
other termination of his employment, all amounts credited to such Participant's
Elective Account shall become fully Vested. The Administrator shall direct the
Trustee, in accordance with the provisions of Sections 6.6 and 6.7, to
distribute the value of the deceased Participant's accounts to the Participant's
Beneficiary.
6.2.2 Upon the death of a Former Participant, the Administrator shall
direct the Trustee, in accordance with the provisions of Sections 6.6 and 6.7,
to distribute any remaining Vested amounts credited to the accounts of a
deceased Former Participant to such Former Participant's Beneficiary.
6.2.3 Any security interest held by the Plan by reason of an
outstanding loan to the Participant or Former Participant shall be taken into
account in determining the amount of the death benefit.
6.2.4 The Administrator may require such proper proof of death and
such evidence of the right of any person to receive payment of the value of the
account of a deceased Participant
-40-
or Former Participant as the Administrator may deem desirable. The
Administrator's. determination of death and of the right of any person to
receive payment shall be conclusive.
6.2.5 The Beneficiary of the death benefit payable pursuant to this
Section shall be the Participant's spouse.
A. Notwithstanding the foregoing, the Participant may designate a
Beneficiary other than his spouse if:
(1) The spouse has waived the right to be the Participant's
Beneficiary, or
(2) The Participant is legally separated or has been abandoned
(within the meaning of local law) and the Participant has a court order to such
effect (and there is no "qualified domestic relations order" as defined in Code
Section 414(p) which provides otherwise), or
(3) The Participant has no spouse, or
(4) The spouse cannot be located.
B. If a Participant designates a Beneficiary other than his spouse
in accordance with the preceding Paragraph A, then the designation of that
Beneficiary shall be made on a form satisfactory to the Administrator. A
Participant may at any time revoke his designation of a Beneficiary or change
his Beneficiary by filing written notice of such revocation or change with the
Administrator. However, the Participant's spouse must again consent in writing
to any change in Beneficiary unless the original consent acknowledged that the
spouse had the right to limit consent only to a specific Beneficiary and that
the spouse voluntarily elected to relinquish such right. In the event no valid
designation of Beneficiary exists at the time of the Participant's death, the
death benefit shall be payable to his estate.
6.2.6 Any consent by the Participant's spouse to waive any rights to
the death benefit must be in writing, must acknowledge the effect of such
waiver, and be witnessed by a Plan representative or a notary public. Further,
the spouse's consent must be irrevocable and must acknowledge the specific
nonspouse Beneficiary.
6.3 Determination of Benefits on Disability In the event of the
Participant's Total and Permanent Disability prior to the Participant's
Retirement Date or other termination of the Participant's employment with the
Employer, all amounts credited to such Participant's Combined Account shall
become fully Vested. In the event of the Participant's Total and Permanent
Disability, the Trustee, in accordance with the provisions of Sections 6.5 and
6.7 of this Plan, shall distribute to such Participant's Combined Account as
thought the Participant had retired.
6.4 Determination Of Benefits Upon Termination.
6.4.1 On or before the Anniversary Date coinciding with or subsequent
to the termination of a Participant's employment for any reason other than death
or retirement, the Administrator may direct the Trustee to segregate the amount
of the Vested portion of such Terminated Participant's Elective Account and
invest the aggregate amount thereof in a separate, federally insured savings
account, certificate of deposit, common or collective trust fund of a bank or a
deferred annuity. In the event the Vested portion of a Participant's Elective
Account is not segregated, the amount shall remain in a separate
-41-
account for the Terminated Participant and share in allocations pursuant to
Section 4.4 until such time as a distribution is made to the Terminated
Participant. For purposes of this Section 6.4, if the value of a Terminated
Participant's Vested benefit is zero, then the Terminated Participant shall be
deemed to have received a distribution of such Vested benefit upon such
Participant's termination of employment with the Employer.
6.4.2 In the event that the amount of the Vested portion of the
Terminated Participant's Elective Account equals or exceeds the fair market
value of any. insurance Contracts, the Trustee, when so directed by the
Administrator and agreed to by the Terminated Participant, shall assign,
transfer, and set over to such Terminated Participant all Contracts on his life
in such form or with such endorsements so that the settlement options and forms
of payment are consistent with the provisions of Section 6.5. In the event that
the Terminated Participant's Vested portion does not at least equal the fair
market value of the Contracts, if any, the Terminated Participant may pay over
to the Trustee the sum needed to make the distribution equal to the value of the
Contracts being assigned or transferred, or the Trustee, pursuant to the
Participant's election, may borrow the cash value of the Contracts from the
insurer so that the value of the Contracts is equal to the Vested portion of the
Terminated Participant's Account and then assign the Contracts to the Terminated
Participant.
6.4.3 Distribution of the funds due to a Terminated Participant shall
be made on the occurrence of an event which would result in the distribution had
the Terminated Participant remained in the employ of the Employer (upon the
Participant's death, Early or Normal Retirement). If the value of a Terminated
Participant's Vested benefit derived from Employer and Employee contributions
does not exceed $5,000 and has never exceeded $5,000 at the time of any prior
distribution, the Administrator shall direct the Trustee to cause the entire
Vested benefit to be payable in a single lump sum to such Participant.
6.4.4 The computation of a Participant's nonforfeitable percentage of
his interest in the Plan shall not be reduced as the result of any direct or
indirect amendment to this Plan. For this purpose, the Plan shall be treated as
having been amended if the Plan provides for an automatic change in vesting due
to a change in top heavy status. In the event that the Plan is amended to change
or modify any vesting schedule, a Participant with at least three (3) Years of
Service as of the expiration date of the election period may elect to have his
nonforfeitable percentage computed under the Plan without regard to such
amendment. if a Participant fails to make such election, then such Participant
shall be subject to the new vesting schedule. The Participant's election period
shall commence on the adoption date of the amendment and shall end 60 days after
the latest of (a) the adoption date of the amendment; (b) the effective date of
the amendment; or (c) the date the Participant receives written notice of the
amendment from the Employer or Administrator.
6.4.5 The Vested portion of any Participant's Account shall be a
percentage of the total amount credited to the Participant's Account determined
on the basis of the Participant's number of Years of Service. Subject to Section
6.4.6 and 6.4.7, below:
A. Each Participant always shall be one hundred percent (100%)
vested in such Participant's Deferred Compensation under this Plan.
B. Each Participant's Vested percentage of the Employer's
Non-Elective Contribution made pursuant to Section 4.1.1B, above, shall be
determined according to the following schedule:
Employer Matching Non-Elective Contributions
-42-
(Section 4.1.1B)
Years of Service
Less than 1
1
2
3
4
5 or more
Vested Percentage
0%
20%
40%
60%
80%
100%
C. A Participant's Vested percentage of the Employer's
Non-Elective Contribution made pursuant to Section 4.1.1C, above, shall be
determined pursuant to the following schedule:
Employer Discretionary Non-Elective Contributions
(Section 4.1.1C)
Years of Service
Less than 2
2
3
4
5
6
7 or more
Vested Percentage
0
20%
30%
40%
60%
80%
100%
6.4.6 Employer hereby acknowledges that (a) Citizens State Bank of
Santa Paula ("Citizens Bank") formerly sponsored that certain "Citizens State
Bank of Santa Paula Profit Sharing 401(k) Plan" (the "Citizens Plan"), and (b)
in transactions that closed effective October 1, 1997, (i) Citizens Bank merged
with and into Employer, (ii) the Citizens Plan was merged with and into this
Plan, and (iii) the assets formerly held in the trust under the Citizens Plan
were merged into the trust under this Plan; (c) the Citizens Plan provided that
each participant in that plan (i) was 100% vested in "Employer Matching
Contributions" allocated to the participant's account under that plan, and (ii)
became vested, in accordance with the following schedule, in "Employer
Discretionary Contributions" allocated to the participant's account under the
Citizens Plan:
-43-
Vesting Schedule - Former Employer Discretionary Contributions Under Citizens
Plan
Years of Service
0
1
2
3
4
5 or more
Vesting Percentage
0%
33.33%
66.67%
100.00%
100.00%
100.00%
Therefore, notwithstanding any other provision of this Plan to the contrary,
each Participant who formerly participated in the Citizens State Bank of Santa
Paula Profit Sharing 401(k) Plan (the "Citizens Plan") and who had an account
balance which was held under that Citizens Plan and has been merged into this
Plan shall become vested in such account balance as follows:
A. That portion of such Participant's account balance attributable
to "Employer Matching Contributions," as defined under the Citizens Plan, shall
be and remain one hundred percent (100%) vested in such contributions; and
B. That portion of such Participant's account balance attributable
to "Employer Discretionary Contributions" (as defined in the Citizens Plan)
shall continue to be and become vested in such contributions in accordance with
the following schedule:
Vesting Schedule - Former Employer Discretionary Contributions Under Citizens
Plan
Years of Service
0
1
2
3
4
5 or more
Vesting Percentage
0%
33.33%
66.67%
100.00%
100.00%
100.00%
Each such Participant shall be and become vested in all other contributions
allocated to such Participant's accounts under this Plan on or after October 1,
1997, in accordance with the regular vesting schedules under this Plan for such
other contributions, as set forth in Sections 6.4.5, above.
6.4.7 The Employer acknowledges that effective as of January 1, 1999,
(i) PACIFIC CAPITAL BANCORP, a California corporation with offices in Salinas,
California (the "Merged Corporation"), is merging with and into the Employer,
and (ii) the PACIFIC CAPITAL BANCORP 401(k) PROFIT SHARING PLAN (the "Merged
Plan") sponsored by the Merged Corporation is merging into this Plan. With
respect to the account balance of each person who was a participant in the
Merged Plan as of the effective date of that merger, (a) the regular Vesting
schedules set forth in Section 6.4.5, above, shall apply only to contributions
allocated to such Participant's account under this Plan with respect to Plan
Years
-44-
beginning on or after January 1, 1999, (b) all contributions, allocations, and
other additions to such Participant's account balance under the Merged Plan
constituting (i) Employee Elective Contributions shall be at all times fully
Vested and non-forfeitable and (ii) attributed to all other Employer
contributions and shall continue to be subject to the following vesting schedule
which was in effect under the Merged Plan:
Alternate Regular Vesting Schedule - Pacific Capital Bancorp Accounts
(for all Employee Contributions, except Employee Elective Contributions, as of
12/31/98)
Years of Service
0 to 1
2
3
4
5
Vested Percentage
20%
40%
60%
80%
100%
6.4.8 Notwithstanding the vesting schedule provided for in
Sections 6.4.5, 6.4.6, or 6.4.7, above, for any Top Heavy Plan Year, the Vested
portion of the Participant's Account consisting of contributions made pursuant
to Sections 4.1.1B or 4.1.1C, above, for any Participant who has an Hour of
Service after the Plan becomes top heavy shall be a percentage of the total
amount credited to the Participant's Account determined on the basis of the
Participant's number of Years of Service according to the following schedule:
Top Heavy Vesting Schedule
Years of Service Percentage Vesting
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 100%
6.4If any Former Participant shall be re-employed by the Employer
before a 1-Year Break in Service occurs, then that Participant shall continue to
participate in the Plan in the same manner as if such termination had not
occurred.
A. If any Former Participant shall be re-employed by the Employer
before five (5) consecutive 1-Year Breaks in Service, and such Former
Participant had received, or was deemed to have received, a distribution of his
entire Vested interest prior to his re-employment, his forfeited account shall
be reinstated only if he repays the full amount distributed to him before the
earlier of five (5) years after the first date on which the Participant is
subsequently re-employed by the Employer or the close of the first period of
five (5) consecutive 1-Year Breaks in Service commencing after the distribution,
or in the event of a deemed distribution, upon the re-employment of such Former
Participant. If a distribution occurs for any reason other than a separation
from service, the time for repayment may not end earlier than five (5) years
after the date of distribution. In the event the Former Participant does repay
the full amount distributed
-45-
to him, or in the event of a deemed distribution, the undistributed portion of
the Participant's Account must be restored in ful, unadjusted by any gains or
losses occurring subsequent to the Anniversary Date or other valuation date
coinciding with or preceding his termination. The source for such reinstatement
shall first be any Forfeitures occurring during the year. If such source is an
amount which is sufficient to restore any such forfeited Accounts provided,
however, that if a discretionary contribution is made for such year pursuant to
Section 4.1.1C, above, such contribution shall first be applied to restore any
such Accounts and the remainder shall be allocated in accordance with Section
4.4, above.
B. If any Former Participant is re-employed after a 1-Year Break
in Service has occurred, Years of Service shall include Years of Service prior
to that Participant's 1-Year Break in Service subject to the following rules:
(1) If a Former Participant has a 1-Year Break in Service,
that Participant's pre-break and post-break service shall be used for computing
Years of Service for eligibility and for Vesting purposes only after that
Participant has been employed for one (1) Year of Service following the date of
re-employment with the Employer;
(2) Any Former Participant who, under the Plan, does not have
a nonforfeitable right to any interest in the Plan resulting from Employer
contributions shall lose credits otherwise allowable under subparagraph (1),
above, if the Former Participant's 1-Year Breaks in Service equal or exceed the
greater of (a) five (5), or (b) the aggregate number of the Former Participant's
pre-break Years of Service.
(3) After five (5) consecutive 1-Year Breaks in Service, a
Former Participant's Vested Account balance attributable to pre-break service
shall not be increased as a result of post-break service.
(4) If a Former Participant who has not had any Years of
Service before a 1-Year Break in Service disregarded pursuant to subparagraph
(2), above, completes one (1) Year of Service for eligibility purposes following
re-employment with the Employer, such Former Participant shall participate in
the Plan retroactively from such date of re-employment.
(5) If a Former Participant who has not had any Years of
Service before a 1-Year Break in Service disregarded pursuant to subparagraph
(2), above, completes a Year of Service (a 1-Year Break in Service previously
occurred, but employment had not terminated), then such Participant shall
participate in the Plan retroactively from the first day of the Plan Year during
which one (1) year of Service was completed.
6.5 Distribution Of Benefits.
6.5.1 The Administrator, pursuant to the election of the
Participant, shall direct to the Trustee to distribute to a Participant or his
Beneficiary any amount to which he is entitled under the Plan in one or more of
the following methods:
A. One lump-sum payment in cash or in property;
B. Payments over a period certain in monthly, quarterly,
semiannual, or annual cash installments. In order to provide such installment
payments, the Administrator may (1) segregate the aggregate amount thereof in a
separate, federally insured savings account, certificate of
-46-
deposit in a bank or savings and loan association, money market certificate or
other liquid short-term security or (2) purchase a nontransferable annuity
contract for a term certain (with no life contingencies) providing for such
payment. The period over which such payment is to be made shall not extend
beyond the Participant's life expectancy (or the life expectancy of the
Participant and his designated Beneficiary).
6.5.2 Any distribution to a Participant who has a benefit which
exceeds, or has ever exceeded, $5,000 at the time of any prior distribution
shall require such Participant's consent if such distribution commences prior to
the later of his Normal Retirement Age or age 62. With regard to this required
consent:
A. The Participant must be informed of his right to defer receipt
of the distribution. If a Participant fails to consent, it shall be deemed an
election to defer the commencement of payment of any benefit. However, any
election to defer the receipt of benefits shall not apply with respect to
distributions which are required under Section 6.5.3.
B. Notice of the rights specified under this section shall be
provided no less than 30 days and no more than 90 days before the first day on
which all events have occurred which entitle the Participant to such benefit.
C. Written consent of the Participant to the distribution must
not be made before the Participant receives the notice and must not be made more
than 90 days before the first day on which all events have occurred which
entitle the Participant to such benefit.
D. No consent shall be valid if a significant detriment is
imposed under the Plan on any Participant who does not consent to the
distribution.
E. Notwithstanding the foregoing provisions of this Section
6.5.2, if a distribution is one to which Code Sections 401(a)(11) and 417 do not
apply, then such distribution may commence less than thirty (30) days after the
participant receives the notice required under Treasury Regulation Section
1.411(a)-11(c), provided that (1) the Administrator clearly informs the
Participant that the Participant has a right to a period of at least thirty (30)
days after receiving the notice to consider the decision of whether or not to
elect a distribution (and, if applicable, a particular distribution option), and
(2) the Participant, after receiving the notice, affirmatively elects a
distribution.
6.5.3 Notwithstanding any provision in the Plan to the contrary, the
distribution of a Participant's benefits shall be made in accordance with the
following requirements and shall otherwise comply with Code Section 401(a)(9)
and the Regulations thereunder (including Regulation 1.401(a)(9)-2), the
provisions of which are incorporated herein by reference.
A. A Participant's benefits shall be distributed to him in
accordance with Paragraph B, below, not later than:
(1) With respect to a Participant who is not a "five percent
owner" (as defined in Section 1.31.3, above), April 1st of the calendar year
following the later of (i) the calendar year in which the Participant attains
age 70-1/2, or (ii) the calendar year in which the Participant retires from
employment with the Employer; or
(2) With respect to a Participant who is a "five percent
owner" (as defined in Section 1.31.3, above), April 1 of the calendar year
following the calendar year in which such five
-47-
percent owner attains age 70-1/2 (without regard to whether such five percent
owner actually retires from employment with the Employer).
B. Distributions shall be deemed to have satisfied the
requirements of this Paragraph B only if:
(1) Either (i) the entire account balance of the Participant
under the Plan shall have been distributed to the Participant or the
Participant's Beneficiaries, or (ii) distributions to the Participant (or the
Participant's beneficiary) commence as of the applicable required beginning date
under Paragraph A, above, and continue over a period certain measured by the
life expectancy of the Participant (or the life expectancies of the Participant
and the Participant's designated Beneficiaries).
(2) Distributions to a Participant and his Beneficiaries
shall only be made in accordance with the incidental death benefit requirements
of Code Section 401(a)(9)(G) and the Regulations thereunder.
(3) Notwithstanding any provision in the Plan to the
contrary, distributions upon the death of a Participant shall be made in
accordance with the following requirements and shall otherwise comply with Code
Section 401(a)(9) and the Regulations thereunder. If it is determined pursuant
to Regulations that the distribution of a Participant's interest has begun and
the Participant dies before his entire interest has been distributed to him, the
remaining portion of such interest shall be distributed at least as rapidly as
under the method of distribution selected pursuant to this Section 6.5 as of his
date of death. If a Participant dies before he has begun to receive any
distributions of his interest under the Plan or before distributions are deemed
to have begun pursuant to Regulations, then his death benefit shall be
distributed to his Beneficiaries by December 31st of the calendar year in which
the fifth anniversary of his date of death occurs. However, in the event that
the Participant's spouse (determined as of the date of the Participant's death)
is his Beneficiary, then in lieu of the preceding rules, distributions must be
made over a period not extending beyond the life expectancy of the spouse and
must commence on or before the later of: (a) December 31st of the calendar year
immediately following the calendar year in which the Participant died; or (b)
December 31st of the calendar year in which the Participant would have attained
age 70 1/2. If the surviving spouse dies before distributions to such spouse
begin, then the 5-year distribution requirement of this Section shall apply as
if the spouse was the Participant.
(4) For purposes of this Section 6.5, the life expectancy of
a Participant and a Participant's spouse may, at the election of the Participant
or the Participant's spouse, be redetermined in accordance with Regulations. The
election, once made, shall be irrevocable. If no election is made by the time
distributions must commence, then the life expectancy of the Participant and the
Participant's spouse shall not be subject to recalculation. Life expectancy and
joint and last survivor expectancy shall be computed using the return multiples
in Tables V and VI of Regulation 1.72-9.
6.6 Distribution Of Benefits Upon Death.
6.6The death benefit payable pursuant to Section 6.2 shall be paid
to the Participant's Beneficiary within a reasonable time after the
Participant's death by either of the following methods, as elected by the
Participant (or if no election has been made prior to the Participant's death,
by his Beneficiary) subject, however, to the rules specified in Section 6.6.2:
A. One lump-sum payment in cash or in property;
-48-
B. Payment in monthly, quarterly, semi-annual, or annual cash
installments over a period to be determined by the Participant or his
Beneficiary. After periodic installments commence, the Beneficiary shall have
the right to direct the Trustee to reduce the period over which such periodic
installments shall be made, and the Trustee shall adjust the cash amount of such
periodic installments accord ingly.
6.6.2 In the event the death benefit payable pursuant to Section 6.2
is payable in installments, then, upon the death of the Participant, the
Administrator may direct the Trustee to segregate the death benefit into a
separate account, and the Trustee shall invest such segregated account
separately, and the funds accumulated in such account shall be used for the
payment of the installments.
6.6.3 Notwithstanding any provision in the Plan to the contrary,
distributions upon the death of a Participant made on or after January 1, 1985
shall be made in accordance with the following requirements and shall otherwise
comply with Code Section 401(a)(9) and the Regulations thereunder.
A. If it is determined pursuant to such Regulations that the
distribution of a Participant's interest has begun and the Participant dies
before his entire interest has been distributed to him, the remaining portion of
such interest shall be distributed at least as rapidly as under the method of
distribution selected pursuant to Section 6.5 as of his date of death. If a
Participant dies before he has begun to receive any distributions of his
interest under the Plan or before distributions are deemed to have begun
pursuant to Regulations, then his death benefit shall be distributed to his
Beneficiaries by December 31st of the calendar year in which the fifth
anniversary of his date of death occurs.
B. However, the 5-year distribution requirement of the preceding
section shall not apply to any portion of the deceased Participant's interest
which is payable to or for the benefit of a designated Beneficiary. In such
event, such portion. may, at the election of the Participant (or the
Participant's designated Beneficiary), be distributed over a period not
extending beyond the life expectancy of such designated Beneficiary provided
such distribution begins not later than December 31st of the calendar year
immediately following the calendar year in which the Participant died. However,
in the event the Participant's spouse (determined as of the date of the
Participant's death) is his Beneficiary, the requirement that distributions
commence within one year of a Participant's death shall not apply. In lieu
thereof, distributions must commence on or before the later of: (1) December
31st of the calendar year immediately following the calendar year in which the
Participant died; or (2) December 31st of the calendar year in which the
Participant would have attained age 70 1/2. If the surviving spouse dies before
distributions to such spouse begin, then the 5-year distribution requirement of
this Section shall apply as if the spouse was the Participant.
6.6.4 For purposes of Section 6.6.2, above, the election by a
designated Beneficiary to be excepted from the 5-year distribution requirement
must be made no later than December 31st of the calendar year following the
calendar year of the Participant's death. Except, however, with respect to a
designated Beneficiary who is the Participant's surviving spouse, the election
must be made by the earlier of: (a) December 31st of the calendar year
immediately following the calendar year in which the Participant died or, if
later, the calendar year in which the Participant would have attained age 70
1/2; or (b) December 31st of the calendar year which contains the fifth
anniversary of the date of the Participant's death. An election by a designated
Beneficiary must be in writing and shall be irrevocable as of the last day of
the election period stated herein. In the absence of an election by the
Participant or a designated Beneficiary, the 5-year distribution requirement
shall apply.
-49-
6.6Subject to the spouse's right of consent afforded under the Plan,
the restrictions imposed by this Section shall not apply if a Participant has,
prior to January 1, 1984, made a written designation to have his death benefits
paid in an alternative method acceptable under Code Section 401(a) as in effect
prior to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982.
6.7 Time Of Segregation Or Distribution. Except as limited by Sections 6.5
and 6.6, whenever the Trustee is to make a distribution or to commence a series
of payments on or as of an Anniver sary Date, the distribution or series of
payments may be made or begun on such date or as soon thereafter as is
practicable. However, unless a Former Participant elects in writing to defer the
receipt of benefits (such election may not result in a death benefit that is
more than incidental), the payment of benefits shall begin not later than the
60th day after the close of the Plan Year in which the latest of the following
events occurs: (a) the date on which the Participant attains the earlier of age
65 or the Normal Retirement Age specified herein; (b) the 10th anniversary of
the year in which the Participant commenced participation in the Plan; or (c)
the date the Participant terminates his service with the Employer.
6.8 Distribution For Minor Beneficiary. In the event a distribution is to
be made to a minor, then the Administrator may direct that such distribution be
paid to the legal guardian, or if none, to a parent of such Beneficiary or a
responsible adult with whom the Beneficiary maintains his residence, or to the
custodian for such Beneficiary under the Uniform Gift to Minors Act or Gift to
Minors Act, if such is permitted by the laws of the state in which said
Beneficiary resides. Such a payment to the legal guardian, custodian or parent
of a minor Beneficiary shall fully discharge the Trustee, Employer, and Plan
from further liability on account thereof.
6.9 Location Of Participant Or Beneficiary Unknown. In the event that all,
or any portion, of the distribution payable to a Participant or his Beneficiary
hereunder shall, at the later of the Participant's attainment of age 62 or his
Normal Retirement Age, remain unpaid solely by reason of the inability of the
Administrator, after sending a registered letter, return receipt requested, to
the last known address, and after further diligent effort, to ascertain the
whereabouts of such Participant or his Beneficiary, the amount so distributable
shall be treated as a Forfeiture pursuant to the Plan. In the event a
Participant or Beneficiary is located subsequent to his benefit being
reallocated, such benefit shall be restored.
6.10 Advance Distribution For Hardship.
6.10.1 The Administrator, at the election of the Participant, shall
direct the Trustee to distribute to any Participant in any one Plan Year up to
the lesser of 80% of his Participant's Elective Account valued as of the last
Anniversary Date or other valuation date or the amount necessary to satisfy the
immediate and heavy financial need of the Participant. Any distribution made
pursuant to this Section shall be deemed to be made as of the first day of the
Plan Year or, if later, the valuation date immediately preceding the date of
distribution, and the Participant's Elective Account shall be reduced
accordingly. Withdrawal under this Section shall be authorized only if the
distribution is on account of:
A. Expenses for medical care described in Code Section 213(d)
previously incurred by the Participant, his spouse, or any of his dependents (as
defined in Code Section 152) or necessary for these persons to obtain medical
care;
B. The costs directly related to the purchase of a principal
residence for the Participant (excluding mortgage payments);
-50-
C. Payment of tuition and related educational fees for the next
twelve (12) months of post-secondary education for the Participant, his spouse,
children, or dependents; or
D. Payments necessary to prevent the eviction of the Participant
from his principal residence or foreclosure on the mortgage of the Participant's
principal residence.
6.10.2 No distribution shall be made pursuant to this Section unless
the Administrator, based upon the Participant's representation and such other
facts as are known to the Administrator, determines that all of the following
conditions are satisfied:
A. The distribution is not in excess of the amount of the
immediate and heavy financial need of the Participant. The amount of the
immediate and heavy financial need may include any amounts necessary to pay any
federal, state, or local income taxes or penalties reasonably anticipated to
result from the distribution;
B. The Participant has obtained all distributions, other than
hardship distributions, and all nontaxable (at the time of the loan) loans
currently available under all plans maintained by the Employer;
C. The Plan, and all other plans maintained by the Employer,
provide that the Participant's elective deferrals and voluntary Employee
contributions will be suspended for at least twelve (12) months after receipt of
the hardship distribution or, the Participant, pursuant to a legally enforceable
agreement, will suspend his elective deferrals and voluntary Employee
contributions to the Plan and all other plans maintained by the Employer for at
least twelve (12) months after receipt of the hardship distribution; and
D. The Plan, and all other plans maintained by the Employer,
provide that the Participant may not make elective deferrals for the
Participant's taxable year immediately following the taxable year of the
hardship distribution in excess of the applicable limit under Code Section
402(g) for such next taxable year less the amount of such Participant's elective
deferrals for the taxable year of the hardship distribution.
6.10.3 Notwithstanding the above, for Plan Years beginning after
December 31, 1988, distributions from the Participant's Elective Account
pursuant to this Section shall be limited, as of the date of distribution, to
the Participant's Elective Account as of the end of the last Plan Year ending
before July 1, 1989, plus the total Participant's Deferred Compensation after
such date.
6.10.4 Any distribution made pursuant to this Section shall be made
in a manner which is consistent with and satisfies the provisions of Section
6.5, including, but not limited to, all notice and consent requirements of Code
Section 411(a)(11) and the Regulations thereunder.
6.11 Qualified Domestic Relations Order Distribution. All rights and
benefits, including elections, provided to a Participant in this Plan shall be
subject to the rights afforded to any "alternate payee" under a "qualified
domestic relations order." Furthermore, a distribution to an "alternate payee"
shall be permitted if such distribution is authorized by a qualified domestic
relations order, even if the affected Participant has not separated from service
and has not reached the "earliest retirement age" under the Plan. For the
purposes of this Section, "alternate payee," "qualified domestic relations
order" and "earliest retirement age" shall have the meaning set forth under Code
Section 414(p).
-51-
7. PLAN LOANS
7.1 Participant Loans.
7.1.1 Loans Permitted. The Trustee may, in the Trustee's discretion,
make loans to Participants and Beneficiaries under the following circumstances:
(a) loans shall be made available to all Participants and Beneficiaries on a
reasonably equivalent basis; (b) loans shall not be made available to Highly
Compensated Employees in an amount greater than the amount made available to
other Partici pants and Beneficiaries; (c) loans shall bear a reasonable rate of
interest; (d) loans shall be adequately secured; and (e) shall provide for
repayment over a reasonable period of time.
7.1.2 Loan Limit. Loans made pursuant to this Section (when added to
the outstanding balance of all other loans made by the Plan to the Participant)
shall be limited to the lesser of: (a) $50,000 reduced by the excess (if any) of
the highest outstanding balance of loans from the Plan to the Participant during
the one year period ending on the day before the date on which such loan is
made, over the outstanding balance of loans from the Plan to the Participant on
the date on which such loan was made, or (b) one-half (1/2) of the present value
of the nonforfeitable accrued benefit of the Participant under the Plan. For
purposes of this limit, all plans of the Employer shall be considered one plan.
Additionally, with respect to any loan made prior to January 1, 1987, the
$50,000 limit specified in clause (a) above shall be unreduced.
7.1.3 Repayment Terms. Loans shall provide for level amortization
with payments to be made not less frequently than quarterly over a period not to
exceed five (5) years. However, loans used to acquire any dwelling unit which,
within a reasonable time, is to be used (determined at the time the loan is
made) as a principal residence of the Participant shall provide for periodic
repayment over a reasonable period of time that may exceed five (5) years.
Notwithstanding the foregoing, loans made prior to January 1, 1987 which are
used to acquire, construct, reconstruct or substantially rehabilitate any
dwelling unit which, within a reasonable period of time is to be used
(determined at the time the loan is made) as a principal residence of the
Participant or a member of his family (within the meaning of Code section
267(c)(4)) may provide for periodic repayment over a reasonable period of time
that may exceed five (5) years. Additionally, loans made prior to January 1,
1987, may provide for periodic payments which are made less frequently than
quarterly and which do not necessarily result in level amortization.
7.1.4 Loan Program. Any loans granted or renewed on or after the
last day of the first Plan Year beginning after December 31, 1988, shall be made
pursuant to a Participant loan program. Such loan program shall be established
in writing and must include, but need not be limited to, the following:
A. The identity of the person or positions authorized to
administer the Participant loan program;
B. A procedure for applying for loans;
C. The basis on which loans will be approved or denied;
D. Limitations, if any, on the types and amounts of loans
offered;
E. The procedure under the program for determining a reasonable
rate of interest;
-52-
F. The types of collateral which may secure a Participant loan;
and
G. The events constituting default and the steps that will be
taken to preserve Plan assets.
Such Participant loan program shall be contained in a separate written document
which, when properly executed, is hereby incorporated by reference and made a
part of the Plan. Furthermore, such Participant loan program may be modified or
amended in writing from time to time without the necessity of amending this
Section.
7.1.5 USERRA - Repayments. Loan repayments on participant loans made
under this Plan will be suspended as permitted under Code Section 414(u)(4).
7.2 Direct Rollovers. The provisions of this Section 7.2 shall apply to
distributions notwithstanding any provision of this Plan to the contrary that
would otherwise limit a distributee's election with respect to distributions.
7.2Election. A "distributee" may elect, at the time and in the
manner prescribed by the Administrator, to have any portion of an "eligible
rollover distribution" paid directly to an "eligible retirement plan" specified
by the distributee in a "direct rollover."
7.2Definitions. For purposes of this Section 7.2, the following
terms shall have the following definitions:
A. The term "eligible rollover distribution" is any distribution
of all or any portion of the balance to the credit of the distributee, except
that an eligible rollover distribution does not include (1) any distribution
that is one of a series of substantially equal periodic payments (occurring not
less frequently than annually) made for the life (or life expectancy) of the
distributee or the joint lives (or joint life expectancies) of the distributee
and the distributee's designated beneficiary, or for a specified period of ten
years or more; (2) any distribution to the extent such distribution is required
under Code Section 401(a)(9); and (3) the portion of any distribution that is
not includible in gross income (determined without regard to the exclusion for
net unrealized appreciation with respect to employer securities).
B. The term "eligible retirement plan" means an individual
retirement account described in Code Section 408(a), and an individual
retirement annuity described in Code Section 408(b), and an annuity plan
described in Code Section 403(a), or a qualified trust described in Code Section
401(a) that accepts the distributee's eligible rollover distribution. However,
in the case of an eligible rollover distribution to the surviving spouse of the
Participant, the term "eligible retirement plan shall mean only an individual
retirement account or an individual retirement annuity.
C. The term "distributee" includes an Employee or former
Employee, the Employee's or former Employee surviving spouse, and the Employee's
or former Employee's spouse or former spouse who is the ultimate payee under a
qualified domestic relations order (as defined in Code Section 414(p)).
D. The term "direct rollover" shall mean a payment by the plan to
the eligible retirement plan specified by the distributee.
-53-
8. AMENDMENT, TERMINATION AND MERGERS
8.1 Amendment.
8.1Subject to the limitations of this Section 8.1, the Employer
shall have the right at any time to amend the Plan with the approval of either
the Employer's Board of Directors or a committee designated or authorized by the
Board of Trustees. However, any amendment which affects the rights, duties or
responsibilities of the Trustee and Administrator may only be made with the
Trustee's and Administrator's written consent. Any such amendment shall become
effective as provided therein upon its execution. The Trustee shall not be
required to execute any such amendment unless the Trust provisions contained
herein are a part of the Plan and the amendment affects the duties of the
Trustee hereunder.
8.1No amendment to the Plan shall be effective if it authorizes or
permits any part of the Trust Fund (other than such part as is required to pay
taxes and administration expenses) to be used for or diverted to any purpose
other than for the exclusive benefit of the Participants or their Beneficiaries
or estates; or causes any reduction in the amount credited to the account of any
Participant; or causes or permits any portion of the Trust Fund to revert to or
become property of the Employer.
8.1Except as permitted by Regulations, no Plan amendment or
transaction having the effect of a Plan amendment (such as a merger, plan
transfer or similar transaction) shall be effective to the extent it eliminates
or reduces any "Section 411(d)(6) protected benefit" or adds or modifies
conditions relating to "Section 411(d)(6) protected benefits" the result of
which is a further restriction on such benefit unless such protected benefits
are preserved with respect to benefits accrued as of the later of the adoption
date or effective date of the amendment. "Section 411(d)(6) protected benefits"
are benefits described in Code Section 411(d)(6)(A), early retirement benefits
and retirement-type subsidies, and optional forms of benefit.
8.2 Termination.
8.2The Employer shall have the right at any time to terminate the
Plan by delivering to the Trustee and Administrator written notice of such
termination. Upon any full or partial termination, all amounts credited to the
affected Participant's Elective Accounts shall become 100% Vested as provided in
Section 6.4 and shall not thereafter be subject to forfeiture, and all
unallocated amounts shall be allocated to the accounts of all Participants in
accordance with the provisions hereof.
8.2Upon the full termination of the Plan, the Employer shall direct
the distribution of the assets of the Trust Fund to Participants in a manner
which is consistent with and satisfies the provisions of Section 6.5.
Distributions to a Participant shall be made in cash or in property or through
the purchase of irrevocable nontransferable deferred commitments from an
insurer. Except as permitted by Regulations, the termination of the Plan shall
not result in the reduction of "Section 411(d)(6) protected benefits" in
accordance with Section 8.1.3, above.
8.3 Merger Or Consolidation. This Plan may be merged or consolidated with,
or its assets and/or liabilities may be transferred to any other Plan only if
the benefits which would be received by a Participant of this Plan, in the event
of a termination of the plan immediately after such transfer, merger or
consolidation, are at least equal to the benefits the Participant would have
received if the Plan had terminated immediately before the transfer, merger or
consolidation, and such transfer, merger or consolidation does not otherwise
result in the elimination or
-54-
8.3.1 Effective as of October 1, 1997, the Citizens State Bank of
Santa Paula Profit-Sharing 401(k) Plan (the "Citizens Plan") was merged with and
into this Plan. The entire account balance of each Participant in the Citizens
Plan shall be continued with and into and maintained under this Plan. In
accordance with Section 8.1.3, above, such merger shall not result in the
elimination or reduction of any "Section 411(d)(6) protected benefits" of any
person who was a participant in the Citizens Plan.
8.3.2 Effective as of January 1, 1999, the Pacific Capital Bancorp
401(k) Profit- Sharing Plan (the "Merged Plan") is being merged and into this
Plan. The entire account balance of each Participant in the Merged Plan shall be
continued into and maintained under this Plan. Pursuant to Section 7.1.3, above,
such merger shall not result in the elimination or reduction of any "Section
411(d)(6) protected benefits" of any person who was a participant in the Merged
Plan.
9. MISCELLANEOUS
9.1 Rights. This Plan shall not be deemed to constitute a contract between
the Employer and any Participant or to be a consideration or an inducement for
the employment of any Participant or Employee. Nothing contained in this Plan
shall be deemed to give any Participant or Employee the right to be retained in
the service of the Employer or to interfere with the right of the Employer to
discharge any Participant or Employee at any time regardless of the effect which
such discharge shall have upon him as a Participant of this Plan.
9.2 Alienation.
9.2Subject to the exceptions provided below, no benefit which shall
be payable out of the Trust Fund to any person (including a Participant or his
Beneficiary) shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, or charge, and any attempt to
anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the
same shall be void; and no such benefit shall in any manner be liable for, or
subject to, the debts, contracts, liabilities, engagements, or torts of any such
person, nor shall it be subject to attachment or legal process for or against
such person, and the same shall not be recognized by the Trustee, except to such
extent as may be required by law.
9.2This provision shall not apply to the extent a Participant or
Beneficiary is indebted to the Plan, as a result of a loan from the Plan. At the
time a distribution is to be made to or for a Participant's or Beneficiary's
benefit, such proportion of the amount distributed as shall equal such loan
indebtedness shall be paid by the Trustee to the Trustee or the Administrator,
at the direction of the Administrator, to apply against or discharge such loan
indebtedness. Prior to making a payment, however, the Participant or Beneficiary
must be given written notice by the Administrator that such loan indebtedness is
to be so paid in whole or part from his Participant's Account. If the
Participant or Beneficiary does not agree that the loan indebtedness is a valid
claim against his Vested Participant's Account, he shall be entitled to a review
of the validity of the claim in accordance with procedures provided in Sections
2.12 and 2.13.
9.2This provision shall not apply to a "qualified domestic relations
order" defined in Code Section 414(p), and those other domestic relations orders
permitted to be so treated by the Administrator under the provisions of the
Retirement Equity Act of 1984. The Administrator shall establish a written
procedure to determine the qualified status of domestic relations orders and to
administer distributions under such qualified orders. Further, to the extent
provided under a "qualified domestic relations order," a former spouse of a
Participant shall be treated as the spouse or surviving spouse for all purposes
under the Plan.
-55-
9.3 Construction of Plan. This Plan shall be construed and enforced
according to the Act and the laws of the State of California, other than its
laws respecting choice of law, to the extent not preempted by the Act.
9.4 Gender and Number. Wherever any words are used herein in the masculine,
feminine or neuter gender, they shall be construed as though they were also used
in another gender in all cases where they would so apply, and whenever any words
are used herein in the singular or plural form, they shall be construed as
though they were also used in the other form in all cases where they would so
apply.
9.5 Legal Action. In the event any claim, suit, or proceeding is brought
regarding the Trust and/or Plan established hereunder to which the Trustee or
the Administrator may be a party, and such claim, suit, or proceeding is
resolved in favor of the Trustee or Administrator, they shall be entitled to be
reimbursed from the Trust Fund for any and all costs, attorneys' fees, and other
expenses pertaining thereto incurred by them for which they shall have become
liable.
9.6 Prohibition Against Diversion of Funds.
9.6Except as provided below and otherwise specifically permitted by
law, it shall be impossible by operation of the Plan or of the Trust, by
termination of either, by power of revocation or amendment, by the happening of
any contingency, by collateral arrangement or by any other means, for any part
of the corpus or income of any trust fund maintained pursuant to the Plan or any
funds contributed thereto to be used for, or diverted to, purposes other than
the exclusive benefit of Participants, Retired Participants, or their
Beneficiaries.
9.6In the event the Employer shall make an excessive contribution
under a mistake of fact pursuant to Act Section 403(c)(2)(A), the Employer may
demand repayment of such excessive contribution at any time within one (1) year
following the time of payment and the Trustees shall return such amount to the
Employer within the one (1) year period. Earnings of the Plan attributable to
the excess contributions may not be returned to the Employer but any losses
attributable there must reduce the amount so returned.
9.7 Bonding. Every Fiduciary, except a bank or an insurance company, unless
exempted by the Act and regulations thereunder, shall be bonded in an amount not
less than 10% of the amount of the funds such Fiduciary handles; provided,
however, that the minimum bond shall be $1,000 and the maximum bond, $500,000.
The amount of funds handled shall be determined at the beginning of each Plan
Year by the amount of funds handled by such person, group, or class to be
covered and their predecessors, if any, during the preceding Plan Year, or if
there is no preceding Plan Year, then by the amount of the funds to be handled
during the then current year. The bond shall provide protection to the Plan
against any loss by reason of acts of fraud or dishonesty by the Fiduciary alone
or in connivance with others. The surety shall be a corporate surety company (as
such term is used in Act Section 412(a)(2)), and the bond shall be in a form
approved by the Secretary of Labor. Notwithstanding anything in the Plan to the
contrary, the cost of such bonds shall be an expense of and may, at the election
of the Administrator, be paid from the Trust Fund or by the Employer.
9.8 Employer's And Trustee's Protective Clause. Neither the Employer nor
the Trustee, nor their successors, shall be responsible for the validity of any
Contract issued hereunder or for the failure on the part of the insurer to make
payments provided by any such Contract, or for the action of any person which
may delay payment or render a Contract null and void or unenforceable in whole
or in part.
-56-
9.9 Insurer's Protective Clause. Any insurer who shall issue Contracts
hereunder shall not have any responsibility for the validity of this Plan or for
the tax or legal aspects of this Plan. The insurer shall be protected and held
harmless in acting in accordance with any written direction of the Trustee, and
shall have no duty to see to the application of any funds paid to the Trustee,
nor be required to question any actions directed by the Trustee. Regardless of
any provision of this Plan, the insurer shall not be required to take or permit
any action or allow any benefit or privilege contrary to the terms of any
Contract which it issues hereunder, or the rules of the insurer.
9.10 Receipt And Release For Payments. Any payment to any Participant, his
legal representative, Beneficiary, or to any guardian or committee appointed for
such Participant or Beneficiary in accordance with the provisions of the Plan,
shall, to the extent thereof, be in full satisfaction of all claims hereunder
against the Trustee and the Employer, either of whom may require such
Participant, legal representative, Beneficiary, guardian or committee, as a
condition precedent to such payment, to execute a receipt and release thereof in
such form as shall be determined by the Trustee or Employer.
9.11 Action By The Employer. Whenever the Employer under the terms of the
Plan is permitted or required to do or perform any act or matter or thing, it
shall be done and performed by a person duly authorized by its legally
constituted authority.
9.12 Named Fiduciaries And Allocation Of Responsibility. The "named
Fiduciaries" of this Plan are (a) the Employer, (b) the Administrator and (c)
the Trustee.
9.12.1 The named Fiduciaries shall have only those specific powers,
duties, responsibilities, and obligations as are specifically given them under
the Plan. In general, the Employer shall have the sole responsibility for making
the contributions provided for under Section 4.1; and shall have the sole
authority to appoint and remove the Trustee and the Administrator; to formulate
the Plan's "funding policy and method"; and to amend or terminate, in whole or
in part, the Plan. The Administrator shall have the sole responsibility for the
administration of the Plan, which responsibility is specifically described in
the Plan. The Trustee shall have the sole responsibility of management of the
assets held under the Trust, except those assets, the management of which has
been assigned to an Investment Manager, who shall be solely responsible for the
management of the assets assigned to it, all as specifically provided in the
Plan.
9.12.2 Each named Fiduciary warrants that any directions given,
information furnished, or action taken by it shall be in accordance with the
provisions of the Plan, authorizing or providing for such direction, information
or action. Furthermore, each named Fiduciary may rely upon any such direction,
information or action of another named Fiduciary as being proper under the Plan,
and is not required under the Plan to inquire into the propriety of any such
direction, information or action.
9.12.3 It is intended under the Plan that each named Fiduciary shall
be responsible for the proper exercise of its own powers, duties,
responsibilities and obligations under the Plan. No named Fiduciary shall
guarantee the Trust Fund in any manner against investment loss or depreciation
in asset value. Any person or group may serve in more than one Fiduciary
capacity. In the furtherance of their responsibilities hereunder, the "named
Fiduciaries" shall be empowered to interpret the Plan and to resolve
ambiguities, inconsistencies and omissions, which findings shall be binding,
final and conclusive.
9.13 Headings. The headings and subheadings of this Plan have been inserted
for convenience of reference and are to be ignored in any construction of the
provisions hereof.
-57-
9.14 Approval By Internal Revenue Service.
9.14.1 Notwithstanding anything herein to the contrary,
contributions to this Plan are conditioned upon the initial qualification of the
Plan under Code Section 401. if the Plan receives an adverse determination with
respect to its initial qualification, then the Plan may return such
contributions to the Employer within one year after such determination, provided
the application for the determination is made by the time prescribed by law for
filing the Employer's return for the taxable year in which the Plan was adopted,
or such later date as the Secretary of the Treasury may prescribe.
9.14.2 Notwithstanding any provisions to the contrary, except
Sections 3.6, 3.7, and 4.1.3, any contribution by the Employer to the Trust Fund
is conditioned upon the deductibility of the contribution by the Employer under
the Code and, to the extent any such deduction is disallowed, the Employer may,
within one (1) year following the disallowance of the deduction, demand
repayment of such disallowed contribution and the Trustee shall return such
contribution within one (1) year following the disallowance. Earnings of the
Plan attributable to the excess contribution may not be returned to the
Employer, but any losses attributable thereto must reduce the amount so
returned.
9.15 Uniformity. All provisions of this Plan shall be interpreted and
applied in a uniform, nondiscriminatory manner. In the event of any conflict
between the terms of this Plan and any Contract purchased hereunder, the Plan
provisions shall control.
9.16 Effective Date. Except as otherwise set forth in this Plan, the
effective date of this Plan's multidocuments shall be January 1, 1998.
(Signatures appear on the following page.)
-58-
IN WITNESS WHEREOF, the parties have executed this Plan on the date(s) set
forth below their respective signatures.
"EMPLOYER:"
PACIFIC CAPITAL BANCORP, a California corporation, formerly known as "SANTA
BARBARA BANCORP," for periods on and after January 1, 1999
By
Jay D. Smith, Senior Vice President
Date
SANTA BARBARA BANK & TRUST, a California corporation, for periods prior to
January 1, 1999
By
Jay D. Smith, Senior Vice President
Date
"TRUSTEE:"
SANTA BARBARA BANK & TRUST,
a California corporation
By
Janice Kroekel, Vice President
-59-
TABLE OF CONTENTS (Cont'd)
Section Page
TABLE OF CONTENTS
Section Page
1. DEFINITIONS...........................................1
1.1 "Act"............................................1
1.2 "Administrator"..................................1
1.3 "Affiliated Employer"............................1
1.4 "Aggregate Account"..............................2
1.5 "Anniversary Date"...............................2
1.6 "Beneficiary"....................................2
1.7 "Code"...........................................2
1.8 "Compensation"...................................2
1.9 "Contract" or "Policy"...........................3
1.10 "Deferred Compensation"..........................3
1.11 "Early Retirement Date"..........................3
1.12 "Elective Contribution"..........................3
1.13 "Eligible Employee"..............................3
1.14 "Employee".......................................3
1.15 "Employer".......................................4
1.16 "Excess Aggregate Contributions".................4
1.17 "Excess Contributions"...........................4
1.18 "Excess Deferred Compensation"...................4
1.19 "Fiduciary"......................................4
1.20 "Fiscal Year"....................................4
1.21 "Forfeiture".....................................4
1.22 "Former Participant".............................5
1.23 "415 Compensation"...............................5
1.24 "414(s) Compensation"............................5
1.25 "Highly Compensated Employee"....................6
1.26 "Highly Compensated Former Employee".............6
1.27 "Highly Compensated Participant".................6
1.28 "Hour of Service"................................6
1.29 "Income".........................................7
1.30 "Investment Manager".............................8
1.31 "Key Employee"...................................8
1.32 "Late Retirement Date"...........................9
1.33 "Leased Employee"................................9
1.34 "Non-Elective Contribution"......................9
1.35 "Non-Highly Compensated Participant"............10
1.36 "Non-Key Employee"..............................10
1.37 "Normal Retirement Age".........................10
1.38 "Normal Retirement Date"........................10
1.39 "1-Year Break in Service".......................10
1.40 "Participant"...................................10
1.41 "Participant's Account".........................10
1.42 "Participant's Combined Account"................10
1.43 "Participant's Elective Account"................10
1.44 "Plan"..........................................11
-i-
TABLE OF CONTENTS (Cont'd)
Section Page
1.45 "Plan Year".....................................11
1.46 "Qualified Non-Elective Contribution"...........11
1.47 "Qualified Voluntary Employee Contribution Account"11
1.48 "Regulation"....................................11
1.49 "Retired Participant"...........................11
1.50 "Retirement Date"...............................11
1.51 "Super Top Heavy Plan"..........................11
1.52 "Terminated Participant"........................11
1.53 "Top Heavy Plan"................................11
1.54 "Top Heavy Plan Year"...........................11
1.55 "Top Paid Group"................................12
1.56 "Total and Permanent Disability"................12
1.57 "Trustee".......................................12
1.58 "Trust Fund" or "Trust".........................12
1.59 "Vested"........................................12
1.60 "Voluntary Contribution Account"................12
1.61 "Year of Service"...............................13
2. TOP HEAVY AND ADMINISTRATION.........................13
2.1 Top Heavy Plan Requirements.....................13
2.2 Determination of Top Heavy Status...............13
2.3 Powers and Responsibilities of the Employer.....16
2.4 Designation of Administrative Authority.........16
2.5. Allocation and Delegation of Responsibilities...16
2.6. Powers and Duties of the Administrator..........17
2.7 Records and Reports.............................18
2.8 Appointment of Advisers.........................18
2.9 Information From Employer.......................18
2.10 Payment of Expenses.............................18
2.11 Majority Actions................................18
2.12 Claims Procedure................................18
2.13 Claims Review Procedure.........................18
3. ELIGIBILITY..........................................19
3.1 Conditions of Eligibility.......................19
3.2 Application for Participation...................19
3.3 Effective Date of Participation.................20
3.4 Determination of Eligibility....................20
3.5 Termination of Eligibility......................20
3.6 Omission of Eligible Employee...................20
3.7 Inclusion of Ineligible Employee................20
3.8 Election Not to Participate.....................20
4. CONTRIBUTION AND ALLOCATION..........................21
4.1 Formula For Determining Employer's Contribution.21
-ii-
TABLE OF CONTENTS (Cont'd)
Section Page
4.2 Participant's Salary Reduction Election.........21
4.3 Time of Payment of Employer's Contribution......24
4.4 Allocation of Contribution and Earnings.........24
4.5 Actual Deferral Percentage Tests................27
4.6 Adjustment to Actual Deferral Percentage Tests..29
4.7 Actual Contribution Percentage Tests............30
4.8 Adjustment To Actual Contribution Percentage Tests32
4.9 Maximum Annual Additions........................34
4.10 Adjustment For Excessive Annual Additions.......36
4.11 Transfers From Qualified Plans..................37
4.12 Directed Investment Account.....................39
4.13 Qualified Voluntary Employee Contributions......39
4.14 USERRA..........................................39
5. VALUATIONS...........................................40
5.1 Valuation Of The Trust Fund.....................40
5.2 Method Of Valuation.............................40
6. DETERMINATION AND DISTRIBUTION OF BENEFITS...........40
6.1 Determination Of Benefits Upon Retirement.......40
6.2 Determination Of Benefits Upon Death............40
6.3 Determination of Benefits on Disability.........41
6.4 Determination Of Benefits Upon Termination......41
6.5 Distribution Of Benefits........................46
6.6 Distribution Of Benefits Upon Death.............48
6.7 Time Of Segregation Or Distribution.............50
6.8 Distribution For Minor Beneficiary..............50
6.9 Location Of Participant Or Beneficiary Unknown..50
6.10 Advance Distribution For Hardship...............50
6.11 Qualified Domestic Relations Order Distribution.51
7. PLAN LOANS...........................................52
7.1 Participant Loans...............................52
7.2 Direct Rollovers................................53
8. AMENDMENT, TERMINATION AND MERGERS...................54
8.1 Amendment.......................................54
8.2 Termination.....................................54
8.3 Merger Or Consolidation.........................54
9. MISCELLANEOUS........................................55
9.1 Rights..........................................55
9.2 Alienation......................................55
9.3 Construction of Plan............................56
9.4 Gender and Number...............................56
-iii-
TABLE OF CONTENTS (Cont'd)
Section Page
9.5 Legal Action....................................56
9.6 Prohibition Against Diversion of Funds..........56
9.7 Bonding.........................................56
9.8 Employer's And Trustee's Protective Clause......56
9.9 Insurer's Protective Clause.....................57
9.10 Receipt And Release For Payments................57
9.11 Action By The Employer..........................57
9.12 Named Fiduciaries And Allocation Of
Responsibility..................................57
9.13 Headings........................................57
9.14 Approval By Internal Revenue Service............58
9.15 Uniformity......................................58
9.16 Effective Date..................................58
-iv-
EXHIBIT 10.1.5
PACIFIC CAPITAL BANCORP
AMENDED AND RESTATED
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
January 1, 1998
PACIFIC CAPITAL BANCORP
AMENDED AND RESTATED
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
THIS AMENDED AND RESTATED EMPLOYEE STOCK OWNERSHIP PLAN AND
TRUST is made and entered into, effective on the date set forth below, by and
among SANTA BARBARA BANK & TRUST, a California corporation, as Employer for
periods prior to January 1, 1999 (with respect to such periods, the "Employer");
PACIFIC CAPITAL BANCORP, a California corporation formerly known as "Santa
Barbara Bancorp," as Employer for periods on and after January 1, 1999 (with
respect to such periods, the "Employer"); and SANTA BARBARA BANK & TRUST, a
California corporation, as Trustee (herein referred to as the "Trustee"), with
reference to the following facts:
RECITALS:
A. The Employer owns all the outstanding shares of the capital stock of
Santa Barbara Bank & Trust, a California corporation (the "Bank").
B. Effective January 1, 1985, the Bank established an Employee Stock
Ownership Plan and Trust known as Santa Barbara Bank & Trust Employee Stock
Ownership Plan and Trust (the "Plan") to recognize the contributions made to the
Bank's successful operation by its employees and for the exclusive benefit of
its eligible employees.
C. Effective January 1, 1989, the Bank amended and restated the Plan to
reflect certain changes in the law and in the operation of the Plan.
D. Since the date of that most recent amendment and restatement, (i) there
have been certain changes in the laws applicable to the Plan, (ii) the Employer
has adopted certain amendments to the Plan to reflect changes in the operation
of the Plan, and (iii) the Employer has acquired certain wholly owned
subsidiaries.
E. The Employer desires to adopt this Amended and Restated Plan document in
order to incorporate all prior amendments to the Plan, to reflect the current
provisions of law applicable to the Plan, and to reward and provide incentives
for all employees of Employer and each of its Affiliated Employers.
AGREEMENT:
NOW, THEREFORE, the Employer and the Trustee, in accordance with the
provisions of the Plan pertaining to amendments thereof, hereby amend and
restate the Plan in its entirety to provide as follows:
1. DEFINITIONS
1.1 "Act" or "ERISA" means the Employee Retirement Income Security Act of
1974, as it may be amended from time to time.
H:\WP\MEP\SBBT\ESOP\p&t-restate-RV1.wpd
1
1.2 "Administrator" means the person or entity designated by the Employer
pursuant to Section 2.4 to administer the Plan on behalf of the Employer.
1.3 "Affiliated Employer" means any corporation which is a member of a
controlled group of corporations (as defined in Code Section 414(b)) which
includes the Employer; any trade or business (whether or not incorporated) which
is under common control (as defined in Code Section 414(c)) with the Employer;
any organization (whether or not incorporated) which is a member of an
affiliated service group (as defined in Code Section 414(m)) which includes the
Employer; and any other entity required to be aggregated with the Employer
pursuant to Regulations under Code Section 414(o).
1.4 "Aggregate Account" means, with respect to each Participant, the value
of all accounts maintained on behalf of a Participant, whether attributable to
Employer or Employee contributions, subject to the provisions of Section 2.2,
below.
1.5 "Anniversary Date" means last day of each calendar quarter in the Plan
Year.
1.6 "Beneficiary" means each person to whom a share of a deceased
Participant's total account is payable, subject to the restrictions of Sections
7.2 and 7.5, below.
1.7 "Code" means the Internal Revenue Code of 1986, as amended or replaced
from time to time.
1.8 "Company Stock" means common stock issued by the Employer (or by a
corporation which is a member of the controlled group of corporations of which
the Employer is a member) which is readily tradeable on an established
securities market. If there is no common stock which meets the foregoing
requirement, the term "Company Stock" means common stock issued by the Employer
(or by a corporation which is a member of the same controlled group) having a
combination of voting power and dividend rights equal to or in excess of (a)
that class of common stock of the Employer (or of any other such corporation)
having the greatest voting power, and (b) that class of common stock of the
Employer (or of any other such corporation) having the greatest dividend rights.
Noncallable preferred stock shall be deemed to be "Company Stock" if such stock
is convertible at any time into stock which constitutes "Company Stock"
hereunder and if such conversion is at a conversion price which (as of the date
of the acquisition by the Trust) is reasonable. For purposes of the preceding
sentence, pursuant to Regulations, preferred stock shall be treated as
noncallable if after the call there will be a reasonable opportunity for a
conversion which meets the requirements of the preceding sentence.
1.9 "Company Stock Account" means the account of a Participant which is
credited with the shares of Company Stock purchased and paid for by the Trust
Fund or contributed to the Trust Fund.
1.10 "Compensation" with respect to any Participant means such
Participant's wages as defined in Code Section 3401(a) and all other payments of
compensation by the Employer (in the course of the Employer's trade or business)
for a Plan Year for which the Employer is required to furnish the Participant a
written statement under Code Sections 6041(d), 6051(a)(3) and 6052. Compensation
must be determined without regard to any rules under Code Section 3401(a) that
limit the remuneration included in wages based on the nature or location of the
employment or the services performed (such as the exception for agricultural
labor in Code Section 3401(a)(2)).
2
1.10.1 Adjustments. For purposes of this Section, the determination
of Compensation shall be made by (a) including amounts which are contributed by
the Employer pursuant to a salary reduction agreement and which are not
includable in the gross income of the Participant under Code Sections 125,
402(e)(3), 402(h), 403(b) or 457, and Employee contributions described in Code
Section 414(h)(2) that are treated as Employer contributions, and (b) excluding
taxable income arising by reason of the Participant's exercise of any option to
purchase the capital stock of the Employer or any Affiliated Employer.
1.10.2 Initial Year. For a Participant's initial year of
participation, Compensation shall be recognized as of such Employee's effective
date of participation pursuant to Section 3.3.
1.10.3 Limit on Amount. For the Plan Years beginning on or after
January 1, 1994, the annual Compensation of each Employee taken into account
under this Plan shall not exceed the One Hundred Fifty Thousand Dollars
($150,000), as adjusted by the Internal Revenue Service for cost of living
increases in accordance with Code Section 401(a)(17)(B).
A. The cost of living adjustment in effect for a calendar year
applies to any period which begins in that calendar year, does not exceed twelve
months, and for which Compensation is required to be determined (the
"determination period"). If a determination period consists of fewer than twelve
(12) months, then the annual compensation limit for such period shall be
$150,000 (or such greater amount determined in accordance with Code Section
401(a)(17)(B)), multiplied by a fraction, the numerator of which is the number
of months in such determination period, and the denominator of which is twelve
(12). For Plan Years beginning on or after January 1, 1994, any reference in
this Plan to the limitation under Code Section 401(a)(17) shall mean such
$150,000 limit (has adjusted pursuant to Code Section 401(a)(17)(B)) set forth
in this Section 1.10.4.
B. If an Employee's benefits accruing in any Plan Year are
determined by reference to the Employee's Compensation for any determination
period commencing prior to such Plan Year, then the Compensation for such prior
determination period shall be subject to the $150,000 limit (as adjusted
pursuant to Code Section 401(a)(17)(B)) in effect for that prior determination
period. For any such determination period beginning prior to the first day of
the first Plan Year beginning on or after January 1, 1994, the annual
compensation limit under this Section 1.10.3 shall be $150,000.
1.10.4 Prior Definition. If, in connection with the adoption of this
amendment and restatement, the definition of Compensation has been modified,
then, for Plan Years prior to the Plan Year which includes the adoption date of
this amendment and restatement, Compensation means compensa tion determined
pursuant to the Plan then in effect.
1.11 "Contract" or "Policy" means any life insurance policy, retirement
income or annuity policy, or annuity contract (group or individual) issued
pursuant to the terms of the Plan.
1.12 "Current Obligations" means Trust obligations arising from extension
of credit to the Trust and payable in cash within one (1) year from the date an
Employer contribution is due.
3
1.13 "Early Retirement Date" means the first day of the month (prior to the
Normal Retirement Date) coinciding with or following the date on which a
Participant or Former Participant attains age 55 and has completed at least 20
Years of Service with the Employer (Early Retirement Age). A Participant shall
become fully Vested upon satisfying this requirement if still employed at his
Early Retirement Age. A Former Participant who terminates employment after
satisfying the service requirement for Early Retirement and who thereafter
reaches the age requirement contained herein shall be entitled to receive his
benefits under this Plan.
1.14 "Eligible Employee" means any Employee. Employees of Affiliated
Employers shall not be eligible to participate in this Plan unless such
Affiliated Employers have specifically adopted this Plan in writing.
1.15 "Employee" means any person who is employed by the Employer or an
Affiliated Employer, but excludes any person who is an independent contractor.
Employee shall include Leased Employees within the meaning of Code Sections
414(n)(2) and 414(o)(2) unless such Leased Employees are covered by a plan
described in Code Section 414(n)(5) and such Leased Employees do not constitute
more than 20% of the recipient's non-highly compensated work force.
1.16 "Employer" means PACIFIC CAPITAL BANCORP, a California corporation,
and any predecessor and successor organization which has or in the future shall
maintain this Plan.
1.17 "ESOP" means an employee stock ownership plan that meets the
requirements of Code Section 4975(e)(7) and Regulation 54.4975-11.
1.18 "Exempt Loan" means a loan made to the Plan by a disqualified person
or a loan to the Plan which is guaranteed by a disqualified person and which
satisfies the requirements of Section 2550.408b- 3 of the Department of Labor
Regulations, Section 54.4975-7(b) of the Treasury Regulations and Section 5.4
hereof.
1.19 "Fiduciary" means any person who (a) exercises any discretionary
authority or discretionary control respecting management of the Plan or
exercises any authority or control respecting management or disposition of its
assets, (b) renders investment advice for a fee or other compensation, direct or
indirect, with respect to any monies or other property of the Plan or has any
authority or responsibility to do so, or (c) has any discretionary authority or
discretionary responsibility in the administration of the Plan, including, but
not limited to, the Trustee, the Employer and its representative body, and the
Administrator.
1.20 "Fiscal Year" means the Employer's accounting year of 12 months
commencing on January 1st of each year and ending the following December 31st.
1.21 "Forfeiture" means that portion of a Participant's Account that is not
Vested, and occurs on the earlier of (a) the distribution of the entire Vested
portion of a Terminated Participant's Account, or (b) the last day of the Plan
Year in which the Participant incurs five (5) consecutive 1-Year Breaks in
Service. For purposes of clause (a), above, in the case of a Terminated
Participant whose Vested benefit is zero, such Terminated Participant shall be
deemed to have received a distribution of his Vested benefit upon his
termination of employment. Restoration of such amounts shall occur pursuant to
Section 7.4.7.B, below. In addition, the term Forfeiture shall also include
amounts deemed to be Forfeitures pursuant to any other provision of this Plan.
4
1.22 "Former Participant" means a person who has been a Participant, but
who has ceased to be a Participant for any reason.
1.23 "415 Compensation" with respect to any Participant means such
Participant's wages as defined in Code Section 3401(a) and all other payments of
compensation by the Employer (in the course of the Employer's trade or business)
for a Plan Year for which the Employer is required to furnish the Participant a
written statement under Code Sections 6041(d), 6051(a)(3) and 6052, and
effective with Plan Years beginning on or after January 1, 1998, shall include
(a) all "elective deferrals"(as defined in Code Section 402(g)(3), and (b) any
amount which is contributed or deferred at the election of the Employee and is
not includable in the gross income of the Employee by reason of Code Section 125
or 457. "415 Compensation" must be determined without regard to any rules under
Code Section 3401(a) that limit the remuneration included in wages based on the
nature or location of the employment or the services performed (such as the
exception for agricultural labor in Code Section 3401(a)(2)). If, in connection
with the adoption of this amendment and restatement, the definition of "415
Compensation" has been modified, then, for Plan Years prior to the Plan Year
which includes the adoption date of this amendment and restatement, "415
Compensation" means compensation determined pursuant to the Plan then in effect.
1.24 "Highly Compensated Employee" means an Employee who either (a) during
the current Plan Year or the immediately preceding Plan Year, was a "five
percent owner" (as defined in Section 1.28.1C, below), or (b) for the preceding
year, either (i) received 415 Compensation from the Employer in excess of Eighty
Thousand Dollars ($80,000.00) (as such amount is adjusted from time-to-time
pursuant to Code Section 414(g)(1), or (ii) in accordance with an election by
the Employer to apply this clause (b)(ii) of this Section 1.24 for any Plan
Year, was in the "Top Paid Group" of Employees for such preceding year. For Plan
Years beginning after December 31, 1996, and prior to January 1, 1998, the
determination of "415 Compensation" under this Section 1.25 shall be made by
including amounts that otherwise would be excluded from a Participant's gross
income by reason of the application of Code Sections 125, 402(e)(3),
402(h)(1)(B) and, in the case of Employer contributions made pursuant to a
salary reduction agreement, by including amounts that would otherwise be
excluded from a Participant's gross income by reason of the application of Code
Section 403(b).
1.25 "Highly Compensated Participant" means any Highly Compensated Employee
who is eligible to participate in the Plan.
1.26 "Hour of Service" means (a) each hour for which an Employee is
directly or indirectly compensated or entitled to compensation by the Employer
for the performance of duties during the applicable computation period; (b) each
hour for which an Employee is directly or indirectly compensated or entitled to
compensation by the Employer (irrespective of whether the employment
relationship has terminated) for reasons other than performance of duties (such
as vacation, holidays, sickness, jury duty, disability, lay-off, military duty
or leave of absence) during the applicable computation period; (c) each hour for
which back pay is awarded or agreed to by the Employer without regard to
mitigation of damages. These hours will be credited to the Employee for the
computation period or periods to which the award or agreement pertains rather
than the computation period in which the award, agreement or payment is made.
The same Hours of Service shall not be credited both under (a) or (b), as the
case may be, and under (c).
1.26.1 Limitations. Notwithstanding the above, (a) no more than 501
Hours of Service are required to be credited to an Employee on account of any
single continuous period during which the Employee performs no duties (whether
or not such period occurs in a single computation period); (b) an hour for which
an Employee is directly or indirectly paid, or entitled to payment, on account
of a period during which no duties are performed is not required to be credited
to the Employee if such payment is made
5
or due under a plan maintained solely for the purpose of complying with
applicable worker's compensation, or unemployment compensation or disability
insurance laws; and (c) Hours of Service are not required to be credited for a
payment which solely reimburses an Employee for medical or medically related
expenses incurred by the Employee.
1.26.2 Payments. For purposes of this Section, a payment shall be
deemed to be made by or due from the Employer regardless of whether such payment
is made by or due from the Employer directly, or indirectly through, among
others, a trust fund, or insurer, to which the Employer contributes or pays
premiums and regardless of whether contributions made or due to the trust fund,
insurer, or other entity are for the benefit of particular Employees or are on
behalf of a group of Employees in the aggregate.
1.26.3 Crediting Hours. An Hour of Service must be credited for the
purpose of determining a Year of Service, a year of participation for purposes
of accrued benefits, a 1-Year Break in Service, and employment commencement date
(or reemployment commencement date). In addition, Hours of Service will be
credited for employment with other Affiliated Employers. The provisions of
Department of Labor regulations 2530.200b-2(b) and (c) are incorporated herein
by reference.
1.27 "Investment Manager" means an entity that (a) has the power to manage,
acquire, or dispose of Plan assets and (b) acknowledges fiduciary responsibility
to the Plan in writing. Such entity must be a person, firm, or corporation
registered as an investment adviser under the Investment Advisers Act of 1940, a
bank, or an insurance company.
1.28 "Key Employee" means an Employee as defined in Code Section 416(i) and
the Regulations thereunder.
1.28.1 General. Generally, any Employee or former Employee (as well
as each of his Beneficiaries) is considered a Key Employee if he, at any time
during the Plan Year that contains the "Determination Date" or any of the
preceding four (4) Plan Years, has been included in one of the following
categories:
A. An officer of the Employer (as that term is defined within the
meaning of the Regulations under Code Section 416) having annual "415
Compensation" greater than 50 percent of the amount in effect under Code Section
415(b)(1)(A) for any such Plan Year.
B. One of the ten employees having annual "415 Compensation" from
the Employer for a Plan Year greater than the dollar limitation in effect under
Code Section 415(c)(1)(A) for the calendar year in which such Plan Year ends and
owning (or considered as owning within the meaning of Code Section 318) both
more than one-half percent interest and the largest interests in the Employer.
C. A "five percent owner" of the Employer. "Five percent owner"
means any person who owns (or is considered as owning within the meaning of Code
Section 318) more than five percent (5%) of the outstanding stock of the
Employer or stock possessing more than five percent (5%) of the total combined
voting power of ail stock of the Employer or, in the case of an unincorporated
business, any person who owns more than five percent (5%) of the capital or
profits interest in the Employer. In determining percentage ownership hereunder,
employers that would otherwise be aggregated under Code Sections 414(b), (c),
(m) and (o) shall be treated as separate employers.
6
D. A "one percent owner" of the Employer having an annual "415
Compensation" from the Employer of more than $150,000. "One percent owner" means
any person who owns (or is considered as owning within the meaning of Code
Section 318) more than one percent (1%) of the outstanding stock of the Employer
or stock possessing more than one percent (1%) of the total combined voting
power of all stock of the Employer or, in the case of an unincorporated
business, any person who owns more than one percent (1%) of the capital or
profits interest in the Employer. In determining percentage ownership hereunder,
employers that would otherwise be aggregated under Code Sections 414(b), (c),
(m) and (o) shall be treated as separate employers. However, in determining
whether an individual has "415 Compensation" of more than $150,000, "415
Compensation" from each employer required to be aggregated under Code Sections
414(b), (c), (m) and (o) shall be taken into account.
1.28.2 Compensation. For purposes of this Section, the determination
of "415 Compensation" shall be made by including amounts that would otherwise be
excluded from a Participant's gross income by reason of the application of Code
Sections 125, 402(e)(3), 402(h)(1)(B) and, in the case of Employer contributions
made pursuant to a salary reduction agreement, by including amounts that would
otherwise be excluded from a Participant's gross income by reason of the
application of Code Section 403(b).
1.29 "Late Retirement Date" means the first day of the month coinciding
with or next following a Participant's actual Retirement Date after having
reached his Normal Retirement Date.
1.30 "Leased Employee" means any person (other than an Employee of the
recipient) who pursuant to an agreement between the recipient and any other
person ("leasing organization") has performed services for the recipient (or for
the recipient and related persons determined in accordance with Code Section
414(n)(6)) on a substantially full time basis for a period of at least one year,
and such services are performed under primary direction or control by the
recipient. Contributions or benefits provided a Leased Employee by the leasing
organization which are attributable to services performed for the recipient
employer shall be treated as provided by the recipient employer. A Leased
Employee shall not be considered an Employee of the recipient if both of the
following requirements are satisfied:
1.30.1 Money Purchase Pension Plan. Such employee is covered by a
money purchase pension plan providing (a) non-integrated employer contribution
rate of at least 10% of compensation, as defined in Code Section 415(c)(3), but
including amounts contributed pursuant to a salary reduction agreement which are
excludable from the employee's gross income under Code Sections 125, 402(e)(3),
402(h) or 403(b); (b) immediate participation; and (c) full and immediate
vesting.
1.30.2 20% Limit. Leased Employees do not constitute more than 20%
of the recipient's non-highly compensated work force.
1.31 "Non-Highly Compensated Participant" means any Participant who is not
a Highly Compensated Employee.
1.32 "Non-Key Employee" means any Employee or former Employee (and the
Beneficiaries of such person) who is not a Key Employee.
1.33 "Normal Retirement Age" means the Participant's 65th birthday. A
Participant shall become fully Vested in his Participant's Account upon
attaining his Normal Retirement Age.
1.34 "Normal Retirement Date" means the first day of the month coinciding
with or next following the Participant's Normal Retirement Age.
7
1.35 "1-Year Break in Service" means the applicable computation period
during which an Employee has not completed more than 500 Hours of Service with
the Employer. Further, solely for the purpose of determining whether a
Participant has incurred a 1-Year Break in Service, Hours of Service shall be
recognized for "authorized leaves of absence" and "maternity and paternity
leaves of absence." Years of Service and 1-Year Breaks in Service shall be
measured on the same computation period.
1.35.1 Authorized Leaves. "Authorized leave of absence" means an
unpaid, temporary cessation from active employment with the Employer pursuant to
an established nondiscriminatory policy, whether occasioned by illness, military
service, or any other reason.
1.35.2 Maternity, Etc. A "maternity or paternity leave of absence"
means, for Plan Years beginning after December 31, 1984, an absence from work
for any period by reason of the Employee's pregnancy, birth of the Employee's
child, placement of a child with the Employee in connection with the adoption of
such child, or any absence for the purpose of caring for such child for a period
immediately following such birth or placement. For this purpose, Hours of
Service shall be credited for the computation period in which the absence from
work begins, only if credit therefore is necessary to prevent the Employee from
incurring a 1-Year Break in Service, or, in any other case, in the immediately
following computation period. The Hours of Service credited for a "maternity or
paternity leave of absence" shall be those which would normally have been
credited but for such absence, or, in any case in which the Administrator is
unable to determine such hours normally credited, eight (8) Hours of Service per
day. The total Hours of Service required to be credited for a "maternity or
paternity leave of absence" shall not exceed 501.
1.36 "Other Investments Account" means the account of a Participant which
is credited with the Participant's share of the net gain (or loss) of the Plan,
Forfeitures and Employer contributions in other than Company Stock and which is
debited with payments made to pay for Company Stock.
1.37 "Participant" means any Eligible Employee who participates in the Plan
as provided in Sections 3.2 and 3.3, below, and has not for any reason become
ineligible to participate further in the Plan.
1.38 "Participant's Account" means the account established and maintained
by the Administrator for each Participant with respect to his total interest in
the Plan and Trust resulting from the Employer's contributions.
1.39 "Plan" means this PACIFIC CAPITAL BANCORP Employee Stock Ownership
Plan and Trust. For periods prior to January 1, 1999, this Plan shall be known
as the "SANTA BARBARA BANK & TRUST Employee Stock Ownership Plan and Trust."
1.40 "Plan Year" means the Plan's accounting year of twelve (12) months
commencing on January 1st of each year and ending the following December 31st.
1.41 "Regulation" means the Income Tax Regulations as promulgated by the
Secretary of the Treasury or his delegate, and as amended from time to time.
1.42 "Retired Participant" means a person who has been a Participant, but
who has become entitled to retirement benefits under the Plan.
8
1.43 "Retirement Date" means the date as of which a Participant retires for
reasons other than Total and Permanent Disability, whether such retirement
occurs on a Participant's Normal Retirement Date, Early or Late Retirement Date.
1.44 "Super Top Heavy Plan" means a plan described in Section 2.2.2.
1.45 "Terminated Participant" means a person who has been a Participant,
but whose employment has been terminated other than by death, Total and
Permanent Disability or retirement.
1.46 "Top Heavy Plan" means a plan described in Section 2.2.1.
1.47 "Top Heavy Plan Year" means a Plan Year during which the Plan is a
Top Heavy Plan.
1.48 "Top Paid Group" means the top 20 percent of Employees who performed
services for the Employer during the applicable year, ranked according to the
amount of "415 Compensation" received from the Employer during such year.
1.48.1 Affiliated Employers. All Affiliated Employers shall be taken
into account as a single employer, and Leased Employees within the meaning of
Code Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless such
Leased Employees are covered by a plan described in Code Section 414(n)(5) and
are not covered in any qualified plan maintained by the Employer.
1.48.2 Non-Residents, Etc. Employees who are non-resident aliens and
who received no earned income (within the meaning of Code Section 911(d)(2))
from the Employer constituting United States source income within the meaning of
Code Section 861(a)(3) shall not be treated as Employ ees.
1.48.3 Exclusions. Additionally, for the purpose of determining the
number of active Employees in any year, the following additional Employees shall
also be excluded (however, such Employees shall still be considered for the
purpose of identifying the particular Employees in the Top Paid Group):
A. Employees with less than six (6) months of service;
B. Employees who normally work less than 17 1/2 hours per week;
C. Employees who normally work less than six (6) months during a
year;
D. Employees who have not yet attained age 21; and
E. If ninety percent (90%) or more of the Employees of the
Employer are covered under agreements the Secretary of Labor finds to be
collective bargaining agreements between Employee representatives and the
Employer, and the Plan covers only Employees who are not covered under such
agreements, then Employees covered by such agreements shall be excluded from
both the total number of active Employees as well as from the identification of
particular Employees in the Top Paid Group.
The foregoing exclusions set forth in this Section 1.48.3 shall be applied on a
uniform and consistent basis for all purposes for which the Code Section 414(q)
definition is applicable.
9
1.49 "Total and Permanent Disability" means a physical or mental
condition of a Participant resulting from bodily injury, disease, or mental
disorder which renders him incapable of continu ing any gainful occupation and
which condition constitutes total disability under the federal Social Security
Acts.
1.50 "Trustee" means the person or entity named as trustee herein or in any
separate trust forming a part of this Plan, and any successors.
1.51 "Trust Fund" means the assets of the Plan and Trust as the same shall
exist from time to time.
1.52 "Unallocated Company Stock Suspense Account" means an account
containing Company Stock acquired with the proceeds of an Exempt Loan and which
has not been released from such account and allocated to the Participants'
Company Stock Accounts.
1.53 "Vested" means the nonforfeitable portion of any account maintained on
behalf of a Participant.
1.54 "Year of Service" means the computation period of twelve (12)
consecutive months, herein set forth, during which an Employee has at least
1,000 Hours of Service.
1.54.1 Eligibility. For purposes of eligibility for participation,
the initial computation period shall begin with the date on which the Employee
first performs an Hour of Service. The participation computation period
beginning after a 1-Year Break in Service shall be measured from the date on
which an Employee again performs an Hour of Service. The participation
computation period shall shift to the Plan Year which includes the anniversary
of the date on which the Employee first performed an Hour of Service. An
Employee who is credited with the required Hours of Service in both the initial
computation period (or the computation period beginning after a 1-Year Break in
Service) and the Plan Year which includes the anniversary of the date on which
the Employee first performed an Hour of Service, shall be credited with two (2)
Years of Service for purposes of eligibility to participate.
1.54.2 Vesting. For vesting purposes, the computation period shall
be the Plan Year, including periods prior to the Effective Date of the Plan.
1.54.3 Other. For all other purposes, the computation period shall
be the Plan Year.
1.54.4 Short Plan Year. Notwithstanding the foregoing, for any short
Plan Year, the determination of whether an Employee has completed a Year of
Service shall be made in accordance with Department of Labor regulation
2530.203-2(c). However, in determining whether an Employee has completed a Year
of Service for benefit accrual purposes in the short Plan Year, the number of
the Hours of Service required shall be proportionately reduced based on the
number of full months in the short Plan Year.
1.54.5 Prior Service. There shall be recognized as "Years of
Service" under this Plan all Years of Service by the Employee with any entity
acquired by the Employer or an Affiliated Employer if the terms and conditions
of such acquisition expressly require that such prior Years of Service be
credited as such under this Plan. For purposes of this Section 1.54.5, an entity
shall be deemed to be "acquired by the Employer or any Affiliate" if (a) that
entity is merged with or into the Employer or any
10
Affiliate, or (b) the Employer or Affiliate purchases or otherwise acquires at
least eighty percent (80%) of the outstanding voting equity interests in such
entity, or (c) the Employer or Affiliated Employer acquires all or substantially
all the assets of such entity.
1.54.6 Service With Affiliates. Years of Service with any
Affiliated Employer shall be recognized.
2. TOP HEAVY AND ADMINISTRATION
2.1 Top Heavy Plan Requirements. For any Top Heavy Plan Year, the Plan
shall provide the special vesting requirements of Code Section 416(b) pursuant
to Section 7.4 of this Plan and the special minimum allocation requirements of
Code Section 416(c) pursuant to Section 4.3 of the Plan.
2.2 Determination Of Top Heavy Status.
2.2.1 Top Heavy. This Plan shall be a Top Heavy Plan for any Plan
Year in which, as of the Determination Date, (a) the Present Value of Accrued
Benefits of Key Employees and (b) the sum of the Aggregate Accounts of Key
Employees under this Plan and all plans of an Aggregation Group, exceeds sixty
percent (60%) of the Present Value of Accrued Benefits and the Aggregate
Accounts of all Key and Non-Key Employees under this Plan and all plans of an
Aggregation Group.
A. If any Participant is a Non-Key Employee for any Plan Year,
but such Participant was a Key Employee for any prior Plan Year, such
Participant's Present Value of Accrued Benefit and/or Aggregate Account balance
shall not be taken into account for purposes of determining whether this Plan is
a Top Heavy or Super Top Heavy Plan (or whether any Aggregation Group which
includes this Plan is a Top Heavy Group).
B. In addition, if a Participant or Former Participant has not
performed any services for any Employer maintaining the Plan at any time during
the five year period ending on the Determination Date, any accrued benefit for
such Participant or Former Participant shall not be taken into account for the
purposes of determining whether this Plan is a Top Heavy or Super Top Heavy
Plan.
2.2.2 Super Top Heavy. This Plan shall be a Super Top Heavy Plan for
any Plan Year in which, as of the Determination Date, (a) the Present Value of
Accrued Benefits of Key Employees and (b) the sum of the Aggregate Accounts of
Key Employees under this Plan and all plans of an Aggregation Group, exceeds
ninety percent (90%) of the Present Value of Accrued Benefits and the Aggregate
Accounts of all Key and Non-Key Employees under this Plan and all plans of an
Aggregation Group.
2.2.3 Aggregate Account. A Participant's Aggregate Account as of
the Determination Date is the sum of:
A. The Participant's Account balance as of the most recent
valuation occurring within a twelve (12) month period ending on the
Determination Date;
11
B. An adjustment for any contributions due as of the
Determination Date. Such adjustment shall be the amount of any contributions
actually made after the valuation date but due on or before the Determination
Date, except for the first Plan Year when such adjustment shall also reflect the
amount of any contributions made after the Determination Date that are allocated
as of a date in that first Plan Year.
C. Any Plan distributions made within the Plan Year that includes
the
Determination Date or within the four (4) preceding Plan Years. However, in the
case of distributions made after the valuation date and prior to the
Determination Date, such distributions are not included as distributions for top
heavy purposes to the extent that such distributions are already included in the
Participant's Aggregate Account balance as of the valuation date.
Notwithstanding anything herein to the contrary, all distributions, including
distributions made prior to January 1, 1984, and distributions under a
terminated plan which if it had not been terminated would have been required to
be included in an Aggregation Group, will be counted. Further, distributions
from the Plan (including the cash value of life insurance policies) of a
Participant's account balance because of death shall be treated as a
distribution for the purposes of this Section.
D. Any Employee contributions, whether voluntary or mandatory.
However, amounts attributable to tax deductible qualified voluntary employee
contributions shall not be considered to be a part of the Participant's
Aggregate Account balance.
E. With respect to unrelated rollovers and plan-to-plan transfers
(ones which are both initiated by the Employee and made from a plan maintained
by one employer to a plan maintained by another employer), if this Plan provides
the rollovers or plan-to-plan transfers, it shall always consider such rollovers
or plan-to-plan transfers as a distribution for the purposes of this Section. If
this Plan is the plan accepting such rollovers or plan-to-plan transfers, it
shall not consider such rollovers or plan-to-plan transfers as part of the
Participant's Aggregate Account balance.
F. With respect to related rollovers and plan-to-plan transfers
(ones either not initiated by the Employee or made to a plan maintained by the
same employer), if this Plan provides the rollover or plan-to-plan transfer, it
shall not be counted as a distribution for purposes of this Section. If this
Plan is the plan accepting such rollover or plan-to-plan transfer, it shall
consider such rollover or plan-to- plan transfer as part of the Participant's
Aggregate Account balance, irrespective of the date on which such rollover or
plan-to-plan transfer is accepted.
G. For the purposes of determining whether two employers are to
be treated as the same employer in Paragraphs E and F, above, all employers
aggregated under Code Section 414(b), (c), (m) and (o) are treated as the same
employer.
2.2.4 Aggregation GroFor purposes of this Plan, the term
"Aggregation Group" means either a Required Aggregation Group or a Permissive
Aggregation Group as hereinafter determined.
A. In determining a Required Aggregation Group hereunder, each
plan of the Employer in which a Key Employee is a participant in the Plan Year
containing the Determination Date or any of the four preceding Plan Years, and
each other plan of the Employer which enables any plan in which a Key Employee
participates to meet the requirements of Code Sections 401(a)(4) or 410, will be
required to be aggregated. Such group shall be known as a Required Aggregation
Group. In the case of a Required
12
Aggregation Group, each plan in the group will be considered a Top Heavy Plan if
the Required Aggregation Group is a Top Heavy Group. No plan in the Required
Aggregation Group will be considered a Top Heavy Plan if the Required
Aggregation Group is not a Top Heavy Group.
B. The Employer may also include any other plan not required to
be included in the Required Aggregation Group, provided the resulting group,
taken as a whole, would continue to satisfy the provisions of Code Sections
401(a)(4) and 410. Such group shall be known as a Permissive Aggregation Group.
In the case of a Permissive Aggregation Group, only a plan that is part of the
Required Aggregation Group will be considered a Top Heavy Plan if the Permissive
Aggregation Group is a Top Heavy Group. No plan in the Permissive Aggregation
Group will be considered a Top Heavy Plan if the Permissive Aggregation Group is
not a Top Heavy Group.
C. Only those plans of the Employer in which the Determination
Dates fall within the same calendar year shall be aggregated in order to
determine whether such plans are Top Heavy Plans.
D. An Aggregation Group shall include any terminated plan of the
Employer if it was maintained within the last five (5) years ending on the
Determination Date.
E. "Determination Date" means (i) the last day of the preceding
Plan Year, or (ii) in the case of the first Plan Year, the last day of such Plan
Year.
F. Present Value of Accrued Benefit: In the case of a defined
benefit plan, the Present Value of Accrued Benefit for a Participant other than
a Key Employee, shall be as determined using the single accrual method used for
all plans of the Employer and Affiliated Employers, or if no such single method
exists, using a method which results in benefits accruing not more rapidly than
the slowest accrual rate permitted under Code Section 411(b)(1)(C). The
determination of the Present Value of Accrued Benefit shall be determined as of
the most recent valuation date that falls within or ends with the 12-month
period ending on the Determination Date except as provided in Code Section 416
and the Regulations thereunder for the first and second plan years of a defined
benefit plan.
G. "Top Heavy Group" means an Aggregation Group in which, as of
the Determination Date, (i) the sum of (a) the Present Value of Accrued Benefits
of Key Employees under all defined benefit plans included in the group, and (b)
the Aggregate Accounts of Key Employees under all defined contribution plans
included in the group, exceeds (ii) sixty percent (60%) of a similar sum
determined for all Participants.
2.3 Powers and Responsibilities of the Employer.
2.3.1 Appoint and Remove. The Employer shall be empowered to appoint
and remove the Trustee and the Administrator from time to time as the Employer
deems necessary for the proper administration of the Plan to assure that the
Plan is being operated for the exclusive benefit of the Participants and their
Beneficiaries in accordance with the terms of the Plan, the Code, and the Act.
2.3.2 Funding Policy and Method. The Employer shall establish a
"funding policy and method", i.e., it shall determine whether the Plan has
a short run need for liquidity (e.g., to pay benefits) or whether liquidity is a
long run goal and investment growth (and stability of same) is a more current
need, or shall appoint a qualified person to do so. The Employer or its delegate
shall communicate such needs and goals to the Trustee, who shall coordinate such
Plan needs with its investment policy.
13
The communication of such a "funding policy and method" shall not, however,
constitute a directive to the Trustee as to investment of the Trust Funds. Such
"funding policy and method" shall be consistent with the objectives of this Plan
and with the requirements of Title I of the Act.
2.3.3 Review. The Employer shall periodically review the performance
of any Fiduciary or other person to whom duties have been delegated or allocated
by it under the provisions of this Plan or pursuant to procedures established
hereunder. This requirement may be satisfied by formal periodic review by the
Employer or by a qualified person specifically designated by the Employer,
through day-today conduct and evaluation, or through other appropriate ways.
2.3.4 Notices.The Employer will furnish Plan Fiduciaries and
Participants with notices and information statements when voting rights must be
exercised pursuant to Section 8.4.
2.4 Administrator. The Employer shall appoint one or more Administrators.
Any person, including, but not limited to, the Employees of the Employer, shall
be eligible to serve as an Administrator. Any person so appointed shall signify
his acceptance by filing written acceptance with the Employer. An Administrator
may resign by delivering his written resignation to the Employer or be removed
by the Employer by delivery of written notice of removal, to take effect at a
date specified therein, or upon delivery to the Administrator if no date is
specified. The Employer, upon the resignation or removal of an Adminis trator,
shall promptly designate in writing a successor to this position. If the
Employer does not appoint an Administrator, the Employer will function as the
Administrator.
2.5 Allocation and Delegation of Responsibilities. If more than one person
is appointed as Administrator, then the responsibilities of each Administrator
may be specified by the Employer and accepted in writing by each Administrator.
In the event that no such delegation is made by the Employer, the Administrators
may allocate the responsibilities among themselves, in which event the
Administrators shall notify the Employer and the Trustee in writing of such
action and specify the responsibilities of each Administrator. The Trustee
thereafter shall accept and rely upon any documents executed by the appropriate
Administrator until such time as the Employer or the Administrators file with
the Trustee a written revocation of such designation.
2.6 Powers and Duties of the Administrator. The primary responsibility
of the Administrator is to administer the Plan for the exclusive benefit of the
Participants and their Beneficiaries, subject to the specific terms of the Plan.
2.6.1 General. The Administrator shall administer the Plan in
accordance with its terms and shall have the power and discretion to construe
the terms of the Plan and to determine all questions arising in connection with
the administration, interpretation, and application of the Plan. Any such
determination by the Administrator shall be conclusive and binding upon all
persons. The Administrator may establish procedures, correct any defect, supply
any information, or reconcile any inconsistency in such manner and to such
extent as shall be deemed necessary or advisable to carry out the purpose of the
Plan; provided, however, that any procedure, discretionary act, interpretation
or construction shall be done in a nondiscriminatory manner based upon uniform
principles consistently applied and shall be consistent with the intent that the
Plan shall continue to be deemed a qualified plan under the terms of Code
Section 401(a), and shall comply with the terms of the Act and all regulations
issued pursuant thereto. The Administrator shall have all powers necessary or
appropriate to accomplish his duties under this Plan.
2.6.2 Duties. The Administrator shall be charged with the duties of
the general administration of the Plan, including, but not limited to, the
following:
14
A. The discretion to determine all questions relating to the
eligibility of Employees to participate or remain a Participant hereunder and to
receive benefits under the Plan;
B. To compute, certify, and direct the Trustee with respect to
the amount and the kind of benefits to which any Participant shall be entitled
hereunder;
C. To authorize and direct the Trustee with respect to all
nondiscretionary or otherwise directed disbursements from the Trust;
D. To maintain all necessary records for the administration of
the Plan;
E. To interpret the provisions of the Plan and to make and
publish such rules for regulation of the Plan as are consistent with the terms
hereof;
F. To determine the size and type of any Contract to be purchased
from any insurer, and to designate the insurer from which such Contract shall be
purchased;
G. To compute and certify to the Employer and to the Trustee from
time to time the sums of money necessary or desirable to be contributed to the
Plan;
H. To consult with the Employer and the Trustee regarding the
short and long-term liquidity needs of the Plan in order that the Trustee can
exercise any investment discretion in a manner designed to accomplish specific
objectives;
I. To establish and communicate to Participants a procedure for
allowing each Participant to direct the Trustee as to the distribution of his
Company Stock Account pursuant to Section 4.6, below;
J. To establish and communicate to Participants a procedure and
method to insure that each Participant will vote Company Stock allocated to such
Participant's Company Stock Account pursuant to Section 8.4, below.
K. To enter into a written agreement with regard to the payment
of federal estate tax pursuant to Code Section 2210(b); and
L. To assist any Participant regarding his rights, benefits, or
elections available under the Plan.
2.7 Records and Reports. The Administrator shall keep a record of all
actions taken and shall keep all other books of account, records, and other data
that may be necessary for proper administration of the Plan and shall be
responsible for supplying all information and reports to the Internal Revenue
Service, Department of Labor, Participants, Beneficiaries and others as required
by law.
2.8 Appointment of Advisers. The Administrator, or the Trustee with the
consent of the Administrator, may appoint counsel, specialists, advisers, and
other persons as the Administrator or the Trustee deems necessary or desirable
in connection with the administration of this Plan.
2.9 Information From Employer. To enable the Administrator to perform
its functions, the Employer shall supply full and timely information to the
Administrator on all matters relating to the
15
Compensation of all Participants, their Hours of Service, their Years of
Service, their retirement, death, disability, or termination of employment, and
such other pertinent facts as the Administrator may require; and the
Administrator shall advise the Trustee of such of the foregoing facts as may be
pertinent to the Trustee's duties under the Plan. The Administrator may rely
upon such information as is supplied by the Employer and shall have no duty or
responsibility to verify such information.
2.10 Payment of Expenses. All expenses of administration may be paid out of
the Trust Fund unless paid by the Employer. Such expenses shall include any
expenses incident to the functioning of the Administrator, including, but not
limited to, fees of accountants, counsel, and other specialists and their
agents, and other costs of administering the Plan. Until paid, the expenses
shall constitute a liability of the Trust Fund. However, the Employer may
reimburse the Trust Fund for any administration expense incurred.
2.11 Majority Actions. Except where there has been an allocation and
delegation of administrative authority pursuant to Section 2.5, above, if there
shall be more than one Administrator, they shall act by a majority of their
number, but may authorize one or more of them to sign all papers on their
behalf.
2.12 Claims Procedure. Claims for benefits under the Plan may be filed with
the Administrator on forms supplied by the Employer. Written notice of the
disposition of a claim shall be furnished to the claimant within 90 days after
the application is filed. In the event the claim is denied, the reasons for the
denial shall be specifically set forth in the notice in language calculated to
be understood by the claimant, pertinent provisions of the Plan shall be cited,
and, where appropriate, an explanation as to how the claimant can perfect the
claim will be provided. In addition, the claimant shall be furnished with an
explanation of the Plan's claims review procedure.
2.13 Claims Review Procedure. Any Employee, former Employee, or Beneficiary
of either, who has been denied a benefit by a decision of the Administrator
pursuant to Section 2.12, above, shall be entitled to request the Administrator
to give further consideration to his claim by filing with the Administrator (on
a form which may be obtained from the Administrator) a request for a hearing.
Such request, together with a written statement of the reasons why the claimant
believes his claim should be al lowed, shall be filed with the Administrator no
later than 60 days after receipt of the written notification provided for in
Section 2.12, above.
2.13.1 Hearing. The Administrator shall then conduct a hearing
within the next 60 days, at which the claimant may be represented by an attorney
or any other representative of his choosing and at which the claimant shall have
an opportunity to submit written and oral evidence and arguments in support of
his claim. At the hearing (or prior thereto upon five (5) business days' written
notice to the Administrator) the claimant or his representative shall have an
opportunity to review all documents in the possession of the Administrator which
are pertinent to the claim at issue and its disallowance. Either the claimant or
the Administrator may cause a court reporter to attend the hearing and record
the proceedings. In such event, a complete written transcript of the proceedings
shall be furnished to both parties by the court reporter. The full expense of
any such court reporter and such transcripts shall be borne by the party causing
the court reporter to attend the hearing.
2.13.2 Final Decision. A final decision as to the allowance of the
claim shall be made by the Administrator within 60 days of receipt of the appeal
(unless there has been an extension of 60 days due to special circumstances,
provided the delay and the special circumstances occasioning it are communicated
to the claimant within the 60 day period). Such communication shall be written
in a manner
16
calculated to be understood by the claimant and shall include specific reasons
for the decision and specific references to the pertinent Plan provisions on
which the decision is based.
3. ELIGIBILITY
3.1 Conditions of Eligibility. Any Eligible Employee who has completed one
(1) Year of Service and has attained age 18 shall be eligible to participate
hereunder as of the date he has satisfied such requirements. However, any
Employee who was a Participant in the Plan prior to the effective date of this
amendment and restatement shall continue to participate in the Plan. The
Employer shall give each prospec tive Eligible Employee written notice of his
eligibility to participate in the Plan prior to the close of the Plan Year in
which he first becomes an Eligible Employee.
3.2 Application for Participation. In order to become a Participant
hereunder, each Eligible Employee shall make application to the Employer for
participation in the Plan and agree to the terms hereof. Upon the acceptance' of
any benefits under this Plan, such Employee shall automatically be deemed to
have made application and shall be bound by the terms and conditions of the Plan
and all amendments hereto.
3.3 Effective Date of Participation. An Eligible Employee shall become a
Participant effective as of the first day of the month coinciding with or next
following the date on which such Employee met the eligibility requirements of
Section 3.1, above, provided said Employee was still employed as of such date
(or if not employed on such date, as of the date of rehire if a 1-Year Break in
Service has not occurred).
3.4 Determination of Eligibility. The Administrator shall determine the
eligibility of each Employee for participation in the Plan based upon
information furnished by the Employer. Such determination shall be conclusive
and binding upon all persons, as long as the same is made pursuant to the Plan
and the Act. Such determination shall be subject to review per Section 2.13,
above.
3.5 Termination of Eligibility.
3.5.1 Vesting and Trust Fund. In the event a Participant shall go
from a classification of an Eligible Employee to an ineligible Employee, such
Former Participant shall continue to vest in his interest in the Plan for each
Year of Service completed while a noneligible Employee, until such time as his
Participant's Account shall be forfeited or distributed pursuant to the terms of
the Plan. Addition ally, his interest in the Plan shall continue to share in the
earnings of the Trust Fund.
3.5.2 Break in Service. In the event a Participant is no longer a
member of an eligible class of Employees and becomes ineligible to participate
but has not incurred a 1-Year Break in Service, such Employee will participate
immediately upon returning to an eligible class of Employees. If such
Participant incurs a 1-Year Break in Service, eligibility will be determined
under the break in service rules of the Plan.
3.6 Omission Of Eligible Employee. If, in any Plan Year, any Employee who
should be included as a Participant in the Plan is erroneously omitted and
discovery of such omission is not made until after a contribution by his
Employer for the year has been made, the Employer shall make a subsequent
contribution with respect to the omitted Employee in the amount which the said
Employer would have contributed with respect to him had he not been omitted.
Such contribution shall be made regardless of whether or not it is deductible in
whole or in part in any taxable year under applicable provisions of the Code.
17
3.7 Inclusion of Ineligible Employee. If, in any Plan Year, any person who
should not have been included as a Participant in the Plan is erroneously
included and discovery of such incorrect inclusion is not made until after a
contribution for the year has been made, the Employer shall not be entitled to
recover the contribution made with respect to the ineligible person regardless
of whether or not a deduction is allowable with respect to such contribution. In
such event, the amount contributed with respect to the ineligible person shall
constitute a Forfeiture for the Plan Year in which the discovery is made.
3.8 Election Not to Participate. An Employee may, subject to the approval
of the Employer, elect voluntarily not to participate in the Plan. The election
not to participate must be communicated to the Employer, in writing, at least
thirty (30) days before the beginning of a Plan Year.
4. CONTRIBUTION AND ALLOCATION
4.1 Formula For Determining Employer's Contribution.
4.1.1 Discretionary Contributions. For each Plan Year, the Employer
shall contribute to the Plan such amount, if any, as shall be determined in the
discretion of the Employer.
4.1.2 Limitation Per Deduction. Notwithstanding the foregoing,
however, the Employer's contributions for any Plan Year shall not exceed the
maximum amount allowable as a deduction to the Employer under the provisions of
Code Section 404; provided, however, to the extent necessary to provide the top
heavy minimum allocations, the Employer shall make a contribution even if it
exceeds the amount which is deductible under Code Section 404.
4.1.3 Form of Contribution. All contributions by the Employer shall
be made in cash, Company Stock or in such property as is determined by the
Employer and acceptable to the Trustee. Company Stock and other property will be
valued at their then fair market value.
4.2 Time of Payment of Employer's Contribution. The Employer shall pay to
the Trustee its contribution to the Plan for each Plan Year within the time
prescribed by law, including extensions of time, for the filing of the
Employer's federal income tax return for the Fiscal Year.
4.3 Allocation of Contribution, Forfeitures and Earnings. The Administrator
shall establish and maintain in the name of each Participant an account to which
the Administrator shall credit as of each Anniversary Date all amounts allocated
to each such Participant as set forth herein.
4.3.1 Allocations of Contributions. Subject to Section 4.3.11,
below, only Participants who have completed a Year of Service during the Plan
Year and are actively employed on the last day of the Plan Year shall be
eligible to share in the discretionary contribution for the year. The Employer
shall provide the Administrator with all information required by the
Administrator to make a proper allocation of the Employer's contributions for
each Plan Year. Within a reasonable period of time after the date of receipt by
the Administrator of such information, the Administrator shall allocate such
contribution to each Participant's Account in the same proportion that each such
Participant's Compensation for the year bears to the total Compensation of all
Participants for such year.
4.3.2 Company Stock Account. The Company Stock Account of each
Participant shall be credited as of each Anniversary Date with Forfeitures of
Company Stock and his allocable share of Company Stock (including fractional
shares) purchased and paid for by the Plan. Stock dividends on Company Stock
held in his Company Stock Account shall be credited to his Company Stock
18
Account when paid. Subject to Section 7.5.4, below, cash dividends on Company
Stock held in his Company Stock Account shall, in the discretion of the
Administrator, either (a) be credited to his Other Investments Account when
paid, or (b) be used to repay an Exempt Loan, or (c) as contemplated by Section
7.5.4, below, be paid in cash to the Participant or the Participant's
Beneficiaries not later than ninety (90) days after the close of the Plan Year
in which such dividend is received by the Trust under this Plan; provided, when
cash dividends are used to repay an Exempt Loan, Company Stock shall be released
from the Unallocated Company Stock Suspense Account and allocated to the
Participant's Company Stock Account pursuant to Section 4.3.5, below, and,
provided further, that Company Stock allocated to the Participant's Company
Stock Account shall have a fair market value not less than the amount of cash
dividends which would have been allocated to such Participant's Other
Investments Account for the year. Company Stock acquired by the Plan with the
proceeds of an Exempt Loan shall only be allocated to each Participant's Company
Stock Account upon release from the Unallocated Company Stock Suspense Account
as provided in Section 4.3.5, below. Company Stock acquired with the proceeds of
an Exempt Loan shall be an asset of the Trust Fund and maintained in the
Unallocated Company Stock Suspense Account.
4.3.3 Trust Fund Earnings and Losses. As of each Anniversary Date
or other valuation date, before the current valuation period allocation of
Employer contributions and Forfeitures, any earnings or losses (net appreciation
or net depreciation) of the Trust Fund shall be allocated in the same proportion
that each Participant's and Former Participant's nonsegregated accounts (other
than each Participant's Company Stock Account) bear to the total of all
Participants' and Former Participants' non segregated accounts (other than
Participants' Company Stock Accounts) as of such date. Earnings or losses do not
include theinterest paid under any installment contract for the purchase of
Company Stock by the Trust Fund or on any loan used by the Trust Fund to
purchase Company Stock, nor does it include income received by the Trust Fund
with respect to Company Stock acquired with the proceeds of an Exempt Loan; all
income received by the Trust Fund from Company Stock acquired with the proceeds
of an Exempt Loan may, at the discretion of the Administrator, be used to repay
such loan.
4.3.4 Insurance. Participants' accounts shall be debited for any
insurance or annuity premiums paid, if any, and credited with any dividends
received on insurance contracts.
4.3.5 Suspense Account. All Company Stock acquired by the Plan with
the proceeds of an Exempt Loan must be added to and maintained in the
Unallocated Company Stock Suspense Account. Such Company Stock shall be released
and withdrawn from that account as if all Company Stock in that account were
encumbered. For each Plan Year during the duration of the loan, the number of
shares of Company Stock released shall equal the number of encumbered shares
held immediately before release for the current Plan Year multiplied by a
fraction, the numerator of which is the amount of principal and interest paid
for the Plan Year and the denominator of which is the sum of the numerator plus
the principal and interest to be paid for all future Plan Years. As of each
Anniversary Date, the Plan must consistently allocate to each Participant's
Account, in the same manner as Employer discretionary contributions pursuant to
Section 4.1.1, above, are allocated, non-monetary units (shares and fractional
shares of Company Stock) representing each Participant's interest in Company
Stock withdrawn from the Unallocated Company Stock Suspense Account. However,
Company Stock released from the Unallocated Company Stock Suspense Account with
cash dividends pursuant to Section 4.3.2, above, shall be allocated to each
Participant's Company Stock Account in the same proportion that each such
Participant's number of shares of Company Stock sharing in such cash dividends
bears to the total number of shares of all Participants' Company Stock sharing
in such cash dividends. Income earned with respect to Company Stock in the
Unallocated Company Stock Suspense Account shall be used, at the discretion of
the Administrator, to repay the Exempt Loan used to purchase such Company Stock.
Company Stock released from the Unallocated Company Stock Suspense Account with
such income, and any income which is not so used, shall be allocated as of each
Anniversary
19
Date or other valuation date in the same proportion that each Participant's and
Former Participant's nonsegregated accounts after the allocation of any earnings
or losses pursuant to Section 4.3.3, above, bear to the total of all
Participants, and Former Participants' nonsegregated accounts after the
allocation of any earnings or losses pursuant to Section 4.3.3, above.
4.3.6 Allocations of Forfeitures. As of each Anniversary Date any
amounts which became Forfeitures since the last Anniversary Date shall first be
made available to reinstate previously forfeited account balances of Former
Participants, if any, in accordance with Section 7.4.7.B. The remaining
Forfeitures, if any, shall be allocated among the Participants' Accounts of
Participants otherwise eligible to share in the allocation of discretionary
contributions in the same proportion that each such Participant's Compensation
for the year bears to the total Compensation of all such Participants for the
year; provided, however, that in the event the allocation of Forfeitures
provided herein shall cause the "annual addition" (as defined in Section 4.4) to
any Participant's Account to exceed the amount allowable by the Code, the excess
shall be reallocated in accordance with Section 4.5, below.
4.3.7 Top Heavy Allocation. For any Top Heavy Plan Year, Employees
not otherwise eligible to share in the allocation of contributions and
Forfeitures as provided above, shall receive the minimum allocation provided for
in Section 4.3.10, below, if eligible pursuant to the provisions of that
Section.
4.3.8 Retirees and Disabled Participants. Notwithstanding the fore
going, Participants who are not actively employed on the last day of the
Plan Year due to Retirement (Early, Normal or Late), Total and Permanent
Disability or death shall share in the allocation of contributions and
Forfeitures for that Plan Year.
4.3.9 Top Heavy Minimum. Notwithstanding the foregoing, for any
Top Heavy Plan Year, the sum of the Employer's contributions and
Forfeitures allocated to the Participant's Account of each Employee shall be
equal to at least three percent (3%) of such Employee's "415 Compensation"
(reduced by contributions and forfeitures, if any, allocated to each Employee in
any defined contribution plan included with this plan in a Required Aggregation
Group). However, if (1) the sum of the Employer's contributions and Forfeitures
allocated to the Participant's Account of each Key Employee for such Top Heavy
Plan Year is less than three percent (3%) of each Key Employee's "415
Compensation" and (2) this Plan is not required to be included in an Aggregation
Group to enable a defined benefit plan to meet the requirements of Code Section
401(a)(4) or 410, the sum of the Employer's contributions and Forfeitures
allocated to the Participant's Account of each Employee shall be equal to the
largest percentage allocated to the Participant's Account of any Key Employee;
provided, no such minimum allocation shall be required in this Plan for any
Employee who participates in another defined contribution plan subject to Code
Section 412 providing such benefits included with this Plan in a Required
Aggregation Group.
A. For purposes of the minimum allocations set forth above, the
percentage allocated to the Participant's Account of any Key Employee shall be
equal to the ratio of the sum of the Employer's contributions and Forfeitures
allocated on behalf of such Key Employee divided by the "415 Compensation" for
such Key Employee.
B. For any Top Heavy Plan Year, the minimum allocations set forth
above shall be allocated to the Participant's Account of all Employees who are
Participants and who are employed by the Employer on the last day of the Plan
Year, including Employees who have (1) failed to complete a Year of Service; and
(2) declined to make mandatory contributions (if required) to the Plan.
20
C. Subject to Section 1.10.3, above, for the purposes of this
Section 4.3, "415 Compensation" shall be limited to $200,000. Such amount shall
be adjusted at the same time and in the same manner as permitted under Code
Section 415(d), except that the dollar increase in effect on January 1 of any
calendar year shall be effective for the Plan Year beginning with or within such
calendar year and the first adjustment to the $200,000 limitation shall be
effective on January 1, 1990. For any short Plan Year the "415 Compensation"
limit shall be an amount equal to the "415 Compensation" limit for the calendar
year in which the Plan Year begins multiplied by the ratio obtained by dividing
the number of full months in the short Plan Year by twelve (12). However, for
Plan Years beginning prior to January 1, 1989, the $200,000 limit shall apply
only for Top Heavy Plan Years and shall not be adjusted.
4.3.10 Reeemployed Former Participant. If a Former Participant is
reemployed after five (5) consecutive 1-Year Breaks in Service, then separate
accounts shall be maintained as follows: (a) one account for nonforfeitable
benefits attributable to pre-break service; and (b) one account representing his
status in the Plan attributable to post-break service.
4.3.11 Fail-Safe Allocations. Notwithstanding any provision of this
Plan to the contrary, if this is a Plan that would otherwise fail to meet the
requirements of Code Sections 410(b)(1) or 410(b)(2)(A)(i) and the Regulations
thereunder because Employer contributions would not be allocated to a sufficient
number or percentage of Participants for a Plan Year, then the following rules
shall apply:
A. The group of Participants eligible to share in the Employer's
contribution and Forfeitures for the Plan Year shall be expanded to include the
minimum number of Participants who would not otherwise be eligible as are
necessary to satisfy the applicable test specified above. The specific
Participants who shall become eligible under the terms of this Section shall be
those who are actively employed on the last day of the Plan Year and, when
compared to similarly situated Participants, have completed the greatest number
of Hours of Service in the Plan Year.
B. If after application of Section 4.3.11A, above, the applicable
test is still not satisfied, then the group of Participants eligible to share in
the Employer's contribution and Forfeitures for the Plan Year shall be further
expanded to include the minimum number of Participants who are not actively
employed on the last day of the Plan Year as are necessary to satisfy the
applicable test. The specific Participants who shall become eligible to share
shall be those Participants, who when compared to similarly situated
Participants, who have completed the greatest number of Hours of Service in the
Plan Year before terminating employment.
C. Nothing in this Section 4.3.11 shall permit the reduction of a
Participant's accrued benefit. Therefore any amounts that have previously been
allocated to Participants may not be reallocated to satisfy these requirements.
In such event, the Employer shall make an additional contribution equal to the
amount such affected Participants would have received had they been included in
the allocations, even if it exceeds the amount which would be deductible under
Code Section 404. Any adjustment to the allocations pursuant to this Section
shall be considered a retroactive amendment adopted by the last day of the Plan
Year.
D. Notwithstanding the foregoing Paragraphs A, B, and C, if this
Plan would fail to satisfy Code Section 410(b) if the coverage tests were
applied by treating those Participants whose only allocation would otherwise be
provided under the top heavy formula as if they were not currently benefitting
under the Plan, then, for purposes of this Section 4.3.11, then such
Participants shall be treated as not benefitting and shall therefore be eligible
to be included in the expanded class of Participants who will share in the
allocation provided under the Plan's non top heavy formula.
21
4.4 Maximum Annual Additions.
4.4.1 Limitation. Notwithstanding any provision of this Plan to the
contrary, the maximum "annual additions" credited to a Participant's accounts
for any "limitation year" shall equal the lesser of: (a) $30,000 (or, if
greater, one-fourth of the dollar limitation in effect under Code Section
415(b)(1)(A)) or (b) twenty-five percent (25%) of the Participant's "415
Compensation" for such "limitation year". For any short "limitation year", the
dollar limitation in clause (a), above, shall be reduced by a fraction, the
numerator of which is the number of full months in the short "limitation year"
and the denominator of which is twelve (12).
A. Any amount which would be allocable to a Participant's
accounts under this Plan in a Plan Year but for the application of the foregoing
limitation of Code Section 415 shall be reallocated to other Participants in
that Plan Year in accordance with Section 4.3, above.
B. The Employer maintains an Incentive & Investment and Salary
Savings Plan (the "I&I and Salary Savings Plan"), in which many Participants in
this Plan also participate. In applying the limitations of Code Section 415 to
each Participant, the Participant (i) first shall be credited under the I&I and
Salary Savings Plan with the maximum amount that the Participant is entitled to
receive under that Plan, and (ii) thereafter shall be credited under this Plan
with the maximum additional amount which can be allocated to the Participant
hereunder in accordance with Section 4.3, above, and the limitations of Code
Section 415.
4.4.2 Annual Additions Defined. For purposes of applying the
limitations of Code Section 415, "annual additions" means the sum credited to a
Participant's accounts for any "limitation year" of (a) Employer contributions,
(b) Employee contributions for "limitation years" beginning after December 31,
1986, (c) forfeitures, (d) amounts allocated to an individual medical account,
as defined in Code Section 415(1)(2), which is part of a pension or annuity plan
maintained by the Employer, and (e) amounts derived from contributions paid or
accrued after December 31, 1985, in taxable years ending after such date, which
are attributable to post-retirement medical benefits allocated to the separate
account of a key employee (as defined in Code Section 419A(d)(3)) under a
welfare benefit plan (as defined in Code Section 419(e)) maintained by the
Employer; provided, however, the 25% "415 Compensation" percentage limitation
referred to in Section 4.4.1(b), above, shall not apply to: (i) any contribution
for medical benefits (within the meaning of Code Section 419A(f)(2)) after
separation from service which is otherwise treated as an "annual addition", or
(ii) any amount otherwise treated as an "annual addition" under Code Section
415(1)(1).
4.4.3 Exclusions From Annual Additions. For purposes of applying
the limitations of Code Section 415:
A. The following are not "annual additions": (a) the transfer of
funds from one qualified plan to another, and (b) provided no more than
one-third of the Employer contributions for the year are allocated to Highly
Compensated Participants, Forfeitures of Company Stock purchased with the
proceeds of an Exempt Loan and Employer contributions applied to the payment of
interest on an Exempt Loan.
B. The following are not Employee contributions for the purposes
of Section 4.4.3(b): (i) rollover contributions (as defined in Code Sections
402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3)); (ii) repayments of loans made to
a Participant from the Plan; (iii) repayments of distributions
22
received by an Employee pursuant to Code Section 411(a)(7)(B) (cash-outs); (iv)
repayments of distributions received by an Employee pursuant to Code Section
411(a)(3)(D) (mandatory contributions); and (v) Employee contributions to a
simplified employee pension excludable from gross income under Code Section
408(k)(6).
4.4.4 Limitation Year. For purposes of applying the limitations of
Code Section 415, the "limitation year" shall be the Plan Year.
4.4.5 Dollar Limitation Adjustment. The dollar limitation under Code
Sec tion 415(b)(1)(A) stated in Section 4.4.1(a), above, shall be adjusted
annually as provided in Code Section 415(d) pursuant to the Regulations. The
adjusted limitation is effective as of January 1st of each calendar year and is
applicable to "limitation years" ending with or within that calendar year.
4.4.6 Defined Benefit Plans. For the purpose of this Section, all
qualified defined benefit plans (whether terminated or not) ever maintained by
the Employer shall be treated as one defined benefit plan, and all qualified
defined contribution plans (whether terminated or not) ever maintained by the
Employer shall be treated as one defined contribution plan.
4.4.7 Controlled Groups. For the purpose of this Section, if the
Employer is a member of a controlled group of corporations, trades or businesses
under common control (as defined by Code Section 1563(a) or Code Section 414(b)
and (c) as modified by Code Section 415(h)), is a member of an affiliated
service group (as defined by Code Section 414(m)), or is a member of a group of
entities required to be aggregated pursuant to Regulations under Code Section
414(o), all Employees of such Employers shall be considered to be employed by a
single Employer.
4.4.8 Collectively Bargained Plans. For the purpose of this Section,
if this Plan is a Code Section 413(c) plan, all Employers of a Participant who
maintain this Plan will be considered to be a single Employer.
4.4.9 Combined Plan Limits: Annual Additions. For Plan Years
beginning on or before December 31, 1999:
A. If a Participant participates in more than one defined
contribution plan maintained by the Employer which have different Anniversary
Dates, the maximum "annual additions" under this Plan shall equal the maximum
"annual additions" for the "limitation year" minus any "annual additions"
previously credited to such Participant's accounts during the "limitation year".
B. If a Participant participates in both a defined contribution
plan subject to Code Section 412 and a defined contribution plan not subject to
Code Section 412 maintained by the Employer which have the same Anniversary
Date, "annual additions" will be credited to the Participant's accounts under
the defined contribution plan subject to Code Section 412 prior to crediting
"annual additions" to the Participant's accounts under the defined contribution
plan not subject to Code Section 412.
C. If a Participant participates in more than one defined
contribution plan not subject to Code Section 412 maintained by the Employer
which have the same Anniversary Date, the maximum "annual additions" under this
Plan shall equal the product of (i) the maximum "annual additions" for the
"limitation year" minus any "annual additions" previously credited under
Sections 4.4.9A or 4.4.9B, above, multiplied by (ii) a fraction, (x) the
numerator of which is the "annual additions" which would be
23
credited to such Participant's accounts under this Plan without regard to the
limitations of Code Section 415 and (y) the denominator of which is such "annual
additions" for all plans described in this subsection.
D If an Employee is (or has been) a Participant in one or more
defined benefit plans and one or more defined contribution plans maintained by
the Employer, the sum of the defined benefit plan fraction and the defined
contribution plan fraction for any "limitation year" may not exceed 1.0.
(1) The defined benefit plan fraction for any "limitation
year" is a fraction, the numerator of which is the sum of the Participant's
projected annual benefits under all the defined benefit plans (whether or not
terminated) maintained by the Employer, and the denominator of which is tho
lesser of 125 percent of the dollar limitation determined for the "limitation
year" under Code Sections 415(b) and (d) or 140 percent of the highest average
compensation, including any adjustments under Code Section 415(b).
Notwithstanding the foregoing, if the Participant was a Participant as of the
first day of the first "limitation year" beginning after December 31, 1986, in
one or more defined benefit plans maintained by the Employer which were in
existence on May 6, 1986, the denominator of this fraction will not be less than
125 percent of the sum of the annual benefits under such plans which the
Participant had accrued as of the close of the last "limitation year" beginning
before January 1, 1987, disregarding any changes in the terms and conditions of
the plan after May 5, 1986. The preceding sentence applies only if the defined
benefit plans individually and in the aggregate satisfied the requirements of
Code Section 415 for all "limitation years" beginning before January 1, 1987.
(2) The defined contribution plan fraction for any
"limitation year" is a fraction, the numerator of which is the sum of the annual
additions to the Participant's Account under all the defined contribution plans
(whether or not terminated) maintained by the Employer for the current and all
prior "limitation years" (including the annual additions attributable to the
Participant's nondeductible Employee contributions to all defined benefit plans,
whether or not terminated, maintained by the Employer, and the annual additions
attributable to all welfare benefit funds, as defined in Code Section 419(e),
and individual medical accounts, as defined in Code Section 415(1)(2),
maintained by the Employer), and the denominator of which is the sum of the
maximum aggregate amounts for the current and all prior "limitation years" of
service with the Employer (regardless of whether a defined contribution plan was
maintained by the Employer).
a. The maximum aggregate amount in any "limitation year"
is the lesser of 125 percent of the dollar limitation determined under Code
Sections 415(b) and (d) in effect under Code Section 415(c)(1)(A) or 35 percent
of the Participant's Compensation for such year.
b. If the Employee was a Participant as of the end of
the first day of the first "limitation year" beginning after December 31, 1986,
in one or more defined contribution plans maintained by the Employer which were
in existence on May 6, 1986, the numerator of this fraction will be adjusted if
the sum of this fraction and the defined benefit fraction would otherwise exceed
1.0 under the terms of this Plan. Under the adjustment, an amount equal to the
product of (i) the excess of the sum of the fractions over 1.0, times (ii) the
denominator of this fraction, will be permanently subtracted from the numerator
of this fraction. The adjustment is calculated using the fractions as they would
be computed as of the end of the last "limitation year" beginning before January
1, 1987, and disregarding any changes in the terms and conditions of the Plan
made after May 5, 1986, but using the Code Section 415 limitation applicable to
the first "limitation year" beginning on or after January 1, 1987. The annual
addition for any "limitation year" beginning before January 1, 1987 shall not be
recomputed to treat all Employee contributions as annual additions.
24
(3) Notwithstanding the foregoing, for any "limitation year"
in which the Plan is a Top Heavy Plan, 100 percent shall be substituted for 125
percent in subparagraphs (1) and (2), above, unless the extra minimum allocation
is being provided pursuant to Section 4.3. However, for any "limitation year" in
which the Plan is a Super Top Heavy Plan, 100 percent shall be substituted for
125 percent in any event.
4.4.10 Code and Regulations. Notwithstanding anything contained in
this Section 4.4 to the contrary, the limitations, adjustments and other
requirements prescribed in this Section shall at all times comply with the
provisions of Code Section 415 and the Regulations thereunder, the terms of
which are specifically incorporated herein by reference.
4.4.11 ESOP Allocation Limitation. Notwithstanding any other
provision of this plan to the contrary, in no event shall more than one-third
(1/3) of the Employer's contribution and forfeitures be allocated for any Plan
Year to the Participant's Accounts of the Participants who are Highly
Compensated Employees. In the event the limitations set forth in this Section
4.4.11 are exceeded in any Plan Year, then the Participant's accounts of those
Highly Compensated Employees shall be reduced equally until the limitations set
forth in this Section 4.4.11 is met. The amount by which the accounts of those
Highly Compensated Employees are reduced pursuant to this Section 4.4.11 shall
be added to the Employer's contribution and allocated amongst the Participant's
Accounts of the remaining Participants in accordance with their respective
Compensation.
4.5 Adjustment For Excessive Annual Additions.
4.5.1 Definitions. For purposes of this Section 4.5, the term:
A. "Excess amount" shall mean, for each Participant in each
limitation year, the excess, if any, of (i) the "annual additions" which would
be credited to his account under the terms of the Plan without regard to the
limitations of Code Section 415, over (ii) the maximum "annual additions"
permitted by Code Section 415, as determined pursuant to Section 4.4, above.
B. "Section 415 suspense account" shall mean an unallocated
account equal to the sum of "excess amounts" for all Participants in the Plan
during the limitation year. The amount allocated to the "Section 415 suspense
account" shall not share in any earnings or losses of the Trust Fund.
4.5.2 Treatment of Excess Amounts. If the "annual additions" under
this Plan would cause the maximum "annual additions" to be exceeded for any
Participant by reason of (a) the alloca tion of Forfeitures, (b) a reasonable
error in estimating a Participant's Compensation, (c) a reasonable error in
determining the amount of elective deferrals (within the meaning of Code Section
402(g)(3)) that may be made with respect to any Participant under the limits of
Section 4.4, above, or (d) other facts and circumstances to which Regulation
Section 1.415-6(b)(6) shall be applicable, then the Administrator shall:
A. Allocate and reallocate such excess amount to other
Participants in accordance with Section 4.3, above, but subject to the limits on
annual additions under Section 4.4, above;
B. Hold in a "Section 415 suspense account" any "excess amount"
remaining after application of Paragraph A, above; and
C. Allocate and reallocate the Section 415 suspense account in
the next limita tion year (and, if the amount in that Section 415 suspense
account is not fully allocated in the next limitation
25
year, in succeeding limitation years) to all Participants in the Plan before any
Employer or Employee contributions which would constitute annual additions are
made to the Plan for such limitation year, and reduce Employer contributions to
the Plan for such limitation year by the amount of the Section 415 suspense
account allocated and reallocated during such limitation year.
4.5.3 Distribution of Excess Amounts. The Plan may not distribute
excess amounts, other than voluntary Employee contributions, to Participants or
Former Participants.
4.6 Directed Investment of Accounts. Except as otherwise provided in this
Section 4.6, no Participant shall be entitled to direct the investment of
amounts allocated to the Participant's accounts under this Plan.
4.6.1 Diversification by Qualified Participant. Each "Qualified
Participant" may elect, within ninety (90) days after the close of each Plan
Year during the Qualified Participant's "Qualified Election Period," to direct
the Trustee, in writing, as to the investment of the number of shares of Company
Stock determined pursuant to Section 4.6.2, below. For purposes of this Section
4.6, the term (a) "Qualified Participant" means any Participant or Former
Participant who has completed ten (10) Plan Years of Service as a Participant
and has attained age 55, and (b) "Qualified Election Period" means the six-
Plan-Year-Period beginning with the first Plan Year in which the Participant
first became a "Qualified Participant."
4.6.2 Number of Shares. With respect to each Plan Year during the
Qualified Election Period, the Qualified Participant may elect to direct the
investment of twenty-five percent (25%) of the total number of shares of Company
Stock acquired by or contributed to the Plan that have ever been allocated to
the Qualified Participant's Company Stock Account (reduced by the number of
shares of Company Stock which the Participant previously was entitled to elect
to diversity). With respect to the last year in the Qualified Election Period,
the preceding sentence shall be applied by substituting "fifty percent (50%)"
for "twenty-five percent (25%)."
4.6.3 Manner of Diversification. The Trustee shall satisfy the
diversification direction of the Qualified Participant under this Section 4.6 by
either:
A. Distributing to the Qualified Participant, within ninety (90)
days after the end of the period in which the Participant may make a
diversification election under this Section 4.6.1, either such number of shares
of Company Stock which the Participant has elected to diversify, or cash in an
amount equal to the fair market value of such shares of Company Stock
(determined as of the last Anniversary Date prior to the date of the
distribution), provided, any such shares of Company Stock distributed to a
Qualified Participant shall be subject to the "put option" requirements of
Section 7.22, below; or
B. Offering within the Trust at least three distinct investment
options (in accordance with Treasury Regulations implementing Code Section
401(a)(28)) in which an amount equal to the fair market value of the number of
shares of Company Stock which the Qualified Participant has elected to diversify
shall be invested during the ninety-day period after the period in which the
Qualified Participant may elect a diversification election pursuant to this
Section 4.6.1; or
C. Transferring to another qualified retirement plan sponsored by
the Employer the number of shares of Company Stock which the Qualified
Participant elects to diversify (or an amount representing the fair market value
of those shares as of the last Anniversary Date preceding the date of the
transfer), and offering in that other plan at least three distinct investment
options (in accordance with
26
Treasury Regulations implementing Code Section 401(a)(28)) into which the
proceeds from the sale of the designated number of shares of the Company Stock
(or an amount of cash representing the fair market value) shall be invested
during the 90-day period following the period in which the Participant may make
a diversification election pursuant to this Section 4.6.
Notwithstanding the foregoing provisions of this Section 4.6.3, if the fair
market value (determined pursuant to Section 6.1, below, at the Plan valuation
date immediately preceding the first day in which a Qualified Participant is
eligible to make an election) of Company Stock acquired by or contributed to the
Plan after December 31, 1986, and allocated to a Qualified Participant's Company
Stock Account is not greater than five hundred dollars ($500.00), then no
portion of the shares of Company Stock allocated to that account shall be
subject to the requirements of this Section 4.6. For purposes of determining
whether the fair market value of such stock exceeds $500, all Company Stock held
in accounts of all employee stock ownership loans (as defined in Code Section
4975(e)(7)) and tax credit employee stock ownership plans (as defined in Code
Section 409(a)) maintained by the Employer or any Affiliated Employer shall be
considered pursuant to this Plan.
4.6.4 Directed Investment Accounts. A separate Directed Investment
Account shall be established for each Participant who is entitled to direct the
investment of any portion of the Participant's Account pursuant to this Section
4.6. The Directed Investment Account shall not share in Trust Fund earnings or
losses, but rather shall be charged or credited, as appropriate, with the net
earnings, gains, losses, and expenses, as well as any appreciation or
depreciation in fair market value during each Plan Year, of investments
allocable separately to such account.
5. FUNDING AND INVESTMENT POLICY
5.1 Investment Policy. The Plan is designed to invest primarily in Company
Stock. Notwithstanding the foregoing:
5.1.1 Other Investments. The Administrator may also direct the
Trustee to invest funds under the Plan in other property described in the Trust
or in life insurance policies to the extent permitted by Section 5.1.3 below, or
the Trustee may hold such funds in cash or cash equivalents.
5.1.2 Key Man Insurance. The Administrator may also direct the
Trustee to invest funds under the Plan in insurance policies on the life of any
"key man" Employee. The proceeds of a "keyman" insurance policy may not be used
for the repayment of any indebtedness owed by the Plan which is secured by
Company Stock. In the event any "key man" insurance is purchased by the Trustee,
the premiums paid thereon during any Plan Year, net of any policy dividends and
increases in cash surrender values, shall be treated as the cost of Plan
investment and any death benefit or cash surrender value received shall be
treated as proceeds from an investment of the Plan.
5.1.3 Limit on Stock Acquisition. The Plan may not obligate itself
to acquire Company Stock (a) from a particular holder thereof at an indefinite
time determined upon the happening of an event such as the death of the holder,
or (b) under a put option binding upon the Plan. However, at the time a put
option is exercised, the Plan may be given an option to assume the rights and
obligations of the Employer under a put option binding upon the Employer.
5.1.4 Price of Company Stock. All purchases of Company Stock shall
be made at a price which, in the judgment of the Administrator, does not exceed
the fair market value thereof. All sales of Company Stock shall be made at a
price which, in the judgment of the Administrator, is not less than
27
the fair market value thereof. The valuation rules set forth in Section 6,
below, shall be applicable to all such purchases and sales.
5.2 Application Of Cash. Employer contributions in cash and other cash
received by the Trust Fund shall be applied first to pay any Current Obligations
of the Trust Fund.
5.3 Transactions Involving Company Stock.
5.3.1 Limitations On Allocations. No portion of the Trust Fund
attributable to (or allocable in lieu of) Company Stock acquired by the Plan
after October 22, 1986 in a sale to which Code Section 1042 or, for estates of
decedents who died prior to December 20, 1989, Code Section 2057 applies may
accrue or be allocated directly or indirectly under any plan maintained by the
Employer meeting the requirements of Code Section 401(a):
A. During the "Nonallocation Period", for the benefit of (i) any
taxpayer who makes an election under Code Section 1042(a) with respect to
Company Stock or any decedent if the executor of the estate of the decedent
makes a qualified sale to which Code Section 2057 applies, or (ii) any
individual who is related to the taxpayer or the decedent (within the meaning of
Code Section 267(b)); or
B. For the benefit of any other person who owns (after
application of Code Section 318(a) applied without regard to the employee trust
exception in Code Section 318(a)(2)(B)(i)) more than 25 percent of (i) any class
of outstanding stock of the Employer or Affiliated Employer which issued such
Company Stock, or (ii) the total value of any class of outstanding stock of the
Employer or Affiliated Employer; provided, however, Section 5.3.1A(2), above,
shall not apply to lineal descendants of the taxpayer, provided that the
aggregate amount allocated to the benefit of all such lineal descendants during
the "Nonallocation Period" does not exceed more than five percent (5%) of the
Company Stock (or amounts allocated in lieu thereof) held by the Plan which are
attributable to a sale to the Plan by any person related to such descendants
(within the meaning of Code Section 267(c)(4)) in a transaction to which Code
Section 1042 or Code Section 2057 is applied.
5.3.2 Stock Ownership. A person shall be treated as failing to meet
the stock ownership limitation under Section 5.3.1B. above if such person fails
such limitation (a) at any time during the one (1) year period ending on the
date of sale of Company Stock to the Plan, or (b) on the date as of which
Company Stock is allocated to Participants in the Plan.
5.3.3 Nonallocation Period. For purposes of this Section,
"Nonallocation Period," for Plan Years beginning after December 31, 1986, means
the period beginning on the date of the sale of the Company Stock and ending on
the later of (a) the date which is ten (10) years after the date of sale, or (b)
the date of the Plan allocation attributable to the final payment of the Exempt
Loan incurred in connection with such sale.
5.4 Loans to the Trust.
5.4.1 Loans Permitted. The Plan may borrow money for any lawful
purpose, provided the proceeds of an Exempt Loan are used within a reasonable
time after receipt only for any or all of the following purposes: (a) to acquire
Company Stock; or (b) to repay such loan; or (c) to repay a prior Exempt Loan.
28
5.4.2 Loans Involving Disqualified Persons. All loans to the Trust
which are made or guaranteed by a disqualified person must satisfy all
requirements applicable to Exempt Loans, including but not limited to the
following:
A. The loan must be at a reasonable rate of interest;
B. Any collateral pledged to the creditor by the Plan shall
consist only of the Company Stock purchased with the borrowed funds;
C. Under the terms of the loan, any pledge of Company Stock shall
provide for the release of shares so pledged on a pro-rata basis pursuant to
Section 4.3.5;
D. Under the terms of the loan, the creditor shall have no
recourse against the Plan except with respect to such collateral, earnings
attributable to such collateral, Employer contributions (other than
contributions of Company Stock) that are made to meet Current Obligations and
earnings attribut able to such contributions;
E. The loan must be for a specific term and may not be payable at
the demand of any person, except in the case of default;
F. In the event of default upon an Exempt Loan, the value of the
Trust Fund transferred in satisfaction of the Exempt Loan shall not exceed the
amount of default. If the lender is a disqualified person, an Exempt Loan shall
provide for a transfer of Trust Funds upon default only upon and to the extent
of the failure of the Plan to meet the payment schedule of the Exempt Loan;
G. Exempt Loan payments during a Plan Year must not exceed an
amount
equal to: (i) the sum, over all Plan Years, of all contributions and cash
dividends paid by the Employer to the Plan with respect to such Exempt Loan and
earnings on such Employer contributions and cash dividends, less (ii) the sum of
the Exempt Loan payments in all preceding Plan Years. A separate accounting
shall be maintained for such Employer contributions, cash dividends and earnings
until the Exempt Loan is repaid.
5.4.3 Disqualified Person. For purposes of this Section, the term
"disqualified person" means a person who is a Fiduciary, a person providing
services to the Plan, an Employer any of whose Employees are covered by the
Plan, an employee organization any of whose members are covered by the Plan, an
owner, direct or indirect, of 50% or more of the total combined voting power of
all classes of voting stock or of the total value of all classes of the stock,
or an officer, director, 10% or more shareholder, or a highly compensated
Employee.
6. VALUATIONS
6.1 Valuation of the Trust Fund. The Administrator shall direct the
Trustee, as of each Anniversary Date, and at such other date or dates deemed
necessary by the Administrator, herein called "valuation date", to determine the
net worth of the assets comprising the Trust Fund as it exists on the "valuation
date." In determining such net worth, the Trustee shall value the assets
comprising the Trust Fund at their fair market value as of the "valuation date,
and shall deduct all expenses for which the Trustee has not yet obtained
reimbursement from the Employer or the Trust Fund.
6.2 Method of Valuation. Valuations must be made in good faith and based on
all relevant factors for determining the fair market value of securities. In the
case of a transaction between a Plan and
29
a disqualified person, value must be determined as of the date of the
transaction. For all other Plan purposes, value must be determined as of the
most recent "valuation date" under the Plan. An independent appraisal will not
in itself be a good faith determination of value in the case of a transaction
between the Plan and a disqualified person. However, in other cases, a
determination of fair market value based on at least an annual appraisal
independently arrived at by a person who customarily makes such appraisals and
who is independent of any party to the transaction will be deemed to be a good
faith determination of value. Company Stock not readily tradeable on an
established securities market shall be valued by an independent appraiser
meeting requirements similar to the requirements of the Regulations prescribed
under Code Section 170(a)(1).
7. DETERMINATION AND DISTRIBUTION OF BENEFITS.
7.1 Determination of Benefits Upon Retirement. Every Participant may
terminate his employment with the Employer and retire for the purposes hereof on
his Normal Retirement Date or Early Retirement Date. However, a Participant may
postpone the termination of his employment with the Employer to a later date, in
which event the participation of such Participant in the Plan, including the
right to receive allocations pursuant to Section 4.3, above, shall continue
until his Late Retirement Date. Upon a Participant's Retirement Date or
attainment of his Normal Retirement Date without termination of employment with
the Employer, or as soon thereafter as is practicable, the Trustee shall
distribute all amounts credited to such Participant's Account in accordance with
Sections 7.5 and 7.6, below.
7.2 Determination of Benefits Upon Death.
7.2.1 Vesting and Distribution. Upon the death of a Participant
before his Retirement Date or other termination of his employment, all amounts
credited to such Participant's Account shall become fully Vested. If elected,
distribution of the Participant's Account shall commence not later than one (1)
year after the close of the Plan Year in which such Participant's death occurs.
The Administrator shall direct the Trustee, in accordance with the provisions of
Sections 7.5 and 7.6, below, to distribute the value of the deceased
Participant's accounts to the Participant's Beneficiary.
7.2.2 Distributions. Upon the death of a Former Participant, the
Administrator shall direct the Trustee, in accordance with the provisions of
Sections 7.5 and 7.6, below, to distribute any remaining Vested amounts credited
to the accounts of a deceased Former Participant to such Former Participant's
Beneficiary.
7.2.3 Proof of Death. The Administrator may require such proper
proof of death and such evidence of the right of any person to receive payment
of the value of the account of a deceased Participant or Former Participant as
the Administrator may deem desirable. The Administrator's determination of death
and of the right of any person to receive payment shall be conclusive.
7.2.4 Beneficiary. The Beneficiary of the death benefit payable
pursuant to this Section shall be the Participant's spouse.
A. Notwithstanding the foregoing, the Participant may designate a
Beneficiary other than his spouse if: (i) the spouse has waived the right to be
the Participant's Beneficiary; or (ii) the Participant is legally separated or
has been abandoned (within the meaning of local law) and the Participant has a
court order to such effect (and there is no "qualified domestic relations order,
as defined in Code Sec tion 414(p) which provides otherwise); or (iii) the
Participant has no spouse; or (iv) the spouse cannot be located.
30
B. In the event of the occurrence of any of the circumstances
described in Paragraph A, above, the designation of a Beneficiary shall be made
on a form satisfactory to the Administra tor. A Participant may at any time
revoke his designation of a Beneficiary or change his Beneficiary by filing
written notice of such revocation or change with the Administrator. However, the
Participant's spouse must again consent in writing to any change in Beneficiary
unless the original consent acknowledged that the spouse had the right to limit
consent only to a specific Beneficiary and that the spouse voluntarily elected
to relinquish such right. In the event no valid designation of Beneficiary
exists at the time of the Participant's death, the death benefit shall be
payable to his estate.
7.2.5 Form of Spousal Waiver. Any consent by the Participant's
spouse to waive any rights to the death benefit must be in writing, must
acknowledge the effect of such waiver, and be witnessed by a Plan representative
or a notary public. Further, the spouse's consent must be irrevocable and must
acknowledge the specific nonspouse Beneficiary.
7.3 Determination of Benefits in Event of Disability. In the event of a
Participant's Total and Permanent Disability prior to his Retirement Date or
other termination of his employment, all amounts credited to such Participant's
Account shall become fully Vested. In the event of a Participant's Total and
Permanent Disability, the Trustee, in accordance with the provisions of Sections
7.5 and 7.6, below, shall distribute to such Participant all amounts credited to
such Participant's Account as though he had retired. If such Participant elects,
distribution shall commence not later than one (1) year after the close of the
Plan Year in which Total and Permanent Disability occurs.
7.4 Determination of Benefits Upon Termination.
7.4.1 Segregation of Accounts. On or before the Anniversary Date
coinciding with or subsequent to the termination of a Participant's employment
for any reason other than death, Total and Permanent Disability or retirement,
the Administrator may direct the Trustee to segregate the amount of the Vested
portion of such Terminated Participant's Account and invest the aggregate amount
thereof in a separate, federally insured savings account, certificate of
deposit, common or collective trust fund of a bank or a deferred annuity. In the
event the Vested portion of a Participant's Account is not segregated, the
amount shall remain in a separate account for the Terminated Participant and
share in allocations pursuant to Section 4.3 until such time as a distribution
is made to the Terminated Participant.
A. If a portion of a Participant's Account is forfeited, Company
Stock allocated to the Participant's Company Stock Account must be forfeited
only after the Participant's Other Investments Account has been depleted. If
interest in more than one class of Company Stock has been allocated to a
Participant's Account, the Participant must be treated as forfeiting the same
proportion of each such class.
B. In the event that the amount of the Vested portion of the
Terminated Participant's Account equals or exceeds the fair market value of any
insurance Contracts, the Trustee, when so directed by the Administrator and
agreed to by the Terminated Participant, shall assign, transfer, and set over to
such Terminated Participant all Contracts on his life in such form or with such
endorsements so that the settlement options and forms of payment are consistent
with the provisions of Section 7.5. In the event that the Terminated
Participant's Vested portion does not at least equal the fair market value of
the Contracts,
31
if any, the Terminated Participant may pay over to the Trustee the sum needed to
make the distribution equal to the value of the Contracts being assigned or
transferred, or the Trustee, pursuant to the Participant's election, may borrow
the cash value of the Contracts from the insurer so that the value of the
Contracts is equal to the Vested portion of the Terminated Participant's Account
and then assign the Contracts to the Terminated Participant.
C. Distribution of the funds due to a Terminated Participant
shall be made on the occurrence of an event which would result in the
distribution had the Terminated Participant remained in the employ of the
Employer (upon the Participant's death, Total and Permanent Disability, Early or
Normal Retirement). However, at the election of the Participant, the
Administrator shall direct the Trustee to cause the entire Vested portion of the
Terminated Participant's Account to be payable to such Terminated Participant on
or after the Anniversary Date coinciding with or next following termination of
employment. Distribution to a Participant shall not include any Company Stock
acquired with the proceeds of an Exempt Loan until the close of the Plan Year in
which such loan is repaid in full. Any distribution under this Section shall be
made in a manner which is consistent with and satisfies the provisions of
Sections 7.5 and 7.6, including, but not limited to, all notice and consent
requirements of Code Section 411(a)(11) and the Regulations thereunder.
D. If the value of a Terminated Participant's Vested benefit
derived from Employer and Employee contributions does not exceed Five Thousand
Dollars ($5,000.00) and has never exceeded Five Thousand Dollars ($5,000.00) at
the time of any prior distribution, the Administrator shall direct the Trustee
to cause the entire Vested benefit to be paid to such Participant in a single
lump sum.
E. For purposes of this Section 7.4, if the value of a Terminated
Participant's Vested benefit is zero, the Terminated Participant shall be deemed
to have received a distribution of such vested benefit.
7.4.2 Regular Vesting Percentage. The Vested portion of any
Participant's Account shall be a percentage of the total amount credited to his
Participant's Account determined on the basis of the Participant's number of
Years of Service according to the following schedule:
Regular Vesting Schedule
Years of Service Percentage Vesting
Less than 2 0
2 20%
3 30%
4 40%
5 60%
6 80%
7 100%
The Employer acknowledges that effective as of January 1, 1999, (i) PACIFIC
CAPITAL BANCORP, a California corporation with offices in Salinas, California
(the "Merged Corporation"), is merging with and into the Employer, and (ii) the
Employee Stock Ownership Plan and Trust (the "Merged ESOP") sponsored by the
Merged Corporation is merging into this Plan. With respect to the account
balance of each person who was a participant in such Merged ESOP as of the
effective date of that merger, (a) the foregoing regular Vesting schedule shall
apply only to contributions allocated to such Participant's account under this
Plan
32
with respect to Plan Years beginning on or after January 1, 1999, and (b) all
contributions, allocations, and other additions to such Participant's account
balance with respect to periods prior to such date shall continue to be subject
to the following vesting schedule which was in effect under the Merged ESOP:
A. The Participant shall become fully Vested in the Participant's
former account balance in the Merged ESOP upon the death or disability of the
Participant or the Participant's attaining age 65.
B. The Participant's interest in his accounts in the Merged ESOP
attributable to allocations of contributions and forfeitures prior to January 1,
1991, shall be subject to the following vesting schedule:
Alternate Regular Vesting Schedule-Merged ESOP Accounts
(pre-1/1/91 allocations and forfeitures)
Credited Nonforfeitable
Service Percentage
Less than 3 years 0%
3 years 20%
4 years 40%
5 years 60%
6 years 80%
7 years 100%
C. The Participant's interest in his accounts under the Merged
ESOP attributable to allocations of contributions and forfeitures after December
31, 1990, and prior to January 1, 1999, shall be subject to the following
vesting schedule:
Alternate Regular Vesting Schedule-Merged ESOP Accounts (allocations &
forfeitures - 1/1/91 through 12/31/98)
Credited Service Percentage Vesting
Less than 1 year 0%
1 10%
2 25%
3 50%
4 75%
5 years or more 100%
7.4.3 Top Heavy Vesting Schedule. Notwithstanding the vesting
schedule provided for in Section 7.4.2, above, for any Top Heavy Plan Year, the
Vested portion of the Participant's Account of any Participant who has an Hour
of Service after the Plan becomes top heavy shall be a percentage of the total
amount credited to his Participant's Account determined on the basis of the
Participant's number of Years of Service and shall be at least equal to the
Vested percentage in the following schedule:
33
Top Heavy Vesting Schedule
Years of Service Percentage Vesting
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 100%
If in any subsequent Plan Year, the Plan ceases to be a Top Heavy Plan, the
Administrator shall revert to the vesting schedule in effect before this Plan
became a Top Heavy Plan. Any such reversion shall be treated as a Plan amendment
pursuant to the terms of the Plan.
7.4.4 Effect of Amendment. Notwithstanding the vesting schedule
above, the Vested percentage of a Participant's Account shall not be less than
the Vested percentage attained as of the later of the effective date or adoption
date of this amendment and restatement.
7.4.5 Effect of Terminations, Etc. Notwithstanding the vesting
schedule above, upon the complete discontinuance of the Employer's contributions
to the Plan or upon any full or partial termination of the Plan, all amounts
credited to the account of any affected Participant shall become 100% Vested and
shall not thereafter be subject to Forfeiture.
7.4.6 No Reduction in Vesting. The computation of a Participant's
nonforfeit able percentage of his interest in the Plan shall not be reduced as
the result of any direct or indirect amendment to this Plan. For this purpose,
the Plan shall be treated as having been amended if the Plan provides for an
automatic change in vesting due to a change in top heavy status. In the event
that the Plan is amended to change or modify any vesting schedule, a Participant
with at least three (3) Years of Service as of the expiration date of the
election period may elect to have his nonforfeitable percentage computed under
the Plan without regard to such amendment. If a Participant fails to make such
election, then such Participant shall be subject to the new vesting schedule.
The Participant's election period shall commence on the adoption date of the
amendment and shall end 60 days after the latest of (a) the adoption date of the
amendment, (b) the effective date of the amendment, or (c) the date the
Participant receives written notice of the amendment from the Employer or
Administrator.
7.4.7 Reemployment of Former Participant. If any Former Participant
shall be reemployed by the Employer before a 1-Year Break in Service occurs, he
shall continue to participate in the Plan in the same manner as if such
termination had not occurred.
A. If any Former Participant shall be reemployed by the Employer
before five (5) consecutive 1-Year Breaks in Service, and such Former
Participant had received, or was deemed to have received, a distribution of his
entire Vested interest prior to his reemployment, his forfeited account shall be
reinstated only if he repays the full amount distributed to him before the
earlier of five (5) years after the first date on which the Participant is
subsequently reemployed by the Employer or the close of the first period of five
(5) consecutive 1-Year Breaks in Service commencing after the distribution, or
in the event of a deemed distribution, upon the reemployment of such Former
Participant. In the event the Former Participant does repay the full amount
distributed to him, or in the event of a deemed distribution, the undistributed
portion of the Participant's Account must be restored in full, unadjusted by any
gains or losses
34
occurring subsequent to the Anniversary Date or other valuation date coinciding
with or preceding his termination. The source for such reinstatement shall first
be any Forfeitures occurring during the year. If such source is insufficient,
then the Employer shall contribute an amount which is sufficient to restore any
such forfeited Accounts provided, however, that if a discretionary contribution
is made for such year, such contribution shall first be applied to restore any
such Accounts and the remainder shall be allocated in accordance with Section
4.3.
B. If any Former Participant is reemployed after a 1-Year Break
in Service has occurred, Years of Service shall include Years of Service prior
to his 1-Year Break in Service subject to the following rules:
(1) If a Former Participant has a 1-Year Break in Service,
his pre-break and post-break service shall be used for computing Years of
Service for eligibility and for vesting purposes only after he has been employed
for one (1) Year of Service following the date of his reemployment with the
Employer;
(2) Any Former Participant who under the Plan does not have a
nonforfeitable right to any interest in the Plan resulting from Employer
contributions shall lose credits otherwise allowable under Paragraph B(1),
above, if the number of his consecutive 1-Year Breaks in Service equals or
exceed the greater of (a) five (5) or (b) the aggregate number of his pre-break
Years of Service;
(3) After five (5) consecutive 1-Year Breaks in Service, a
Former
Participant's Vested Account balance attributable to pre-break service shall not
be increased as a result of post-break service;
(4) If a Former Participant who has not had his Years of
Service before a 1-Year Break in Service disregarded pursuant to Paragraph B(2),
above, completes one (1) Year of Service for eligibility purposes following his
reemployment with the Employer, he shall participate in the Plan retroactively
from his date of reemployment;
(5) If a Former Participant who has not had his Years of
Service before a 1-Year Break in Service disregarded pursuant to Paragraph B(2),
above, completes a Year of Service (a 1-Year Break in Service previously
occurred, but employment had not terminated), he shall participate in the Plan
retroactively from the first day of the Plan Year during which he completes one
(1) Year of Service.
7.4.8 Pre-Age-18 Service. In determining Years of Service for
purposes of vesting under the Plan, Years of Service prior to the vesting
computation period in which an Employee attained his eighteenth birthday shall
be excluded.
7.5 Distribution of Benefits.
7.5.1 Form of Distribution. The Administrator, pursuant to the
election of the Participant (or if no election has been made prior to the
Participant's death, by his Beneficiary), shall direct the Trustee to distribute
to a Participant or his Beneficiary any amount to which he is entitled under the
Plan in one or more of the following methods:
A. One lump-sum payment; or
35
B. Payments over a period certain in monthly, quarterly,
semiannual, or annual installments. The period over which such payment is to be
made shall not extend beyond the earlier of the Participant's life expectancy
(or the life expectancy of the Participant and his designated Beneficiary) or
the limited distribution period provided for in Section 7.5.2, below.
7.5.2 Period of Installments. Unless the Participant elects in
writing a longer distribution period, distributions to a Participant or his
Beneficiary attributable to Company Stock shall be in substantially equal
monthly, quarterly, semiannual, or annual installments over a period not longer
than five (5) years. In the case of a Participant with an account balance
attributable to Company Stock in excess of $500,000, the five (5) year period
shall be extended one (1) additional year (but not more than five (5) additional
years) for each $100,000 or fraction thereof by which such balance exceeds
$500,000. The dollar limits shall be adjusted at the same time and in the same
manner as provided in Code Section 415(d).
7.5.3 Participant Consent. Any distribution to a Participant who has
a benefit which exceeds, or has ever exceeded, Five Thousand Dollars ($5,000.00)
at the time of any prior distribution shall require such Participant's consent
if such distribution commences prior to the later of his Normal Retirement Age
or age 62. With regard to this required consent:
A. The Participant must be informed of his right to defer receipt
of the distri bution. If a Participant fails to consent, it shall be deemed an
election to defer the commencement of payment of any benefit. However, any
election to defer the receipt of benefits shall not apply with respect to
distributions which are required under Section 7.5.6, below.
B. Notice of the rights specified under this Section shall be
provided no less than 30 days and no more than 90 days before the first day on
which all events have occurred which entitle the Participant to such benefit.
C. Written consent of the Participant to the distribution must
not be made before the Participant receives the notice and must not be made more
than 90 days before the first day on which all events have occurred which
entitle the Participant to such benefit.
D. No consent shall be valid if a significant detriment is
imposed under the Plan on any Participant who does not consent to the
distribution.
E. Notwithstanding the foregoing provisions of this Section
7.5.3, if a distribution is one to which Code Sections 401(a)(11) and 417 do not
apply, then such distribution may commence less than thirty (30) days after the
participant receives the notice required under Treasury Regulation Section
1.411(a)-11(c), provided that (1) the Administrator clearly informs the
Participant that the Participant has a right to a period of at least thirty (30)
days after receiving the notice to consider the decision of whether or not to
elect a distribution (and, if applicable, a particular distribution option), and
(2) the Participant, after receiving the notice, affirmatively elects a
distribution.
7.5.4 Distribution of Dividends. Notwithstanding anything herein
to the contrary, the Administrator, in its sole discretion, may direct that cash
dividends on shares of Company Stock allocable to Participants' or Former
Participants' Company Stock Accounts be distributed to such Participants or
Former Participants within 90 days after the close of the Plan Year in which the
dividends are paid.
36
7.5.5 Treatment of Accounts. Any part of a Participant's benefit
which is retained in the Plan after the Anniversary Date on which his
participation ends will continue to be treated as a Company Stock Account or as
an Other Investments Account (subject to Section 7.4.1) as provided in Article
IV. However, neither account will be credited with any further Employer
contributions or Forfeitures.
7.5.6 Required Distributions. Notwithstanding any provision in the
Plan to the contrary, the distribution of a Participant's benefits shall be made
in accordance with the following requirements and shall otherwise comply with
Code Section 401(a)(9) and the Regulations thereunder (including Regulation
1.401(a)(9)-2), the provisions of which are incorporated herein by reference:
A. A Participant's benefits shall be distributed to him in
accordance with Paragraph B, below, not later than:
(1) With respect to a Participant who is not a "five percent
owner" (as defined in Section 1.30.3, above), April 1st of the calendar year
following the later of (i) the calendar year in which the Participant attains
age 70-1/2, or (ii) the calendar year in which the Participant retires from
employment with the Employer; or
(2) With respect to a Participant who is a "five percent
owner" (as defined in Section 1.28.1C, above) April 1 of the calendar year
following the calendar year in which such five percent owner attains age 70-1/2
(without regard to whether such five percent owner actually retires from
employment with the Employer).
B. Distributions shall be deemed to have satisfied the
requirements of this Paragraph B only if:
(1) Either (i) the entire account balance of the Participant
under the Plan shall have been distributed to the Participant or the
Participant's Beneficiaries, or (ii) distributions to the Participant (or the
Participant's beneficiary) commence as of the applicable required beginning date
under Paragraph A, above, and continue over a period certain measured by the
life expectancy of the Participant (or the life expectancies of the Participant
and the Participant's designated Beneficiaries).
(2) Distributions to a Participant and his Beneficiaries
shall only be made in accordance with the incidental death benefit requirements
of Code Section 401(a)(9)(G) and the Regulations thereunder.
(3) Notwithstanding any provision in the Plan to the
contrary, distributions upon the death of a Participant shall be made in
accordance with the following requirements and shall otherwise comply with Code
Section 401(a)(9) and the Regulations thereunder. If it is determined pursuant
to Regulations that the distribution of a Participant's interest has begun and
the Participant dies before his entire interest has been distributed to him, the
remaining portion of such interest shall be distributed at least as rapidly as
under the method of distribution selected pursuant to this Section 7.5 as of his
date of death. If a Participant dies before he has begun to receive any
distributions of his interest under the Plan or before distributions are deemed
to have begun pursuant to Regulations, then his death benefit shall be
distributed to his Beneficiaries by December 31st of the calendar year in which
the fifth anniversary of his date of death occurs. However, in the event that
the Participant's spouse (determined as of the date of the Participant's death)
is his Beneficiary, then in lieu of the preceding rules, distributions must be
made
37
over a period not extending beyond the life expectancy of the spouse and must
commence on or before the later of: (a) December 31st of the calendar year
immediately following the calendar year in which the Participant died; or (b)
December 31st of the calendar year in which the Participant would have attained
age 70 1/2. If the surviving spouse dies before distributions to such spouse
begin, then the 5-year distribution requirement of this Section shall apply as
if the spouse was the Participant.
(4) For purposes of this Section 7.5, the life expectancy of
a Participant and a Participant's spouse may, at the election of the Participant
or the Participant's spouse, be redetermined in accordance with Regulations. The
election, once made, shall be irrevocable. If no election is made by the time
distributions must commence, then the life expectancy of the Participant and the
Participant's spouse shall not be subject to recalculation. Life expectancy and
joint and last survivor expectancy shall be computed using the return multiples
in Tables V and VI of Regulation 1.72-9.
7.5.7 Commencement of Distributions. Except as limited by this
Section 7.5 and Section 7.6, below, whenever the Trustee is to make a
distribution or to commence a series of payments on or as of an Anniversary
Date, the distribution or series of payments may be made or begun on such date
or as soon thereafter as is practicable. However, unless a Former Participant
elects in writing to defer the receipt of benefits (such election may not result
in a death benefit that is more than incidental), the payment of benefits shall
begin not later than the 60th day after the close of the Plan Year in which the
latest of the following events occurs (a) the date on which the Participant
attains the earlier of age 65 or the Normal Retirement Age specified herein; (b)
the 10th anniversary of the year in which the Participant commenced
participation in the Plan; or (c) the date the Participant terminates his
service with the Employer.
7.5.8 Segregation of Account. If a distribution is made at a time
when a Partici pant is not fully Vested in his Participant's Account (employment
has not terminated) and the Participant may increase the Vested percentage in
such account:
A. A separate account shall be established for the Participant's
interest in the Plan as of the time of the distribution; and
B. At any relevant time, the Participant's Vested portion of the
separate account shall be equal to an amount ("X") determined by the formula:
X equals P(AB plus R x D)) - R x D)
For purposes of applying such formula: P is the Vested percentage at the
relevant time, AB is the account balance at the relevant time, D is the amount
of distribution, and R is the ratio of the account balance at the relevant time
to the account balance after distribution.
7.6 How Plan Benefit Will be Distributed.
7.6.1 Form of Distribution. Distribution of a Participant's benefit
may be made in cash or Company Stock or both, provided, however, that if a
Participant or Beneficiary so demands, such benefit shall be distributed only in
the form of Company Stock. Prior to making a distribution of benefits, the
Administrator shall advise the Participant or his Beneficiary, in writing, of
the right to demand that benefits be distributed solely in Company Stock.
38
7.6.2 Distribution of Stock. If a Participant or Beneficiary
demands that benefits be distributed solely in Company Stock, distribution of a
Participant's benefit will be made entirely in whole shares or other units of
Company Stock. Any balance in a Participant's Other Investments Account will be
applied to acquire for distribution the maximum number of whole shares or other
units of Company Stock at the then fair market value. Any fractional unit value
unexpended will be distributed in cash. If Company Stock is not available for
purchase by the Trustee, then the Trustee shall hold such balance until Company
Stock is acquired and then make such distribution, subject to Sections 7.5.9 and
7.5.6.
7.6.3 Instructions to Trustee. The Trustee will make distribution
from the Trust only on instructions from the Administrator.
7.6.4 Restricted Ownership. Notwithstanding anything contained
herein to the contrary, if the Employer's charter or by-laws restrict ownership
of substantially all shares of Company Stock to Employees and the Trust Fund, as
described in Code Section 409(h)(2), the Administrator shall distribute a
Participant's Account entirely in cash without granting the Participant the
right to demand distribution in shares of Company Stock.
7.6.5 Restrictions on Resale. Except as otherwise provided herein,
Company Stock distributed by the Trustee may be restricted as to sale or
transfer by the by-laws or articles of incorpo ration of the Employer, provided
restrictions are applicable to all Company Stock of the same class. If a
Participant is required to offer the sale of his Company Stock to the Employer
before offering to sell his Company Stock to a third party, in no event may the
Employer pay a price less than that offered to the distributee by another
potential buyer making a bona fide offer and in no event shall the Trustee pay a
price less than the fair market value of the Company Stock.
7.6.6 Multiple Classes of Stock. If Company Stock acquired with the
proceeds of an Exempt Loan (described in Section 5.4 hereof) is available for
distribution and consists of more than one class, a Participant or his
Beneficiary must receive substantially the same proportion of each such class.
7.7 Distribution for Minor Beneficiary. In the event a distribution is to
be made to a minor, then the Administrator may direct that such distribution be
paid to the legal guardian, or if none, to a parent of such Beneficiary or a
responsible adult with whom the Beneficiary maintains his residence, or to the
custodian for such Beneficiary under the Uniform Gift to Minors Act or Gift to
Minors Act, if such is permitted by the laws of the state in which said
Beneficiary resides. Such a payment to the legal guardian, custodian or parent
of a minor Beneficiary shall fully discharge the Trustee, Employer, and Plan
from further liability on account thereof.
7.8 Location of Participant or Beneficiary Unknown. In the event that all,
or any portion, of the distribution payable to a Participant or his Beneficiary
hereunder shall, at the later of the Participant's attainment of age 62 or his
Normal Retirement Age, remain unpaid solely by reason of the inability of the
Administrator, after sending a registered letter, return receipt requested, to
the last known address, and after further diligent effort, to ascertain the
whereabouts of such Participant or his Beneficiary, the amount so distributable
shall be treated as a Forfeiture pursuant to the Plan. In the event a
Participant or Beneficiary is located subsequent to his benefit being
reallocated, such benefit shall be restored.
39
7.9 Put Option.
7.9.1 Participant Right. If Company Stock which was not acquired
with the proceeds of an Exempt Loan is distributed to a Participant and such
Company Stock is not readily tradeable on an established securities market, a
Participant has a right to require the Employer to repurchase the Company Stock
distributed to such Participant under a fair valuation formula. Such Stock shall
be subject to the provisions of Section 7.9.3, below.
7.9.2 Required Put Option. Company Stock which is acquired with
the proceeds of an Exempt Loan and which is not publicly traded when
distributed, or if it is subject to a trading limitation when distributed, must
be subject to a put option. For purposes of this Section, a "trading limitation"
on a Company Stock is a restriction under any Federal or State securities law or
any regulation thereunder, or an agreement (not prohibited by Section 7.12)
affecting the Company Stock which would make the Company Stock not as freely
tradeable as stock not subject to such restriction.
7.9.3 Exercise of Put Option. The put option shall be exercisable
during the period commencing as of the first day following the date the Company
Stock is distributed to the Former Participant and ending 60 days thereafter and
if not exercised within such 60-day period, an additional 60- day option period
shall commence on the first day of the Plan Year following the date the Company
Stock was distributed to the Former Participant (or, if later, the first day
following the end of the initial 60-day period as is provided in regulations
promulgated by the Secretary of the Treasury.
A. The put option shall commence as of the day following the
date the Company Stock is distributed to the Former Participant and end 60 days
thereafter and if not exercised within such 60-day period, an additional 60-day
option shall commence on the first day of the fifth month of the Plan Year next
following the date the stock was distributed to the Former Participant (or such
other 60-day period as provided in regulations promulgated by the Secretary of
the Treasury). However, in the case of Company Stock that is publicly traded
without restrictions when distributed but ceases to be so traded within either
of the 60-day periods described herein after distribution, the Employer must
notify each holder of such Company Stock in writing on or before the tenth day
after the date the Company Stock ceases to be so traded that for the remainder
of the applicable 60-day period the Company Stock is subject to the put option.
The number of days between the tenth day and the date on which notice is
actually given, if later than the tenth day, must be added to the duration of
the put option. The notice must inform distributees of the term of the put
options that they are to hold. The terms must satisfy the requirements of this
Section.
B. The put option is exercised by the holder notifying the
Employer in writing that the put option is being exercised; the notice shall
state the name and address of the holder and the number of shares to be sold.
The period during which a put option is exercisable does not include any time
when a distributee is unable to exercise it because the party bound by the put
option is prohibited from honoring it by applicable Federal or State law. The
price at which a put option must be exercisable is the value of the Company
Stock determined in accordance with Section 6.2, above. Payment under the put
option involving a "Total Distribution" shall be paid in substantially equal
monthly, quarterly, semiannual or annual installments over a period certain
beginning not later than thirty (30) days after the exercise of the put option
and not extending beyond (5) years. The deferral of payment is reasonable if
adequate security and a reasonable interest rate on the unpaid amounts are
provided. The amount to be paid under the put option involving installment
distributions must be paid not later than thirty (30) days after the exercise of
the put option. Payment under a put option must not be restricted by the
provisions of a loan or any other arrangement, including the terms of the
Employer's articles of incorporation, unless so required by applicable state
law.
40
C. For purposes of this Section, "Total Distribution" means a
distribution to a Participant or his Beneficiary within one taxable year of the
entire Vested Participant's Account.
7.9.4 Limitation. An arrangement involving the Plan that creates a
put option must not provide for the issuance of put options other than as
provided under this Section. The Plan (and the Trust Fund) must not otherwise
obligate itself to acquire Company Stock from a particular holder thereof at an
indefinite time determined upon the happening of an event such as the death of
the holder.
7.10 Nonterminable Protections and Rights. Except as provided in Section
4.3.15, above, and Section 7.9.2, below, no Company Stock acquired with the
proceeds of a loan described in Section 5.4 hereof may be subject to a put,
call, or other option, or buy-sell or similar arrangement when held by and when
distributed from the Trust Fund, whether or not the Plan is then an ESOP. The
protections and rights granted in this Section are nonterminable, and such
protections and rights shall continue to exist under the terms of this Plan so
long as any Company Stock acquired with the proceeds of a loan described in
Section 5.4 hereof is held by the Trust Fund or by any Participant or other
person for whose benefit such protections and rights have been created, and
neither the repayment of such loan nor the failure of the Plan to be an ESOP,
nor an amendment of the Plan shall cause a termination of said protections and
rights.
7.11 Qualified Domestic Relations Order Distribution. All rights and
benefits, including elections, provided to a Participant in this Plan shall be
subject to the rights afforded to any "alternate payee" under a "qualified
domestic relations order." Furthermore, a distribution to an "alternate payee"
shall be permitted if such distribution is authorized by a "qualified domestic
relations order," even if the affected Participant has not separated from
service and has not reached the "earliest retirement age" under the Plan. For
the purposes of this Section, "alternate payee," "qualified domestic relations
order" and "earliest retire ment age" shall have the meaning set forth under
Code Section 414(p).
8. TRUSTEE
8.1 Basic Responsibilities of the Trustee. The Trustee shall have the
following categories of responsibilities:
8.1.1 Investment. Consistent with the "funding policy and method"
determined by the Employer, to invest, manage, and control the Plan assets
subject, however, to the direction of an Investment Manager if the Trustee
should appoint such manager as to all or a portion of the assets of the Plan;
8.1.2 Benefits. At the direction of the Administrator, to pay
benefits required under the Plan to be paid to Participants, or, in the event of
their death, to their Beneficiaries;
8.1.3 Records. To maintain records of receipts and disbursements and
furnish to the Employer and/or Administrator for each Plan Year a written annual
report per Section 8.7; and
8.1.4 Co-Trustees. If there shall be more than one Trustee, they
shall act by a majority of their number, but may authorize one or more of them
to sign papers on their behalf.
8.2 Investment Powers and Duties of the Trustee.
8.2.1 General. The Trustee shall invest and reinvest the Trust Fund
to keep the Trust Fund invested without distinction between principal and income
and in such securities or property, real
41
or personal, wherever situated, as the Trustee shall deem advisable, including,
but not limited to, stocks, common or preferred, bonds and other evidences of
indebtedness or ownership, and real estate or any interest therein. The Trustee
shall at all times in making investments of the Trust Fund consider, among other
factors, the short and long-term financial needs of the Plan on the basis of
information furnished by the Employer. In making such investments, the Trustee
shall not be restricted to securities or other property of the character
expressly authorized by the applicable law for trust investments; however, the
Trustee shall give due regard to any limitations imposed by the Code or the Act
so that at all times the Plan may qualify as an Employee Stock Ownership Plan
and Trust.
8.2.2 Banks. The Trustee may employ a bank or trust company pursuant
to the terms of its usual and customary bank agency agreement, under which the
duties of such bank or trust company shall be of a custodial, clerical and
record-keeping nature.
8.2.3 Pooled Funds. The Trustee may from time to time with the
consent of the Employer transfer to a common, collective, or pooled trust fund
maintained by any corporate Trustee hereunder, all or such part of the Trust
Fund as the Trustee may deem advisable, and such part or all of the Trust Fund
so transferred shall be subject to all the terms and provisions of the common,
collective, or pooled trust fund which contemplate the commingling for
investment purposes of such trust assets with trust assets of other trusts. The
Trustee may, from time to time with the consent of the Employer, withdraw from
such common, collective, or pooled trust fund all or such part of the Trust Fund
as the Trustee may deem advisable.
8.2.4 Sale of Company Stock. In the event the Trustee invests any
part of the Trust Fund, pursuant to the directions of the Administrator, in any
shares of stock issued by the Employer, and the Administrator thereafter directs
the Trustee to dispose of such investment, or any part thereof, under
circumstances which, in the opinion of counsel for the Trustee, require
registration of the securities under the Securities Act of 1933 and/or
qualification of the securities under the Blue Sky laws of any state or states,
then the Employer at its own expense, will take or cause to be taken any and all
such action as may be necessary or appropriate to effect such registration
and/or qualification.
8.2.5 Insurance. The Trustee, at the direction of the Administrator,
shall ratably apply for, own, and pay premiums on Contracts on the lives of the
Participants. If a life insurance policy is to be purchased for a Participant,
the aggregate premium for ordinary life insurance for each Participant must be
less than 50% of the aggregate of the contributions and Forfeitures to the
credit of the Participant at any particular time. If term insurance is purchased
with such contributions, the aggregate premium must be less than 25% of the
aggregate contributions and Forfeitures allocated to a Participant's Account. If
both term insurance and ordinary life insurance are purchased with such
contributions, the amount expended for term insurance plus one-half of the
premium for ordinary life insurance may not in the aggregate exceed 25% of the
aggregate contributions and Forfeitures allocated to a Participant's Account.
The Trustee must convert the entire value of the life insurance contracts at or
before retirement into cash or provide for a periodic income so that no portion
of such value may be used to continue life insurance protection beyond
retirement, or distribute the Contracts to the Participant. In the event of any
conflict between the terms of this Plan and the terms of any insurance Contract
purchased hereunder, the Plan provisions shall control.
8.3 Other Powers of the Trustee. The Trustee, in addition to all powers and
authorities under common law, statutory authority, including the Act, and other
provisions of the Plan, shall have the following powers and authorities, to be
exercised in the Trustee's sole discretion:
42
8.3.1 Purchase Securities. To purchase, or subscribe for, any
securities or other property and to retain the same. In conjunction with the
purchase of securities, margin accounts may be opened and maintained;
8.3.2 Sell Securities. To sell, exchange, convey, transfer, grant
options to purchase, or otherwise dispose of any securities or other property
held by the Trustee, by private contract or at public auction. No person dealing
with the Trustee shall be bound to see to the application of the purchase money
or to inquire into the validity, expediency, or propriety of any such sale or
other disposition, with or without advertisement;
8.3.3 Voting, Etc. Subject to Section 8.4, below, with respect to
Company Stock, to vote upon any stocks, bonds, or other securities; to give
general or special proxies or powers of attorney with or without power of
substitution; to exercise any conversion privileges, subscription rights or
other options, and to make any payments incidental thereto; to oppose, or to
consent to, or otherwise participate in, corporate reorganizations or other
changes affecting corporate securities, and to delegate discretionary powers,
and to pay any assessments or charges in connection therewith; and generally to
exercise any of the powers of an owner with respect to stocks, bonds,
securities, or other property;
8.3.4 Title. To cause any securities or other property to be
registered in the Trustee's own name or in the name of one or more of the
Trustee's nominees, and to hold any investments in bearer form, but the books
and records of the Trustee shall at all times show that all such investments are
part of the Trust Fund;
8.3.5 Borrow. To borrow or raise money for the purposes of the Plan
in such amount, and upon such terms and conditions, as the Trustee shall deem
advisable; and for any sum so borrowed, to issue a promissory note as Trustee,
and to secure the repayment thereof by pledging all, or any part, of the Trust
Fund; and no person lending money to the Trustee shall be bound to see to the
application of the money lent or to inquire into the validity, expediency, or
propriety of any borrowing;
8.3.6 Liquid Investments. To keep such portion of the Trust Fund in
cash or cash balances as the Trustee may, from time to time, deem to be in the
best interests of the Plan, without liability for interest thereon;
8.3.7 Holding Period. To accept and retain for such time as the
Trustee may deem advisable any securities or other property received or acquired
as Trustee hereunder, whether or not such securities or other property would
normally be purchased as investments hereunder;
8.3.8 Transfer Payments. To make, execute, acknowledge, and
deliver any and all documents of transfer and conveyance and any and all other
instruments that may be necessary or appropriate to carry out the powers herein
granted;
8.3.9 Disputes. To settle, compromise, or submit to arbitration any
claims, debts, or damages due or owing to or from the Plan, to commence or
defend suits or legal or administrative proceedings, and to represent the Plan
in all suits and legal and administrative proceedings;
8.3.10 Agents. To employ suitable agents and counsel and to pay
their reasonable expenses and compensation, and such agent or counsel may or may
not be agent or counsel for the Employer;
43
8.3.11 Insurance. To apply for and procure from responsible
insurance companies, to be selected by the Administrator, as an investment of
the Trust Fund such annuity, or other Contracts (on the life of any Participant)
as the Administrator shall deem proper; to exercise, at any time or from time to
time, whatever rights and privileges may be granted under such annuity, or other
Contracts; to collect, receive, and settle for the proceeds of all such annuity
or other Contracts as and when entitled to do so under the provisions thereof;
8.3.12 Accounts. To invest funds of the Trust in time deposits or
savings accounts bearing a reasonable rate of interest in the Trustee's bank;
8.3.13 Treasury Securities. To invest in Treasury Bills and other
forms of United States government obligations;
8.3.14 Mutual Funds. To invest in shares of investment companies
registered under the Investment Company Act of 1940;
8.3.15 Insured Deposits. To deposit monies in federally insured savings accounts
or certificates of deposit in banks or savings and loan associations;
8.3.16 Voting Company Stock. To vote Company Stock as provided in
Section 8.4;
8.3.17 Reorganizations, Etc. To consent to or otherwise participate
in reorganizations, recapitalizations, consolidations, mergers and similar
transactions with respect to Company Stock or any other securities and to pay
any assessments or charges in connection therewith;
8.3.18 Voting Trust, Etc. To deposit such Company Stock (but only
if such deposit does not violate the provisions of Section 8.4 hereof) or other
securities in any voting trust, or with any protective or like committee, or
with a trustee or with depositories designated thereby;
8.3.19 Options, Etc. To sell or exercise any options, subscription
rights and conversion privileges and to make any payments incidental thereto;
8.3.20 Exercise Powers. To exercise any of the powers of an owner,
with respect to such Company Stock and other securities or other property
comprising the Trust Fund. The Administrator, with the Trustee's approval, may
authorize the Trustee to act on any administrative matter or class of matters
with respect to which direction or instruction to the Trustee by the
Administrator is called for hereunder without specific direction or other
instruction from the Administrator;
8.3.21 Options. To sell, purchase and acquire put or call options if
the options are traded on and purchased through a national securities exchange
registered under the Securities Exchange Act of 1934, as amended, or, if the
options are not traded on a national securities exchange, are guaranteed by a
member firm of the New York Stock Exchange;
8.3.22 Other. To do all such acts and exercise all such rights and
privileges, although not specifically mentioned herein, as the Trustee may deem
necessary to carry out the purposes of the Plan.
44
8.4 Voting Company Stock. All voting rights with respect to Company Stock
held by the Trustee shall be voted in accordance with the provisions of this
Section 8.4.
8.4.1 Voting Rights Pass-Through. If the Employer has a
registration-type class of securities or, with respect to Company Stock acquired
by, or transferred to, the Plan in connection with a securities acquisition loan
(as defined in Code Section 133(b)) after July 10, 1989, each Participant or
Beneficiary shall be entitled to direct the Trustee as to the manner in which
the Company Stock which is entitled to vote and which is allocated to the
Company Stock Account of such Participant or Beneficiary is to be voted.
A. If the Employer does not have a registration-type class of
securities, with respect to Company Stock other than Company Stock acquired by,
or transferred to, the Plan in connection with a securities acquisition loan (as
defined in Code Section 133(b)) after July 10, 1989, each Participant or
Beneficiary in the Plan shall be entitled to direct the Trustee as to the manner
in which voting rights on shares of Company Stock which are allocated to the
Company Stock Account of such Participant or Beneficiary are to be exercised
with respect to any corporate matter which involves the voting of such shares
with respect to the approval or disapproval of any corporate merger or
consolidation, recapitalization, reclassification, liquidation, dissolution,
sale of substantially all assets of a trade or business, or such similar
transaction as prescribed in Regulations.
B. For purposes of this Section the term "registration-type class
of securities" means: (i) a class of securities required to be registered under
Section 12 of the Securities Exchange Act of 1934; and (ii) a class of
securities which would be required to be so registered except for the exemption
from registration provided in subsection (g)(2)(H) of such Section 12 of such
Act.
8.4.2 Other. If the Employer does not have a registration-type class
of securities and the by-laws of the Employer require the Plan to vote an issue
in a manner that reflects a one-man, one- vote philosophy, each Participant or
Beneficiary shall be entitled to cast one vote on an issue and the Trustee shall
vote the shares held by the Plan in proportion to the results of the votes cast
on the issue by the Participants and Beneficiaries.
8.4.3 Vote by Trustee Absent Participant Directions. The Trustee
shall be entitled to exercise, in such manner as the Trustee deems appropriate,
all voting rights attributable to Company Stock (a) which is held unallocated in
the Unallocated Company Stock Suspense Account or (b) for which the Trustee
proffers pass-through voting rights in accordance with Section 8.3.1, above, and
for which the Trustee does not receive any written direction from the
Participant as to the manner in which votes shall be cast with respect to shares
held in the Participant's account.
8.4.4 Pledged Shares Voted Under Voting Agreement. If any
agreement entered into by the Trust provides for voting of any shares of Company
Stock pledged as security for any obligation of the Plan, then such shares of
Company Stock shall be voted in accordance with such agreement.
8.5 Duties Of The Trustee Regarding Payments.
8.5.1 Distributions. The Trustee shall make distributions from the
Trust Fund at such times and in such numbers of shares or other units of Company
Stock and amounts of cash to or for the benefit of the person entitled thereto
under the Plan as the Administrator directs in writing. Any undistributed part
of a Participant's interest in his accounts shall be retained in the Trust Fund
until the Administrator directs its distribution. Where distribution is directed
in Company Stock, the Trustee shall
45
cause an appropriate certificate to be issued to the person entitled thereto and
mailed to the address furnished it by the Administrator. Any portion of a
Participant's Account to be distributed in cash shall be paid by the Trustee
mailing its check to the same person at the same address. If a dispute arises as
to who is entitled to or should receive any benefit or payment, the Trustee may
withhold or cause to be withheld such payment until the dispute has been
resolved.
8.5.2 Administrator Directions. As directed by the Administrator,
the Trustee shall make payments out of the Trust Fund. Such directions or
instructions need not specify the purpose of the payments so directed and the
Trustee shall not be responsible in any way respecting the purpose or propriety
of such payments except as mandated by the Act.
8.5.3 Returned Payment. In the event that any distribution or
payment directed by the Administrator shall be mailed by the Trustee to the
person specified in such direction at the latest address of such person filed
with the Administrator, and shall be returned to the Trustee because such person
cannot be located at such address, the Trustee shall promptly notify the
Administrator of such return. Upon the expiration of sixty (60) days after such
notification, such direction shall become void and unless and until a further
direction by the Administrator is received by the Trustee with respect to such
distribution or payment, the Trustee shall thereafter continue to administer the
Trust as if such direction had not been made by the Administrator. The Trustee
shall not be obligated to search for or ascertain the whereabouts of any such
person.
8.6 Trustee's Compensation and Expenses and Taxes. The Trustee shall be
paid such reasonable compensation as shall from time to time be agreed upon in
writing by the Employer and the Trustee. An individual serving as Trustee who
already receives full-time pay from the Employer shall not receive compensation
from the Plan. In addition, the Trustee shall be reimbursed for any reasonable
expenses, including reasonable counsel fees incurred by it as Trustee. Such
compensation and expenses shall be paid from the Trust Fund unless paid or
advanced by the Employer. All taxes of any kind and all kinds whatsoever that
may be levied or assessed under existing or future laws upon, or in respect of,
the Trust Fund or the income thereof, shall be paid from the Trust Fund.
8.7 Annual Report of the Trustee. Within a reasonable period of time after
the later of the Anniversary Date or receipt of the Employer's contribution for
each Plan Year, the Trustee shall furnish to the Employer and Administrator a
written statement of account with respect to the Plan Year for which such
contribution was made.
8.7.1 Contents. Such report shall set forth (a) the net income, or
loss, of the Trust Fund; (b) the gains, or losses, realized by the Trust Fund
upon sales or other disposition of the assets; (c) the increase, or decrease, in
the value of the Trust Fund; (d) all payments and distributions made from the
Trust Fund; and (e) such further information as the Trustee or Administrator
deems appropriate.
8.7.2 Employer Review. The Employer, forthwith upon its receipt of
each such statement of account, shall acknowledge receipt thereof in writing and
advise the Trustee and/or Administrator of its approval or disapproval thereof.
Failure by the Employer to disapprove any such statement of account within
thirty (30) days after its receipt thereof shall be deemed an approval thereof.
The approval by the Employer of any statement of account shall be binding as to
all matters embraced therein as between the Employer and the Trustee to the same
extent as if the account of the Trustee had been
46
settled by judgment or decree in an action for a judicial settlement of its
account in a court of competent jurisdiction in which the Trustee, the Employer
and all persons having or claiming an interest in the Plan were parties;
provided, however, that nothing herein contained shall deprive the Trustee of
its right to have its accounts judicially settled if the Trustee so desires.
8.8 Audit.
8.8.1 Conduct. If an audit of the Plan's records shall be required
by the Act and the regulations thereunder for any Plan Year, the Administrator
shall direct the Trustee to engage on behalf of all Participants an independent
qualified public accountant for that purpose. Such accountant shall, after an
audit of the books and records of the Plan in accordance with generally accepted
auditing standards, within a reasonable period after the close of the Plan Year,
furnish to the Administrator and the Trustee a report of his audit setting forth
his opinion as to whether any statements, schedules or lists that are required
by Act Section 103 or the Secretary of Labor to be filed with the Plan's annual
report, are presented fairly in conformity with generally accepted accounting
principles applied consistently. All auditing and accounting fees shall be an
expense of and may, at the election of the Administrator, be paid from the Trust
Fund.
8.8.2 Information. If some or all of the information necessary to
enable the Administrator to comply with Act Section 103 is maintained by a bank,
insurance company, or similar institution, regulated and supervised and subject
to periodic examination by a state or federal agency, it shall transmit and
certify the accuracy of that information to the Administrator as provided in Act
Section 103(b) within one hundred twenty (120) days after the end of the Plan
Year or by such other date as may be pre scribed under regulations of the
Secretary of Labor.
8.9 Resignation, Removal and Succession of Trustee.
8.9.1 Resignation. The Trustee may resign at any time by delivering
to the Employer, at least thirty (30) days before its effective date, a written
notice of his resignation.
8.9.2 Removal. The Employer may remove the Trustee by mailing by
registered or certified mail, addressed to such Trustee at his last known
address, at least thirty (30) days before its effective date, a written notice
of his removal.
8.9.3 Successor. Upon the death, resignation, incapacity, or removal
of any Trustee, a successor may be appointed by the Employer; and such
successor, upon accepting such appoint ment in writing and delivering same to
the Employer, shall, without further act, become vested with all the estate,
rights, powers, discretions, and duties of his predecessor with like respect as
if he were originally named as a Trustee herein. Until such a successor is
appointed, the remaining Trustee or Trustees shall have full authority to act
under the terms of the Plan.
8.9.4 Designation of Successor. The Employer may designate one or
more successors prior to the death, resignation, incapacity, or removal of a
Trustee. In the event a successor is so designated by the Employer and accepts
such designation, the successor shall, without further act, become vested with
all the estate, rights, powers, discretions, and duties of his predecessor with
the like effect as if he were originally named as Trustee herein immediately
upon the death, resignation, incapacity, or removal of his predecessor.
47
8.9.5 Statement. Whenever any Trustee hereunder ceases to serve as
such, he shall furnish to the Employer and Administrator a written statement of
account with respect to the portion of the Plan Year during which he served as
Trustee. This statement shall be either (a) included as part of the annual
statement of account for the Plan Year required under Section 8.7, or (b) set
forth in a special statement. Any such special statement of account should be
rendered to the Employer no later than the due date of the annual statement of
account for the Plan Year. The procedures set forth in Section 8.7 for the
approval by the Employer of annual statements of account shall apply to any
special statement of account rendered hereunder and approval by the Employer of
any such special statement in the manner provided in Section 8.7 shall have the
same effect upon the statement as the Employer's approval of an annual statement
of account. No successor to the Trustee shall have any duty or responsibility to
investigate the acts or transactions of any predecessor who has rendered all
statements of account required by Section 8.7 and this subsection.
8.10 Transfer of Interest. Notwithstanding any other provision contained in
this Plan, the Trustee at the direction of the Administrator shall transfer the
Vested interest, if any, of such Participant in his account to another trust
forming part of a pension, profit sharing or stock bonus plan maintained by such
Participant's new employer and represented by said employer in writing as
meeting the requirements of Code Section 401(a), provided that the trust to
which such transfers are made permits the transfer to be made.
8.11 Direct Rollover. This Section applies to distributions made on or
after January 1, 1993.
8.11.1 Rule. Notwithstanding any provision of the Plan to the
contrary that would otherwise limit a distributees election under this Section,
a "distributee" may elect, at the time and in the manner prescribed by the Plan
Administrator, to have any portion of an "eligible rollover distribution" paid
directly to an "eligible retirement plan" specified by the distributee in a
"direct rollover."
8.11.2 Definitions. For purposes of this Section 8.11:
A. An "eligible rollover" distribution is any distribution of all
or any portion of the balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any distribution that is one of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the distributees
designated beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under section 401(a)(9)
of the Code; and the portion of any distribution that is not includable in gross
income (determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities).
B. An "eligible retirement plan" is an individual retirement
account described in section 408(a) of the Code, an individual retirement
annuity described in section 408(b) of the Code, an annuity plan described in
section 403(a) of the Code, or a qualified trust described in section 401(a) of
the Code, that accepts the distributee's eligible rollover distribution.
However, in the case of an eligible rollover distribution to the surviving
spouse, an eligible retirement plan is an individual retirement account or
individual retirement annuity.
C. A "distributee" includes an Employee or former Employee. In
addition, the Employee's or former Employee's surviving spouse and the
Employee's or former Employee's spouse or former spouse who is the alternate
payee under a qualified domestic relations order, as defined in section 414(p)
of the Code, are distributees with regard to the interest of the spouse or
former spouse.
48
D. A "direct rollover" is a payment by the plan to the eligible
retirement plan specified by the distributee.
9. AMENDMENT, TERMINATION AND MERGERS
9.1 Amendment.
9.1.1 General. The Employer shall have the right at any time to
amend the Plan, subject to the limitations of this Section, by action of its
Board of Directors or such committee as the Board may designate or authorize to
amend the Plan. However, any amendment which affects the rights, duties or
responsibilities of the Trustee and Administrator may only be made with the
Trustee's and Administrator's written consent. Any such amendment shall become
effective as provided therein upon its execution. The Trustee shall not be
required to execute any such amendment unless the Trust provisions contained
herein are a part of the Plan and the amendment affects the duties of the
Trustee hereunder.
9.1.2 Limitation. No amendment to the Plan shall be effective if it
authorizes or permits any part of the Trust Fund (other than such part as is
required to pay taxes and administration expenses) to be used for or diverted to
any purpose other than for the exclusive benefit of the Participants or their
Beneficiaries or estates; or causes any reduction in the amount credited to the
account of any Participant; or causes or permits any portion of the Trust Fund
to revert to or become property of the Employer.
9.1.3 Protected Benefits. Except as permitted by Regulations, n
Plan amendment or transaction having the effect of a Plan amendment (such as a
merger, plan transfer or similar transaction) shall be effective to the extent
it eliminates or reduces any "Section 411(d)(6) protected benefit" or adds or
modifies conditions relating to "Section 411(d)(6) protected benefits" the
result of which is a further restriction on such benefit unless such protected
benefits are preserved with respect to benefits accrued as of the later of the
adoption date or effective date of the amendment. "Section 411(d)(6) protected
benefits" are benefits described in Code Section 411(d)(6)(A), early retirement
benefits and retirement-type subsidies, and optional forms of benefit. In
addition, no such amendment shall have the effect of terminating the protections
and rights set forth in Section 7.12, unless such termination shall then be
permitted under the applicable provisions of the Code and Regulations; such a
termination is currently expressly prohibited by Regulation
54.4975-11(a)(3)(ii).
9.2 Termination.
9.2.1 Employer Right; Vesting. The Employer shall have the right at
any time to terminate the Plan by delivering to the Trustee and Administrator
written notice of such termination. Upon any full or partial termination, all
amounts credited to the affected Participants' Accounts shall become 100% Vested
as provided in Section 7.4 and shall not thereafter be subject to forfeiture,
and all unallocated amounts shall be allocated to the accounts of all
Participants in accordance with the provisions hereof.
9.2.2 Distribution of Trust Fund. Upon the full termination of the
Plan, the Employer shall direct the distribution of the assets of the Trust Fund
to Participants in a manner which is consistent with and satisfies the
provisions of Sections 7.5 and 7.6. Except as permitted by Regulations, the
termination of the Plan shall not result in the reduction of "Section 411(d)(6)
protected benefits" in accordance with Section 9.1.3, above.
49
9.3 Merger or Consolidation.
9.3.1 General. This Plan and Trust may be merged or consolidated
with, or its assets and/or liabilities may be transferred to any other plan and
trust only if the benefits which would be received by a Participant of this
Plan, in the event of a termination of the plan immediately after such transfer,
merger or consolidation, are at least equal to the benefits the Participant
would have received if the Plan had terminated immediately before the transfer,
merger or consolidation, and such transfer, merger or consolidation does not
otherwise result in the elimination or reduction of any "Section 411(d)(6)
protected benefits" in accordance with Section 9.1.3, above.
9.3.2 Merger with Pacific Capital Bancorp. Effective as of January
1, 1999, the Merged ESOP (as defined in Section 7.4.2, above) shall merge with
and into this Plan. The entire account balance of each Participant in the Merged
ESOP shall be continued into and maintained under this Plan. In accordance with
Section 9.1.3, above, such merger shall not result in the elimination or
reduction of any "Section 411(d)(6) protected benefits" of any person who was a
participant in the Merged ESOP.
10. MISCELLANEOUS
10.1 Participant's Rights. This Plan shall not be deemed to constitute a
contract between the Employer and any Participant or to be a consideration or an
inducement for the employment of any Participant or Employee. Nothing contained
in this Plan shall be deemed to give any Participant or Employee the right to be
retained in the service of the Employer or to interfere with the right of the
Employer to discharge any Participant or Employee at any time regardless of the
effect which such discharge shall have upon him as a Participant of this Plan.
10.2 Alienation.
10.2.1 Prohibition. Subject to the exceptions provided below, no
benefit which shall be payable out of the Trust Fund to any person (including a
Participant or his Beneficiary) shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any
attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or
charge the same shall be void; and no such benefit shall in any manner be liable
for, or subject to, the debts, contracts, liabilities, engagements, or torts of
any such person, nor shall it be subject to attachment or legal process for or
against such person, and the same shall not be recognized by the Trustee, except
to such extent as may be required by law.
10.2.2 Exception: QDROs. This provision shall not apply to a
"qualified domestic relations order" defined in Code Section 414(p), and those
other domestic relations orders permitted to be so treated by the Administrator
under the provisions of the Retirement Equity Act of 1984. The Administrator
shall establish a written procedure to determine the qualified status of
domestic relations orders and to administer distributions under such qualified
orders. Further, to the extent provided under a "qualified domestic relations
order", a former spouse of a Participant shall be treated as the spouse or
surviving spouse for all purposes under the Plan.
10.3 Construction of Plan. This Plan and Trust shall be construed and
enforced according to the Act and the laws of the State of California, other
than its laws respecting choice of law, to the extent not preempted by the Act.
50
10.4 Gender and Number. Wherever any words are used herein in the
masculine, feminine or neuter gender, they shall be construed as though they
were also used in another gender in all cases where they would so apply, and
whenever any words are used herein in the singular or plural form, they shall be
construed as though they were also used in the other form in all cases where
they would so apply.
10.5 Legal Action. In the event any claim, suit, or proceeding is brought
regarding the Trust and/or Plan established hereunder to which the Trustee or
the Administrator may be a party, and such claim, suit, or proceeding is
resolved in favor of the Trustee or Administrator, they shall be entitled to be
reimbursed from the Trust Fund for any and all costs, attorney's fees, and other
expenses pertaining thereto incurred by them for which they shall have become
liable.
10.6 Prohibition Against Diversion of Funds.
10.6.1 Exclusive Benefit. Except as provided below and otherwise
specifically permitted by law, it shall be impossible by operation of the Plan
or of the Trust, by termination of either, by power of revocation or amendment,
by the happening of any contingency, by collateral arrangement or by any other
means, for any part of the corpus or income of any trust fund maintained
pursuant to the Plan or any funds contributed thereto to be used for, or
diverted to, purposes other than the exclusive benefit of Participants, Retired
Participants, or their Beneficiaries.
10.6.2 Excess Contributions. In the event the Employer shall make an
excessive contribution under a mistake of fact pursuant to Act Section
403(c)(2)(A), the Employer may demand repay ment of such excessive contribution
at any time within one (1) year following the time of payment and the Trustees
shall return such amount to the Employer within the one (1) year period.
Earnings of the Plan attributable to the excess contributions may not be
returned to the Employer but any losses attributable thereto must reduce the
amount so returned.
10.7 Bonding. Every Fiduciary, except a bank or an insurance company,
unless exempted by the Act and regulations thereunder, shall be bonded in an
amount not less than 10% of the amount of the funds such Fiduciary handles;
provided, however, that the minimum bond shall be $1,000 and the maximum bond,
$500,000. The amount of funds handled shall be determined at the beginning of
each Plan Year by the amount of funds handled by such person, group, or class to
be covered and their predecessors, if any, during the preceding Plan Year, or if
there is no preceding Plan Year, then by the amount of the funds to be handled
during the then current year. The bond shall provide protection to the Plan
against any loss by reason of acts of fraud or dishonesty by the Fiduciary alone
or in connivance with others. The surety shall be a corporate surety company (as
such term is used in Act Section 412(a)(2)), and the bond shall be in a form
approved by the Secretary of Labor. Notwithstanding anything in the Plan to the
contrary, the cost of such bonds shall be an expense of and may, at the election
of the Administrator, be paid from the Trust Fund or by the Employer.
10.8 Employer's and Trustee's Protective Clause. Neither the Employer nor
the Trustee, nor their successors, shall be responsible for the validity of any
Contract issued hereunder or for the failure on the part of the insurer to make
payments provided by any such Contract, or for the action of any person which
may delay payment or render a Contract null and void or unenforceable in whole
or in part.
10.9 Insurer's Protective Clause. Any insurer who shall issue Contracts
hereunder shall not have any responsibility for the validity of this Plan or for
the tax or legal aspects of this Plan. The insurer shall be protected and held
harmless in acting in accordance with any written direction of the Trustee, and
shall have no duty to see to the application of any funds paid to the Trustee,
nor be required to question any
51
actions directed by the Trustee. Regardless of any provision of this Plan, the
insurer shall not be required to take or permit any action or allow any benefit
or privilege contrary to the terms of any Contract which it issues hereunder, or
the rules of the insurer.
10.10 Receipt and Release for Payments. Any payment to any Participant, his
legal representative, Beneficiary, or to any guardian or committee appointed for
such Participant or Beneficiary in accordance with the provisions of the Plan,
shall, to the extent thereof, be in full satisfaction of all claims hereunder
against the Trustee and the Employer, either of whom may require such
Participant, legal representative, Beneficiary, guardian or committee, as a
condition precedent to such payment, to execute a receipt and release thereof in
such form as shall be determined by the Trustee or Employer.
10.11 Action by the Employer. Whenever the Employer under the terms of the
Plan is permitted or required to do or perform any act or matter or thing, it
shall be done and performed by a person duly authorized by its legally
constituted authority.
10.12 Named Fiduciaries and Allocation of Responsibility. The "named
Fiduciaries" of this Plan are (i) the Employer, (ii) the Administrator and (iii)
the Trustee. The named Fiduciaries shall have only those specific powers,
duties, responsibilities, and obligations as are specifically given them under
the Plan. In general, the Employer shall have the sole responsibility for making
the contributions provided for under Section 4.1; and shall have the sole
authority to appoint and remove the Trustee and the Administrator; to formulate
the Plan's "funding policy and method"; and to amend or terminate, in whole or
in part, the Plan. The Administrator shall have the sole responsibility for the
administration of the Plan, which responsibility is specifically described in
the Plan. The Trustee shall have the sole responsibility of management of the
assets held under the Trust, except those assets, the management of which has
been assigned to an Investment Manager, who shall be solely responsible for the
management of the assets assigned to it, all as specifically provided in the
Plan. Each named Fiduciary warrants that any directions given, information
furnished, or action taken by it shall be in accordance with the provisions of
the Plan, authorizing or providing for such direction, information or action.
Furthermore, each named Fiduciary may rely upon any such direction, information
or action of another named Fiduciary as being proper under the Plan, and is not
required under the Plan to inquire into the propriety of any such direction,
information or action. It is intended under the Plan that each named Fiduciary
shall be responsible for the proper exercise of its own powers, duties,
responsibilities and obligations under the Plan. No named Fiduciary shall
guarantee the Trust Fund in any manner against investment loss or depreciation
in asset value. Any person or group may serve in more than one Fiduciary
capacity. In the furtherance of their responsibilities hereunder, the "named
Fiduciaries" shall be empowered to interpret the Plan and Trust and to resolve
ambiguities, inconsistencies and omissions, which findings shall be binding,
final and conclusive.
10.13 Headings. The headings and subheadings of this Plan have been
inserted for convenience of reference and are to be ignored in any construction
of the provisions hereof.
10.14 Approval by Internal Revenue Service.
10.14.1Qualification. Notwithstanding anything herein to the
contrary, contributions to this Plan are conditioned upon the initial
qualification of the Plan under Code Section 401. if the Plan receives an
adverse determination with respect to its initial qualification, then the Plan
may return such contributions to the Employer within one year after such
determination, provided the application for the determination is made by the
time prescribed by law for filing the Employer's return for the taxable year in
which the Plan was adopted, or such later date as the Secretary of the Treasury
may prescribe.
52
10.14.2Deductibility. Notwithstanding any provisions to the
contrary, except Sections 3.6, 3.7, and the last clause of Section 4.1.3, any
contribution by the Employer to the Trust Fund is conditioned upon the
deductibility of the contribution by the Employer under the Code and, to the
extent any such deduction is disallowed, the Employer may, within one (1) year
following the disallowance of the deduction, demand repayment of such disallowed
contribution and the Trustee shall return such contribution within one (1) year
following the disallowance. Earnings of the Plan attributable to the excess
contribution may not be returned to the Employer, but any losses attributable
thereto must reduce the amount so returned.
10.15 Uniformity. All provisions of this Plan shall be interpreted and
applied in a uniform, nondiscriminatory manner. In the event of any conflict
between the terms of this Plan and any Contract purchased hereunder, the Plan
provisions shall control.
10.16 Securities and Exchange Commission Approval. The Employer may request
an interpretative letter from the Securities and Exchange Commission stating
that the transfers of Company Stock contemplated hereunder do not involve
transactions requiring a registration of such Company Stock under the Securities
Act of 1933. In the event that a favorable interpretative letter is not
obtained, the Employer reserves the right to amend the Plan and Trust
retroactively to their Effective Dates in order to obtain a favorable
interpretative letter or to terminate the Plan.
10.17 Effective Date. Except as otherwise expressly set forth above, this
Plan document shall be effective as of January 1, 1998.
(Signatures appear on the following page.)
53
IN WITNESS WHEREOF, each of the parties has executed this Plan on the date
set forth below.
"EMPLOYER:"
PACIFIC CAPITAL BANCORP, a California corporation, formerly known as "SANTA
BARBARA BANCORP," for periods on and after January 1, 1999
By
Jay D. Smith, Senior Vice President
Date
SANTA BARBARA BANK & TRUST, a
California corporation, for periods prior to
January 1, 1999
By
Jay D. Smith, Senior Vice President
Date
"TRUSTEE:"
SANTA BARBARA BANK & TRUST, a
California corporation
By
Janice Kroekel, Vice President
Date
54
TABLE OF CONTENTS
Section Page
1. DEFINITIONS..........................................1
1.1 "Act" or "ERISA"..............................1
1.2 "Administrator"...............................2
1.3 "Affiliated Employer".........................2
1.4 "Aggregate Account"...........................2
1.5 "Anniversary Date"............................2
1.6 "Beneficiary".................................2
1.7 "Code"........................................2
1.8 "Company Stock"...............................2
1.9 "Company Stock Account".......................2
1.10 "Compensation"................................2
1.11 "Contract" or "Policy"........................3
1.12 "Current Obligations".........................3
1.13 "Early Retirement Date".......................4
1.14 "Eligible Employee"...........................4
1.15 "Employee"....................................4
1.16 "Employer"....................................4
1.17 "ESOP"........................................4
1.18 "Exempt Loan".................................4
1.19 "Fiduciary"...................................4
1.20 "Fiscal Year".................................4
1.21 "Forfeiture"..................................4
1.22 "Former Participant"..........................5
1.23 "415 Compensation"............................5
1.24 "Highly Compensated Employee".................5
1.25 "Highly Compensated Participant"..............5
1.26 "Hour of Service".............................5
1.27 "Investment Manager"..........................6
1.28 "Key Employee"................................6
1.29 "Late Retirement Date"........................7
1.30 "Leased Employee".............................7
1.31 "Non-Highly Compensated Participant"..........7
1.32 "Non-Key Employee"............................7
1.33 "Normal Retirement Age".......................7
1.34 "Normal Retirement Date"......................7
1.35 "1-Year Break in Service".....................8
1.36 "Other Investments Account"...................8
1.37 "Participant".................................8
1.38 "Participant's Account".......................8
1.39 "Plan"........................................8
1.40 "Plan Year"...................................8
1.41 "Regulation"..................................8
1.42 "Retired Participant".........................8
1.43 "Retirement Date".............................9
1.44 "Super Top Heavy Plan"........................9
i
TABLE OF CONTENTS (Cont'd)
Section Page
1.45 "Terminated Participant"......................9
1.46 "Top Heavy Plan"..............................9
1.47 "Top Heavy Plan Year".........................9
1.48 "Top Paid Group"..............................9
1.49 "Total and Permanent Disability".............10
1.50 "Trustee"....................................10
1.51 "Trust Fund".................................10
1.52 "Unallocated Company Stock Suspense Account".10
1.53 "Vested".....................................10
1.54 "Year of Service"............................10
2. TOP HEAVY AND ADMINISTRATION........................11
2.1 Top Heavy Plan Requirements..................11
2.2 Determination Of Top Heavy Status............11
2.3 Powers and Responsibilities of the Employer..13
2.4 Administrator................................14
2.5 Allocation and Delegation of Responsibilities14
2.6 Powers and Duties of the Administrator.......14
2.7 Records and Reports..........................15
2.8 Appointment of Advisers......................15
2.9 Information From Employer....................15
2.10 Payment of Expenses..........................16
2.11 Majority Actions.............................16
2.12 Claims Procedure.............................16
2.13 Claims Review Procedure......................16
3. ELIGIBILITY.........................................17
3.1 Conditions of Eligibility....................17
3.2 Application for Participation................17
3.3 Effective Date of Participation..............17
3.4 Determination of Eligibility.................17
3.5 Termination of Eligibility...................17
3.6 Omission Of Eligible Employee................17
3.7 Inclusion of Ineligible Employee.............18
3.8 Election Not to Participate..................18
4. CONTRIBUTION AND ALLOCATION.........................18
4.1 Formula For Determining Employer's
Contribution.................................18
4.2 Time of Payment of Employer's Contribution...18
4.3 Allocation of Contribution, Forfeitures and
Earnings.....................................18
4.4 Maximum Annual Additions.....................22
4.5 Adjustment For Excessive Annual Additions....25
4.6 Directed Investment of Accounts..............26
ii
TABLE OF CONTENTS (Cont'd)
Section Page
5. FUNDING AND INVESTMENT POLICY.......................27
5.1 Investment Policy............................27
5.2 Application Of Cash..........................28
5.3 Transactions Involving Company Stock.........28
5.4 Loans to the Trust...........................28
6. VALUATIONS..........................................29
6.1 Valuation of the Trust Fund..................29
6.2 Method of Valuation..........................29
7. DETERMINATION AND DISTRIBUTION OF BENEFITS..........30
7.1 Determination of Benefits Upon Retirement....30
7.2 Determination of Benefits Upon Death.........30
7.3 Determination of Benefits in Event of
Disability...................................31
7.4 Determination of Benefits Upon Termination...31
7.5 Distribution of Benefits.....................35
7.6 How Plan Benefit Will be Distributed.........38
7.7 Distribution for Minor Beneficiary...........39
7.8 Location of Participant or Beneficiary
Unknown......................................39
7.9 Put Option...................................40
7.10 Nonterminable Protections and Rights.........41
7.11 Qualified Domestic Relations Order
Distribution.................................41
8. TRUSTEE.............................................41
8.1 Basic Responsibilities of the Trustee........41
8.2 Investment Powers and Duties of the Trustee..41
8.3 Other Powers of the Trustee..................42
8.4 Voting Company Stock.........................45
8.5 Duties Of The Trustee Regarding Payments.....45
8.6 Trustee's Compensation and Expenses and Taxes46
8.7 Annual Report of the Trustee.................46
8.8 Audit........................................47
8.9 Resignation, Removal and Succession of
Trustee......................................47
8.10 Transfer of Interest.........................48
8.11 Direct Rollover..............................48
9. AMENDMENT, TERMINATION AND MERGERS..................49
9.1 Amendment....................................49
9.2 Termination..................................49
9.3 Merger or Consolidation......................50
10. MISCELLANEOUS.......................................50
10.1 Participant's Rights.........................50
10.2 Alienation...................................50
10.3 Construction of Plan.........................50
iii
TABLE OF CONTENTS (Cont'd)
Section Page
- ------- ----
10.4 Gender and Number............................51
10.5 Legal Action.................................51
10.6 Prohibition Against Diversion of Funds.......51
10.7 Bonding......................................51
10.8 Employer's and Trustee's Protective Clause...51
10.9 Insurer's Protective Clause..................51
10.10 Receipt and Release for Payments.............52
10.11 Action by the Employer.......................52
10.12 Named Fiduciaries and Allocation of
Responsibility...............................52
10.13 Headings.....................................52
10.14 Approval by Internal Revenue Service.........52
10.15 Uniformity...................................53
10.16 Securities and Exchange Commission Approval..53
10.17 Effective Date...............................53
iv
EXHIBIT 10.1.9
SANTA BARBARA BANCORP
1996 DIRECTORS STOCK OPTION PLAN
(As Amended March 24, 1998)
1. PURPOSES OF THE PLAN
The purposes of this 1996 Directors Stock Option Plan are to attract,
motivate and retain the best available Directors for the Company and each of the
Parent and Subsidiaries and to provide them with additional incentive to promote
the success of the Company's business.
2. DEFINITIONS
As used herein, the following definitions shall apply:
2.1 "Board of Directors" means the Board of Directors of the Company.
2.2 "Code" means the Internal Revenue Code of 1986, as amended.
2.3 "Commission" means the Securities and Exchange Commission.
2.4 "Committee" means the Committee of the Board of Directors that shall
administer the Plan.
2.5 "Common Stock" means the Common Stock of the Company.
2.6 "Company" means Santa Barbara Bancorp, a California corporation.
2.7 "Disability" means total and permanent disability as defined in Section
22(e)(3) of the Code.
2.8 "Donative Transfer" means any transfer of an Option or Reload Option
made for donative purposes or without the payment or receipt by or on behalf of
the Optionee of any cash, property or other consideration. For purposes of this
Section, neither an Optionee's receipt of or eligibility for a deduction, credit
or similar allowance for federal or state income tax or estate tax purposes nor
the transferee's use for family or support purposes of any proceeds realized
from the sale of the any shares of Common Stock acquired on exercise of an
Option shall be deemed to be the receipt of consideration.
2.9 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
H:\WP\BWM\SBBT\OPTION\DIR-96.PLN\dsop-pln-rv8.wpd
12/07/98-bwm
-1-
2.10 "Fair Market Value" means, as of any date, the value of the Common
Stock determined as follows.
2.10.1If the Common Stock is listed on an established stock exchange
or a national market system, including without limitation the Nasdaq National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, the Fair Market Value of a share of Common Stock
shall be the closing sales price for such stock (or the closing bid, if no sales
were reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in the Common Stock) on the last market trading day
prior to the date of determination.
2.10.2If the Common Stock is quoted on the NASDAQ System (but not on
the Nasdaq National Market thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the date of
determination.
2.11 "Option" means a stock option granted pursuant to the Plan and shall
include Reload Options. All Options granted hereunder shall be "nonstatutory
stock options" and each such Option shall be evidenced by a written Stock Option
Agreement.
2.12 "Optioned Stock" means the Common Stock subject to an Option.
2.13 "Optionee" means a Director who receives an Option.
2.14 "Plan" means this 1996 Directors Stock Option Plan.
2.15 "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3 in effect at the time in question.
2.16 "Section 16(b)" means Section 16(b) of the Exchange Act.
2.17 "Stock Option Agreement" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. Each Option Agreement is subject to the terms and conditions of the Plan.
The terms and provisions of each Option Agreement need not be the same.
2.18 "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined as Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN
-2-
3.1 Original Reserve. Subject to the provisions of Section 14 and Section
15 of the Plan, the maximum aggregate number of shares which are reserved for
issuance upon exercise of Options granted under the Plan is One Hundred Fifty
Thousand (150,000) shares of Common Stock.
3.2 Adjustments In Reserve. In the event that any outstanding Option
granted under the Plan expires or is terminated without exercise, or with only
partial exercise, prior to the end of the period during which Options may be
granted under the Plan, the shares allocable to the unexercised portion of such
Option shall be added back into the Reserve and may again be subject to option
under the Plan.
4. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Board of Directors or the Committee.
The Committee shall consist of not less than two (2) Directors all of whom shall
be Non-Employee Directors of the Company within the meaning of Rule 16b-3.
Members of the Committee shall serve at the pleasure of the Board of Directors.
No member of the Board of Directors or the Committee shall be liable for any
action or determination undertaken or made in good faith with respect to the
Plan or any agreement executed pursuant to the Plan. Subject to the terms of
this Plan, the Board of Directors or the Committee shall determine:
4.1 Directors to Receive Option. The Directors to whom options shall be
granted;
4.2 Number of Shares. The number of shares of Common Stock to be optioned
to each such Director;
4.3 Option Price. The price to be paid for the shares of Common Stock
upon the exercise of each Option;
4.4 Option Period. The period within which each Option shall be or become
exercisable; and
4.5 Other Terms and Conditions. The terms and conditions of the Stock
Option Agreement between the Company and each Director to whom an Option is
granted under the Plan; which terms and conditions shall be in accordance with
the provisions of this Plan but may include any other or additional terms or
conditions not inconsistent with this Plan. The terms and conditions of each
Stock Option Agreement need not be identical.
5. ELIGIBILITY
Options may be granted only to Directors of the Company, or any Subsidiary,
who are not otherwise employed by the Company or any Subsidiary. In addition,
notwithstanding any other provision contained in this Plan, no Director shall be
eligible to participate in the Plan if such individual owns stock and securities
possessing more than ten percent (10%) of the total combined voting power or
value of all classes of stock of the Company or any Subsidiary. Notwithstanding
anything in this Plan to the contrary, no person shall be entitled to the grant
of more than one Option during or with respect to any year by reason of such
person acting as
a Director of more than one of the Company or a Subsidiary. No person shall be
eligible to receive the grant of an Option under this Plan unless he or she is a
Director of the Company or such Subsidiary on the date of such grant.
6. EFFECTIVE DATE OF OPTION GRANT.
The "grant" of an Option pursuant to this Plan shall be deemed to have
occurred on the later of: (a) the date the Committee announces the grant of the
Option; or (b) such later date set by the Committee or set forth in the Stock
Option Agreement.
7. TERM OF PLAN
This Plan has been adopted by the Board of Directors as of February 27,
1996. The term of the Plan shall begin as of February 27, 1996, and shall
continue until December 31, 2005, unless terminated sooner in accordance with
the provisions of the Plan.
8. TERM OF OPTION
Subject to the provisions of Section 10, below, the term of each Option
shall be five (5) years from the date of grant thereof.
9. EXERCISE PRICE AND CONSIDERATION
9.1 Exercise Price. The exercise price per share for the shares to be
issued upon exercise of an Option shall be 100% of the Fair Market Value per
share of Common Stock on the date of grant of the Option.
9.2 Consideration. The consideration to be paid for the shares to be issued
upon exercise of an Option shall consist entirely of cash, cashier's or bank
certified check, or other shares of Common Stock having a Fair Market Value on
the date of exercise of the Option equal to the exercise price for the shares as
to which the Option is being exercised, or any combination of such methods of
payment. In the event that the exercise price is paid, whether in whole or in
part, through the tender of shares of Common Stock already owned by the
Optionee, then the Option must be exercised for a minimum of at least 100 shares
or the total number of shares subject to the Option, if less than 100 shares.
10. EXERCISE OF OPTION
10.1 Six-Month Vesting Period. Any Option shall become exercisable only
after the expiration of six (6) months following the date of grant of such
Option. Thereafter, the Option shall be fully vested and shall be exercisable in
whole or in part at any time and from time to time during the term of the
Option.
10.2 Procedure for Exercise. An Option shall be deemed to be exercised
when the Optionee has delivered to the Company written notice of such exercise
and full payment of the exercise price for the shares with respect to which the
Option is being exercised. Full payment shall consist of such consideration as
is allowable under Section 9.2, above. An Option may not be granted or exercised
for a fraction of a share. Exercise of an Option in any manner shall result in a
decrease in the number of shares which thereafter may be available, both for the
purposes of the Plan and for issuance under the Option, by the number of shares
as to which the Option is exercised. Optionee may designate in the notice of
exercise that some or all of the shares of Common Stock or other securities to
be issued upon such exercise shall be issued in the name of Optionee's spouse,
the trustee of a revocable trust in which Optionee and his or her spouse are the
sole primary beneficiaries, Optionee's prior spouse, or any combination of the
foregoing. Notwithstanding anything herein to the contrary, Optionee may not
designate in the notice of exercise that any of the shares of Common Stock or
other securities shall be issued to Optionee's prior spouse unless such issuance
is to be made pursuant to a domestic relations order as defined in the Code or
Title I of the Employee Income Retirement Security Act, or the rules thereunder.
The Company may rely on a representation of the Optionee, or such other evidence
as the Company deems appropriate, for purposes of determining the propriety of
the exercise of any Option and the compliance of such exercise with the terms of
this Plan and any applicable Stock Option Agreement. The Company shall have no
obligation to independently investigate the propriety of the exercise of any
Option or the compliance of such exercise with the terms of this Plan or any
applicable Stock Option Agreement.
10.3 Rights as a Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing the shares of Common
Stock, the Optionee shall have no right to vote or receive dividends or any
other rights as a shareholder with respect to the Optioned Stock,
notwithstanding the exercise of the Option. No adjustment shall be made in the
exercise price payable on the exercise of any Option or the number of shares of
Common Stock or other securities or property issuable upon exercise of an Option
for any dividend, distribution or other right for which the record date is prior
to the date the stock certificate is issued to Optionee with respect to any
Optioned Stock, except as provided in Section 14 and Section 15, below.
10.4 Termination of Status as Director. If an Optionee's continuous status
as a Director is terminated other than for cause or by reason of the Optionee's
death or disability, the Optionee may, but only within the three (3)-month
period from the date of the termination of the Optionee's status as a Director
(but not later than the expiration of the term of the Option), exercise any
outstanding Option (including any Reload Option) to the extent that the Option
was exercisable at the date of such termination. If the Optionee does not
exercise the Option in full during such 3-month period, the unexercised portion
of the Option shall terminate at the close of business, California time, on the
last business day of such 3-month period and thereafter shall not be exercisable
in whole or in part. Notwithstanding anything in this Section to the contrary,
if the Option is not exercisable on the date of the termination of the
Optionee's status as a Director, then the Option shall terminate simultaneously
with the termination of the Optionee's status as a Director and thereafter shall
not be exercisable in whole or in part.
10.5 Disability of Optionee. Notwithstanding the provisions of Section
10.5, above, if an Optionee's continuous status as a Director is terminated as a
result of the Optionee's death or disability, the Optionee or his or her estate
or personal representative may exercise the Option to the extent that the Option
was exercisable at the date of such termination in whole or in part at any time
and from time to time during the twelve (12)-month period from the date of the
termination of the Optionee's status as a Director. If the Optionee does not
exercise the Option in full during such 12-month period, the unexercised portion
of the Option shall terminate at the close of business, California time, on the
last business day of such 12-month period and thereafter shall not be
exercisable in whole or in part. Notwithstanding anything in this Section to the
contrary, if the Option is not exercisable on the date of the termination of the
Optionee's status as a Director, then the Option shall terminate simultaneously
with the termination of the Optionee's status as a Director and thereafter shall
not be exercisable in whole or in part.
10.6 Termination for Cause. If an Optionee's continuous status as a
Director is terminated for cause, all outstanding Options held by the Optionee
shall terminate simultaneously with the termination of the Optionee's status as
a Director and thereafter shall not be exercisable in whole or in part. For
purposes of this Section, an Optionee's status as a Director shall be deemed to
be terminated for "cause" as of the date on which the Optionee is removed as a
Director for any reason described in Section 304 of the California General
Corporation Law.
10.7 Status as a Director. The termination of an Optionee's status as a
Director shall be deemed to occur on the effective date of the earliest of (a)
the Optionee's resignation as a Director, (b) the removal of the Optionee as a
Director, and (c) the Optionee's death.
11. RELOAD FEATURES
11.1 Grant of Reload Options. Whenever the holder of an Option granted
under this Plan (including any Reload Options granted under the provisions of
this Section 11 or Section 13, below) (the "Original Option") exercises the
Original Option and makes payment of the exercise price by tendering shares of
the Common Stock previously held by the Optionee, then the Optionee shall be
entitled to receive and the Company shall grant the Optionee a new option (the
"Reload Option") for that number of shares of the Common Stock which is equal to
the number of shares tendered by the Optionee in payment of the exercise price
for the Original Option being exercised. All such Reload Options granted
hereunder shall be on the following terms and conditions.
11.1.1Exercise Price. The exercise price per share shall be an amount
equal to the Fair Market Value per share of the Common Stock as of the date of
exercise of the Original Option.
11.1.2Expiration Date. The term of the Reload Option shall begin as of
the date of exercise of the Original Option and, unless terminated sooner
pursuant to the terms of this Plan or the Stock Option Agreement, shall
terminate five (5) years thereafter.
11.1.3Vesting Period. Any Reload Option shall become exercisable one
(1) year following the date of grant of such Reload Option. Thereafter the
Reload Option shall be fully vested and shall be exercisable in whole or in part
at any time and from time to time during the term of the Reload Option.
11.1.4Other Terms. All other terms of Reload Options granted hereunder
shall be identical to the terms and conditions of the Original Option, the
exercise of which gives rise to the grant of the Reload Option.
11.2 Restrictions on Reload Options. Any and all Reload Options granted
pursuant to this Section 11 (or Section 13, below) shall be subject to the
following conditions and restric tions.
11.2.1Holding Period of Shares Tendered. No Reload Option shall be
granted pursuant to Section 11.1, above, unless the shares of Common Stock
tendered upon exercise of the Original Option in payment therefore have been
held by the Optionee for a period of more than six (6) months prior to the
exercise of the Original Option. The Company may rely on a representation of the
Optionee, or such other evidence as the Company deems appropriate, for purposes
of determining the holding period of any shares surrendered on exercise of an
Option and the compliance of such exercise with the terms of this Plan and any
applicable Stock Option Agreement. The Company shall have no obligation to
independently investigate the holding period or the propriety of the exercise of
any Option or the compliance of such exercise with the terms of this Plan or any
applicable Stock Option Agreement.
11.2.2Holding Period of Original Option Shares. If any of the shares
of Common Stock of the Company which are issued upon exercise of the Original
Option are sold within one (1) year following the exercise of the Original
Option, then the Reload Option shall immediately terminate.
11.2.3Exception. The holding period restrictions set forth in Sections
11.2.1 and 11.2.2, above, shall not apply to an Optionee's transfer of shares of
Common Stock (a) to the Company in payment of all or any portion of the exercise
price upon exercise of an Option, whether an Original Option or a Reload Option,
or (b) in satisfaction of the Optionee's income tax withholding obligation, if
any, by the transfer of shares to the Company or by the Company's withholding of
shares that would otherwise be issued as a result of the exercise of an Option,
or (c) to the acquiring party in any transaction described in Section 16, below,
in which the Company is not the surviving corporation, or (d) to any person
described in Section 13.2.1 hereof so long as the transfer satisfies the
conditions of Section 13.2 hereof.
12. TRANSFERABILITY OF OPTIONS
12.1 Restriction on Transfer. Except as specifically set forth in Section
13.2 hereof, no Option or Reload Option may be sold, pledged, assigned,
hypothecated, transferred, or otherwise disposed of in any manner, other than by
will or the laws of descent and distribution.
12.2.Limited Transferability. A Stock Option Agreement may provide that an
Optionee may transfer all or any portion of any Option or Reload Option in
accordance with the provisions of this Section 13.2. If a Stock Option Agreement
permits the transfer of any Option or Reload Option, any transfer that does not
comply with all of the provisions of this Section 13.2 and the Stock Option
Agreement shall be null and void ab initio. The provisions of the Stock Option
Agreements dealing with the transferability of the Options need not be identical
for all Options and the provision for transferability with respect to one Option
shall not require the provision for transferability with respect to any other
Option.
12.2.1Permitted Transferees. An Option or Reload Option may be
transferred or assigned by the Optionee only to one or more of the following:
(a) the Optionee's spouse, parents and lineal descendants, including adopted
children (the "Immediate Family Members"); (b) a trust established by the
Optionee and with respect to which all beneficial interests are held by one or
more of the Optionee, the Immediate Family Members, and a tax-exempt charitable
organization which has only a contingent residual interest in the trust; (c) a
partnership or limited liability company established by the Optionee and in
which all beneficial interests are held by one or more of the Optionee and the
Immediate Family Members; (d) a tax-exempt educational, religious or charitable
organization, as those terms are defined in Section 501(c)(3) of the Code; and
(e) such other persons and entities as the Company may specifically approve in
writing after written notice from the Optionee. The Company may require as a
condition to the transfer of any Option or Reload Option under this Section that
the transferee provide to the Company reasonable evidence that the proposed
transferee is described in one of the foregoing clauses.
12.2.2Permitted Transfers. Any transfer of an Option or Reload Option
under this Section 13.2 must be either a Donative Transfer, a transfer to a
partnership or limited liability company described in clause (c) of Section
13.2.1 above, or a transfer specifically approved in writing by the Company
after written notice from the Optionee.
12.2.3Minimum Transfer. Any transfer of an Option or a Reload Option
must be with respect to not less than one hundred (100) shares of Optioned Stock
and may be made only in whole number multiples of one hundred (100) shares of
Optioned Stock.
12.2.4Notice to the Company. The Optionee shall give the Company at
least ten (10) days prior written notice of any proposed transfer of an Option
or Reload Option pursuant to this Section 13.2 and shall include with such
notice:
A.The name and address of the proposed transferee and a statement
of the basis on which the proposed transferee is a permitted transferee under
Section 13.2.1 hereof; and
B.The proposed transferee's written agreement to accept the
transferred Option or Reload Option and any shares of Common Stock acquired on
exercise of the Option or Reload Option subject to all of the terms and
conditions of this Plan and the applicable Stock Option Agreement, including the
provisions dealing with the termination of the Option or Reload Option on the
death or disability of the Optionee or the termination of the Optionee's status
as a Director of the Company.
12.2.5No Further Transfer. Notwithstanding anything in this Plan or
any Stock Option Agreement to the contrary, a transferee of any Option or Reload
Option shall not have the right to further transfer all or any portion of the
transferred Option, other than (a) by will or the laws of descent and
distribution, or (b), if the transferee is a trust, pursuant to the terms of the
trust agreement by reason of the death of any settlor.
12.2.6Further Acts. The Company may require as a condition to the
transfer of any Option or Reload Option such additional information and
agreements from the Optionee and the proposed transferee as the Company may deem
necessary or beneficial for purposes of complying with this Section or any
applicable federal or state law, rule or regulation.
12.2.7Disclaimer. The Company's acceptance of any transfer of an
Option or Reload Option shall not be considered legal or tax advice to the
Optionee or the proposed transferee as to their compliance with any applicable
law, rule or regulation or the legal or tax consequences of such transfer or the
subsequent exercise of the transferred Option or the sale or exchange of any of
the shares of Common Stock acquired on exercise of the transferred Option.
13. TAX WITHHOLDING
To the extent that the exercise of any Option (including any Reload Option)
granted hereunder gives rise to an income tax withholding obligation on the part
of the Company with respect to the Optionee, the Company may satisfy such
obligation on such terms and in accordance with such procedures as it deems
appropriate under applicable law. At the election of the Optionee, such
withholding obligation may be satisfied through the Optionee's surrender of
shares of Common Stock owned by the Optionee or through the Company's retention
of shares of the Common Stock which would otherwise be issued as a result of the
exercise of the Option. If withholding is made in shares of Common Stock, the
Company shall grant to the Optionee a Reload Option, on the terms specified in
Section 11 hereof for the number of shares so withheld.
14. RECAPITALIZATION OF COMPANY
Except as otherwise provided herein, appropriate and proportionate
adjustments shall be made in the number and class of shares subject to the Plan
and to the Options granted under the
Plan, and the exercise price of such Options, in the event of a stock dividend
(but only on Common Stock), stock split, reverse stock split, recapitalization,
reorganization or like change in the capital structure of the Company. To the
extent that the foregoing adjustments relate to stock or securities of the
Company, such adjustments shall be made by the Committee, the determination of
which in that respect shall be final, binding, and conclusive.
15. REORGANIZATION OR LIQUIDATION OF THE COMPANY
In the event of (a) a liquidation of the Company, or (b) a merger,
reorganization, or consolidation of the Company with any other corporation in
which the Company is not the surviving corporation or the Company becomes a
wholly owned subsidiary of another corporation, or (c) any sale of all or
substantially all of the Company's assets, any unexercised Options then
outstanding under the Plan shall be deemed cancelled as of the effective date of
any such liquidation, merger, reorganization, consolidation or sale, unless the
surviving corporation in any such merger, reorganization or consolidation or the
acquiring corporation in any such sale elects to assume the Options under the
Plan or to issue substitute options in place thereof; provided that, if any
Options granted under the Plan would be cancelled in accordance with the
foregoing, the Optionee shall have the right, exercisable during a 10-day period
ending on the fifth day prior to the effective date of such liquidation, merger,
reorganization, consolidation or sale, to exercise the Options in whole or in
part even though the Option otherwise was not then exercisable. The Company
shall give each Optionee at least thirty (30) days' prior written notice of the
anticipated effective date of any such liquidation, merger, reorganization,
consolidation or sale. Notwithstanding anything in this Plan or in any Stock
Option Agreement to the contrary, (i) all Option exercises effected during the
foregoing 10-day period shall be deemed to be effective immediately prior to the
closing of such liquidation, merger, reorganization, consolidation or sale and
(ii) if the Company abandons or otherwise fails to close any such liquidation,
merger, reorganization, consolidation or sale, then (A) all exercises during the
foregoing 10-day period shall cease to be effective ab initio and (B) the
outstanding Options shall be exercisable as otherwise determined under the
applicable Stock Option Agreements and without consideration of this Section or
the corresponding provisions of any Stock Option Agreement.
16. AMENDMENT AND TERMINATION OF THE PLAN
16.1 Amendment and Termination. The Board of Directors may amend or
terminate the Plan from time to time in such respects as the Board may deem
advisable; provided that the following revisions or amendments shall require
approval of the shareholders of the Company entitled to vote:
16.1.1Number of Shares. Any material increase in the number or shares
which may be issued pursuant to the Plan (other than in accordance with Section
14 and 15, above);
16.1.2Eligibility. Any material modification of the requirements as
to eligibility for participation in the Plan; or
16.1.3Increase in Benefits. Any material increase in the benefits
accruing to participants under the Plan.
16.2 Effect of Amendment or Termination. Any amendment or termination of
the Plan shall not affect Options already granted and such Options shall remain
in full force and effect as if this Plan had not been amended or terminated,
unless mutually agreed otherwise between the Optionee and the Company, which
agreement must be in writing and signed by the Optionee and the Company.
17. CONDITIONS UPON ISSUANCE OF SHARES
17.1 Compliance with Law. Shares of Common Stock shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
17.2 Investment Intent. As a condition to the exercise of an Option, the
Company may require the person exercising such Option to represent and warrant
at the time of any such exercise that the shares of Common Stock are being
purchased only for investment and without any present intention to sell or
distribute such shares if, in the opinion of counsel for the Company, such a
representation is required by applicable law.
17.3 Governmental Consents. Inability of the Company to obtain authority
from any regulatory body having jurisdiction, which authority is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any shares
of Common Stock hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell, or any delay in issuing or selling, such shares
as to which such requisite shall not have been obtained.
18. RESERVE OF SHARES
During the term of this Plan, the Company will at all times reserve and
keep available such number of shares as shall be sufficient to satisfy the
requirements of the Plan (the Plan "Reserve").
19. OPTION AGREEMENT
Each Option granted hereunder shall be evidenced by a written Stock Option
Agreement (the "Stock Option Agreement").
20. INDEMNIFICATION
In addition to such other rights of indemnification as they may have as
members of the Board of Directors and/or employees of the Company, the members
of the Committee administering the Plan shall be indemnified by the Company
against reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit, or proceeding, or
in connection with any appeal therein, to which they or any of them may be a
party by reason of any action taken or failure to act under or in connection
with the Plan, any Stock Option Agreement or any Option granted under the Plan,
and against all amounts paid or payable by them in settlement thereof (provided
such settlement is approved by independent legal counsel selected by the
Company) or paid or payable by them in satisfaction of a judgment in any action,
suit, or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit, or proceeding that such person is liable for
gross negligence or willful misconduct in the performance of his or her duties.
The indemnification provided in this Section shall be available only if, within
sixty (60) days after institution of any such action, suit, or proceeding, the
person seeking indemnification shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.
21. EFFECTIVE DATE OF PLAN; SHAREHOLDER APPROVAL
The Plan was adopted by action of the Board of Directors taken at a duly
noticed and held meeting on February 27, 1996. The effectiveness of the Plan
shall be subject to approval by the shareholders of the Company within twelve
(12) months after the aforesaid date of the adoption of the Plan. The manner and
method for approval of the Plan by the shareholders of the Company must comply
with Rule 16b-3. If the Plan has not been previously approved by the
shareholders of the Company, the Plan shall terminate on January 31, 1997.
22. EFFECT OF AMENDMENTS
22.1 Amendment of Options. From and after December 17, 1996, the date of
this Amended Plan, all of the terms and provisions of the Plan as amended shall
apply to all Options which are outstanding as of such date and the Stock Option
Agreements covering such Options shall be deemed automatically amended to
reflect the amended terms of this Plan.
22.2 No Change in Price or Term. Notwithstanding anything in this Plan to
the contrary, in no event shall the amendment of any Stock Option Agreement in
accordance with the provisions of this Section change any or all of the number
of shares covered by any Option or the exercise price, vesting schedule or term
of the Option.
22.3 Amended Stock Option Agreements. Any Optionee who holds an Option that
is deemed amended under this Section may at any time deliver to the Company his
or her existing Stock Option Agreement and request that the Company deliver to
the Optionee a new Stock Option Agreement incorporating the amended and restated
terms and provisions of the Plan. The Company shall deliver to the Optionee a
new Stock Option Agreement promptly after the Optionee's delivery of the
existing Stock Option Agreement. NOTWITHSTANDING ANYTHING IN THIS PLAN TO THE
CONTRARY, THE OPTIONEE SHALL BE SOLELY RESPONSIBLE FOR DETERMINING WHETHER THE
AMENDMENT OF A STOCK OPTION AGREEMENT WILL CONSTITUTE A MODIFICATION OF THE
OPTION AND THE COMPANY SHALL HAVE NO RESPONSIBILITY OR LIABILITY TO THE OPTIONEE
BY REASON OF THE AMENDMENT OF A STOCK OPTION AGREEMENT BEING A MODIFICATION OF
THE OPTION.
-3-
CERTIFICATE OF SECRETARY
The undersigned, being the Corporate Secretary of the Company, does hereby
certify that:
(a) the foregoing Plan was adopted by the Board of Directors of the Company
at a duly called and held meeting of the Board of Directors on February 27,
1996, and the Plan was approved by the shareholders of the Company at a duly
called and held meeting of the shareholders on April 23, 1996;
(b) the Plan was amended at duly called and held meetings of the Board of
Directors on August 27, 1996, and September 25, 1996, and that the amendments
adopted by the Board of Directors on August 27, 1996, and September 25, 1996,
did not need to be approved by the shareholders of the Company;
(c) the Plan was amended at a duly called and held meeting of the Board of
Directors on December 17, 1996, and that the amendments adopted by the Board of
Directors on December 17, 1996, did not need to be approved by the shareholders
of the Company; and
(d) the Plan was amended at a duly called and held meeting of the Board of
Directors on March 24, 1998, and that the amendments adopted by the Board of
Directors on March 24, 1998, did not need to be approved by the shareholders of
the Company.
Dated: ___________, 1998
-----------------------------------
Jay D. Smith, Esq.
Corporate Secretary
-4-
EXHIBIT 10.1.24
MANAGEMENT RETENTION PLAN
January 11, 1999
1. Establishment of Plan.
1.1 Establishment of Plan. As of the Effective Date, Santa Barbara Bancorp,
a California corporation (the "Company"), hereby jointly establishes a
management retention plan to be known as the "Management Retention Plan" (the
"Plan"), as set forth in this document.
1.2 Purpose of Plan. It is expected that in the future the Company may have
to consider the possibility of its acquisition by another company or the impact
of the occurrence of another change of control event. The Company recognizes
that such consideration can be a distraction to key employees and can cause such
employees to consider alternative employment opportunities. The Company has
determined that it is in its best interest and the best interests of its
shareholders to assure that it will have the continued dedication and
objectivity of its employees, notwithstanding the possibility, threat or
occurrence of a Change of Control (as defined below) and to provide these
employees with an incentive to continue their employment and to motivate these
employees to maximize the value of the Company upon a Change of Control for the
benefit of its shareholders. The purpose of this Plan is to secure the continued
dedication and objectivity of such employees by providing such incentive and
motivation through the provision of certain severance benefits upon a
termination of employment following a Change of Control.
1.3 Applicability of Plan. Subject to the terms of this Plan, the benefits
provided by this Plan shall be available only to those eligible Employees of the
Company who, on or after the Effective Date, receive, execute and return to the
Company a Notice of Participation.
2. Definitions. Whenever used in the Plan or any Notice of Participation, the
following terms shall have the meanings set forth below.
2.1 Average Annual Compensation. "Average Annual Compensation" for any
Participant means an amount equal to the average of the Participant's annual
cash salary and cash bonuses and commissions payable for each of the three (3)
full Fiscal Years ended immediately prior to the date of the Termination of
Employment as a result of which the Participant is entitled to receive a
Severance Payment under this Plan; provided that, if the Termination of
Employment occurs during the fourth quarter of any Fiscal Year, the
Participant's Average Annual Compensation shall be an amount equal to the
greater of (a) the average of the Participant's annual cash salary and cash
bonuses and commissions payable for each of the three (3) full Fiscal Years
ended immediately prior to the Termination of Employment and (b) the average,
determined on the basis of the number of Fiscal Years considered, of the sum of
(i) the Participant's annual cash salary and cash bonuses and commissions
payable for each of the two (2) full Fiscal Years ended immediately prior to the
Termination of Employment, and (ii) the sum of (A) the annualized cash salary
that would be payable to the Participant for the Fiscal Year in which the
Termination of
-1-
Employment occurs determined on the basis of the monthly salary payable to the
Participant for such Fiscal Year and (B) the amount of the cash bonuses and
commissions paid to the Participant with respect to the immediately preceding
Fiscal Year. If, at the time of the Termination of Employment, the Participant
has been employed with the Company for a period of less than three (3) full
Fiscal Years, the number of full Fiscal Years of the Company that the
Participant has been an employee of the Company shall be substituted for the
foregoing references to "three (3) full Fiscal Years of the Company." Section 11
of this Plan sets forth certain provisions for determining a Participant's
Average Annual Compensation.
2.2 Bank. "Bank" means Santa Barbara Bank & Trust, a California corporation
and wholly-owned subsidiary of the Company.
2.3 Board. "Board" means the Board of Directors of the Company or the Bank,
as appropriate, as constituted as of the time of the action in question.
2.4 Cause.
2.4.1 "Cause" means (a) any act of personal dishonesty taken by the
Participant in connection with his or her responsibilities as an Employee and
intended to result in substantial personal enrichment of the Participant, (b)
the Participant's conviction of a felony, (c) a willful act by the Participant
which constitutes gross misconduct and which is injurious to the Company, or (d)
continued substantial violations by the Participant of the Participant's
employment duties which are demonstrably willful and deliberate on the
Participant's part after there has been delivered to the Participant a written
demand for performance from the Company which specifically sets forth the
factual basis for the Company's belief that the Participant has not
substantially performed his or her duties; provided that cause shall not be
deemed to exist under clause (c) or (d) of this Section unless and until (i)
there shall have been delivered to the Participant a written notice stating that
the Participant was guilty of the conduct described in such clause and
specifying the particulars thereof in detail, and (ii) the Participant shall
have been provided an opportunity to be heard by the Board (with the assistance
of the Participant's counsel if the Participant so desires).
2.4.2 Notwithstanding anything in this Plan to the contrary, no act or
omission on the Participant's part shall be considered "willful" or "deliberate"
unless the Partici pant has acted, or failed to act, with an absence of good
faith and without a reasonable belief that his or her action or failure to act
was in the best interest of the Company.
2.5 Change of Control.
2.5.1 "Change of Control" means the occurrence of any of the following
events:
A. An acquisition (other than directly from the Company) of any
voting securities of the Company by any person (as that term is used for
purposes of Section 13(d) or
-2-
14(d) of the Exchange Act), immediately after which such person has beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of thirty-five percent (35%) or more of the combined voting power of the
Company's then outstanding voting securities; provided that in determining
whether a Change of Control has occurred, voting securities which are acquired
in a Non-Control Acquisition shall not constitute an acquisition which would
cause a Change of Control;
B. A cumulative change in the composition of the Board of the
Company occurring during any two-year period, as a result of which fewer than a
majority of the directors are Incumbent Directors; provided that no individual
shall be considered an Incumbent Director if such individual initially assumed
office as a result of either an actual or threatened Election Contest (as
described in Rule 14a-11 promulgated under the Exchange Act) (an "Election
Contest") or other actual or threatened solicitation of proxies or consents by
or on behalf of a person other than the Board of the Company (a "Proxy Contest")
including by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest; or
C. Approval by the shareholders of the Company of:
(1) A merger, consolidation or reorganization involving the
Company or the Bank, unless such merger, consolidation or reorganization is or
would be a Non-Control Transaction;
(2) A complete liquidation or dissolution of the Company; or
(3) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company or the Bank to any person other
than a Subsidiary of the Company;
2.5.2 Notwithstanding the foregoing, a Change of Control shall not be
deemed to occur solely because any person (the "Subject Person") acquired
beneficial ownership of more than the permitted amount of the then outstanding
voting securities of the Company as a result of the acquisition of voting
securities by the Company which, by reducing the number of voting securities
then outstanding, increases the proportional number of voting securities
beneficially owned by the Subject Person; provided that if a Change of Control
would occur (but for the operation of this sentence) as a result of the
acquisition of voting securities by the Company, and, after such acquisition by
the Company, the Subject Person becomes the beneficial owner of any additional
voting securities which increases the percentage of the then outstanding voting
securities beneficially owned by the Subject Person, then a Change of Control
shall occur.
2.5.3 A Change of Control shall not be deemed to occur if one of the
events described in Section 2.5.1 above occurs with respect to the Bank.
2.6 Change of Control Date. "Change of Control Date" means the earliest
of (a) the date on which the Change of Control occurs, (b) the date on which the
Company executes an
-3-
agreement, the consummation of which would result in the occurrence of a Change
of Control, (c) the date the Board approves a transaction or series of
transactions, the consummation of which would result in a Change of Control and
(d) the date the Company fails to satisfy its obligations to have this Plan
assumed by any successor to the Company in accordance with Section 7 hereof. If
the Change of Control Date occurs as a result of an agreement described in
clause (b) of the previous sentence or as a result of the approval of the Board
described in clause (c) of the previous sentence and the Change of Control to
which such agreement or approval relates (the "Contemplated Change of Control")
subsequently is abandoned or does not occur (regardless of the reason for such
abandonment or failure of occurrence), then effective as of the date (the "Reset
Date") of adoption of a resolution of the Board approved by three-fourths
(3/4ths) of the Incumbent Directors then in office certifying that the
Contemplated Change of Control is not reasonably likely to occur, neither the
Change of Control nor the Change of Control Date shall be deemed to have
occurred for any purposes under this Plan; provided that this sentence shall not
apply (A) to any Participant whose termination of employment with the Company
has occurred on and after the Change of Control Date and on or prior to the
Reset Date or (B) if the Contemplated Change of Control subsequently occurs
within three (3) months of the Reset Date. Following the Reset Date, the
provisions of the Plan shall remain in effect until the Plan is terminated in
accordance with the provisions of Section 8 hereof, and a new Severance Window
Period shall commence upon the occurrence of a subsequent Change of Control
Date. Notwithstanding the first sentence of this Section, if a Participant's
employment with the Company terminates prior to the Change of Control Date
(regardless of whether or not the contemplated Change of Control is subsequently
abandoned or does not occur and whether or not a Reset Date is established) and
it is reasonably demonstrated that such termination of employment (x) was at the
request of the third party who has taken steps reasonably calculated to effect
the Change of Control or (y) otherwise arose in connection with or in
anticipation of the Change of Control, then, solely with respect to the affected
Participant, the Change of Control Date means the date immediately prior to the
date of such Participant's termination of employment and the second sentence of
this Section shall not apply.
2.7. Code. "Code" means the Internal Revenue Code of 1986, as amended.
2.8 Company. "Company" means Santa Barbara Bancorp, a California
corporation, any of its Subsidiaries, any of its successor entities as provided
in Section 7 hereof, and any parent or Subsidiaries of such successor entities.
In addition, when used with reference to any act (other than the occurrence of a
Change of Control) by or with respect to any Participant or Employee who is an
Employee of the Bank or any other Subsidiary of Santa Barbara Bancorp, "Company"
means the Bank or the other Subsidiary for whom the person is an Employee, the
successor entity of the Bank or other Subsidiary as provided in Section 7
hereof, and any parent or Subsidiary of such successor entity.
2.9 Designated Agent. "Designated Agent" means the agent designated by the
Company from time to time as the person to whom notices and other written
communications to the Company, including, but not limited to, a notice of appeal
under Section 10 hereof, shall be
-4-
delivered on behalf of the Company. As of the Effective Date, the Designated
Agent is the Company's General Counsel.
2.10 Disability. "Disability" means that the Participant has been unable to
perform all of his or her duties as an Employee as the result of incapacity due
to physical or mental illness, and that it has been determined that such
inability is total and permanent, which determination shall be made by a
physician selected by the Company or its insurers and acceptable to the
Participant or the Participant's legal representative (such agreement as to
acceptability not to be unreasonably withheld).
2.11 Effective Date. "Effective Date" means November 24, 1998, the date on
which the Plan was approved by the Board.
2.12 Employee. "Employee" means an individual employed by the Company, the
Bank or any other Subsidiary of the Company. For purposes of this Plan, the
Chairman of the Board of the Company and the Chairman of the Board of the Bank
shall be deemed to employed by the Company and the Bank, respectively.
2.13 ERISA. "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
2.14 Exchange Act. "Exchange Act" means the Securities Exchange Act of
1934, as amended.
2.15 Fiscal Year. "Fiscal Year" means fiscal year of the Company or the
Bank, as appropriate.
2.16 Incumbent Directors. "Incumbent Directors" means Directors of the
Company who either (a) are Directors of the Company as of the Effective Date, or
(b) are elected, or nominated for election, to the Board of the Company by the
affirmative vote of at least a majority of the Incumbent Directors at the time
of such election or nomination; provided that, for purposes of clause (b) of
this Section, an individual whose election or nomination is effected in
connection with an actual or threatened Proxy Contest relating to the election
of Directors to the Company shall not be considered an Incumbent Director.
2.17 Involuntary Termination. "Involuntary Termination" means any of the
following: (a) without the Participant's express written consent, the
significant reduction of the Participant's duties or responsibilities relative
to the Participant's duties or responsibilities in effect immediately prior to
such reduction; (b), unless the reduction described in this clause (b) results
primarily from a reduction in the amount of the annual cash bonuses and
commissions and the reduction in such bonuses and commissions results primarily
from a proportionate reduction in the bonus pool available to Employees based on
the performance of the Company, a reduction by more than twenty-five percent
(25%) in the aggregate amount of the annual base salary and annual cash bonuses
or commissions payable to the Participant for any Fiscal Year relative to his
-5-
or her annual base salary and annual cash bonuses or commissions for the
immediately preceding Fiscal Year; (c) a material reduction by the Company in
the kind or level of employee benefits to which the Participant is entitled
immediately prior to such reduction with the result that the Participant's
overall benefits package is significantly reduced; (d) without the Participant's
express written consent, the termination of the Participant's status as a member
of the Senior Leadership Team of the Company; (e) without the Participant's
express written consent, the relocation of the Participant's principal place of
employment to a facility or a location more than thirty-five (35) miles from the
Participant's then present principal place of employment; (f) any purported
termination of the Participant by the Company which is not effected for Cause or
as a result of the Participant's death or Disability; or (g) the failure of the
Company to obtain the assumption of this Plan by any successor as contemplated
in Section 7, hereof.
2.18 Non-Control Acquisition. "Non-Control Acquisition" means an
acquisition of any voting securities of the Company by (a) an employee benefit
plan (or a trust forming a part thereof) maintained by the Company or any of its
Subsidiaries, (b) the Company or any of its Subsidiaries, or (c) any person in
connection with a Non-Control Transaction.
2.19 Non-Control Transaction. "Non-Control Transaction" means a merger,
consolidation or reorganization of the Company where:
2.19.1the shareholders of the Company, immediately before such merger,
consolidation or reorganization, own directly or indirectly immediately
following such merger, consolidation or reorganization at least fifty-one
percent (51%) of the combined voting power of the outstanding voting securities
of the corporation resulting from such merger, consolidation or reorganization
(the "Surviving Corporation") in substantially the same proportion as their
ownership of the voting securities of the Company immediately before such
merger, consolidation or reorganization; and
2.19.2 the individuals who were Incumbent Directors at the time of the
Company's execution of the agreement providing for such merger, consolidation or
reorganization constitute at least two-thirds of the members of the board of
directors of the Surviving Corporation, or a corporation beneficially owning,
directly or indirectly, a majority of the voting securities of the Surviving
Corporation; and
2.19.3 no person other than (a) the Company, (b) any Subsidiary of the
Company, (c) any employee benefit plan (or any trust forming a part thereof)
maintained by the Company, the Surviving Corporation or any Subsidiary of the
Company, or (d) any person who, immediately prior to such merger, consolidation
or reorganization had beneficial ownership of thirty-five percent (35%) or more
of the then outstanding voting securities of the Company), has beneficial
ownership of thirty-five percent (35%) or more of the combined voting power of
the Surviving Corporation's voting securities outstanding immediately after such
merger, consolidation or reorganization.
-6-
2.20 Notice of Participation. "Notice of Participation" means an
individualized written Notice of Participation in the Plan from an authorized
Employee of the Company. Attached to this Plan is a form of Notice of
Participation; provided that the Company may change the form of the Notice of
Participation at any time and from time to time. For purposes of this Section
2.20, authorized Employees of the Company shall include, but not be limited to,
the Designated Agent and any officer of the Company designated by the Board.
2.21 Participant. "Participant" means an Employee who meets the eligibility
requirements of Section 3 hereof. All references in this Plan to a Participant
shall apply equally to and shall include a former Participant whose benefits
under the Plan have accrued prior to the termination of the former Participant's
employment.
2.22 Person. "Person" means any person as that term is used for purposes of
Section 13(d) or 14(d) of the Exchange Act.
2.23 Plan. "Plan" means this Management Retention Plan.
2.24 Retiree Health Plan. "Retiree Health Plan" means the Key Employee
Retiree Health Plan and the Retiree Health Plan (Non-Key Employee) maintained by
the Bank and under which the Bank is obligated to contribute to the payment of
the cost of the post-retirement participation by an eligible retired employee
and his or her spouses and dependents in the Bank's Group Health Insurance Plan,
as that term is defined in the Retire Health Plan.
2.25 Severance Payment. "Severance Payment" means the severance
compensation and other benefits payable to a Participant under Section 4 hereof.
2.26 Severance Payment Percentage. "Severance Payment Percentage" means,
for each Participant, the Severance Payment Percentage determined as follows:
Description of Position Percentage
Chairman of the Board of the Company 200%
Chairman of the Board of the Bank 200%
Vice Chairman of the Board of the Company 200%
President and CEO of the Bank 200%
Executive Vice President of
the Company or the Bank 200%
Senior Leadership Team Member of
the Company or the Bank 150%
Grade 18, 19 or T6 of
the Company or the Bank 100%
The Company shall specify each Participant's Severance Payment Percentage in his
or her Notice of Participation; provided that, if there is any discrepancy
between the Severance Payment
-7-
Percentage set forth above and that set forth in the Notice of Participation,
the Severance Payment Percentage set forth above shall control. If the Severance
Payment Percentage applicable to any Participant changes (whether an increase or
decrease) from that specified in the Notice of Participation previously
delivered to the Participant as a result of any change in the Participant's
employment position, such change (whether an increase or a decrease) shall be
effective as of the date of the change in the employment position and the
Company shall have no obligation to deliver to the Participant any new or
amended Notice of Participation.
2.27 Severance Window Period. "Severance Window Period" means the period
of twenty-four (24) months immediately following the Change of Control Date.
2.28 Subsidiary. "Subsidiary" means any corporation or other person or
entity of which a majority of its voting power, voting equity securities or
equity interests is owned, directly or indirectly, by the Company.
2.29 Termination of Employment. "Termination of Employment" means the
termination of a Participant's employment with the Company, whether such
Termination of Employment is as a result of an Involuntary Termination, a
voluntary termination by the Participant or otherwise.
3. Eligibility and Participation.
3.1 Eligibility. Only Employees who are employed in any of the following
positions are eligible to participate in the Plan:
(a) Chairman of the Board of the Company;
(b) Chairman of the Board of the Bank;
(c) Vice Chairman of the Board of the Company
(d) President and CEO of the Bank;
(e) Any Executive Vice President of the Bank;
(f) Any Senior Leadership Team Member of the Bank; and
(g) Any Employees of the Bank who are employed in positions in any
Grades 18, 19 or T6.
All determinations of the eligibility of any Employee to participate in the Plan
and whether or not an Employee is performing services in a position described
above shall be made by the Board of the Company, which determination shall be
final and conclusive for all purposes.
3.2 Participation. Notwithstanding anything in this Plan to the contrary,
an eligible Employee shall become a Participant in the Plan only at such time as
all of the following actions have been taken: (a) the Board adopts a resolution
designating the Employee as a Participant, (b) the Company delivers to the
Employee a written Notice of Participation, and (c) the Employee executes and
returns to the Company the Notice of Participation. A Participant shall cease to
be a Participant in the Plan immediately upon his or her Termination of
Employment; provided that,
-8-
if the Participant is or becomes entitled to any Severance Payment or other
payments under this Plan as a result of such Termination of Employment, the
Participant shall remain a Participant in the Plan until the full amount of such
Severance Payment or other payments has been paid to the Participant.
3.3 Right to Benefits. Subject to the terms of this Plan, this Plan and the
Notice of Participation establish and vest in each Participant a contractual
right to the benefits to which the Participant is entitled pursuant to the terms
thereof, enforceable by the Participant against the Company; provided that prior
to the occurrence of a Change of Control Date no Participant or class of
Participants shall have any right to receive the payment of any benefits under
or by reason of the Plan.
3.4 Termination of Eligibility. Prior to the occurrence of a Change of
Control Date, a Participant's participation in the Plan and right to receive any
Severance Payment or other benefit under this Plan as a result of the occurrence
of a Change of Control Date automatically shall terminate on the date on which
the Participant ceases to be employed with the Company in an eligible position
described in Section 3.1 above, regardless of whether the change in position
resulted from a change in the Participant's employment position, the amendment
of the Plan to change the eligible employment positions, a Termination of
Employment or otherwise.
4. Severance Benefits.
4.1 Right To Severance Benefits.
4.1.1 Termination Following a Change of Control. If a Participant's
employment with the Company or the Bank terminates at any time within the
Participant's Severance Window Period, then, subject to Section 5 hereof, the
Participant shall be entitled to receive the following severance benefits.
A. Involuntary Termination Following A Change Of Control. If the
Participant's employment is terminated as a result of an Involuntary Termination
other than for Cause or the Participant's death or Disability at any time within
the Severance Window Period, then the Participant shall be entitled to receive a
Severance Payment equal to the product obtained by multiplying the Participant's
Severance Payment Percentage times the Participant's Average Annual
Compensation.
B. Voluntary Termination. If the Participant voluntarily
terminates his or her employment at any time during the thirty (30) day period
beginning on the first (1st) anniversary of the Change of Control Date and such
voluntary termination does not breach or conflict with any of the Participant's
obligations under a written employment agreement between the Participant and the
Company or any successor of the Company, then the Participant shall be entitled
to receive a Severance Payment equal to the product obtained by multiplying the
Participant's Severance Payment Percentage times the Participant's Average
Annual Compensa tion.
-9-
C. Continuation of Employee Benefits. If (i) the Participant's
employment is terminated at any time during the Severance Window Period, and
(ii) the Participant is entitled to receive a Severance Payment by reason of
such Termination of Employment, and (iii) the Participant is not eligible to
participate in any Retiree Health Plan, and (iv) the Participant timely
exercises his or her rights under Title X of the Consolidated Budget
Reconciliation Act of 1985 ("COBRA") to continue to participate in the Company's
group health and dental plans after such Termination of Employment, then the
Company shall pay all premiums and costs associated with the participation by
the Participant and his or her spouse and dependents' in such health and dental
plans for the period beginning as of the date of the Termination of Employment
and ending on the earlier of (x) the date that the Participant and his or her
spouse and dependents become covered under another employer's health and/or
dental insurance plans and (y) the last day of the period during which the
Participant and/or his or her spouse and dependents are eligible to participate
in the Company's health and dental plans under COBRA. If the Participant is
eligible to participate in any Retiree Health Plan, the Company shall have no
obligation to make any payment to or on behalf of the Participant or any of his
or her spouse and dependents under this Section with respect to their
participation in such Retiree Health Plan.
4.1.2 Voluntary Resignation; Termination For Cause. If the
Participant's employment is terminated by reason of the Participant's voluntary
resignation (and is not an Involuntary Termination), or for Cause, then (a) the
Participant shall not be entitled to receive any benefits under this Plan and
(b) the Participant shall be entitled to receive only such severance benefits
(if any) as may then be provided under the Company's then existing severance and
benefits plans and policies other than under this Plan.
4.1.3 Disability; Death. If the Participant's employment is terminated
as a result of the Participant's Disability or death, then (a) the Participant
shall not be entitled to receive any benefits under this Plan and (b) the
Participant shall be entitled to receive only such severance or other benefits
(if any) as may then be provided under the Company's then existing severance and
benefits plans and policies other than this Plan.
4.1.4 Termination Apart From Change Of Control. In the event that a
Participant's employment is terminated for any reason, either prior to the
occurrence of a Change of Control or after the expiration of the Severance
Window Period following a Change of Control, then (a) the Participant shall not
be entitled to receive any benefits under this Plan by reason of the occurrence
of such Change of Control and (b) the Participant shall be entitled to receive
only such severance benefits as may then be provided under the Company's then
existing severance and benefit plans and policies other than this Plan.
4.1.5 Limitation on Benefits. By executing and returning to the
Company a Notice of Participation, a Participant shall be deemed to acknowledge
that the benefits, if any, payable to the Participant under this Plan as a
result of an Involuntary Termination following a Change of Control are the only
compensation to which the Participant is entitled as a result of such
Involuntary Termination and that the Participant shall have no right to bring or
maintain, and shall not bring or maintain, any suit, action or other proceeding
seeking compensation or damages
-10-
based on wrongful termination of his or her employment with the Company, the
Bank or any other Subsidiary.
4.2 Payment Of Severance Payment. Any Severance Payment which a Participant
is entitled to receive under this Plan shall be paid by whichever of the Company
and the Bank the Participant is an Employee as of the date of the Termination of
Employment; provided that, if the Participant is an Employee of a Subsidiary of
the Company other than the Bank at the time of the Termination of Employment,
the Bank shall pay the Severance Payment to the Participant; and provided
further that if, for whatever reason, the Company is unable to pay the Severance
Payment for any Participant who is an Employee of the Company, the Bank shall
pay the Severance Payment to such Participant.
4.3 Timing Of Severance Payment. Any Severance Payment to which a
Participant is entitled to receive under this Plan shall be paid by the Company
in a lump sum by the later of (a), if no Dispute is made with respect to the
Determination, as those terms are used in Section 5.2 hereof, ten (10) business
days after the date of the delivery of the Determination, and (b), if a Dispute
is made with respect to the Determination, ten (10) business days after the date
of the resolution of such Dispute.
4.4 Retiree Health Plan. In addition to this Plan, the Bank maintains the
Retiree Health Plans under which the Bank is obligated to contribute to the
payment of the cost of the post-retirement participation by certain retired
employees and their spouses and dependents in the Bank's Group Health Insurance
Plan, as that term is defined in the Retiree Health Plans. The rights and
benefits of a Participant under this Plan are in addition to and not in lieu of
any rights of the Participant under either Retiree Health Plan. Nothing in this
Plan shall limit the rights of any Participant under either Retiree Health Plan
and nothing in either Retiree Health Plan shall limit the rights of any
Participant under this Plan.
5. Excise Tax and Non-Deductibility Limitations.
5.1 Benefits Cap. In the event that the payments and benefits payable to
any Participant under this Plan, when aggregated with any other payments or
benefits received by a Participant, or to be received by a Participant, by
reason of the occurrence of the Change of Control, would (a) constitute
"parachute payments" within the meaning of Section 280G of the Code and (b), but
for this Section 5, would be subject to the excise tax imposed by Section 4999
of the Code, then the Participant has the right to have either Section 5.1.1 or
Section 5.1.2 below apply.
5.1.1 Reduction.The Participant may elect to have the amount of the
Severance Payment payable to the Participant under this Plan reduced to such
lesser amount as would result in no portion of the payments and benefits
(including the Severance Payment) received or to be received by the Participant
as a result of the occurrence of a Change of Control being subject to excise tax
under Section 4999 of the Code.
-11-
5.1.2 Payment of Excise Tax. The Participant may elect to receive
the entire amount of the Severance Payment payable to the Participant under this
Plan and to pay the excise tax payable under Section 4999 of the Code with
respect to such Severance Payment and the other payments and benefits received,
or to be received, by the Participant as a result of the occurrence of a Change
of Control.
5.2 Determination of Parachute Payments.
5.2.1 Initial Determination An initial determination as to whether any
payments and benefits payable to any Participant under this Plan would
constitute "parachute payments", the amount of any "parachute payments"
otherwise subject to the excise tax under Section 4999 of the Code and the
amount of the excise tax payable shall be made at the Company's expense by an
accounting firm selected by the Company (which firm may be the Company's regular
outside auditors) (the "Accountants"). The Accountants shall provide their
determination (the "Determination"), together with supporting calculations and
documentation, to the Company and the Participant within thirty (30) days after
the date of the Participant's Termination of Employment. For purposes of making
the calculations required by this Section 5, the Accountants may make reasonable
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of Sections
280G and 4999 of the Code. The Company and the Participant shall furnish to the
Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this Section 5. The Company shall
bear all costs the Accountants may reasonably incur in connection with any
calculations contemplated by this Section 5.
5.2.2 Dispute. The Participant shall have the right to dispute the
Determination (the "Dispute"). The Participant shall initiate the Dispute, if at
all, by delivering to the Company written notice of the Dispute within ten (10)
days after the delivery to the Participant of the Determination. If there is no
Dispute, the Determination shall be binding, final and conclusive upon the
Company. The Company shall pay the reasonable attorney fees, costs and expenses
incurred in good faith by the Participant in connection with the resolution of
any Dispute, regardless of the outcome of the Dispute.
5.2.3 Reporting. The Company and the Participant each shall report the
Severance Payment and other payments and benefits received, or to be received,
by the Participant as a result of the occurrence of a Change of Control in
accordance with the Determination, as finally adjusted as a result of any
Dispute.
5.3 Adjustment. If, after the delivery of the Determination, the resolution
of any Dispute and the payment of the Severance Payment, it is determined, as a
result of an audit or review by any taxing authority or any person or agency
other than the Company, the Bank or the Participant, that any portion of the
payments and benefits payable to the Participant under this Plan which exceed
the amounts of the "parachute payments" computed under the Determination and any
Dispute are "parachute payments" and subject to the Section 4999 excise tax, the
provisions of Sections 5.3.1 and 5.3.2 below shall apply.
-12-
5.3.1 Reduction. If the Participant has elected to have Section 5.1.1
above apply, the Participant shall refund to the Company or the Bank, as
appropriate, within sixty (60) days after the delivery to the Participant of a
written demand for repayment, an amount such that, after considering such
refund, no portion of such benefits being subject to excise tax under Section
4999 of the Code. The Company shall include with such written demand a
reasonable description of the determination and the basis for such
determination. The Participant also shall pay interest on the refunded amount at
the rate equal to the lowest Applicable Federal Rate, determined under Section
1274 of the Code, so that there will be no imputed interest or similar charge
with respect to such refunded amount or any Severance Payment or other amount
paid to the Participant under this Plan. Notwithstanding the foregoing, if the
Participant will be deemed to have received "parachute payments" subject to the
Section 4999 excise tax even after the Participant has made the refund payments
under this Section, the Participant shall have no obligation to make any refund
or interest payments under this Section.
5.3.2 Additional Payment. If the Participant has elected to have
Section 5.1.2 above apply, the Participant shall (a) be solely responsible for
paying any additional excise tax and (b) notify the Company of the results of
the audit or review.
5.4 No Liability. In no event shall the Company or the Accountants have any
obligation to pay, or reimburse the Participant for, all or any portion of any
Section 4999 excise tax payable with respect to any payments or benefits payable
to the Participant under this Plan or otherwise as a result of the occurrence of
a Change of Control.
6. Employment Status; Withholding.
6.1 Employment Status. This Plan does not constitute a contract of
employment or impose on (a) the Company, the Bank or any other Subsidiary of the
Company any obligation to (i) retain the Participant as an Employee, (ii)
change, or refrain from changing, the status of the Participant's employment, or
(iii) change, or refrain from changing, the Company's policies regarding
termination of employment, or (b) the Participant any obligation to continue his
or her employment with the Company, the Bank or any other Subsidiary of the
Company for any time or any particular period of time. Subject to the provisions
of any written employment agreement between the Company, the Bank or any other
Subsidiary of the Company and the Participant, the Participant's employment is
and shall continue to be at-will, as defined under applicable law. If the
Participant's employment with the Company, the Bank or any other Subsidiary of
the Company or a successor entity terminates for any reason at any time other
than during the Severance Window Period, including (without limitation) any
termination prior to a Change of Control, the Participant shall not be entitled
to any payments, benefits, damages, awards or other compensation under this
Plan, and shall be entitled only to such payments, benefits, damages, awards and
other compensation as shall be available in accordance with the Company's
established employee plans and practices or other agreements with the Company at
the time of termination.
6.2 Employment by Subsidiary. Notwithstanding anything in this Plan to the
contrary, the reassignment of a Participant's employment from the Company to the
Bank or any
-13-
other Subsidiary of the Company or from the Bank or any other Subsidiary of the
Company to the Company or any other Subsidiary of the Company shall not, by
itself, be considered a termination of the Participant's employment.
6.3 Taxation of Plan Payments. All amounts paid by the Company to a
Participant pursuant to this Plan shall be subject to all applicable federal,
state and local payroll and withholding taxes, including, but not limited to,
any withholding obligations with respect to the Section 4999 excise tax.
7. Successors to Company and Participants.
7.1 Company's Successors. The Company shall require any successor to the
Company (whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) or to all or substantially all of the
Company's business and/or assets (including, but not limited to, the stock of
the Bank) to assume this Plan and expressly agree to perform all of the
obligations of the Company and the Bank under this Plan. For all purposes under
this Plan, the term "Company" shall include any successor to the Company and the
Company's business and/or assets. Any corporation, partnership, limited
liability company or other person or entity which is the successor of the
Company (whether directly or indirectly and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) or successor to all or substantially
all of the business and/or assets of the Company (including, but not limited to,
the stock of the Bank) shall be deemed to have assumed all of the Company's and
the Bank's obligations under this Plan regardless of whether or not such
successor specifically acknowledges in writing that it is assuming all of such
obligations under this Plan.
7.2 Failure to Obtain Assumption. The failure of the Company to obtain the
assumption of this Plan and agreement by the successor prior to the
effectiveness of any such succession will be deemed to be the Involuntary
Termination of each person who is then a Participant under the Plan effective as
of the day before the effective date of such succession and will entitle each
such Participant to receive the same Severance Payment and other benefits under
this Plan that each such Participant would have been entitled to receive had
such Participant's employment been terminated in an Involuntary Termination
after the effective date of such succes sion and after the occurrence of a
Change of Control.
7.3 Successor Fund. Notwithstanding anything in this Plan to the contrary,
if a transaction occurs in which any person or entity would be deemed to be a
successor to the Company and the successor does not specifically assume all of
the obligations under this Plan as contemplated in Section 7.1 above, the
Company (a) shall retain or shall cause to be set aside from either its or the
Bank's assets or the consideration payable to the Company or the Bank in such
transaction an amount sufficient to pay, based on the compensation levels of the
Participants as of the date immediately preceding the close of such transaction,
all of the Severance Payments and other benefits payable under this Plan and (b)
promptly after the close of such transaction shall use such assets and/or
consideration to pay the Severance Payments and other benefits payable to the
Participants under this Plan.
-14-
7.4 Participant's Successors. All rights of each Participant hereunder
shall inure to the benefit of, and be enforceable by, the Participant's personal
or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
8. Term and Termination.
8.1 Term. The term of this Plan shall begin as of the Effective Date, and,
unless terminated sooner, shall continue to and including the earliest of the
dates determined under this Section, whichever is applicable:
8.1.1 if a Change of Control has not occurred prior to the occurrence
of the earlier of the dates described in this clause 8.1.1, the earlier of (a)
December 31, 2007 and (b) the effective date of the termination of the Plan by
the Board pursuant to Section 8.2 hereof;
8.1.2 if a Change of Control has occurred prior to the occurrence of
the earlier of the dates described in this clause 8.1.2, the earlier of (a) the
date on which the Company and/or the Bank have paid and satisfied all of their
obligations under this Plan and (b) three (3) years after the Change of Control
Date with respect to any Change of Control; and
8.1.3 if, prior to the occurrence of the earlier of the dates
described in this clause 8.1.3, a transaction shall have occurred by reason of
which another person or entity is deemed under Section 7 above to be the
successor to the Company and the successor person or entity has not assumed and
agreed to perform all of the obligations of the Company and the Bank under this
Plan, the earlier of (a) the date on which the Company and/or the Bank have paid
and satisfied all of their obligations under this Plan and (b) three (3) years
after the effective date of such succession transaction.
A termination of this Plan pursuant to this Section shall be effective
for all purposes, except that such termination shall not affect or limit the
obligation of the Company and/or the Bank to pay and/or make provision for the
payment of the Severance Payment and other benefits earned by or payable to a
Participant prior to the termination of this Plan.
8.2 Termination.
8.2.1 Prior to Change of Control. Prior to the occurrence of a Change
of Control Date or the effective date (the "Succession Date") of a transaction
by reason of which another person or entity is deemed under Section 7 above to
be the successor to the Company, the Board shall have authority to terminate the
Plan by resolution adopted by three-fourths (3/4ths) of the Incumbent Directors.
8.2.2 After Change of Control. On and after any Change of Control Date
or Succession Date, the Plan may not be terminated by the Board prior to the
Company's satisfac tion of all of its obligations to the Participants under this
Plan arising from or relating to the occurrence of such Change of Control Date
or Succession Date. For the purposes of this Section,
-15-
no Change of Control Date shall be deemed to have occurred if the Contemplated
Change of Control is abandoned or does not occur, the Board adopts a resolution
described in Section 2.6 hereof which establishes a Reset Date, and the
Contemplated Change of Control does not subsequently occur within three (3)
months of the Reset Date.
9. Amendment.
9.1 Prior to Change of Control. Prior to the occurrence of a Change of
Control Date or a Succession Date, the Board of the Company shall have authority
to amend the Plan in any respect, by resolution adopted by three-fourths
(3/4ths) of the Incumbent Directors then in office. The types of amendments of
the Plan which the Board may adopt under the preceding sentence include, but are
not limited to, (a) the removal or addition of any Participants or class of
Participants entitled to benefits under this Plan, (b) the removal or addition
of any Employees or class of Employees eligible to participate in the Plan, (c)
the increase or decrease of the Severance Payment Percentage for any
Participants or class of Participants and (d) the extension or reduction of the
length of the Severance Window Period.
9.2 After Change of Control. On and after any Change of Control Date or
Succession Date, the Plan may not be amended by the Board prior to the Company's
and/or the Bank's satisfaction of all of their obligations to the Participants
under the Plan arising from or relating to the occurrence of such Change of
Control or Succession Date; provided that, after such Change of Control Date or
Succession Date, the Board of the Company may amend the Plan to effect
administrative changes that do not reduce the amount of any Severance Payments
or other benefits payable to any Participant as a result of the occurrence of
such Change of Control Date or Succession Date. For purposes of this Section, no
Change of Control Date shall be deemed to have occurred if the Contemplated
Change of Control, as that term is defined in Section 2.6 hereof is abandoned or
does not occur, the Board adopts a resolution described in Section 2.6 hereof
which establishes a Reset Date, and the Contemplated Change of Control does not
subsequently occur within three months of the Reset Date.
10. Plan Administration.
10.1 Appeal Procedure. A Participant who disagrees with the Severance
Payment or other benefits payable to the Participant under this Plan may file a
written appeal with the Designated Agent. Any claim relating to this Plan shall
be subject to the appeal process set forth in this Section.
10.1.1 Notice of Appeal. The Participant must file, if at all, a
written notice of appeal within sixty (60) days of the date of the termination
of the Participant's employment. The appeal must state the reasons why the
Participant believes he or she is entitled to a different or additional
Severance Payment and/or other benefits under the Plan. The Designated Agent
shall review the claim. If the claim is wholly or partially denied, the
Designated Agent shall provide the Participant a written notice of the denial,
specifying the reasons the claim was denied. The Designated Agent shall deliver
to the Participant written notice
-16-
of the Designated Agent's determination with respect to the appeal within ninety
(90) days after the delivery of the notice of appeal.
10.1.2 Further Appeal on Denial of Claim. If the claim is denied, in
whole or in part, the Participant may request a review of the denial at any time
within ninety (90) days following the date the Participant received written
notice of the denial of his or her claim.
10.1.3 Information to Participant. The Designated Agent shall afford
the Participant a full and fair review of the decision denying the claim and, if
requested by the Participant, shall:
A. Permit the Participant to review any documents that are
pertinent to the claim;
B. Permit the Participant to submit to the Designated Agent
issues and comments in writing; and
C. The decision on review by the Designated Agent shall be in
writing and shall be issued within 60 days following receipt of the request for
review of the decision.
The decision on review shall include specific reasons for the decision
and specific references to the pertinent Plan provisions on which the decision
of the Designated Agent is based.
10.1.4 Sole Remedy. If the appeal of a Participant is denied, or if
the outcome of said appeal is unsatisfactory to the Participant, the
Participant's sole remedy shall be to commence an arbitration proceeding in
accordance with the provisions of Section 10.2.
10.2 Arbitration. Any dispute or controversy arising under or in connection
with the Plan shall be settled by arbitration in accordance with the rules of
the American Arbitration Association then in effect, conducted before a panel of
three arbitrators sitting in a location selected by the Participant within fifty
(50) miles from the location of the Participant's principal place of employment.
This agreement to arbitrate shall be specifically enforceable. At the time of
the commencement of any arbitration, the parties to the arbitration shall use
their best efforts to establish reasonable discovery and other procedures for
the conduct of such arbitration. In consideration for the Participant's waiver
of his or her right to litigate any such dispute or controversy in a court of
law, and notwithstanding any contrary provisions of California law regarding
allocation of attorney fees, costs and expenses in arbitration proceedings, the
Company agrees to pay, on a monthly basis, the reasonable attorney fees, costs
and expenses (with such reasonableness determined by the arbitrator) incurred in
good faith by the Participant in connection with any such arbitration regardless
of the outcome of the arbitration. Judgment may be entered on the arbitrator's
award in any court having jurisdiction. If the Participant is the prevailing
party or recovers any damages in such arbitration, he or she shall be entitled
to receive, in addition thereto, pre-judgment and post-judgment interest.
Punitive damages shall not be awarded.
-17-
10.3 Action by Representative. For purposes of the appeal and arbitration
procedures set forth in this Section, any action required or authorized to be
taken by the Participant may be taken by a representative authorized in writing
by the Participant to represent him or her.
11. Rules for Determining Annual Compensation. The following provisions shall
apply to the determination of a Participant's annual cash salary and cash
bonuses and commissions and Average Annual Compensation.
11.1 Cash Bonuses. The amount of the cash bonuses payable by the Company
with respect to any Fiscal Year is determined after the close of such Fiscal
Year and normally is paid during the first quarter of the following Fiscal Year.
The amount of the cash bonuses payable to any Participant with respect to any
Fiscal Year shall be the amount, if any, determined after the close of such
Fiscal Year and which is paid during the following Fiscal Year.
11.2 Cash Commissions. If the amount of any cash commissions payable by the
Company with respect to any Fiscal Year is determined and paid after the close
of such Fiscal Year, the amount of the cash commissions payable to any
Participant with respect to any Fiscal Year shall be the amount, if any,
determined after the close of such Fiscal Year and which is paid during the
following Fiscal Year.
11.3 No Fringe Benefits. A Participant's annual cash salary and cash
bonuses and commissions for any Fiscal Year shall not include any income or
benefit realized by the Participant with respect to any fringe benefits provided
by the Company, the Bank and/or any other Subsidiary of the Company, including,
without limitation, contributions to the I & I Plan or Employee Stock Ownership
Plan, any matching contributions to any 401(k) plan, any contributions or
accruals to the Retiree Health Plans, and any premiums on life, disability or
medical insurance. For purposes of this Section, the eligibility for or payment
of cash bonuses and commissions shall not to be considered a fringe benefit.
11.4 No Stock Options. A Participant's annual cash salary and cash bonuses
and commissions for any Fiscal Year shall not include any income or gain
realized by the Participant with respect to any stock options granted to the
Participant by the Company under any stock option plan of the Company in effect
at any time.
12. Notices.
12.1 General. Notices and all other communications contemplated by this
Plan shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Participant, mailed
notices shall be addressed to him or her at the home address which he or she
most recently communicated to the Company in writing. In the case of the
Company, mailed notices shall be addressed to its corporate headquarters, and
all notices shall be directed to the attention of the Designated Agent.
-18-
12.2 Notice of Termination by the Company. If a Participant's employment is
terminated at any time during the Severance Window Period following a Change of
Control Date, the Company shall deliver to the Participant written notice
stating whether or not such termination is an Involuntary Termination for
purposes of this Plan. Notwithstanding anything to the contrary in this Plan,
any Notice of Participation, or any employment agreement between the Participant
and the Company, the delay or failure of the Company to deliver any notice under
this Section shall neither (a) limit the right of the Company to terminate the
Participant's employment or (b) be considered the breach by the Company of any
of its obligations under this Plan.
12.3 Notice by the Participant of Involuntary Termination by the Company.
In the event that the Participant determines that an Involuntary Termination has
occurred at any time during a Severance Window Period following a Change of
Control, the Participant shall deliver to the Company (within ninety (90) days
after the date on which such Involuntary Termination occurred) written notice
that such Involuntary Termination has occurred. Such notice shall identify the
specific provision or provisions in this Plan upon which the Participant relied
to make such determination and shall set forth the facts and circumstances
claimed to provide a basis for such determination. The failure by the
Participant to include in the notice any fact or circumstance which contributes
to a showing of Involuntary Termination shall not waive any right of the
Participant hereunder or preclude the Participant from asserting such fact or
circumstance in enforcing his or her rights hereunder.
13. Miscellaneous Provisions.
13.1 Determination of Voting Power. For purposes of determining the
ownership of voting power "immediately after" any event or as of any date, (a)
the determination shall be made (i), if the determination is made in connection
with the occurrence of any event, as of the close of business on the first
calendar day after the closing of the event and (ii), if the determination is
made as of a date other than in connection with the occurrence of an event, as
of the close of business on the applicable date, and (b) the Company shall
consider the effect of the issuance of all securities to be issued upon the
closing of the event and all transactions related to the occurrence of such
event.
13.2 No Duty to Mitigate. The Participant shall not be required to mitigate
the amount of any payment contemplated by this Plan, nor shall any such payment
be reduced by any earnings that the Participant may receive from any other
source.
13.3 Severability. The invalidity or unenforceability of any provision or
provisions of this Plan shall not affect the validity or enforceability of any
other provision hereof, which shall remain in full force and effect.
13.4 Tax Withholding. All payments made pursuant to this Plan will be
subject to the income, employment and excise tax withholding obligations of all
applicable federal, state and local laws.
-19-
13.5 Assignment.
13.5.1 No Assignment by Participant. A Participant may not assign any
or all of his or her rights or benefits under this Plan. The rights of any
Participant to receive any Severance Payment or other benefits under this Plan
shall not be made subject to any option or assignment, whether voluntarily,
involuntarily, by operation of law or otherwise, including (without limitation)
bankruptcy, garnishment, attachment or other creditor's process. Any purported
assignment or option with respect to any rights or benefits of any Participant
or the payment of any Severance Payment or other benefit in violation of this
Section shall be void.
13.5.2 Assignment by Company. The Company and the Bank each may
assign any or all of its rights and may delegate all or any portion of its
obligations under this Plan to an affiliate of the Company or the Bank; provided
that no such assignment shall be made (a) if the net worth of the assignee is
less than the net worth of the Company or the Bank, as appropriate, at the time
of assignment and (b) the Company or the Bank, as appropriate, guarantees the
assignee's timely performance of all obligations and payment of all Severance
Payment and other benefits payable under the Plan. Notwithstanding anything in
this Plan to the contrary, without the effected Participant(s)'s prior written
consent, which consent may be withheld for any reason, after the occurrence of a
Change of Control Date or a Succession Date neither the Company nor the Bank may
assign all or any portion of their obligations under this Plan. In the case of
any such assignment, the term "Company" when used in this Plan means the
corporation that actually employs the Participant.
14. ERISA Required Information.
14.1 Plan Sponsor. The Plan sponsor and administrator is:
Santa Barbara Bancorp
1021 Anacapa Street
Santa Barbara, California 93101
Attn: William S. Thomas, Jr.
(805) 564-6216
14.2 Designated Agent. Designated Agent for service of process:
General Counsel
Santa Barbara Bancorp
1021 Anacapa Street
Santa Barbara, California 93101
(805) 564-6310
The Company may change the name and position of the Designated Agent at any time
and from time to time; provided that no such change shall be effective with
respect to any particular Partici pant until the Company has delivered notice of
such change to such Participant.
-20-
14.3 Plan Records. Plan records are kept on a Fiscal Year basis.
14.4 Plan Funding. The Plan, and the payment of any Severance Payments and
other benefits under the Plan, shall be funded from the Company's and the Bank's
general assets. Except as otherwise specifically provided in this Plan, neither
the Company nor the Bank shall have no obligation to set aside, segregate or
place in any escrow or any other fund, any assets for purposes of providing any
Severance Payments or other benefits that here or hereafter might be payable to
any Participant under this Plan.
-21-
SANTA BARBARA BANCORP MANAGEMENT RETENTION PLAN
NOTICE OF PARTICIPATION
TO: ________________________
DATE: _________________________
Designation. The Board of Directors of the Company has designated you as a
Participant in the Santa Barbara Bancorp Management Retention Plan (the "Plan"),
a copy of which is attached hereto. The terms and conditions of your
participation in the Plan are as set forth in the Plan and herein. Your
Severance Payment Percentage is as follows:
SEVERANCE PAYMENT PERCENTAGE = _____%
The undersigned acknowledges that his or her Severance Payment
Percentage set forth above may change as a result of a change in the
undersigned's employment position and that any such change shall be effective
regardless of whether or not the Company notifies the undersigned of such
change.
Election. Within ten (10) days after the later of (a) the date of delivery
of the Accountant's Determination under Section 5.2.1 of the Plan and (b) the
date of delivery of notice of the final decision of a Dispute under Section
5.2.2 of the Plan, the Participant shall deliver to the Company written notice
of his or her election to have Section 5.1.1 or Section 5.1.2 apply to the
payments and benefits payable to the Participant under the Plan. Any such
election by the Participant shall be irrevocable.
Continuation. Prior to the occurrence of a Change of Control Date, your
participation in the Plan automatically shall terminate on the date on which you
cease to be employed in an eligible position described in Section 3.1 of the
Plan.
Return of Notice. If you agree to participate in the Plan on these terms
and conditions, please acknowledge your acceptance by signing below. Please
return the signed copy of this Notice of Participation within ten (10) days of
the date set forth above to:
General Counsel
Santa Barbara Bancorp
1021 Anacapa Street
Santa Barbara, California 93101
(805) 564-6310
Your failure to timely remit this signed Notice of Participation will
result in your removal from the Plan.
1-
Waiver of Employment Claims. By executing and returning this Notice of
Participation, you agree that the benefits, if any, payable to you under this
Plan as a result of an Involuntary Termination of your employment with the
Company or any of its Subsidiaries following a Change of Control are the only
compensation to which you are entitled as a result of such Involuntary
Termination and that you shall not bring or maintain any suit, action or other
proceeding seeking compensation or damages and alleging the wrongful termination
of your employment, any discriminatory employment practices or other claim based
on improper employment practices by the Company or the Bank.
Designation of Beneficiary. The undersigned hereby directs that, if the
undersigned should die prior to the payment to the undesigned of any Severance
Payment under this Plan, such Severance Payment shall be paid to the following
person and that the Company may rely on this designation for all purposes and
shall have no obligation to independently determine the propriety of this
designation.
Beneficiary: ______________________________________________
Relationship to Participant: ______________________________
Your failure to timely remit this signed Notice of Participation will result in
your removal from the Plan. Please retain a copy of this Notice of
Participation, along with the Plan, for your records.
Date
Signature
2-
EXHIBIT 23.1
Consent of Arthur Andersen LLP with respect to financial statements of
Registrant
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 5, 1999, included in this Form 10-K, into Pacific Capital
Bancorp (formerly known as Santa Barbara Bancorp) and subsidiaries previously
filed Form S-8 Registration Statements, File Nos. 33-5493, 2-83293, 33-43560 and
33-48724.
Los Angeles, California ARTHUR ANDERSEN LLP
April 14, 1999
EXHIBIT 23.2
Consent of KPMG LLP with respect to financial statements of Registrant
The Board of Directors
Pacific Capital Bancorp:
We consent to incorporation by reference in the registration statement No.
33-83848 on Form S-8 of Pacific Capital Bancorp and subsidiaries (prior to its
merger into Santa Barbara Bancorp) of our report dated January 23, 1998,
relating to its consolidated balance sheet as of December 31, 1997, and its
related consolidated statements of income, shareholders' equity, and cash flows
for the years ended December 31, 1997 and 1996, which report appears in the
December 31, 1998, annual report on Form 10-K of the new Pacific Capital
Bancorp.
KPMG LLP
Mountain View, California
April 14, 1999