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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO ______
COMMISSION FILE NO.: 333-43021
VIB CORP
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
I.R.S. EMPLOYER IDENTIFICATION NO.: 33-0780371
1498 MAIN STREET
EL CENTRO, CALIFORNIA 92243
TELEPHONE: (760) 337-3200
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE WARRANTS (TO PURCHASE COMMON STOCK)
INDICATE BY CHECKMARK 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 CHECKMARK 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. [X]
AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK HELD BY NON-AFFILIATES
AT MARCH 3, 2000: $66,232,075
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 3, 2000: 11,472,196
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE INTO
THE IDENTIFIED PARTS OF THIS FORM 10-K:
VIB CORP'S 1999 ANNUAL REPORT TO SHAREHOLDERS - PART II, ITEM 5.
2000 ANNUAL MEETING PROXY STATEMENT - PART III, ITEMS 10, 11, 12 AND 13.
TOTAL NO. OF PAGES: 221
EXHIBIT INDEX AT PAGE: 99
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INDEX
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PAGE
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS............................................................ 3
ITEM 2 - DESCRIPTION OF PROPERTY............................................................ 38
ITEM 3 - LEGAL PROCEEDINGS.................................................................. 39
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................ 39
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................................... 39
ITEM 6 - SELECTED FINANCIAL DATA............................................................ 39
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................... 41
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK................................................................. 61
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................ 61
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................. 95
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................ 95
ITEM 11 - EXECUTIVE COMPENSATION............................................................ 95
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................................ 95
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................... 95
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K .......................................................... 95
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
THE COMPANY
VIB Corp (the "Company" or the "Registrant") was incorporated on
November 7, 1997, under the laws of the State of California at the direction of
the Board of Directors of Valley Independent Bank ("VIB") for the purpose of
becoming VIB's holding company. The holding company reorganization was
consummated on March 12, 1998, pursuant to a Plan of Reorganization and Merger
Agreement dated November 18, 1997, and each outstanding share of VIB's Common
Stock was converted into one share of the Company's Common Stock and all
outstanding shares of VIB's Common Stock were transferred to the Company in a
transaction accounted for as a pooling of interests. Further, each outstanding
Warrant to purchase VIB's Common Stock, issued in connection with VIB's 1997
Unit Offering, was converted into a Warrant to purchase the Company's Common
Stock. The Warrants remaining unexercised expired on October 29, 1999. (See "THE
BANKING SUBSIDIARIES - VIB" and "SUPERVISION AND REGULATION - THE COMPANY"
herein.)
On September 15, 1998, the Company entered into an Agreement and Plan of
Reorganization with Bank of Stockdale, F.S.B. ("Stockdale"), a federal stock
savings bank headquartered in Bakersfield, California, providing for a
stock-for-stock merger transaction whereby Stockdale would become the Company's
wholly-owned subsidiary. The transaction was closed on January 28, 1999, and was
accounted for as a pooling of interests. The Company issued approximately
2,498,876 shares of its Common Stock (as adjusted for stock dividends) in
exchange for all of the issued and outstanding shares of Stockdale's common
stock. (See "THE BANKING SUBSIDIARIES - Stockdale" herein.)
On December 10, 1998, the Company formed a wholly-owned business trust
subsidiary, Valley Capital Trust (the "Trust"), pursuant to the laws of the
State of Delaware. The Company formed the Trust for the specific purpose of: (1)
investing in the Company's 9.00% Junior Subordinated Debentures (the
"Debentures"), due February 5, 2029; (2) selling 9% Cumulative Capital
Securities (the "Capital Securities"), representing a 97% beneficial interest in
the Debentures owned by the Trust; and (3) issuing Common Securities (the
"Common Securities") to the Company, representing a 3% beneficial interest in
the Debentures owned by the Trust.
On January 29, 1999, the Company entered into a Purchase Terms Agreement
(the "Purchase Terms Agreement") with First Tennessee Capital Markets, a
subsidiary of First Tennessee Bank, N.A. (the "Placement Agent"). Pursuant to
the Purchase Terms Agreement, the Placement Agent solicited subscriptions for
the purchase of up to $23 million of the Capital Securities from accredited
investors.
On February 5, 1999, the Company issued $23.093 million in Debentures to
the Trust. Concurrently, the Trust issued $22.4 million of the Capital
Securities to accredited investors within the meaning of Rule 501 of Regulation
D of the Securities Act of 1933 in a private placement and $693,000 of Common
Securities to the Company. The Debentures were purchased by the Trust
concurrently with the issuance of the Capital Securities and Common Securities.
The proceeds to the Company, net of the fees and other offering expenses, was
approximately $22.2 million, of which approximately $17.4 million is treated as
Tier 1 capital by the Company for regulatory purposes. (See "SUPERVISION AND
REGULATION - The Banking Subsidiaries - Recent Legislation and Regulatory
Developments - 4. Risk-Based Capital Guidelines" herein.) The Company used
approximately $8.5 million of the proceeds to increase
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VIB's regulatory capital and $10.0 million to fund the Kings River State Bank
acquisition. The remainder is available for general corporate purposes.
The interest on the Debentures paid by the Company is deductible and
represents the sole source of the Trust's revenues available for distributions
to the holders of the Capital Securities. The Company has the right, assuming
that no default has occurred regarding the Debentures, to defer interest
payments on the Debentures, at any time and for a period of up to twenty
consecutive calendar quarters. The Capital Securities will mature concurrently
with the Debentures on February 5, 2029, but can be called after February 5,
2009.
Other than receiving interest payments on the Debentures and making
distributions to the holders of the Capital Securities when required, the Trust
does not conduct any other business.
On September 7, 1999, the Company entered into an Agreement and Plan of
Reorganization with Kings River Bancorp and Kings River State Bank ("Kings
River"), a state-chartered bank headquartered in Reedley, California, providing
for a cash acquisition of Kings River. The transaction was closed on January 7,
2000, and was accounted for as a purchase. The aggregate purchase price was
$21,728,277. (See "THE BANKING SUBSIDIARIES - Kings River" herein.)
During 1999 the Company did not conduct any business other than through
VIB and Stockdale and as described above. At year-end, the Company had total
consolidated assets of $918 million. Upon consummation of the transactions
described above, the Company conducts its banking business only through VIB,
Stockdale and Kings River (collectively, the "Banking Subsidiaries"). Neither
the Company nor the Banking Subsidiaries earn revenues from sources outside of
the United States.
The Company's internet "home page" on the world wide web is:
http://www.vibcorp.com. Valley Independent Bank has a home page, located at:
http://www.vibank.com.
THE BANKING SUBSIDIARIES
VIB
VIB was incorporated under the laws of the State of California on March
28, 1980, and commenced operations as a California state-chartered bank on March
19, 1981. VIB's deposit accounts are insured under the Federal Deposit Insurance
Act, up to the maximum legal limits thereof, and VIB is a member of the Federal
Reserve System. VIB's main office is located in the City of El Centro and its
phone number is (760) 337-3200. VIB has branch offices in Brawley, Calexico and
Holtville, in Imperial County, Blythe, Coachella, Hemet, Indio, La Quinta, Palm
Desert, Thousand Palms and Palm Springs in Riverside County, and Julian and
Tecate, in San Diego County, California. VIB also operates six loan production
offices, located in Fresno, El Centro, Orange and Rancho Mirage, California, in
Yuma, Arizona, and in Las Vegas, Nevada.
VIB has grown through de novo branching and acquisitions. On December
31, 1992, VIB consummated its first acquisition, acquiring the Coachella branch
office through the merger of The First National Bank in Coachella. During 1996
VIB consummated two acquisitions. On June 21, 1996, VIB acquired the Calexico
branch office of California Commerce Bank and combined its Calexico branch with
and into the acquired facility. On September 12, 1996, VIB acquired four
branches, Indio, La Quinta, Palm Desert and Thousand Palms, by the merger of
Bank of the Desert, N.A. On February 14, 1997, VIB purchased two branches from
Wells Fargo Bank, N.A., Blythe in Riverside County and Tecate in San Diego
County. On March 27, 1998 VIB acquired the Palm Springs branch office of Palm
Desert National Bank. On January 22,
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1999, VIB acquired the Hemet branch office of Fremont Investment and Loan. VIB
assumed approximately $111 million in deposits, the lease to the premises and
$27,000 in other assets associated with the branch. These acquisitions enhanced
VIB's market share in the Coachella Valley and the City of Calexico and expanded
VIB's geographic market areas.
VIB offers a full range of commercial banking services, including the
origination of commercial, U.S. Small Business Administration ("SBA"), accounts
receivable, real estate, construction, home improvement, consumer, and other
installment and term loans; checking, savings, time, NOW, super NOW and
money-market deposit accounts; travelers' checks, pre-approved overdraft lines,
and safe deposit; and other customary non-deposit banking services. VIB is a
"Preferred Lender" of the SBA and, as such, is able to process SBA loans more
quickly than other institutions that do not have such status. VIB is an agent
for VISA(R) and MasterCard(R) credit cards and is a merchant depository for
cardholder drafts under both types of credit cards. VIB's customers include
individuals, many of whom are farmers or ranchers, and small-to-medium sized
businesses. Although VIB does not presently provide trust services, such
services are made available to its customers through correspondent banks. VIB's
branches, the majority of which offer drive-through banking services, also
provide 24-hour automated teller machines which are integrated into multi-state
ATM networks.
STOCKDALE
Stockdale is a federal stock savings bank, chartered by the Office of
Thrift Supervision (the "OTS") on June 27, 1991. Stockdale was initially
incorporated on February 26, 1985, as Stockdale Savings and Loan Association, a
California state-chartered savings and loan association, and began operations on
that date. Effective June 27, 1991, Stockdale converted to a federal stock
savings bank and currently operates under a federal charter as Bank of
Stockdale, F.S.B. Stockdale is a member of the Federal Home Loan Bank ("FHLB")
of San Francisco, which is one of twelve regional banks making up the Federal
Home Loan Bank System. Stockdale's deposits are insured up to the applicable
limits by the Savings Association Insurance Fund of the FDIC. Stockdale's
principal executive office is located at 5151 Stockdale Highway, Bakersfield,
California 93309, and its telephone number is (805) 833-9292. Stockdale has
branch offices located at 3990 Gosford Road, Bakersfield, California 93309, and
2700 Mount Vernon Avenue, Bakersfield, California 93306 and has plans to open a
branch in Fresno, California, in April, 2000. In addition, Stockdale has a loan
production office in Fresno, California.
Stockdale's services include those traditionally offered by community
banks, such as checking and savings accounts and real estate and home
improvement loans. The vast majority of Stockdale's loans are direct loans made
to individuals, professionals, and small and medium sized businesses within
Stockdale's marketing area. The majority of Stockdale's loans are sold into the
secondary market while retaining servicing rights and fees generated therefrom.
Stockdale's principal sources of income are interest received on real
estate and other loans, and income derived from the sale of loans. To a lesser
extent, Stockdale earns income from investments, from fees received in
connection with the servicing of loans and consumer banking activities. Its
principal expenses are interest paid on deposits and other borrowings, and
administrative and other operating expenses. The sources of funds for lending
activities are deposit acquisitions, borrowings, loan sales and repayments.
Stockdale's primary use of funds is the origination of real estate loans and
loans to small businesses.
Stockdale's results of operations depend upon the local real estate
market and the interest rate environment, both of which impact the demand for
loans. Interest rates also impact the difference between interest earned on
loans and investments, and the interest paid on deposits and borrowings. Other
significant influences on Stockdale's operations, and on the operations of
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thrifts generally, include general economic conditions, the related monetary and
fiscal policies of the federal government and the policies of the various
regulatory authorities.
KINGS RIVER
Kings River State Bank was incorporated under the laws of the State of
California on November 18, 1977, and commenced operations as a California
state-chartered bank on April 24, 1978. Kings River's deposit accounts are
insured under the Federal Deposit Insurance Act, up to the maximum units
thereof. Kings River's main office is located at 1003 "I" Street, Reedley,
California 93654, and its phone number is (559) 638-8131. Kings River has branch
offices in Hanford and Dinuba, California, and a loan production office in
Visalia, California.
Kings River conducts substantially the same business operations as a
typical independent commercial bank, including the acceptance of demand, savings
and time deposits, and the making of real estate mortgage and construction
loans, commercial loans and installment loans (including personal, home
improvement, and automobile loans). Additionally, Kings River offers to its
customers travelers' checks, money orders, bank-by-mail, drive-up facilities and
24-hour automated teller machines, plus other customary banking services. Kings
River's deposits are attracted primarily from individuals and small to
medium-sized businesses and professional firms located in and around the central
San Joaquin Valley area. Kings River is not dependent upon a single customer or
group of related customers for a material portion of its deposits. The general
areas in which Kings River has directed its lendable assets are: (i) real estate
mortgage and construction loans; (ii) commercial loans; and (iii) loans to
individuals for household, family and other consumer expenditures (installment
loans). Although not a credit card issuing bank, Kings River honors merchant
drafts of both MasterCard(R) and Visa(R). Kings River does not operate a trust
department or provide trust services.
MARKET AREAS
During 1999 the Company's primary market areas included the cities and
surrounding rural communities in the Imperial, Coachella and southern San
Joaquin Valleys. Agriculture is the major economic activity within Imperial
County, with year-round harvesting. El Centro is Imperial County's largest city
and also serves as the county's financial center. Agriculture also is the most
significant economic activity in the Coachella Valley, although the tourism,
retail and service industries are growing.
VIB significantly increased its market area in recent years through
acquisitions and de novo branching. The Julian, California, office opened in
1995, and the Tecate, California, office, acquired in 1997, expanded VIB's
service area to eastern San Diego County. The Julian office serves customers in
that and neighboring eastern San Diego County mountain communities and the
Tecate office serves customers on both sides of the international border. The
Blythe office, acquired in 1997, extended VIB's service area to the Palo Verde
Valley, along the Colorado River, in eastern Riverside County. Blythe is the
only incorporated city on the eastern side of Riverside County along Interstate
10 and serves as the major service and retail center for eastern Riverside
County and the Palo Verde Valley, including communities on the Arizona side of
the Colorado River. The acquisition of the Hemet branch in January, 1999, marked
VIB's first entry into the San Jacinto Valley, which is approximately 90 miles
east of Los Angeles, 35 miles southeast of Riverside and 85 miles northeast of
San Diego.
The Company further expanded the geographic scope of its banking
franchise into California's San Joaquin Valley through the acquisitions of
Stockdale in January, 1999 and Kings River in January, 2000. Stockdale operates
three full-service offices in Bakersfield, in the southern San Joaquin Valley,
and a loan production office in Fresno, in the central San Joaquin
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Valley. Kings River operates three full service offices in Reedley, Hanford and
Dinuba, California, and a loan production office in Visalia, California, all
located in the central San Joaquin Valley counties of Kings, Fresno and Tulare.
Bakersfield is Kern County's largest city and also serves as the
county's financial center. The economy in Kern County is focused in three
sectors - petroleum production, agriculture, and government/institutional. Kern
County accounts for one-half of all of the petroleum production in the State of
California and is considered the greatest single oil producing county in the
nation. Kern County's farm production placed it among the top agricultural
counties in the United States. The federal, state, county and municipal
governments are also important employers in Kern County, with military one of
the largest components. Thus far, the county has not been impacted by the
reduction of military spending or base closures, with base consolidations having
actually increased military employment in the county.
The central San Joaquin Valley is also agriculturally oriented. Reedley,
known as the "World's Fruit Basket," is primarily an agricultural community
located in the southeast portion of Fresno County. Fresno County is the leading
agricultural county in the nation and is often deemed the "Raisin Capital" of
the United States.
Hanford is the county seat for Kings County. The economy is well
diversified with a majority of people working in non-agricultural jobs.
Agriculture is the primary business of Kings County, generating over $800
million in gross income per year. Kings County is also home to Lemoore Naval Air
Station, one of the largest naval air stations in the world.
Dinuba and Visalia are both located in Tulare County. Dinuba is located
in the northwestern corner of Tulare County. Visalia is located in the western
end of Tulare County. Tulare County is ranked second as the most productive
agricultural county in the nation, but it has recently shown the largest gain in
employment in the manufacturing industries including the durable goods segment.
Over half of Tulare County is devoted to national parks and forest including
Kings Canyon and Sequoia National Park, Inyo and Sequoia National Forest.
EMPLOYEES
As of December 31, 1999, the Company, primarily through VIB and
Stockdale, employed approximately 358 full-time and 74 part-time persons. After
consummating the acquisition of Kings River, the number of full-time equivalent
employees increased to approximately 446 persons. None of the employees are
represented by any union or other collective bargaining agreement and the
Company has not experienced any type of strike or labor dispute. The Company
considers its relationship with its employees to be excellent.
COMPETITION
The banking business in California, generally, and in the service areas
served by the Banking Subsidiaries specifically, is highly competitive with
respect to both loans and deposits and is dominated by a few major banks which
have many offices operating over wide geographic areas. The Banking Subsidiaries
compete for deposits and loans principally with these major banks, savings and
loan associations, finance companies, credit unions and other financial
institutions located in the Banking Subsidiaries' market areas. Among the
advantages which the major banks have over the Banking Subsidiaries are their
ability to finance extensive advertising campaigns and to allocate their
investment assets to regions of highest yield and demand. Many of the major
commercial banks operating in the Banking Subsidiaries' service areas offer
certain services (such as trust and international banking services) which are
not offered directly by the
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Banking Subsidiaries and, by virtue of their greater total capitalization, such
banks have substantially higher lending limits than the Banking Subsidiaries.
Moreover, banks generally, and the Banking Subsidiaries in particular,
face increasing competition for loans and deposits from non-bank financial
intermediaries such as savings and loan associations, thrift and loan
associations, credit unions, mortgage companies, insurance companies, and other
lending institutions. The Depository Institutions Deregulation and Monetary
Control Act of 1980 ("DIDA") authorized savings and loan associations and credit
unions to make certain consumer loans. The Garn-St. Germain Depository
Institutions Act of 1982 (the "Garn-St. Germain Act") and California legislation
further expanded the power of savings and loan associations to make consumer and
commercial loans in competition with commercial banks. Further, DIDA and a 1979
amendment to the usury provisions of the California Constitution have resulted
in the inflow of lendable funds from out-of-state lenders and in increased
competition from previously non-exempt in-state lenders for loans. (See
"SUPERVISION AND REGULATION - THE BANKING SUBSIDIARIES" herein.)
Historically, banks were not permitted to pay the same rates of interest
on similar deposit accounts as those offered by savings and loan associations,
credit unions and money-market funds. DIDA began the process of deregulating
interest rate controls and the Garn-St. Germain Act, which authorized banks and
savings and loan associations to pay money-market interest rates on most types
of accounts and eliminated interest rate differentials between banks and savings
and loan associations, and subsequent actions of federal regulatory agencies
have accelerated the deregulation process, enabling banks to compete more
effectively for deposits.
However, banks have faced increasing competition for deposits because
these same legislative and regulatory developments have permitted non-bank
financial intermediaries to offer certain types of deposit accounts not
previously permitted.
Further, the recent trend has been for other institutions, such as
brokerage firms, credit card companies, and even retail establishments, to offer
alternative investment vehicles, such as money market funds, as well as to offer
traditional banking services such as check access to money market funds and cash
advances on credit card accounts. In addition, other entities (both public and
private) seeking to raise capital through the issuance and sale of debt or
equity securities also compete with the Banking Subsidiaries in the acquisition
of deposits.
In order to compete with the other financial institutions in their
market areas the Banking Subsidiaries rely principally upon local promotional
activity, personal contacts by their officers, directors, employees and the
Company's shareholders, and specialized services. In conjunction with the
Banking Subsidiaries' business plans to serve the financial needs of local
residents and small-to medium-sized businesses, they also rely on officer
calling programs to existing and prospective customers, focusing their overall
marketing efforts towards their local communities. The Banking Subsidiaries'
promotional activities emphasize the advantages of dealing with a
locally-headquartered institution sensitive to the particular needs of their
local communities. For customers whose loan demands exceed a Banking
Subsidiary's lending limit, the Banking Subsidiary attempts to arrange for such
loans on a participation basis with other banks. The Banking Subsidiaries also
assist customers requiring services not offered by them to obtain these services
from their correspondent banks.
OTHER SIGNIFICANT FACTORS RELATING TO THE COMPANY
Certain matters discussed in this Annual Report on Form 10-K may
constitute forward- looking statements, within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act, that involve substantial
risks and uncertainties. When used in this Annual
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Report on Form 10-K, the words "anticipate," "believe," "estimate," "intend,"
"expect" and similar expressions identify certain of such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained herein. The considerations listed below represent certain important
factors the Company believes could cause such results to differ. These
considerations are not intended to represent a complete list of the general or
specific risks that may affect the Company's future results of operations or
stock price and should be considered carefully.
HOLDING COMPANY STRUCTURE AND DEBT SERVICE
As a bank holding company, substantially all of the Company's operating
assets are owned by the Banking Subsidiaries. The Company, therefore, relies
upon receipt of sufficient funds from the Banking Subsidiaries, primarily in the
form of dividends, to meets its obligations and corporate expenses. The ability
of the Banking Subsidiaries to pay dividends to the Company, however, is limited
by statutory and regulatory authority, which may preclude payment of dividends
when the Company most needs them. On February 5, 1999, the Company issued the
Debentures which will increase its interest expense by approximately $2.1
million annually. The ability of the Company to meet its interest obligations on
the Debentures, therefore, may be impaired should the Banking Subsidiaries be
unable to pay dividends. (See "SUPERVISION AND REGULATION - THE COMPANY - Bank
Holding Company Liquidity" herein.)
Additionally, pursuant to an Agreement as to Expenses and Liabilities
(the "Expense Agreement") the Company irrevocably and unconditionally guaranteed
to each person or entity with which the Trust itself becomes indebted or liable,
the full costs of any expenses or liabilities of the Trust, other than the
Trust's obligations to pay holders of the Capital Securities of the amounts due,
pursuant to the terms of the Capital Securities. Consequently, third party
creditors of the Trust may proceed directly against the Company under the
Expense Agreement, regardless of whether they have notice of the Expense
Agreement.
ACQUISITIONS
The Company's future results depend, to a significant extent, upon its
ability to successfully manage its recent external growth. There can be no
assurance that the Company will be able to adequately and profitably manage its
expanded operations. Factors that could adversely affect the Company's future
prospects and financial results include:
Ability to Manage Growth. Taking into consideration VIB's 1998 and 1999
acquisitions of its Palm Springs and Hemet branch offices and the Company's
acquisitions of Stockdale and Kings River, the Company has increased its asset
size by approximately $562 million, the number of its branch locations by 8, and
the number of loan production offices by 6 since January 1, 1998. The Company's
future success is, therefore, dependent, in significant part, upon its ability
to properly manage and effectively integrate these new operations. Management
has devoted substantial time to the Company's growth strategy, including the
above-referenced acquisitions, and anticipates devoting substantial time to
future growth and acquisition opportunities. While the Company has experience in
managing external growth, there can be no assurance that the Company will be
successful in integrating the recent acquisitions or that they will enhance the
Company's profitability.
Ability to Achieve Operating Efficiencies. Because the markets in which
the Banking Subsidiaries operate are highly competitive and due to the inherent
uncertainties associated with integrating their operations, there can be no
assurance that the Banking Subsidiaries will be able to fully realize the
operating efficiencies contemplated by Management in connection with their
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acquisitions. Such efficiencies include, but are not limited to, centralization
of operational auditing, accounting, data processing, cash clearing, personnel
and executive management functions. Furthermore, should operating efficiencies
be realized, there can be no assurance as to the timing of their realization.
GENERAL BUSINESS RISKS
The business of the Banking Subsidiaries are subject to various business
risks. The volume of loan originations depends upon demand for loans of the type
originated by the Banking Subsidiaries and the competition in the marketplace
for such loans. The level of consumer confidence, fluctuations in real estate
values, in prevailing interest rates and in investment returns expected by the
financial community could combine to make loans of the type originated by the
Banking Subsidiaries less attractive. Additionally, the Company and the Banking
Subsidiaries may be adversely affected by factors that could : (1) increase the
costs to the borrowers of loans originated by the Banking Subsidiaries; (2)
create alternative lending sources for such borrowers; or (3) increase the cost
of funds to the Banking Subsidiaries at rates faster than increases in interest
income, thereby narrowing interest rate margins. There can be no assurance,
therefore, that there will be sufficient loan demand or interest margins in the
future to keep pace with deposit growth experienced. Additionally, governmental
interventions through elimination of income tax benefits of home equity loans,
increased or the addition of additional regulations could also adversely affect
the business in which the Banking Subsidiaries are engaged. (See "SUPERVISION
AND REGULATION - THE BANKING SUBSIDIARIES - IMPACT OF MONETARY POLICIES"
herein.)
RESERVE FOR LOAN LOSSES
Historical experience indicates that a portion of the Banking
Subsidiaries' loans will become delinquent and will require either a partial or
total charge-off. Regardless of the underwriting criteria utilized, losses may
be experienced by the Company as a result of various factors beyond its or the
Banking Subsidiaries' control, including changes in market conditions affecting
the value of collateral and problems affecting a borrower's continued
creditworthiness. The Banking Subsidiaries' determination of the adequacy of
their reserves for loan losses is based upon various considerations, including
an analysis of risk characteristics of various classifications of loans,
previous loan loss experience, specific loans which have loss potential,
delinquency trends, estimated fair value of underlying collateral, current
economic conditions, results of regulatory examinations (which can mandate
additional loss reserves), geographic and industry concentrations. Such factors
can necessitate higher provisions for loan losses and higher-charge- offs, thus
adversely affecting the Banking Subsidiaries' and the Company's net income. Some
of the more significant factors affecting the Banking Subsidiaries' reserves for
loan losses are:
Seasonality and Agriculture. The Banking Subsidiaries' market areas are
heavily dependent upon the success of the seasonal agricultural economies of the
Imperial, Coachella and San Joaquin Valleys. This seasonality impacts evaluation
of the special risks involved in considering the adequacy of loan loss reserves.
Concentration of Operations; Recessionary Environments; Decline in Real
Estate Values. The Banking Subsidiaries' business activities are currently
focused in the Imperial, Coachella and San Joaquin Valleys, as well as other
inland communities in Southern California. Although VIB has expanded into
coastal, north San Diego County and Orange County, California, Yuma, Arizona and
Las Vegas, Nevada, with loan production offices, the results of operations of
the Banking Subsidiaries are dependent on general economic trends in Fresno,
Kern, Kings, Imperial, Riverside and Tulare Counties. The concentration of the
Banking Subsidiaries' operations in these counties exposes them to greater risk
than other banks with a wider
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geographic base in the event of an economic slow-down or recession affecting
certain segments of the economy, especially agriculture, or in the event of
localized catastrophes, such as earthquakes, fires and floods. Moreover,
localized declines in the market values of real estate of the type that secure
loans originated by the Banking Subsidiaries, reducing homeowners' equity and
businesses' equity in their properties could result in: (1) weakening of
collateral coverage on loans previously made and (2) diminish the available
market for similar loan originations in the future.
SUPERVISION AND REGULATION
INTRODUCTION
Banking is a complex, highly regulated industry. The primary goals of
the regulatory scheme are to maintain a safe and sound banking system, protect
depositors and the Federal Deposit Insurance Corporation's insurance fund, and
facilitate the conduct of sound monetary policy. In furtherance of these goals,
Congress and the states have created several largely autonomous regulatory
agencies and enacted numerous laws that govern banks, bank holding companies and
the banking industry. Consequently, the growth and earnings performance of the
Company and the Banking Subsidiaries can be affected not only by management
decisions and general economic conditions, but also by the requirements of
applicable state and federal statutes, regulations and the policies of various
governmental regulatory authorities, including:
o the Board of Governors of the Federal Reserve System (the
"FRB");
o the Federal Deposit Insurance Corporation (the "FDIC");
o the California Department of Financial Institutions (the "DFI");
and
o the Office of Thrift Supervision (the "OTS").
The system of supervision and regulation applicable to the Company and
the Banking Subsidiaries establishes a comprehensive framework for their
respective operations. Federal and state laws and regulations generally
applicable to financial institutions, such as the Company and the Banking
Subsidiaries, regulate, among other things:
o the scope of business that they may conduct;
o investments that they can make;
o reserves that must be maintained against deposits;
o capital levels that must be maintained relative to the amount
and risks associated with assets;
o the nature and amount of collateral that may be taken to secure
loans;
o the establishment of new branches;
o mergers and consolidations with other financial institutions;
and
o the amount of dividends that the Company and the Banking
Subsidiaries may pay.
The following summarizes the material elements of the regulatory
framework that applies to the Company and any subsidiaries, including the
Banking Subsidiaries. It does not describe all
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of the statutes, regulations and regulatory policies that are applicable. Also,
it does not restate all of the requirements of the statutes, regulations and
regulatory policies that are described. Consequently, the following summary is
qualified in its entirety by reference to the applicable statutes, regulations
and regulatory policies. Any change in applicable laws, regulations or
regulatory policies may have a material effect on the business of the Company
and the Banking Subsidiaries.
SUPERVISION AND REGULATION - THE COMPANY
GENERAL. The Company, as a bank holding company registered under the
Bank Holding Company Act of 1956 (the "BHCA"), is subject to regulation by the
FRB. According to FRB policy, the Company is expected to act as a source of
financial strength for the Banking Subsidiaries and to commit resources to
support them in circumstances where the Company might not otherwise do so. Under
the BHCA, the Company and its subsidiaries are subject to periodic examination
by the FRB. The Company is also required to file periodic reports of its
operations and any additional information regarding its activities and those of
its subsidiaries with the FRB, as may be required.
The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its subsidiaries
are subject to examination by, and may be required to file reports with, the
Commissioner of the California Department of Financial Institutions (the
"Commissioner"). Regulations have not yet been proposed or adopted or steps
otherwise taken to implement the Commissioner's powers under this statute.
BANK HOLDING COMPANY LIQUIDITY. The Company is a legal entity, separate
and distinct from its subsidiaries. Although there exists the ability to raise
capital on its own behalf or borrow from external sources, it may also obtain
additional funds through dividends paid by, and fees for services provided to,
its subsidiaries. However, regulatory constraints may restrict or totally
preclude its subsidiaries from paying dividends to the Company.
Regarding VIB and Kings River, the Company is entitled to receive
dividends, when and as declared by their respective Boards of Directors, out of
funds legally available therefor, as specified and limited by the California
Financial Code. Under the California Financial Code, funds available for cash
dividend payments by a bank are restricted to the lesser of: (i) a bank's
retained earnings; or (ii) a bank's net income for its last three fiscal years
(less any distributions to shareholders made during such period). With the prior
approval of the Commissioner, cash dividends may also be paid out of the greater
of: (i) a bank's retained earnings; (ii) net income for a bank's last preceding
fiscal year; or (iii) net income for a bank's current fiscal year. If the
Commissioner finds that the shareholders' equity of the bank is not adequate or
that the payment of a dividend would be unsafe or unsound for the bank, the
Commissioner may order the bank not to pay a dividend to the bank's
shareholders.
Regarding Stockdale, OTS regulations impose limitations upon all capital
distributions by savings banks, such as cash dividends, payments to repurchase
or otherwise acquire their shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. In general, savings banks may not declare or pay a cash dividend on
their capital stock if the payment would cause the savings bank to fail to meet
any of its regulatory capital requirements. Savings banks must also provide the
OTS with 30 days advance notice of any proposed dividend declaration.
Under the OTS regulations, a savings bank that meets its capital
requirements both before and after a proposed distribution and has not been
notified by the OTS that it is in need of more
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than normal supervision (a "Tier 1 association") may, after prior notice to but
without the approval of the OTS, make capital distributions during a calendar
year up to the higher of: (i) 100% of its net income to date during the calendar
year plus the amount that would reduce by one-half its surplus capital ratio at
the beginning of the calendar year, or (ii) 75% of its net income over the most
recent four-quarter period. A Tier 1 association may make capital distributions
in excess of the above amount if it gives notice to the OTS and the OTS does not
object to the distribution. At December 31, 1999, Stockdale qualified as a Tier
1 association. In addition, the OTS may prohibit a proposed capital distribution
that would otherwise be permitted if the OTS determines that the distribution
would constitute an unsafe or unsound practice.
Since the Banking Subsidiaries are FDIC insured institutions, it is
therefore possible, depending upon their financial condition and other factors,
that the FDIC could assert that the payment of dividends or other payments
might, under some circumstances, constitute an unsafe or unsound practice and
thereby prohibit such payments.
TRANSACTIONS WITH AFFILIATES. The Company and any subsidiaries it may
purchase or organize are deemed to be affiliates of the Banking Subsidiaries
within the meaning of Sections 23A and 23B of the Federal Reserve Act. Pursuant
thereto, loans by the Banking Subsidiaries to affiliates, investments by the
Banking Subsidiaries in affiliates' stock, and taking affiliates' stock by the
Banking Subsidiaries as collateral for loans to any borrower will be limited to
10% of the Banking Subsidiary's capital, in the case of any one affiliate, and
will be limited to 20% of the Banking Subsidiaries' capital in the case of all
affiliates. In addition, such transactions must be on terms and conditions that
are consistent with safe and sound banking practices; in particular, a bank and
its subsidiaries generally may not purchase from an affiliate a low-quality
asset, as defined in the Federal Reserve Act. Such restrictions also prevent a
bank holding company and its other affiliates from borrowing from a banking
subsidiary of the bank holding company unless the loans are secured by
marketable collateral of designated amounts. The Company and the Banking
Subsidiaries are also subject to certain restrictions with respect to engaging
in the underwriting, public sale and distribution of securities. (See
"Supervision and Regulation - The Banking Subsidiaries - Recent Legislation and
Regulatory Developments - 1. Gramm-Leach-Bliley Act Facilitating Affiliations
and Expansion of Financial Activities" herein.)
LIMITATIONS ON BUSINESSES AND INVESTMENT ACTIVITIES. Under the BHCA, a
bank holding company must obtain the FRB's approval before:
o directly or indirectly acquiring more than 5% ownership or
control of any voting shares of another bank or bank holding
company;
o acquiring all or substantially all of the assets of another
bank; or
o merging or consolidating with another bank holding company.
The FRB may allow a bank holding company to acquire banks located in any
state of the United States without regard to whether the acquisition is
prohibited by the law of the state in which the target bank is located. In
approving interstate acquisitions, however, the FRB must give effect to
applicable state laws limiting the aggregate amount of deposits that may be held
by the acquiring bank holding company and its insured depository institutions in
the state in which the target bank is located, provided that those limits do not
discriminate against out-of-state depository institutions or their holding
companies, and state laws which require that the target bank have been in
existence for a minimum period of time, not to exceed five years, before being
acquired by an out-of-state bank holding company.
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In addition to owning or managing banks, bank holding companies may own
subsidiaries engaged in certain businesses that the FRB has determined to be "so
closely related to banking as to be a proper incident thereto." The Company,
therefore is permitted to engage in a variety of banking-related businesses.
Some of the activities that the FRB has determined, pursuant to its Regulation
Y, to be related to banking are:
o making or acquiring loans or other extensions of credit for its
own account or for the account of others;
o servicing loans and other extensions of credit;
o operating a trust company in the manner authorized by federal or
state law under certain circumstances;
o leasing personal and real property or acting as agent, broker,
or adviser in leasing such property in accordance with various
restrictions imposed by FRB regulations;
o providing financial, banking, or economic data processing and
data transmission services;
o owning, controlling, or operating a savings association under
certain circumstances;
o selling money orders, travelers' checks and U.S. Savings Bonds;
o providing securities brokerage services, related securities
credit activities pursuant to Regulation T, and other incidental
activities; and
o underwriting and dealing in obligations of the U.S., general
obligations of states and their political subdivisions, and
other obligations authorized for state member banks under
federal law.
o Federal law prohibits a bank holding company and any subsidiary
banks from engaging in certain tie-in arrangements in connection
with the extension of credit. Thus, for example, the Banking
Subsidiaries may not extend credit, lease or sell property, or
furnish any services, or fix or vary the consideration for any
of the foregoing on the condition that:
o the customer must obtain or provide some additional credit,
property or services from or to the Banking Subsidiaries other
than a loan, discount, deposit or trust service;
o the customer must obtain or provide some additional credit,
property or service from or to the Company or any of the Banking
Subsidiaries; or
o the customer may not obtain some other credit, property or
services from competitors, except reasonable requirements to
assure soundness of credit extended.
Generally, the BHCA does not place territorial restrictions on the
domestic activities of non-bank subsidiaries of bank holding companies.
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On November 12, 1999, the President signed into law the
Gramm-Leach-Bliley Act (the "GLB Act" or the "Financial Modernization Act"). The
GLB Act significantly changed the regulatory structure and oversight of the
financial services industry. The GLB Act permits banks and bank holding
companies to engage in previously prohibited activities under certain
conditions. Also, banks and bank holding companies may affiliate with other
financial service providers such as insurance companies and securities firms
under certain conditions. Consequently, a qualifying bank holding company,
called a financial holding company ("FHC"), can engage in a full range of
financial activities, including banking, insurance, and securities activities,
as well as merchant banking and additional activities that are beyond those
permitted for traditional bank holding companies. Moreover, various non-bank
financial services providers which were previously prohibited from engaging in
banking can now acquire banks while also offering services such as securities
underwriting and underwriting and brokering insurance products. The GLB Act also
expands passive investment activities by FHCs, permitting them to indirectly
invest in any type of company, financial or nonfinancial, through merchant
banking activities and insurance company affiliations. (See "Supervision and
Regulation - The Banking Subsidiaries - Recent Legislation and Regulatory
Developments - 1. Gramm-Leach-Bliley Act" herein.)
CAPITAL ADEQUACY. Bank holding companies must maintain minimum levels of
capital under the FRB's risk based capital adequacy guidelines. If capital falls
below minimum guideline levels, a bank holding company, among other things, may
be denied approval to acquire or establish additional banks or non-bank
businesses.
The FRB's risk-based capital adequacy guidelines for bank holding
companies and state member banks, discussed in more detail below (see
"Supervision and Regulation - The Banking Subsidiaries - Recent Legislation and
Regulatory Developments - 4. Risk-Based Capital Guidelines" herein), assign
various risk percentages to different categories of assets, and capital is
measured as a percentage of risk assets. Under the terms of the guidelines, bank
holding companies are expected to meet capital adequacy guidelines based both on
total risk assets and on total assets, without regard to risk weights.
The risk-based guidelines are minimum requirements. Higher capital
levels will be required if warranted by the particular circumstances or risk
profiles of individual organizations. For example, the FRB's capital guidelines
contemplate that additional capital may be required to take adequate account of,
among other things, interest rate risk, or the risks posed by concentrations of
credit, nontraditional activities or securities trading activities. Moreover,
any banking organization experiencing or anticipating significant growth or
expansion into new activities, particularly under the expanded powers under the
GLB Act, would be expected to maintain capital ratios, including tangible
capital positions, well above the minimum levels.
LIMITATIONS ON DIVIDEND PAYMENTS. California Corporations Code Section
500 allows the Company to pay a dividend to its shareholders only to the extent
that the Company has retained earnings and, after the dividend, the Company's
assets (exclusive of goodwill and other intangible assets) would be 1.25 times
its liabilities (exclusive of deferred taxes, deferred income and other deferred
credits), and the Company's current assets would be at least equal to its
current liabilities.
Additionally, the FRB's policy regarding dividends provides that a bank
holding company should not pay cash dividends exceeding its net income or which
can only be funded in ways that weaken the bank holding company's financial
health, such as by borrowing. The FRB also possesses enforcement powers over
bank holding companies and their non-bank subsidiaries to prevent or remedy
actions that represent unsafe or unsound practices or violations of applicable
statutes and regulations.
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SUPERVISION AND REGULATION - THE BANKING SUBSIDIARIES
GENERAL. VIB, as a state-chartered bank which is a member of the Federal
Reserve System, is subject to regulation, supervision, and regular examination
by the DFI and the FRB. Kings River, as a state-chartered nonmember bank, is
subject to regulation, supervision, and regular examination by the DFI and the
FDIC. Stockdale, as a federal stock savings bank, is subject to regulation,
supervision and regular examination by the OTS and the FDIC. The Banking
Subsidiaries' deposits are insured by the FDIC up to the maximum extent provided
by law. The regulations of these agencies govern most aspects of the Banking
Subsidiaries' business and establish a comprehensive framework governing their
operations. California law exempts all banks from usury limitations on interest
rates.
RECENT LEGISLATION AND REGULATORY DEVELOPMENTS. From time to time
legislation is proposed or enacted which has the effect of increasing the cost
of doing business and changing the competitive balance between banks and other
financial and non-financial institutions. Various federal laws enacted over the
past several years have provided, among other things, for the maintenance of
mandatory reserves with the FRB on deposits by depository institutions (state
reserve requirements have been eliminated); the phasing-out of the restrictions
on the amount of interest which financial institutions may pay on certain of
their customers' accounts. Federal regulators have been given increased
authority and means for providing financial assistance to insured depository
institutions and for effecting interstate and cross-industry mergers and
acquisitions of failing institutions. These laws have generally had the effect
of altering competitive relationships existing among financial institutions,
reducing the historical distinctions between the services offered by banks,
savings and loan associations and other financial service providers, and
increasing the cost of funds to banks and other depository institutions.
1. GRAMM-LEACH-BLILEY ACT
GENERAL. The Gramm-Leach-Bliley Act was signed into law on November 12,
1999. The GLB Act represents the most significant revision of the banking and
financial services industry laws since the Depression Era by revising the BHCA
and permitting full affiliations with other financial service providers. The GLB
Act permits a qualified bank holding company, called a financial holding
company, to engage in a full range of financial activities including banking,
insurance, securities activities, as well as merchant banking and other
activities that are financial in nature. The following discusses the more
significant elements of the GLB Act.
FACILITATING AFFILIATIONS AND EXPANSION OF FINANCIAL ACTIVITIES. The GLB
Act:
o eliminates many federal and state barriers to affiliations among
banks and securities firms, insurance companies, and other
financial service providers;
o establishes a statutory framework for permitting full
affiliations to occur;
o provides financial organizations with flexibility in structuring
new financial affiliations through the FHC structure or through
a bank financial subsidiary, with certain safeguards and
limitations;
o preserves the role of the FRB as the umbrella supervisory
authority for those FHCs, while incorporating a system of
functional regulation designed to utilize the strengths of
various federal and state regulatory authorities; and
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o establishes a mechanism for coordination between the FRB and the
Secretary of the Treasury (the "Secretary") regarding the
approval of new financial activities for both holding companies
and financial subsidiaries of national banks.
Safety and soundness is also emphasized by requiring that banks and
holding companies be "well capitalized" and "well managed" in order to engage in
the new activities and affiliations contemplated by the GLB Act, with the
appropriate regulators given authority to address any failure to maintain safety
and soundness standards in a prompt manner.
Financial Affiliations and Activities. The GLB Act repeals previous
statutory prohibitions by permitting bank holding companies and FRB member banks
to engage in previously prohibited activities and affiliations. Specifically,
the GLB Act adds Section 6 to the BHCA, designating qualifying bank holding
companies engaging in the new, permissible financial activities and affiliations
as FHCs. In order for a bank holding company to qualify as an FHC, its
subsidiary depository institutions must be "well managed," "well capitalized,"
and have at least a "satisfactory" Community Reinvestment Act ("CRA") rating as
of their last examination.
On January 19, 2000, the FRB adopted interim regulations under Subpart I
of Regulation Y implementing the FHC provisions of the GLB Act. The interim
regulations, subject to revision, became effective March 11, 2000. Under the
interim regulations, a bank holding company must submit a declaration to the FRB
stating that the company elects to become an FHC and a certification that all
depository institutions controlled by the company are "well capitalized" and
"well managed." Providing that those requirements are met and that the
depository institutions have at least a "satisfactory" CRA rating, the election
to become an FHC is effective on the 31st day after the FRB receives the
election.
If any of an FHC's subsidiary depository institutions fails to retain a
"well managed" or "well capitalized" status, the FHC must execute an agreement
with the FRB within 45 days after notice of the deficiency, agreeing to
implement specific corrective measures to return the FHC to compliance. After
the agreement is executed, the FHC will have 180 days to correct any management
or capital deficiencies. Until the FRB has determined that the deficiencies have
been corrected, the FRB may impose any conditions or limitations on the conduct
or activities of an FHC or on any of its affiliates that the FRB deems
appropriate and consistent with the BHCA and the FHC and its affiliates may not
engage in any additional activities permitted by the GLB Act without the FRB's
prior approval.
If the FHC fails to correct the capital and management deficiencies
within 180 days, the FRB may require the FHC to divest itself of any insured
depository institutions or the FRB may require the FHC to cease engaging (both
directly and through any subsidiary that is not a depository institution or a
subsidiary of a depository institution) in all activities that are not otherwise
permissible for a traditional bank holding company pursuant to the FRB's
Regulation Y.
If any one of an FHC's depository institution falls out of compliance
with the "satisfactory" CRA rating requirement, the FHC may continue existing
activities permitted by the GLB Act. However, the FHC may not commence any
additional GLB Act activities, or acquire direct or indirect control of any
entity engaged in such activities.
The GLB Act permits FHCs to engage in non-banking activities beyond
those permitted for traditional bank holding companies. Rather than requiring
that the non-banking activities be "closely related to banking," FHCs may engage
in those that the FRB determines to be financial in nature, incidental to
activities that are financial in nature, or complimentary to financial
activities. The GLB Act enumerates certain permissible activities that the FRB
considers financial in nature.
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FHCs, however, may only engage in complimentary financial activities if the FRB
determines that the complimentary activities do not pose a substantial risk to
the safety and soundness of the FHC's depository institutions or the financial
system in general.
For those expanded financial activities that are not specifically
enumerated in the GLB Act, the FRB has the primary authority to determine which
activities are financial in nature, incidental or complimentary, and may act by
regulation or order. However, the FRB may not act unilaterally. Pursuant to the
GLB Act, a consultive process between the FRB and the Secretary is required. The
Secretary may also make similar proposals to the FRB with respect to determining
whether proposed activities are financial in nature or incidental to financial
activities regarding financial subsidiaries of national banks. Such a process is
intended to bring a balance to the determinations regarding the type of
activities that are financial and limit so-called "regulatory shopping" by
financial service providers.
A qualifying FHC may engage in any new activity enumerated in the GLB
Act without receiving prior approval from the FRB. Rather, the FHC is only
required to file a notice with the FRB within 30 days after the activity is
commenced or a company is acquired. The new activities enumerated in the GLB Act
which are specifically considered financial in nature include:
o underwriting insurance or annuities, or acting as an insurance
or annuity principal, agent or broker;
o providing financial or investment advice;
o issuing or selling interests in pools of assets that a bank
could hold;
o all underwriting, dealing in or making markets in securities
without any revenue limitation;
o engaging within the United States in any activity that a bank
holding company could engage in outside of the country, if the
FRB determined, before the GLB Act, that the activity was usual
in connection with banking or other financial operations
internationally;
o sponsoring and distributing all types of mutual funds;
o investment company activities;
o merchant banking equity investment activities;
o insurance company equity investments; and
o engaging in any activity that the FRB determined before the GLB
Act to be permitted for a bank holding company that is not an
FHC.
The most significant of the new activities authorized by the GLB Act are
merchant banking and insurance company portfolio investment powers. Before
enactment of the GLB Act, bank holding companies were limited in their ability
to make equity investments, including controlling equity investments, to
entities that were engaged in activities that were closely related to the
business of banking. At the same time securities and insurance companies were
free to make merchant banking and insurance company portfolio investments in
virtually any kind of financial or non-financial company. Recognizing that such
investments are financial in nature, the
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GLB Act substantially expands the authority of an FHC to make controlling equity
investments in any kind of entity, including those engaged in non-financial
activities.
Merchant Banking. The GLB Act permits FHC's to make controlling equity
investments in virtually any business entity (including those that engage in
non-financial activities) by permitting the FHC to engage in merchant banking
activities. In order to engage in merchant banking activities:
o the investment must not be made by a depository institution
subsidiary of the FHC, or by a subsidiary of a depository
institution;
o the FHC must own a securities affiliate;
o the investment must be made as part of a bona fide underwriting
or merchant or investment banking activity, including investment
activities engaged in for the purpose of appreciation and
ultimate resale or disposition of the investment;
o the investment must be held for a period of time to enable the
sale or disposition thereof on a reasonable basis consistent
with the financial viability of the bona fide underwriting or
merchant or investment banking activity; and
o the FHC must not routinely manage or operate the entity in which
the investment is made, except as may be required to obtain a
reasonable return on investment upon sale or disposition.
Insurance Company Portfolio Investments. The GLB Act permits FHCs to
affiliate with insurance companies. The GLB Act recognizes that, as part of
their ordinary business, insurance companies frequently invest funds received
from policy holders in most or all of the shares of stock of a company that may
not be engaged in a financial activity. New Section 4(k)(4)(I) of the BHCA
permits an insurance company that is affiliated with a depository institution to
continue insurance company portfolio investment activities, provided that
certain requirements are met. Specifically, the investments held by an insurance
company affiliate of a depository institution must:
o be acquired and held by an insurance company that is
predominantly engaged in underwriting life, accident and health,
or property and casualty insurance, or in providing and issuing
annuities;
o represent investments made in the ordinary course of the
insurance company's business, according to relevant state
insurance laws governing such investments; and
o not be routinely managed or operated by the FHC, except as may
be necessary or required to obtain a reasonable return.
To the extent that an FHC does participate in management of the portfolio,
participation would be limited to safeguarding the investments under the
applicable requirements of state insurance laws.
The GLB Act imposes other restrictions on equity investment activities
of FHCs. First, a depository institution controlled by an FHC may not cross
market the products or services of a company in which the FHC has made a
merchant banking or insurance company portfolio investment (a "portfolio
company"), and vice versa. However, the GLB Act does not prevent a nonbank
affiliate of an FHC and a portfolio company from cross marketing each other's
products.
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Second, a controlling investment made pursuant to the GLB Act's merchant
banking or insurance company portfolio investment authority would make the
portfolio company an "affiliate" of the FHC's depository institution for
purposes of Sections 23A and 23B of the Federal Reserve Act. Moreover, the GLB
Act establishes a presumption that an investment of 15% or more in the equity of
a portfolio company will make the portfolio company an affiliate. Thus, an
affiliated depository institution's credit and asset purchase transactions will
be subject to the "covered transaction" restrictions of Sections 23A and 23B of
the Federal Reserve Act, including quantitative limits, collateral requirements,
and the "arms'-length" transaction standard.
The Riegle-Neal Act was amended to apply its prohibitions against
establishment of deposit production offices to interstate branches acquired or
established under the GLB Act, including all branches of a bank owned by an
out-of-state bank holding company.
Preemption of State Law. The GLB Act affirms that the states are the
primary legal authority to regulate the insurance business and related
activities. However, in their regulation of insurance activities, state laws are
pre-empted to the extent that they prohibit the affiliations permitted under the
GLB Act. States may not prevent or restrict depository institutions or their
affiliates from engaging in any activity permitted under the GLB Act, such as
insurance sales, solicitations and cross-marketing. States, however are allowed
to continue regulating other insurance activities such as licensing and
requiring that insurance companies maintain certain levels of capital.
Additionally, state regulation of other activities is not pre-empted,
even if they do prevent or restrict an activity permitted under the GLB Act, so
long as they do not discriminate. Consequently, state securities regulations are
not pre-empted with respect to a state's ability to investigate and enforce
certain unlawful transactions or require licensing. Similarly, state corporation
and antitrust laws are not pre-empted so long as such laws are consistent with
the intent of the Financial Modernization Act permitting affiliations.
Streamlining Supervision of Bank Holding Companies. The GLB Act
authorizes the FRB to examine each holding company and its subsidiaries. The
legislation provides that the FRB may require a bank holding company or any
subsidiary to submit reports regarding: financial condition; monitoring of
financial and operating risks; transactions with depository institutions; and
compliance with the BHCA and other laws that the FRB has jurisdiction to
enforce. The FRB, however, is directed to use existing examination reports
prepared by functional regulators of the particular activity, publicly reported
information and reports filed with other agencies to the fullest extent
possible.
The FRB may only directly examine subsidiaries that are functionally
regulated by other federal or state agencies if it:
o has a reasonable basis to believe that the subsidiary is engaged
in activities that pose a material risk to an affiliated
depository institution;
o reasonably believes, after reviewing the relevant reports, that
examining the subsidiary is necessary to adequately provide
information regarding its risk monitoring systems; or
o has a reasonable basis to believe that the subsidiary is not in
compliance with the BHCA or other federal law that the FRB has
specific authority to enforce, and the FRB cannot make the
determination through an examination of an affiliated depository
institution or the holding company.
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The FRB is not authorized to mandate capital requirements for any
subsidiary that is functionally regulated by another agency and which is in
compliance with the capital requirements prescribed by another federal or state
regulatory authority. Insurance and securities activities conducted in regulated
entities are subject to functional regulation by relevant state insurance
authorities and the Securities and Exchange Commission (the "SEC"),
respectively.
Also, the FRB cannot force a broker-dealer or insurance company that is
a bank holding company to contribute additional capital to a depository
institution, if the company's functional regulator determines, in writing, that
the contribution would have a material adverse effect on the broker-dealer or
insurance holding company. If a functional regulator, however, makes such a
determination, the FRB has authority to require the bank holding company to
divest its interests in the depository institution. The limitations on the FRB
also apply to all federal banking agencies. Thus, the Office of the Comptroller
of the Currency (the "OCC") which regulates national banks, the OTS, and the
FDIC will not be able to assume and duplicate the function of being the general
supervisory authority over functionally regulated subsidiaries of banks.
However, the GLB Act specifically preserves the FDIC's authority to examine a
functionally regulated affiliate of an insured depository institution, if it is
necessary to protect the deposit insurance fund.
The GLB Act also specifically limits the FRB's ability to take indirect
action against functionally regulated affiliates. Consequently, the FRB may not
promulgate rules, adopt restrictions, safeguards or any other requirement
affecting a functionally regulated affiliate unless:
o the action is necessary to address a "material risk" to the
safety and soundness of a depository institution affiliate or to
the domestic or international payments system; and
o it is not possible to guard against that material risk through
requirements imposed upon the depository institution directly.
Subsidiaries of National Banks. In addition to the permissible statutory
subsidiaries (agricultural credit corporations, bank service companies and
community development corporations, etc.) and operating subsidiaries
(subsidiaries engaged in activities that a national bank itself can perform),
the GLB Act permits national banks to establish and operate a third class of
subsidiary known as a financial subsidiary. A financial subsidiary is a
subsidiary that performs financial activities that a national bank either cannot
otherwise perform itself, or that a national bank cannot otherwise own if not
for the enabling provisions of GLB Act.
Financial activities for national banks are essentially the same as
those for FHCs. Thus, national banks, through financial subsidiaries, are
permitted to engage in the enumerated financial activities authorized by the GLB
Act. However, the following activities, although permissible for FHCs, are
prohibited for financial subsidiaries of national banks and can only be
performed in nonbank subsidiaries of FHCs. These prohibited activities are:
o insurance or annuity underwriting, except that underwriting
title insurance is permitted for national banks in those states
where state-chartered banks may do so;
o insurance company portfolio investments;
o merchant banking; and
o real estate investment and development activities beyond those
directly authorized by law.
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The Secretary, in concert with the FRB, may jointly adopt rules lifting
the insurance underwriting, insurance company portfolio investment, and merchant
banking prohibitions beginning November 12, 2004. Additionally, the Secretary,
in conjunction with the FRB, has the authority to determine whether additional
activities are financial in nature and must follow the same evaluation criteria
that the FRB uses in determining additional financial activities for FHC
purposes.
On January 19, 2000, the OCC issued a proposal to amend Part 5 of its
regulations to provide that a national bank may establish a financial subsidiary
if:
o the national bank and its depository institution affiliates meet
the same "well capitalized," "well managed" and "satisfactory"
CRA rating standards for banking subsidiaries of FHCs;
o the aggregate consolidated financial assets of all of the
national bank's financial subsidiaries does not exceed the
lesser of 45% of the consolidated net assets of the parent bank
or $50 billion; and
o a national bank that is one of the nation's 100 largest insured
banks, determined on the basis of consolidated total assets, has
at least one issue of outstanding eligible debt that is rated in
one of the three highest investment grade categories.
The proposed regulations provide for a filing and notification process.
Once expanded activities have commenced in a financial subsidiary, the proposed
regulations require a national bank to comply with certain conditions in order
to ensure that proper safeguards are implemented. These conditions include, but
are not limited to:
o requiring the national bank to deduct the total amount of its
investment in the financial subsidiary from its assets and
equity for purposes of determining regulatory capital, and
presenting the information separately in any published financial
statements for the bank;
o prohibiting the consolidation of the financial subsidiary's
assets and liabilities with those of the bank;
o requiring the national bank to establish adequate policies and
procedures to maintain the separate corporate identities of the
bank and its financial subsidiaries; and
o requiring adoption and implementation of policies and procedures
to identify and manage financial and operational risks
associated with the financial subsidiary.
Subsidiaries of State-Chartered Nonmember Banks. The GLB Act added
Section 46 to the Federal Deposit Insurance Act (the "FDI Act") which permits
state nonmember banks to hold interests in a subsidiary that are essentially
equivalent to a national bank's financial subsidiary. Additionally, the state
nonmember bank must comply with substantially all of the requirements and
conditions imposed on national banks in order to qualify and maintain their
investments in financial subsidiaries established under the GLB Act, except that
there is no requirement that the state nonmember bank be "well managed."
However, the FDI Act requires the FDIC's consent to an investment in any
financial subsidiary of a state-chartered institution. (See - 5. Expanded
Enforcement Powers - Activities of State Banks herein.)
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BROKER-DEALER ACTIVITIES. The GLB Act provides for the functional
regulation of bank securities activities by the SEC. The GLB Act replaces the
broad bank exemption from broker-dealer regulation under the Securities Exchange
Act of 1934 ( the "'34 Act"). The amendments include certain previously excluded
activities within the definition of "broker" and "dealer," thereby subjecting
those activities to the registration requirements and regulation of the '34 Act,
with an exception for certain activities in which banks have traditionally
engaged. These exemptions relate to:
o third-party networking arrangements;
o trustee and fiduciary activities if the bank: (i) is chiefly
compensated by means of administration and certain other fees;
and (ii) does not publicly solicit brokerage deposits; and
o identified banking products such as commercial paper, bankers'
acceptances, employee and shareholder benefit plans, sweep
accounts, affiliate transactions, private placements,
safekeeping and custody services, asset-backed securities,
derivatives and other identified banking products.
The GLB Act also amends the Investment Company Act and the Investment
Advisers Act, subjecting banks that advise mutual funds to the same regulatory
scheme as other advisers to mutual funds. It also requires banks to make
additional disclosures when a fund is sold or advised by a bank.
INSURANCE ACTIVITIES. In addition to affirming that states are the
functional regulators of insurance activities, the GLB Act prohibits
federally-chartered banks from engaging in any activity involving the
underwriting and sale of title insurance. National banks may, however, sell
title insurance products in any state in which state-chartered banks are
permitted to do so, so long as those activities are undertaken in the same
manner, to the same extent, and under the same restrictions that apply to
state-chartered banks.
The GLB Act requires the federal bank regulatory agencies and state
insurance regulators to coordinate efforts to supervise companies that control
both depository institutions and entities engaged in the insurance business, and
to share supervisory information including financial condition and affiliate
transactions on a confidential basis. Federal agencies are further directed to
provide notice to and consult with state regulators before taking actions which
affect any affiliates engaging in insurance activities.
UNITARY SAVINGS AND LOAN HOLDING COMPANY PROVISIONS. The GLB Act amends
the Home Owners' Loan Act (the "HOLA") to prohibit unitary savings and loan
holding companies from engaging in non-financial activities or affiliations with
non-financial organizations. The prohibition applies to applications to form
unitary savings and loan holding companies filed with the OTS after May 4, 1999.
Unitary savings and loan holding companies existing or whose applications were
pending on or before May 4, 1999, retain their authority to engage in
nonfinancial activities and affiliations.
The prohibition on non-financial affiliations, however, does not prevent
transactions that involve corporate reorganizations. Specifically, it does not
prohibit transactions that solely involve an acquisition, merger, consolidation
or other type of business combination of a savings and loan holding company (or
any savings association subsidiary) with another company, where both are under
common control.
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CONSUMER PRIVACY PROTECTION. The GLB Act enhances financial privacy laws
by imposing an affirmative and continuing obligation to respect the privacy and
protect the confidentiality of nonpublic personal customer information provided
by a consumer to a financial institution, or otherwise obtained by the financial
institution. For purposes of the privacy provisions of the GLB Act, a financial
institution means any entity engaging in the financial activities that are
listed in the new Section 4(k) of the of the BHCA. Thus, the privacy protections
extend to all entities engaged in financial activities defined in the GLB Act,
whether or not they are affiliated with banks or bank holding companies, FHCs or
banks.
The GLB Act also makes it a federal crime to obtain, attempt to obtain,
disclose, cause to be disclosed or attempt to cause to be disclosed customer
information of a financial institution through fraudulent or deceptive means.
These include misrepresenting the identity of the person requesting the
information and misleading an institution or customer into making unwitting
disclosures of confidential information. In addition to criminal sanctions, the
legislation provides for a private right of action and enforcement by state
attorneys general.
FEDERAL HOME LOAN BANK SYSTEM MODERNIZATION. The Federal Home Loan Bank
System Modernization Act of 1999 (the "FHLBSMA") was enacted as part of the GLB
Act. The FHLBSMA reforms the Federal Home Loan Bank System (the "FHLBS") in
several ways. The more significant changes include:
o voluntary rather than mandatory membership of federal savings
associations in the FHLBS;
o permitting all community financial institutions (i.e.
institutions whose deposits are insured by the FDIC and have
less than $500 million in average total assets) to obtain
advances from Federal Home Loan Banks; and
o permitting any community financial institution greater access to
FHLBS credit facilities by expanding the types of assets that
may be pledged as collateral, including small business,
agricultural, rural development, or low-income community
development loans.
In addition, a number of restrictions that had applied to FHLBS member
institutions which did not comply with the Qualified Thrift Lender ("QTL")
requirements under the HOLA were abolished, including: the Federal Home Loan
Bank stock purchase requirements; the requirement that advances only be given
for housing related purposes; the 30% limit on total advances for non-QTL
members; and certain restrictions that applied to non-QTL thrift institutions.
COMMUNITY REINVESTMENT ACT PROVISIONS. In addition to the maintenance of
at least a "satisfactory" CRA rating in order to qualify for expanded
activities, the GLB Act amends the FDIA to require full disclosure of agreements
entered into between an insured depository institution or its affiliates and
non-governmental entities or persons made under or in connection with
fulfillment of the CRA. These agreements are to be made available to the public
and federal regulatory agencies. Annually, the parties to each CRA agreement are
required to report the use of resources provided to the participating bank's
primary federal regulator.
Other provisions affecting the CRA include:
o reducing the frequency of CRA examinations for banks with less
than $250 million in assets to once every five years if they
have "outstanding" CRA ratings, and once every four years if
they have "satisfactory" ratings;
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o requiring an FRB study of the default rates, delinquency rates
and profitability of CRA loans; and
o requiring a Treasury study of whether adequate services are
being provided under the CRA.
OTHER PROVISIONS. Other provisions of the GLB Act include, but are not
limited to:
o requiring ATM operators who impose a fee for use of an ATM by a
non-customer to post notice on the ATM and on the screen that a
fee will be charged, the amount of the fee and that no fee will
be imposed unless such notices are made and the customer elects
to proceed with the transaction;
o requiring a General Accounting Office study of possible
revisions to the Internal Revenue Code's Subchapter S
corporation rules to permit greater access by community banks to
Subchapter S tax treatment; and
o requiring a General Accounting Office study analyzing the
conflict of interest faced by the FRB between its role as a
primary regulator of the banking industry and its role as a
vendor of services to the banking and financial services
industry.
CONCLUSION. The provisions of the GLB Act are numerous and become
effective at various times between the date of enactment and the middle of 2001
and beyond. Additionally, various federal regulatory authorities including the
FRB, OCC, FDIC, OTS and SEC have only started to promulgate the regulations and
interpretations required by the GLB Act. Furthermore, procedures for the
coordination of information among regulators, both state and federal, have yet
to be formulated. Management of the Company and the Banking Subsidiaries,
therefore, cannot estimate with any degree of certainty the effect that the GLB
Act, future regulations and future regulatory information sharing will have on
the financial condition, results of operations or future prospects of the
Company or the Banking Subsidiaries.
Finally, the provisions of the GLB Act, particularly those permitting
affiliations and expansion of activities, may prompt mergers, joint ventures,
partnerships and other affiliations among providers of banking, insurance and
securities services, both domestically and internationally. The extent and
magnitude of these affiliations and their impact on the Company, the Banking
Subsidiaries or on the banking industry in general cannot be predicted.
2. INTERSTATE BANKING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle- Neal Act") allows banks to open branches across state lines and
also amended the BHCA to make it possible for bank holding companies to buy
out-of-state banks in any state and convert them into interstate branches.
The amendment to the Bank Holding Company Act permits bank holding
companies to acquire banks in other states provided that the acquisition does
not result in the bank holding company controlling more than 10 percent of the
deposits in the United States, or 30 percent of the deposits in the state in
which the bank to be acquired is located. However, the Riegle-Neal Act also
provides that states have the authority to waive the state concentration limit.
Individual states may also require that the bank being acquired be in existence
for up to five years before an out-of-state bank or bank holding company may
acquire it.
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The Riegle-Neal Act permits interstate branching through merging of
existing banks, provided that the banks are at least adequately capitalized and
demonstrate good management. The states were also authorized to enact laws to
permit interstate banks to branch de novo. Federal savings banks may establish,
retain and operate branches outside of the state in which its home office is
located as long as, among other conditions, they qualify as a domestic building
association under the Internal Revenue Code of 1986, as amended, and they meet
certain requirements as to asset composition or qualify as a "Qualified Thrift
Lender" pursuant to the HOLA. All banks, however, are prohibited from using the
interstate branching authority of the Riegle-Neal Act for the primary purpose of
deposit production or the establishment of deposit production offices. (See "-
1. Gramm-Leach-Bliley Act - Facilitating Affiliations and Expansion of Financial
Activities" herein.)
The California Interstate Banking and Branching Act of 1995 ("CIBBA")
authorized out-of-state banks to enter California by the acquisition of or
merger with a California bank that has been in existence for at least five
years, unless the California bank is in danger of failing or in certain other
emergency situations, but limits interstate branching into California to
branching by acquisition of an existing bank. CIBBA allows a California state
bank to have agency relationships with affiliated and unaffiliated insured
depository institutions and allows a bank subsidiary of a bank holding company
to act as an agent to receive deposits, renew time deposits, service loans and
receive payments for a depository institution affiliate.
3. FEDERAL DEPOSIT INSURANCE
GENERAL. The Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA") has resulted in major changes in the regulation of
insured financial institutions, including significant changes in the authority
of government agencies to regulate insured financial institutions.
Under FIRREA, virtually all federal deposit insurance activities were
consolidated under the FDIC, including insuring deposits of federal savings
associations, state chartered savings and loans and other depository
institutions determined to be operated in substantially the same manner as a
savings association. FIRREA established two deposit insurance funds to be
administered by the FDIC. The money in these two funds is separately maintained
and not commingled. The Bank Insurance Fund (the "BIF") insures deposits of
commercial banking institutions and the Savings Association Insurance Fund (the
"SAIF") replaced the deposit insurance fund administered by the Federal Savings
and Loan Insurance Corporation. Insurance of deposits may be terminated by the
FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.
DEPOSIT INSURANCE ASSESSMENTS. Under FIRREA, the premium assessments
made on banks and savings associations for deposit insurance were initially
increased, with rates set separately for banks and savings associations, subject
to statutory restrictions.
Since 1994, the FDIC has assessed deposit insurance premiums pursuant to
a risk-based assessment system, under which an institution's premium assessment
is based on the probability that the deposit insurance fund will incur a loss
with respect to the institution, the likely amount of such loss, and the revenue
needs of the deposit insurance fund. Under the risk-based assessment system, BIF
member institutions such as VIB and Kings River are categorized into one of
three capital categories (well capitalized, adequately capitalized, and
undercapitalized) and one of three categories based on supervisory evaluations
by its primary federal regulator (in VIB's case, the
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FRB and in Kings River's case, the FDIC). The three supervisory categories are:
financially sound with only a few minor weaknesses (Group A), demonstrates
weaknesses that could result in significant deterioration (Group B), and poses a
substantial probability of loss (Group C). The capital and supervisory group
ratings for SAIF institutions are the same as for BIF institutions. The capital
ratios used by the FRB, the FDIC and in the case of Stockdale, the OTS, to
define well-capitalized, adequately capitalized and undercapitalized are the
same as in the prompt corrective action regulations (discussed below). The BIF
and SAIF assessment rates since January 1, 1997 are summarized below; assessment
figures are expressed in terms of cents per $100 in insured deposits.
ASSESSMENT RATES EFFECTIVE JANUARY 1, 1997
<TABLE>
<CAPTION>
SUPERVISORY GROUP
--------------------------------------
CAPITAL GROUP GROUP A GROUP B GROUP C
- ------------- ------- ------- -------
<S> <C> <C> <C>
Well Capitalized ........... 0 3 17
Adequately Capitalized ..... 3 10 24
Undercapitalized ........... 10 24 27
</TABLE>
Stockdale pays its normal deposit insurance premiums as a member of the
SAIF. In addition, Stockdale also pays an assessment towards the retirement of
the Financing Corporation bonds ("FICO Bonds") issued in the 1980s to assist in
the recovery of the savings and loan industry. Commencing the first quarter of
1997, banks were required to share in the payment of interest on the FICO Bonds.
Previously, the FICO debt was paid solely out of the SAIF assessment base. Prior
to January 1, 2000, the FICO assessments imposed on BIF insured institutions
were assessed at a rate equal to 1/5 of the rate of the assessments imposed on
SAIF insured depository institutions. Between the first quarter of 1997 and the
fourth quarter of 1999, the quarterly FICO assessment rates for SAIF insured
institutions ranged from a high of $.0650 to a low of $.0582 per $100 in insured
deposits. The BIF assessment rate for the same period ranged from a high of
$.0130 to a low of $.01164 per $100 in insured deposits. The rates equalized
effective January 1, 2000 at $.0212 per $100 in insured deposits. Although the
FICO assessment rates are annual rates, they are subject to change quarterly.
Since the FICO bonds do not mature until the year 2019, it is conceivable that
banks and savings associations will continue to share in the payment of the
interest on the bonds until then.
With certain limited exceptions, FIRREA prohibits a bank from changing
its status as an insured depository institution with the BIF to the SAIF and
prohibits a savings association from changing its status as an insured
depository institution with the SAIF to the BIF, without the prior approval of
the FDIC.
FDIC RECEIVERSHIPS. Pursuant to FIRREA, the FDIC may be appointed
conservator or receiver of any insured bank or savings association. In addition,
FIRREA authorized the FDIC to appoint itself as sole conservator or receiver of
any insured state bank or savings association for any, among others, of the
following reasons:
o insolvency of such institution;
o substantial dissipation of assets or earnings due to any
violation of law or regulation or any unsafe or unsound
practice;
o an unsafe or unsound condition to transact business, including
substantially insufficient capital or otherwise;
o any willful violation of a cease and desist order which has
become final;
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o any concealment of books, papers, records or assets of the
institution;
o the likelihood that the institution will not be able to meet the
demands of its depositors or pay its obligations in the normal
course of business;
o the incurrence or likely incurrence of losses by the institution
that will deplete all or substantially all of its capital with
no reasonable prospect for the replenishment of the capital
without federal assistance; or
o any violation of any law or regulation, or an unsafe or unsound
practice or condition which is likely to cause insolvency or
substantial dissipation of assets or earnings, or is likely to
weaken the condition of the institution or otherwise seriously
prejudice the interest of its depositors.
As a receiver of any insured depository institution, the FDIC may
liquidate such institution. The liquidation must be done in an orderly manner.
The FDIC may also dispose of any matter concerning the institution that the FDIC
determines to be in the institution's, its depositors' and the FDIC's best
interests. Additionally, the FDIC, as the conservator or receiver, succeeds to
all rights, titles, powers and privileges of the insured institution.
Consequently, the FDIC may take over the assets of and operate an institution
with all the powers of its members, shareholders, directors or officers, and
conduct all business of the institution, collect all obligations and money due
to the institution, and preserve and conserve the assets and property of the
institution.
ENFORCEMENT POWERS. Some of the most significant provisions of FIRREA
were the expansion of regulatory enforcement powers. FIRREA has given the
federal regulatory agencies broader and stronger enforcement authorities
reaching a wider range of persons and entities. Some of those provisions
included those which:
o expanded the category of persons subject to enforcement under
the Federal Deposit Insurance Act;
o expanded the scope of cease and desist orders and provided for
the issuance of temporary cease and desist orders;
o provided for the suspension and removal of wrongdoers on an
expanded basis and on an industry-wide basis;
o prohibited the participation of persons suspended or removed or
convicted of a crime involving dishonesty or breach of trust
from serving in another insured institution;
o required the regulators to publicize all final enforcement
orders; and
o provided for extensive increases in the amounts and
circumstances for assessment of civil money penalties, civil and
criminal forfeiture and other civil and criminal fines and
penalties.
CRIME CONTROL ACT OF 1990. The Crime Control Act of 1990 further
strengthened the authority of federal regulators to enforce capital
requirements, increased civil and criminal penalties for financial fraud, and
enacted provisions allowing the FDIC to regulate or prohibit
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certain forms of golden parachute benefits and indemnification payments to
officers and directors of financial institutions.
4. RISK-BASED CAPITAL GUIDELINES
GENERAL. The federal banking agencies have established minimum capital
standards known as risk-based capital guidelines. The risk-based capital
guidelines include both a new definition of capital and a framework for
calculating the amount of capital that must be maintained against a bank's
assets and off balance sheet items. The amount of capital required to be
maintained is based upon the credit risks associated with a bank's types of
assets and off-balance sheet items. A bank's assets and off balance sheet items
are classified under several risk categories, with each category assigned a
particular risk weighting from 0% to 100%. A bank's risk-based capital ratio is
calculated by dividing its qualifying capital which is the numerator of the
ratio, by the combined risk weights of its assets and off balance sheet items
which is the denominator of the ratio.
QUALIFYING CAPITAL. A bank's qualifying total capital consists of two
types of capital components: "core capital elements," known as Tier 1 capital
and "supplementary capital elements," known as Tier 2 capital. The Tier 1
component of a bank's qualifying capital must represent at least 50% of
qualifying total capital and may consist of the following items that are defined
as core capital elements:
o common stockholders' equity;
o qualifying noncumulative perpetual preferred stock (including
related surplus); and
o minority interests in the equity accounts of consolidated
subsidiaries.
The Tier 2 component of a bank's qualifying total capital may consist of the
following items:
o a portion of allowance for loan and lease losses;
o certain types of perpetual preferred stock and related surplus;
o certain types of hybrid capital instruments and mandatory
convertible debt securities; and
o a portion of term subordinated debt and intermediate-term
preferred stock, including related surplus.
RISK WEIGHTED ASSETS AND OFF BALANCE SHEET ITEMS. Assets and credit
equivalent amounts of off-balance sheet items are assigned to one of several
broad risk classifications, according to the obligor or, if relevant, the
guarantor or the nature of collateral. The aggregate dollar value of the amount
in each risk classification is then multiplied by the risk weight associated
with that classification. The resulting weighted values from each of the risk
classification are added together. This total is the bank's total risk weighted
assets comprising the denominator of the risk-based capital ratio.
Risk weights for off-balance sheet items, such as unfunded loan
commitments, letters of credit and recourse arrangements, are determined by a
two-step process. First, the "credit equivalent amount" of the off-balance sheet
items is determined, in most cases by multiplying the off-balance sheet item by
a credit conversion factor. Second, the credit equivalent amount is
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treated like any balance sheet asset and is assigned to the appropriate risk
category according to the obligor or, if relevant, the guarantor or the nature
of the collateral.
MINIMUM CAPITAL STANDARDS. The supervisory standards set forth below
specify minimum capital ratios based primarily on broad risk considerations. The
risk-based ratios do not take explicit account of the quality of individual
asset portfolios or the range of other types of risks to which banks may be
exposed, such as interest rate, liquidity, market or operational risks. For this
reason, banks are generally expected to operate with capital positions above the
minimum ratios.
All banks are required to meet a minimum ratio of qualifying total
capital to risk weighted assets of 8%. At least 4% must be in the form of Tier 1
capital, net of goodwill, and a minimum ratio of Tier 1 capital to risk weighted
assets of 4%. The maximum amount of supplementary capital elements that
qualifies as Tier 2 capital is limited to 100% of Tier 1 capital net of
goodwill. In addition, the combined maximum amount of subordinated debt and
intermediate-term preferred stock that qualifies as Tier 2 capital is limited to
50% of Tier 1 capital. The maximum amount of the allowance for loan and lease
losses that qualifies as Tier 2 capital is limited to 1.25% of gross risk
weighted assets. The allowance for loan and lease losses in excess of this limit
may, of course, be maintained, but would not be included in a bank's risk-based
capital calculation.
Federal banking agencies also require all banks to maintain a minimum
amount of Tier 1 capital to total assets, referred to as the leverage ratio. For
a bank rated in the highest of the five categories used by regulators to rate
banks, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For
all banks not rated in the highest category, the minimum leverage ratio must be
at least 4% to 5%. These uniform risk-based capital guidelines and leverage
ratios apply across the industry. Regulators, however, have the discretion to
set minimum capital requirements for individual institutions which may be
significantly above the minimum guidelines and ratios.
OTHER FACTORS AFFECTING MINIMUM CAPITAL STANDARDS. The federal banking
agencies have established certain benchmark ratios of loan loss reserves to be
held against classified assets. The benchmark set forth by the policy statement
is the sum of:
o 100% of assets classified loss;
o 50% of assets classified doubtful;
o 15% of assets classified substandard; and
o estimated credit losses on other assets over the upcoming twelve
months.
The federal banking agencies have recently revised their risk-based
capital rules to take account of concentrations of credit and the risks of
non-traditional activities. Concentrations of credit refers to situations where
a lender has a relatively large proportion of loans involving a single borrower,
industry, geographic location, collateral or loan type. Non-traditional
activities are considered those that have not customarily been part of the
banking business, but are conducted by a bank as a result of developments in,
for example, technology, financial markets or other additional activities
permitted by law or regulation. The regulations require institutions with high
or inordinate levels of risk to operate with higher minimum capital standards.
The federal banking agencies also are authorized to review an institution's
management of concentrations of credit risk for adequacy and consistency with
safety and soundness standards regarding internal controls, credit underwriting
or other operational and managerial areas.
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Further, the banking agencies recently have adopted modifications to the
risk-based capital rules to include standards for interest rate risk exposure.
Interest rate risk is the exposure of a bank's current and future earnings and
equity capital to adverse movements in interest rates. While interest rate risk
is inherent in a bank's role as financial intermediary, it introduces volatility
to bank earnings and to the economic value of the bank. The banking agencies
have addressed this problem by implementing changes to the capital standards to
include a bank's exposure to declines in the economic value of its capital due
to changes in interest rates as a factor that they will consider in evaluating
an institution's capital adequacy. A bank's interest rate risk exposure is
assessed by its primary federal regulator on an individualized basis, and it may
be required by the regulator to hold additional capital if it has a significant
exposure to interest rate risk or a weak interest rate risk management process.
The federal banking agencies also limit the amount of deferred tax
assets that are allowable in computing a bank's regulatory capital. Deferred tax
assets that can be realized for taxes paid in prior carryback years and from
future reversals of existing taxable temporary differences are generally not
limited. However, deferred tax assets that can only be realized through future
taxable earnings are limited for regulatory capital purposes to the lesser of:
o the amount that can be realized within one year of the
quarter-end report date; or
o 10% of Tier 1 capital.
The amount of any deferred tax in excess of this limit would be excluded from
Tier 1 capital, total assets and regulatory capital calculations.
5. EXPANDED ENFORCEMENT POWERS
GENERAL. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") recapitalized the FDIC's Bank Insurance Fund, granted broad
authorization to the FDIC to increase deposit insurance premium assessments and
to borrow from other sources, and continued the expansion of regulatory
enforcement powers, along with many other significant changes.
PROMPT CORRECTIVE ACTION. FDICIA established five categories of bank
capitalization: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized" and mandated the establishment of a system of "prompt
corrective action" for institutions falling into the lower capital categories.
Under the regulations, a bank shall be deemed to be:
o "well capitalized" if it has a total risk-based capital ratio of
10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or
more, has a leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a
specific capital level for any capital measure;
o "adequately capitalized" if it has a total risk-based capital
ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0%
or more and a leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well
capitalized";
o "undercapitalized" if it has a total risk-based capital ratio
that is less than 8.0%, a Tier 1 risk-based capital ratio that
is less than 4.0%, or a leverage capital ratio that is less than
4.0% (3.0% under certain circumstances);
31
<PAGE> 32
o "significantly undercapitalized" if it has a total risk-based
capital ratio that is less than 6.0%, a Tier 1 risk-based
capital ratio that is less than 3.0% or a leverage capital ratio
that is less than 3.0%; and
o "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
Banks are prohibited from paying dividends or management fees to
controlling persons or entities if, after making the payment the bank would be
undercapitalized, that is, the bank fails to meet the required minimum level for
any relevant capital measure. Asset growth and branching restrictions apply to
undercapitalized banks, which are required to submit acceptable capital plans
guaranteed by its holding company, if any. Broad regulatory authority was
granted with respect to significantly undercapitalized banks, including forced
mergers, growth restrictions, ordering new elections for directors, forcing
divestiture by its holding company, if any, requiring management changes, and
prohibiting the payment of bonuses to senior management. Even more severe
restrictions are applicable to critically undercapitalized banks, those with
capital at or less than 2%, including the appointment of a receiver or
conservator after 90 days, even if the bank is still solvent. All of the federal
banking agencies have promulgated substantially similar regulations to implement
this system of prompt corrective action.
Information concerning the Company's capital adequacy at December 31,
1999 and on a pro forma basis, giving effect to the acquisition of Kings River,
is as follows:
<TABLE>
<CAPTION>
AMOUNT TO
BE "WELL
MINIMUM CAPITALIZED"
AMOUNT UNDER
FOR PROMPT
ACTUAL PRO FORMA CAPITAL MINIMUM CORRECTIVE
------------------- ----------------- ADEQUACY REGULATORY ACTION
AMOUNT RATIO AMOUNT RATIO PURPOSES RATIO PROVISIONS RATIO
------ ----- ------ ----- -------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Capital (To Risk-
Weighted Assets) ............... $85,576 11.9% $73,014 9.4% $62,448 8.0% $78,059 10.0%
Tier 1 Capital (To Risk-
Weighted Assets) ............... 78,381 10.9 65,165 8.3 31,224 4 46,836 6
Leverage Ratio (Tier 1 Capital
To Average Assets) ............. 78,381 8.9 65,165 6.7 38,918 4 48,648 5
</TABLE>
FDICIA and the implementing regulations also provide that a federal
banking agency may, after notice and an opportunity for a hearing, reclassify a
well capitalized institution as adequately capitalized and may require an
adequately capitalized institution or an undercapitalized institution to comply
with supervisory actions as if it were in the next lower category if the
institution is in an unsafe or unsound condition or engaging in an unsafe or
unsound practice. The FDIC may not, however, reclassify a significantly
undercapitalized institution as critically undercapitalized.
OPERATIONAL STANDARDS. FDICIA also granted the regulatory agencies
authority to prescribe standards relating to internal controls, credit
underwriting, asset growth and compensation, among others, and required the
regulatory agencies to promulgate regulations prohibiting excessive compensation
or fees. Many regulations have been adopted by the regulatory agencies to
implement these provisions and subsequent legislation (see -"6. Riegle Community
Development and Regulatory Improvement Act of 1994" herein) gave the regulatory
agencies the option of prescribing the safety and soundness standards as
guidelines rather than regulations.
32
<PAGE> 33
BROKERED DEPOSITS. Effective June 16, 1992, FDICIA placed restrictions
on the ability of banks to obtain brokered deposits or to solicit and pay
interest rates on deposits that are significantly higher than prevailing rates.
FDICIA provides that a bank may not accept, renew or roll over brokered deposits
unless: (i) it is "well capitalized"; or (ii) it is adequately capitalized and
receives a waiver from the FDIC permitting it to accept brokered deposits paying
an interest rate not in excess of 75 basis points over certain prevailing market
rates. FDIC regulations define brokered deposits to include any deposit
obtained, directly or indirectly, from any person engaged in the business of
placing deposits with, or selling interests in deposits of, an insured
depository institution, as well as any deposit obtained by a depository
institution that is not "well capitalized" for regulatory purposes by offering
rates significantly higher (generally more than 75 basis points) than the
prevailing interest rates offered by depository institutions in such
institution's normal market area. In addition to these restrictions on
acceptance of brokered deposits, FDICIA provides that no pass-through deposit
insurance will be provided to employee benefit plan deposits accepted by an
institution which is ineligible to accept brokered deposits under applicable law
and regulations.
LENDING. New regulations were issued in the area of real estate lending,
prescribing standards for extensions of credit that are secured by real property
or made for the purpose of the construction of a building or other improvement
to real estate. In addition, the aggregate of all loans to executive officers,
directors and principal shareholders and related interests may now not exceed
100% (200% in some circumstances) of the depository institution's capital.
FEDERAL HOME LOAN BANK SYSTEM. VIB and Stockdale are members of the
FHLBS. Among other benefits, each Federal Home Loan Bank serves as a reserve or
center bank for its members within its assigned region. Each FHLB makes
available to its members loans (i.e., advances) in accordance with the policies
and procedures established by the Board of Directors of the individual FHLB.
ACTIVITIES OF STATE BANKS. FDICIA imposed restrictions on the activities
of state-chartered banks which are otherwise authorized under state law.
Generally, FDICIA restricts investments and activities of state banks, either
directly or through subsidiaries, to those permissible for national banks,
unless the FDIC has determined that such activities would not pose a risk to the
insurance find of which the bank is a member and the bank is also in compliance
with applicable capital requirements. This restriction effectively eliminated
real estate investments authorized under California law.
6. RIEGLE COMMUNITY DEVELOPMENT AND REGULATORY IMPROVEMENT ACT OF 1994
The Riegle Community Development and Regulatory Improvement Act of 1994
(the "1994 Act") provides for funding for the establishment of a Community
Development Financial Institutions Fund (the "Fund"), which provides assistance
to new and existing community development lenders to help to meet the needs of
low- and moderate-income communities and groups. The 1994 Act also mandated
changes to a wide range of banking regulations. These changes included:
o less frequent regulatory examination schedules for small
institutions;
o amendments to the money laundering and currency transaction
reporting requirements of the Bank Secrecy Act; and
o amendments to the Truth in Lending Act to provide greater
protection for consumers by reducing discrimination against the
disadvantaged.
33
<PAGE> 34
The "Paperwork Reduction and Regulatory Improvement Act," Title III of
the 1994 Act, required the federal banking agencies to consider the
administrative burdens that new regulations will impose before their adoption
and required a transition period in order to provide adequate time for
compliance. This Act also required the federal banking agencies to work together
to establish uniform regulations and guidelines as well as to work together to
eliminate duplicative or unnecessary requests for information in connection with
applications or notices. The Paperwork Reduction and Regulatory Improvement Act
also amended the BHCA and Securities Act of 1933 to simplify the formation of
bank holding companies.
7. SAFETY AND SOUNDNESS STANDARDS
In July, 1995, the federal banking agencies adopted uniform guidelines
establishing standards for safety and soundness. The guidelines set forth
operational and managerial standards relating to internal controls, information
systems and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and compensation, fees and benefits and
asset quality and earnings. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
The federal banking agencies issued regulations prescribing uniform
guidelines for real estate lending. The regulations require insured depository
institutions to adopt written policies establishing standards, consistent with
such guidelines, for extensions of credit secured by real estate. The policies
must address loan portfolio management, underwriting standards and loan to value
limits that do not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
8. CONSUMER PROTECTION LAWS AND REGULATIONS
The bank regulatory agencies are focusing greater attention on
compliance with consumer protection laws and their implementing regulations.
Examination and enforcement have become more intense in nature, and insured
institutions have been advised to monitor carefully compliance with various
consumer protection laws and their implementing regulations. In addition to the
consumer privacy protections enacted pursuant to the GLB Act, banks are subject
to many other federal consumer protection laws and their regulations including,
but not limited to, the Community Reinvestment Act, the Truth in Lending Act
(the "TILA"), the Fair Housing Act (the "FH Act"), the Equal Credit Opportunity
Act (the "ECOA"), the Home Mortgage Disclosure Act ("HMDA"), and the Real Estate
Settlement Procedures Act ("RESPA").
34
<PAGE> 35
The CRA is intended to encourage insured depository institutions, while
operating safely and soundly, to help meet the credit needs of their
communities. The CRA specifically directs the federal bank regulatory agencies,
in examining insured depository institutions, to assess their record of helping
to meet the credit needs of their entire community, including low- and
moderate-income neighborhoods, consistent with safe and sound banking practices.
The CRA further requires the agencies to take a financial institution's record
of meeting its community credit needs into account when evaluating applications
for, among other things, domestic branches, consummating mergers or
acquisitions, or holding company formations.
The federal banking agencies have adopted regulations which measure a
bank's compliance with its CRA obligations on a performance-based evaluation
system. This system bases CRA ratings on an institution's actual lending service
and investment performance rather than the extent to which the institution
conducts needs assessments, documents community outreach or complies with other
procedural requirements. The ratings range from a high of "outstanding" to a low
of "substantial noncompliance."
The ECOA prohibits discrimination in any credit transaction, whether for
consumer or business purposes, on the basis of race, color, religion, national
origin, sex, marital status, age (except in limited circumstances), receipt of
income from public assistance programs, or good faith exercise of any rights
under the Consumer Credit Protection Act. In March, 1994, the Federal
Interagency Task Force on Fair Lending issued a policy statement on
discrimination in lending. The policy statement describes the three methods that
federal agencies will use to prove discrimination: overt evidence of
discrimination, evidence of disparate treatment and evidence of disparate
impact. This means that if a creditor's actions have had the effect of
discriminating, the creditor may be held liable -- even when there is no intent
to discriminate.
The FH Act regulates may practices, including making it unlawful for any
lender to discriminate in its housing-related lending activities against any
person because of race, color, religion, national origin, sex, handicap, or
familial status. The FH Act is broadly written and has been broadly interpreted
by the courts. A number of lending practices have been found to be, or may be
considered illegal under the FH Act, including some that are not specifically
mentioned in the FH Act itself. Among those practices that have been found to
be, or may be considered illegal under the FH Act are: declining a loan for the
purposes of racial discrimination; making excessively low appraisals of property
based on racial considerations; pressuring, discouraging, or denying
applications for credit on a prohibited basis; using excessively burdensome
qualifications standards for the purpose or with the effect of denying housing
to minority applicants; imposing on minority loan applicants more onerous
interest rates or other terms, conditions or requirements; and; racial steering,
or deliberately guiding potential purchasers to or away from certain areas
because of race.
The TILA is designed to ensure that credit terms are disclosed in a
meaningful way so that consumers may compare credit terms more readily and
knowledgeably. As a result of the TILA, all creditors must use the same credit
terminology and expressions of rates, the annual percentage rate, the finance
charge, the amount financed, the total payments and the payment schedule.
HMDA grew out of public concern over credit shortages in certain urban
neighborhoods. One purpose of HMDA is to provide public information that will
help show whether financial institutions are serving the housing credit needs of
the neighborhoods and communities in which they are located. HMDA also includes
a "fair lending" aspect that requires the collection and disclosure of data
about applicant and borrower characteristics as a way of identifying possible
discriminatory lending patterns and enforcing anti-discrimination statutes. HMDA
requires institutions to report data regarding applications for one-to-four
family loans, home improvement loans, and multifamily loans, as well as
information concerning originations and purchases of such
35
<PAGE> 36
types of loans. Federal bank regulators rely, in part, upon data provided under
HMDA to determine whether depository institutions engage in discriminatory
lending practices.
RESPA requires lenders to provide borrowers with disclosures regarding
the nature and costs of real estate settlements. Also, RESPA prohibits certain
abusive practices, such as kickbacks, and places limitations on the amount of
escrow accounts.
Violations of these various consumer protection laws and regulations can
result in civil liability to the aggrieved party, regulatory enforcement
including civil money penalties, and even punitive damages.
9. RECENT CALIFORNIA DEVELOPMENTS
Effective January 1, 1998, California legislation eliminated the
provisions regarding impairment of contributed capital and the assessment of
shares when there is an impairment in capital and added as additional grounds to
close a bank, if the Commissioner finds that the bank's tangible shareholders'
equity is less than the greater of 3% of the bank's total assets or $1 million.
In addition, California law provides the Commissioner with certain
additional enforcement powers. For example, if it appears to the Commissioner
that a bank is violating its articles of incorporation or state law, or is
engaging in unsafe or unsound business practices, the Commissioner can order the
bank to comply with the law or to cease the unsafe or injurious practices or the
Commissioner can close the bank. The Commissioner also has the power to suspend
or remove the bank's officers, directors and employees who: (i) violate any law,
regulation or fiduciary duty to the bank; (ii) engage in any unsafe or unsound
practices related to the business of the bank; or (iii) are charged with or
convicted of a crime involving dishonesty or breach of trust.
10. QUALIFIED THRIFT LENDER TEST
Savings associations, like Stockdale, must meet a QTL test, by
maintaining a specified level of assets in qualified thrift investments as
specified in the HOLA. If Stockdale maintains an appropriate level of certain
specified investments (primarily residential mortgages and related investments,
including certain mortgage-related securities) and otherwise qualifies as a QTL,
it will be allowed to establish and maintain interstate branches. The required
percentage under the HOLA is 65% of assets. An association must be in compliance
with the QTL test or the Internal Revenue Code's definition of a domestic
building and loan association in nine out of every 12 months. Associations that
fail to meet the QTL test will generally be prohibited from engaging in any
activity not permitted for both a national bank and a savings association. As of
December 31, 1999, Stockdale was in compliance with its QTL requirements.
11. CONCLUSION
As a result of the recent federal and California legislation, including
the GLB Act, there has been a competitive impact on commercial banking in
general and the business of the Company and the Banking Subsidiaries in
particular. There has been a lessening of the historical distinction between the
services offered by banks, savings and loan associations, credit unions,
securities dealers, insurance companies, and other financial institutions. Banks
have also experienced increased competition for deposits and loans which may
result in increases in their cost of funds, and banks have experienced increased
overall costs. Further, the federal banking agencies have increased enforcement
authority over banks and their directors and officers.
36
<PAGE> 37
Future legislation is also likely to impact the Company's business.
Consumer legislation has been proposed in Congress which may require banks to
offer basic, low-cost, financial services to meet minimum consumer needs.
Further, the regulatory agencies have proposed and may propose a wide range of
regulatory changes, including the calculation of capital adequacy and limiting
business dealings with affiliates. These and other legislative and regulatory
changes may have the impact of increasing the cost of business or otherwise
impacting the earnings of financial institutions. However, the degree, timing
and full extent of the impact of these proposals cannot be predicted. Management
of the Company and the Banking Subsidiaries cannot predict what other
legislation might be enacted or what other regulations might be adopted or the
effects thereof.
The foregoing summary of the relevant laws, rules and regulations
governing banks and bank holding companies do not purport to be a complete
summary of all applicable laws, rules and regulations governing banks and bank
holding companies.
IMPACT OF MONETARY POLICIES
Banking is a business which depends on rate differentials. In general,
the difference between the interest rate paid by the Banking Subsidiaries on
their deposits and their other borrowings and the interest rate earned by the
Banking Subsidiaries on loans, securities and other interest-earning assets will
comprise the major source of the Company's earnings. These rates are highly
sensitive to many factors which are beyond the Company's and the Banking
Subsidiaries' control and, accordingly, the earnings and growth of the Banking
Subsidiaries are subject to the influence of economic conditions generally, both
domestic and foreign, including inflation, recession, and unemployment; and also
to the influence of monetary and fiscal policies of the United States and its
agencies, particularly the FRB. The FRB implements national monetary policy,
such as seeking to curb inflation and combat recession, by its open-market
dealings in United States government securities, by adjusting the required level
of reserves for financial institutions subject to reserve requirements, by
placing limitations upon savings and time deposit interest rates, and through
adjustments to the discount rate applicable to borrowings by banks which are
members of the Federal Reserve System. The actions of the FRB in these areas
influence the growth of bank loans, investments, and deposits and also affect
interest rates. The nature and timing of any future changes in such policies and
their impact on the Company or the Banking Subsidiaries cannot be predicted;
however, depending on the degree to which the Banking Subsidiaries'
interest-earning assets and interest-bearing liabilities are rate sensitive,
increases in rates would have the temporary effect of increasing their net
interest margin, while decreases in interest rates would have the opposite
effect.
In addition, adverse economic conditions could make a higher provision
for loan losses more prudent and could cause higher loan charge-offs, thus
adversely affecting the Company's net income.
37
<PAGE> 38
SELECTED STATISTICAL DISCLOSURES
The following table presents certain ratios for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Income to Average(1) Shareholders'
Equity ............................... 10.40% 10.54% 11.56% 5.07% 8.12%
Net Income to Average Assets ............. 0.71 0.91 0.79 0.40 0.76
Average Net Loans to Average Deposits .... 83.14 79.21 76.16 85.69 80.89
</TABLE>
- ---------------------
(1) Averages used herein, unless indicated otherwise, are based on daily
averages.
Additional statistical disclosures relating to the Company's business
and operations are included in ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 2 - DESCRIPTION OF PROPERTY
VIB leased property located adjacent to its main office, at 1498 Main
Street, El Centro, California 92243, on which VIB constructed a new facility to
house its corporate and loan functions and to consolidate its loan center. The
Company maintains its offices at this facility. The lease has a twenty-year term
and two five-year renewal options. Construction cost approximately $2.9 million
and was completed in June, 1997. The term of the lease commenced upon completion
of the construction. The rent for each year of the term is $318,972, plus
cost-of-living adjustments of not less than 3.5% and not more than 5.5% each
year after the initial year.
VIB owns its main office and its branches in Brawley, Calexico,
Coachella, La Quinta and Thousand Palms. VIB leases its remaining branches as
well as an operations center at 2415 La Brucherie Road, Imperial, and its loan
production offices in El Centro, Carlsbad, Orange and Rancho Mirage, California,
Yuma, Arizona, and Las Vegas, Nevada.
VIB's Holtville lease expired in 1998 and was renewed through November
30, 2003. The remaining leases expire in 2000 or beyond and/or have extension
options. All leases expiring in 2000 will be extended.
VIB purchased a parcel of vacant land at 81-710 Highway 111, Indio, with
the original intention of constructing a permanent Indio branch office. The
purchase price was $310,000. The purchase preceded the acquisition of Bank of
the Desert, N.A. VIB has determined to sell the property and has exercised an
additional 28-month extension option on the branch lease at 81-790 Highway 111
effective February, 2000. VIB has also purchased a parcel of vacant land
adjacent to its La Quinta office, at a cost of $23,100, to be used as additional
parking for that branch.
Stockdale owns its branch location at 2700 Mount Vernon Avenue,
Bakersfield, California 93306 and leases its main office at 5151 Stockdale
Highway, Bakersfield, California 93309, its branch at 3990 Gosford Road,
Bakersfield, California 93309, and its loan production office at 7433 North
First Street, Suite 103, Fresno, California 93720.
During 1999 the Company's aggregate lease expense for these properties
was $1,224,798. The Company's aggregate lease expense in 1998 was $1,079,018.
38
<PAGE> 39
Kings River owns the building housing its main office at 1003 "I"
Street, Reedley, California 93654, and leases the property pursuant to a written
ground lease which expires on March 31, 2003, but which can be extended for
three additional five-year terms. Kings River owns its Dinuba branch and leases
its Hanford branch and Visalia loan production office.
The Company's and the Banking Subsidiaries' premises are deemed to be
adequate for their present and anticipated needs and no material capital
expenditures are contemplated. In Management's opinion, the Company and the
Banking Subsidiaries have sufficient insurance to cover their interests in their
premises.
ITEM 3 - LEGAL PROCEEDINGS
To the best of the Company's knowledge, there are no pending legal
proceedings to which the Company or the Banking Subsidiaries are a party and
which may have a materially adverse effect upon the Company's or the Banking
Subsidiaries' property, business or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders during the
fourth quarter of 1999.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item regarding the market for the
Company's Common Stock, the number of holders, and the payment of dividends is
incorporated by reference from Page 18 of the Company's Annual Report to
Shareholders for the year ended December 31, 1999.
During 1997, 1998 and 1999 the Company's predecessor, VIB, issued
2,114,998 shares (as adjusted for stock dividends and splits) of its Common
Stock without registration under the Securities Act of 1933 upon exercise of
stock options pursuant to VIB's 1989 Stock Option Plan, pursuant to VIB's 1997
Unit Offering, and pursuant to the exercise of Warrants issued in VIB's 1997
Unit Offering. The aggregate proceeds were $14,686,819. The issuances of VIB's
Common Stock were exempt from the registration requirements of the Securities
Act of 1933 pursuant to Section 3(a)(2) thereof.
For information concerning the Company's issuance of trust preferred
securities through its business trust subsidiary, please refer to Item 1 -
DESCRIPTION OF BUSINESS - The Company.
ITEM 6 - SELECTED FINANCIAL DATA
The following table presents a summary of selected financial information
for the five years ended December 31, 1999. This financial information should be
read in conjunction with the Financial Statement and Notes thereto, included in
"Item 8 - Financial Statements and Supplementary Data" herein. See also "Item 7
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein.
39
<PAGE> 40
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME (000'S)
Total Interest Income $ 63,856 $ 50,883 $ 42,261 $ 33,946 $ 31,936
Total Interest Expense 26,226 17,499 15,811 12,758 12,142
----------- ----------- ----------- ----------- -----------
Net Interest Income 37,630 33,384 26,450 21,188 19,794
Provision for Credit Losses 2,592 2,581 2,265 1,489 1,483
----------- ----------- ----------- ----------- -----------
Net Interest Income After Provision
for Credit Losses 35,038 30,803 24,185 19,699 18,311
Non-Interest Income 7,008 7,201 7,224 4,604 4,313
Non-Interest Expense 32,866 29,267 25,407 22,177 19,749
----------- ----------- ----------- ----------- -----------
Income Before Tax Expense and Merger
and Related Costs 9,180 8,737 6,002 2,126 2,875
Income Tax Expense 2,653 2,938 1,899 520 1,106
----------- ----------- ----------- ----------- -----------
Income before Merger and Related Costs 6,527 5,799 4,103 1,606 1,769
Merger and Related Costs, net of tax 661 223 - - -
----------- ----------- ----------- ----------- -----------
Net Income $ 5,866 $ 5,576 $ 4,103 $ 1,606 $ 1,769
=========== =========== =========== =========== ===========
PER SHARE DATA(1)
Net Income Basic Before Merger and
Related Costs $ 0.58 $ 0.53 $ 0.44 $ 0.19 $ 0.21
Net Income Diluted(2) Before Merger
and Related Costs $ 0.58 $ 0.51 $ 0.42 $ 0.18 $ 0.20
Net Income Basic $ 0.52 $ 0.51 $ 0.44 $ 0.19 $ 0.21
Net Income Diluted(2) $ 0.52 $ 0.49 $ 0.42 $ 0.18 $ 0.20
Cash Dividends N/A N/A N/A N/A N/A
Book Value Per Share(1)(3) $ 5.09 $ 5.01 $ 4.68 $ 3.77 $ 3.84
Number of Shares Used in Income Calculations 11,308,048 11,414,234 9,804,297 9,131,235 9,049,934
STATEMENTS OF FINANCIAL CONDITION
(AT END OF PERIOD)(000'S)
Total Assets $ 918,128 $ 691,467 $ 574,741 $ 460,299 $ 384,445
Total Net Loans(4) 647,759 494,028 401,714 333,115 281,598
Allowance for Credit Losses 5,696 4,296 3,145 3,792 3,206
Total Investments 162,009 119,798 94,124 58,808 63,133
Total Deposits 701,333 600,103 519,855 420,238 344,896
Borrowed Funds 130,674 31,886 2,842 4,000 6,400
Trust Preferred Securities 22,400 - - - -
Shareholders' Equity 58,245 55,602 49,279 32,728 30,423
OPERATING RATIOS
Total Net Loans to Total Deposits 92.36% 82.32% 77.27% 79.88% 81.93%
Total Equity to Total Assets 6.34 8.04 8.57 7.11 7.91
Average Equity to Average Assets 6.79 8.66 6.87 7.94 7.90
Tier 1 Capital to Risk Weighted Assets(5) 10.93 9.27 10.21 8.49 11.00
Total Capital to Risk Weighted Assets(5) 11.94 10.01 10.90 9.45 12.04
Income Before Merger and Related Costs
on Average Equity 11.61 11.00 11.56 5.07 8.12
Income Before Merger and Related Costs
on Average Assets 0.79 0.95 0.79 0.40 0.76
Income on Average Equity 10.40 10.54 11.56 5.07 8.12
Income on Average Total Assets 0.71 0.91 0.79 0.40 0.76
Net Interest Margin 4.98 6.10 5.72 5.87 5.89
Total Interest Expense to Total Interest Income 41.07 34.39 37.41 37.58 38.02
Allowance for Credit Losses to Total Loans 0.87 0.86 0.78 1.13 1.13
Dividend Payment Ratio N/A N/A N/A N/A N/A
</TABLE>
- -----------------------------
(1) These figures have been adjusted retroactively to reflect previous stock
dividends and the 1995, 1997 and 1998 stock splits.
(2) Diluted net income per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
(3) "Book value per share" is defined as total capital divided by the number
of shares outstanding at the end of the period.
(4) "Total net loans" is defined as total loans net of unearned discount,
net of deferred fees and the allowance for credit losses.
(5) As defined under regulatory guidelines.
N/A - Not Applicable
40
<PAGE> 41
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion, which incorporates an analysis of financial
condition and results of operations, is designed to provide a more comprehensive
understanding of the significant changes and trends related to the Company's
financial condition, results of operations, liquidity and capital resources. The
discussion should be read in conjunction with the Financial Statements of the
Company and Notes thereto and the "Selected Financial Data" included elsewhere
herein.
The following table sets forth, for the periods indicated, the increase
or decrease of certain items in the Statement of Income as compared to the prior
comparable period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 VERSUS 1998 1998 VERSUS 1997
------------------------ ------------------------
AMOUNT OF AMOUNT OF
INCREASE PERCENT OF INCREASE PERCENT OF
(DECREASE) INCREASE (DECREASE) INCREASE
(000'S) (DECREASE) (000'S) (DECREASE)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total Interest Income $ 12,973 25.50% $ 8,621 20.40%
Total Interest Expense 8,727 49.87 1,688 10.68
-------- --------
Net Interest Income 4,246 12.72 6,933 26.21
Provision for Credit Losses 11 0.43 316 13.95
-------- --------
Net Interest Income After
Provision for Credit Losses 4,235 13.75 6,617 27.36
Non-Interest Income (193) (2.68) (23) (0.32)
Non-Interest Expense 4,037 13.69 4,084 16.07
-------- --------
Income Before Taxes 5 0.06 2,511 41.83
Income Taxes (285) (9.69) 1,039 54.71
-------- --------
Net Income $ 290 5.20 $ 1,472 35.88
======== ========
</TABLE>
GENERAL
VIB Corp's financial performance for the year concluded December 31,
1999 was highlighted with record earnings growth, VIB Corp's acquisition of Bank
of Stockdale, F.S.B., the issuance of $22.4 million in trust preferred
securities through Valley Capital Trust, a wholly owned business trust
subsidiary, Valley Independent Bank's acquisition of the Hemet, California
branch of Fremont Investment and Loan, and the Company's agreement to acquire
Kings River State Bank.
VIB Corp was incorporated in California on November 7, 1997 under the
laws of the State of California at the direction of the Board of Directors of
VIB for the purpose of becoming a bank holding company. The holding company
organization was consummated on March 12, 1998, pursuant to a Plan of
Reorganization and Merger Agreement dated November 18, 1997, and each
outstanding share of VIB's Common Stock was converted into one share of the
Company's Common Stock and all outstanding shares of VIB's Common Stock were
transferred to the Company in a transaction accounted for as a pooling of
interests. Further, each outstanding warrant to purchase VIB's Common Stock,
issued in connection with VIB's 1997 unit offering, was converted into a warrant
to purchase the Company's Common Stock. The conversion period for these warrants
expired on October 29, 1999.
On January 28, 1999, VIB Corp acquired Bank of Stockdale, F.S.B.,
Bakersfield, California ("Stockdale") which continues to operate under its
federal stock savings bank charter.
41
<PAGE> 42
As a result of the merger, the Company acquired total assets of $144.4 million,
comprising $9.1 million in cash and due from banks, $23.5 million in securities
and investments, $102.4 million in net loans and $9.4 million in other assets.
Total liabilities assumed amounted to $134.6 million, of which $128.9 million
comprised deposits. The remainder represented other borrowed funds and other
liabilities.
The Stockdale merger was accounted for as a pooling of interests. The
Company issued 2,498,876 shares of its Common Stock (adjusted for subsequent
stock dividends) in exchange for all 1,212,265 shares of Stockdale's issued and
outstanding common stock (at an exchange ratio of 1.943 to 1).
On January 22, 1999, VIB acquired Fremont Investment & Loan's Hemet
branch office, including substantially all the deposits of the branch. VIB
assumed approximately $112 million in deposits and the lease on the branch
premises, and acquired approximately $27,000 in loans as well as cash on hand
and fixtures and equipment associated with the branch. The consideration paid
amounted to approximately $1.12 million. Goodwill arising from the transaction
totaled approximately $1.14 million.
In connection with the branch acquisition by Valley Independent Bank it
was anticipated that VIB would require additional capitalization. On February 5,
1999, the Company raised approximately $22.4 million in net proceeds from an
offering of up to 23,000 Capital Securities in a private placement. The proceeds
were used to increase Valley Independent Bank's capital by $8.5 million and the
balance was used for the acquisition of Kings River State Bank and general
corporate purposes.
The Company formed a wholly owned business trust subsidiary, Valley
Capital Trust (the "Trust"), pursuant to the laws of the State of Delaware, for
the specific purpose of (1) investing in the Company's 9.00 percent Junior
Subordinate Debentures (the "Debentures"), due February 5, 2029; (2) selling
9.00 percent Cumulative Capital Securities (the "Capital Securities"),
representing a 97 percent beneficial interests in the Debentures owned by the
Trust; and (3) issuing beneficial interest in the Debentures owned by the Trust.
On February 5, 1999, the Company issued $23.093 million in Debentures to
the Trust. Concurrently, the Trust issued $22.4 million of the Capital
Securities to the accredited investors and $693,000 of Common Securities to the
Company. The Debentures were purchased by the Trust concurrently with the
Trust's issuance of the Capital Securities and Common Securities. The proceeds
to the Company, net of the Placement Agent's fees and other offering expenses,
was approximately $22.4 million, of which approximately $17.4 million is treated
as Tier 1 capital for regulatory purposes.
The interest on the Capital Securities is deductible. The Company has
the right assuming that no default has occurred, to defer interest payments at
any time and for a period of up to twenty consecutive calendar quarters. The
Capital Securities will mature on February 5, 2029, but can be called after
February 5, 2009.
On September 7, 1999, VIB Corp, Kings River State Bank and Kings River
Bancorp, headquartered in Reedley, California, entered into an Agreement and
Plan of Reorganization pursuant to which Kings River State Bank would become a
wholly-owned subsidiary of VIB Corp and would continue to operate under its
separate California commercial bank charter. Upon consummation of the merger on
January 7, 2000, Kings River Bancorp's shareholders received approximately $21.7
million in exchange for their stock.
42
<PAGE> 43
For the year ended December 31, 1999, Kings River had total assets of
approximately $87.2 million, interest and non-interest income of approximately
$8.0 million and pretax income of approximately $1.9 million. The acquisition
will be accounted for using the purchase method of accounting in accordance with
Accounting Principals Board Opinion No. 16, "Business Combinations." Under this
method of accounting, the purchase price is allocated to the assets acquired and
deposits and liabilities assumed based on their fair values as of the
acquisition date. Goodwill arising from this transaction totaled approximately
$12.4 million and will be amortized over fifteen years on a straight-line basis.
The results of Kings River's operations will be included in those reported by
the Company beginning January 10, 2000.
The Board of Directors approved 3% stock dividends for shareholders of
record on May 14, 1999 and December 8, 1999. The dividends were paid on June 4,
1999 and December 29, 1999, respectively. Consequently, all per share
information has been restated to reflect the effect of the stock dividends.
Consolidated net income for the year ended December 31, 1999, adjusted
for merger and related non-recurring costs, was $6.5 million or $.58 per share
fully diluted based upon average shares outstanding of 11,308,048. This compares
with net income of $5.7 million or $.51 per share fully diluted based upon the
average shares outstanding of 11,414,234 for the year ended December 31, 1998.
After merger and related non-recurring costs, net income for the year ending
December 31, 1999 was $5.9 million or $.52 per share fully diluted as compared
to $5.6 million or $.49 per share for 1998.
Increases in net interest income partially offset by increases in
non-interest expenses and decreases in non-interest income were the primary
elements effecting the increased financial performance in 1999. Net Income of
$5.6 million in 1998 represented an increase of $1.5 million, or 35.9%, from the
$4.1 million net income earned in 1997. The Company's return on average assets
ratio was .71% in 1999 compared to .91% and .79% in 1998 and 1997, respectively.
The return on average equity ratio in 1999 was 10.40% compared to 10.54% and
11.56%, respectively, in the two previous years.
Total assets at December 31, 1999 were $918.1 million, an increase of
$226.7 million, or 32.8%, compared to December 31, 1998. Total deposits
increased $101.2 million, or 16.9%, to $701.3 million at December 31, 1999. This
increase includes the assumption of deposits acquired from Fremont Investment &
Loan, discussed above, and the normal seasonal deposit cycle experienced in the
Imperial, Coachella and Central Valleys as it relates to the local agricultural
business cycle. Total loans increased $155.1 million, or 31.1%, to $653.5
million at December 31, 1999. During 1998 total assets increased $116.7 million,
or 20.3%, from $574.7 million at year-end 1997. Total deposits increased $80.2
million, or 15.4%, from year-end 1997 to $600.1 million at December 31, 1998.
Total loans increased $93.4 million, or 23.1%, from December 31, 1997.
At December 31, 1999, the Company's Tier 1 and total capital to risk
weighted assets ratios increased to 10.93% and 11.94%, respectively, when
compared to 9.27% and 10.01%, respectively, at December 31, 1998. At December
31, 1997 the Tier I capital ratio was 10.21% and the total capital ratio was
10.90%. These ratios exceed regulatory requirements.
YEAR 2000 READINESS COMPLIANCE
During 1999 and earlier the Company and its banking subsidiaries
evaluated, tested and upgraded computer systems to assure proper recognition of
date sensitive information when the date changed to the year 2000 ("Y2K").
Computer systems that did not properly recognize the year 2000 would have
generated erroneous data or caused the system to fail.
43
<PAGE> 44
VALLEY INDEPENDENT BANK
During 1996 VIB began the process of identifying and addressing issues
surrounding the year 2000 and their impact on VIB's operations. Final
implementation, validation and certification of all internal systems were
accomplished by June 30, 1999. Simultaneously, VIB conducted an evaluation for
the impact of Y2K compliance on large corporate customers as well as the third
party vendors. As of December, 1999, VIB had updated its assessment of Y2K risk
in this regard and had established a specific reserve of $800,000 within the
general reserve for credit losses and liquidity policies to mitigate this risk.
Subsequent to the year 2000 rollover date there have been no related loan
losses. It is anticipated that the $800,000 reserve will be disestablished prior
to the second quarter of 2000.
VIB expended $523,000 through December 31, 1999 on Y2K compliance.
BANK OF STOCKDALE
Bank of Stockdale engages the services of third-party software vendors
and service providers for substantially all of its electronic data processing.
As such, a primary focus of Stockdale's Y2K compliance program was to monitor
the progress of its software providers toward Y2K compliance and to prepare and
test future-date sensitive data of Stockdale in simulated processing.
Stockdale established a specific reserve of $80,000 within the general
reserve for credit losses to cover customers and borrowers.
As Stockdale relies upon third-party software vendors and service
providers for substantially all of its electronic data processing, the primary
cost of the Y2K compliance program was the reallocation of internal resources
for testing and for the purchase of computer hardware and, therefore, does not
represent incremental expense to Stockdale. The estimated value of internal
resources allocated to the Y2K compliance program and the cost of computer
hardware through December 31, 1999 was approximately $281,000.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
The following table presents the average amounts outstanding for the
major categories of the Company's assets, liabilities and equity accounts, the
amount and average rate of interest income earned or interest expense paid for
each category of interest-earning asset and interest-bearing liability, and net
interest margin for the periods indicated. Tax-exempt interest income from
investment securities has not been adjusted to a tax-equivalent basis.
44
<PAGE> 45
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998
------------------------------------- -------------------------------------
AVERAGE AMOUNT OF AVERAGE AMOUNT OF
BALANCE INTEREST AVERAGE BALANCE INTEREST AVERAGE
(000'S) (000'S) RATE (000'S) (000'S) RATE
--------- --------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Interest Bearing Deposits $ 775 $ 40 5.16% $ 1,06 $ 62 5.84%
Investment Securities 176,159 9,693 5.50 105,022 6,330 6.03
Federal Funds Sold 9,939 534 5.37 8,340 510 6.12
Net Loans(1) 569,471 53,590 9.41 432,834 43,981 10.16
--------- --------- --------- ---------
TOTAL INTEREST-EARNING ASSETS 756,344 63,857 8.44 547,257 50,883 9.30
NON INTEREST-EARNING ASSETS
Cash and Due from Banks 37,510 33,750
Allowance for Credit Losses (5,169) (3,702)
Premises and Equipment 12,395 12,386
Other Assets 29,142 21,522
--------- ---------
TOTAL NON INTEREST-EARNING ASSETS 73,878 63,956
--------- ---------
TOTAL ASSETS $ 830,222 $ 611,213
========= =========
LIABILITIES AND EQUITY
INTEREST-BEARING LIABILITIES
Money Market and Now Accounts $ 140,425 $ 3,363 2.39% $ 124,897 $ 3,217 2.58%
Time and Savings Deposits 267,559 11,011 4.12 182,338 7,719 4.23
Time Deposits Over $100,000 123,974 6,366 5.13 105,534 5,888 5.58
--------- --------- --------- ---------
Total Interest-Bearing Deposits 531,958 20,740 3.90 412,769 16,824 4.08
Borrowed Funds 83,950 5,486 6.53 7,048 674 9.56
--------- --------- --------- ---------
TOTAL INTEREST-BEARING LIABILITIES 615,908 26,226 4.26 419,817 17,498 4.17
--------- ---------
NON INTEREST-BEARING LIABILITIES
Demand Deposits 153,027 133,688
Other Liabilities 4,903 4,788
--------- ---------
TOTAL NON INTEREST-BEARING 157,930 138,476
LIABILITIES
SHAREHOLDERS' EQUITY 56,384 52,920
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 830,222 $ 611,213
========= =========
NET INTEREST INCOME $ 37,631 4.18% $ 33,385 5.13%
========= =========
NET INTEREST INCOME AS A PERCENT
OF INTEREST-EARNING ASSETS 4.98% 6.10%
</TABLE>
45
<PAGE> 46
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------
AVERAGE AMOUNT OF
BALANCE INTEREST AVERAGE
(000'S) (000'S) RATE
--------- ---------- --------
<S> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Interest Bearing Deposits $ 1,688 $ 75 4.44%
Investment Securities 89,409 5,936 6.64
Federal Funds Sold 9,374 475 5.07
Net Loans(1) 362,024 35,776 9.88
--------- ---------
TOTAL INTEREST-EARNING ASSETS 462,495 42,262 9.14
NON INTEREST-EARNING ASSETS
Cash and Due from Banks 28,074
Allowance for Credit Losses (3,726)
Premises and Equipment 9,945
Other Assets 20,900
---------
TOTAL NON INTEREST-EARNING ASSETS 55,193
---------
TOTAL ASSETS $ 517,688
=========
LIABILITIES AND EQUITY
INTEREST-BEARING LIABILITIES
Money Market and Now Accounts $ 93,396 $ 2,344 2.43%
Time and Savings Deposits 177,094 8,078 4.56
Time Deposits Over $100,000 93,085 5,119 5.50
--------- ---------
Total Interest-Bearing Deposits 366,575 15,541 4.24
Borrowed Funds 3,357 270 8.04
--------- ---------
TOTAL INTEREST-BEARING LIABILITIES 369,932 15,811 4.27
---------
NON INTEREST-BEARING LIABILITIES
Demand Deposits 108,771
Other Liabilities 3,441
---------
TOTAL NON INTEREST-BEARING LIABILITIES 112,212
SHAREHOLDERS' EQUITY 35,544
---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 517,688
=========
NET INTEREST INCOME $ 26,451 4.86%
=========
NET INTEREST INCOME AS A PERCENT
OF INTEREST-EARNING ASSETS 5.72%
</TABLE>
- ------------
(1) Yields and amounts include loan fees and late charges of $3,368,923,
$3,242,012, and $1,955,479, for the years ended December 31,1999, 1998
and 1997, respectively.
46
<PAGE> 47
NET INTEREST INCOME AND NET INTEREST MARGIN
Average interest-earning assets totaled $756.3 million in 1999, an
increase of $209 million, or 38.2%, compared to 1998. Average investment
securities increased $71.1 million, or 67.7%, primarily related to the liquidity
obtained in the branch acquisition from Fremont Investment and Loan. In
addition, VIB experienced significant average loan growth of $136.6 million, or
31.6%. In 1998 average interest earning assets increased $84.8 million, or
18.3%, from a 1997 average of $462.5 million.
Average interest-bearing liabilities grew $196.1 million, or 46.7%, from
$419.8 million for 1998 to $615.9 million for 1999. During 1999 all
interest-bearing liability categories increased, including borrowed funds, which
increased $76.9 million or 1,091.1%. In 1998, average interest-bearing
liabilities increased $49.9 million, or 13.5%, from $369.9 million for 1997.
Interest income in 1999 was $63.9 million, an increase of $13.0 million,
or 25.5%, compared to 1998. The increase in interest income was the result of
volume increases in investment securities and loans offset by a decreased
interest rate environment. The yield on interest-earning assets decreased 86
basis points to 8.44% in 1999 from 9.30% in 1998. The yield on the loan
portfolio, the largest portion of the Bank's interest-earning assets, decreased
75 basis points, from 10.16% in 1998 to 9.41% in 1999.
Interest expense increased $8.7 million, or 49.9%, to $26.2 million
during 1999. The increase in interest expense was primarily the result of volume
increases in all interest-bearing categories, including borrowed funds, as well
as a deposit mix shift towards the higher interest bearing categories. This
increase was partially offset by a lower interest rate environment. The cost of
interest-bearing liabilities increased 9 basis points from 4.17% in 1998 to
4.26% in 1999.
Net interest income was $37.6 million for 1999, which represented an
increase from the prior year of $4.2 million, or 12.7%. The net interest spread
percentage, which represents the difference between the rate earned on average
interest-earning assets and the rate paid on average interest-bearing
liabilities, decreased to 4.18% for the year-ending December 31, 1999, compared
to 5.13% in 1998. Net interest income as a percentage of average
interest-earning assets, or the net interest margin, decreased to 4.98% in 1999
compared to 6.10% in 1998. A lower interest rate environment and a shift in the
deposit mix towards the higher interest bearing categories and the issuance of
the Capital Securities, offset by the relatively greater increases in interest
earning assets than in interest bearing liabilities and the greater
proportionate growth in loans, the highest yielding assets, were the primary
reasons for the comparative decrease in yield for both the net interest spread
and the net interest margin.
Net interest income, which amounted to $33.4 million in 1998,
represented an increase of $6.9 million, or 26.2%, compared to 1997. Interest
income was $50.9 million, an increase of $8.6 million, or 20.4%, compared to
1997. The increase in interest income was primarily the result of volume
increases in investment securities and loans. The yield on interest-earning
assets increased 16 basis points to 9.30% in 1998 from 9.14% in 1997. Interest
expense increased $1.7 million, or 10.7%, to $17.5 million during 1998. The
increase in interest expense was the result of volume increases in all
interest-bearing categories and rate increases in all categories, with the
exception of time and savings deposits. The cost of total interest bearing
liabilities decreased 10 basis points from 4.27% in 1997 to 4.17% in 1998. A
greater proportionate growth in the higher yielding interest-earning asset
categories offset by a lower cost mix of interest-bearing liabilities as well as
the repricing effect of interest-earning assets and interest-bearing liabilities
in a lower rate environment were the principal causes for the increased yields
in both net interest spread percentage and net interest margin.
47
<PAGE> 48
The following table sets forth the dollar amount of changes in interest
earned and paid for each major category of interest-earning assets and
interest-bearing liabilities and the amount of changes attributable to changes
in average balances (volume) or changes in average interest rates. The variances
attributable to both balance and rate changes have been allocated to volume and
rate changes in proportion to the relationship of the absolute dollar amounts of
the changes in each category. Tax-exempt interest income from investment
securities has not been adjusted to a tax-equivalent basis since the effect of
such an adjustment would not be material.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
OVER OVER
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
INCREASE/DECREASE DUE INCREASE/DECREASE DUE
TO CHANGE IN (000'S) TO CHANGE IN (000'S)
-------------------------------------- --------------------------------------
Net Net
VOLUME Rate Change Volume Rate Change
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest Bearing Deposits $ (17) $ (5) $ (22) $ (28) $ 15 $ (13)
Investment Securities 4,288 (925) 3,363 1,037 (643) 394
Federal Funds Sold (98) (74) 24 (52) 87 35
Net Loans(1)(2) 13,884 (4,275) 9,609 6,998 1,207 8,205
-------- -------- -------- -------- -------- --------
Total Interest Income $ 18,253 $ (5,279) $ 12,974 $ 7,954 $ 667 $ 8,621
-------- -------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES
Money Market and NOW $ 400 $ (254) $ 146 $ 693 $ 180 $ 873
Time and Savings 3,608 (316) 3,292 239 (598) (359)
Time Deposits Over $100,000 1,029 (551) 478 685 84 769
Borrowed Funds 7,354 (2,542) 4,812 297 107 404
-------- -------- -------- -------- -------- --------
Total Interest Expense 12,391 (3,663) 8,728 1,914 (227) 1,687
-------- -------- -------- -------- -------- --------
Interest Differential or
Net Interest Income $ 5,862 $ (1,616) $ 4,246 $ 6,040 $ (894) $ 6,934
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) The average balance of non-accruing loans is immaterial as a percentage
of total loans and as such have been included in net loans.
(2) Loan fees and late charges of $3,368,923, $3,242,012 and $1,955,479 for
the years ended December 31,1999, 1998 and 1997, respectively, have been
included in the interest income computation.
LOANS
Total loans averaged $569.5 million in 1999, an increase of $136.6
million, or 31.6%, compared to 1998. The average loan growth is reflective of
the full year effect of the 1998 opening of the Las Vegas, Nevada and Carlsbad
and Orange, California Loan Production Offices as well as an overall strong
lending economic environment. At December 31, 1999 total loans were $653.5
million, representing an increase of $155.1 million, or 31.1%, over December 31,
1998. The yield on the total portfolio decreased 75 basis points to 9.41% in
1999, from 10.16% in 1998. This decrease in yield was the result of repricing of
variable-rate loans in an overall lower interest rate environment.
In 1998 total loans averaged $432.8 million, which represented an
increase of $70.8 million, or 19.6%, compared to 1997. At December 31, 1998,
total loans were $498.3 million, which represented an increase of $93.4 million,
or 23.1%, over December 31, 1997. The yield on the total portfolio increased 28
basis points to 10.16% in 1998 from 9.88% in 1997. This increase was the result
of a loan mix with a larger proportionate growth in higher yielding loans offset
by the repricing of variable rate loans in a lower interest rate environment.
The subsidiary bank loan portfolios represent the diversification of the
markets served. At December 31, 1999, there were no significant concentration of
loans within any particular
48
<PAGE> 49
industry. However, the local economies of VIB Corp's service areas are
agriculturally related and are impacted by fluctuations in farming commodity
pricing.
The following table sets forth the amount of the Company's total
outstanding loans, net of participations sold, in each category. The retained
portion of SBA loans, as well as the guaranteed portion of such loans held for
sale, are included primarily within the commercial and real estate construction
loan totals.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- --------------------
AMOUNT PERCENT- AMOUNT PERCENT AMOUNT PERCENT
(000'S) OF TOTAL (000'S) OF TOTAL (000'S) OF TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial and Agricultural $180,129 27.4% $116,634 23.2% $102,150 25.10%
Real Estate- Construction 89,168 13.6 61,680 12.3 43,674 10.74
Real Estate - Other 344,379 52.4 276,809 55.2 220,174 54.14
Installment 43,083 6.6 46,719 9.3 40,653 10.00
-------- ------ -------- ------ -------- ------
Total Loans $656,759 100.0% $501,842 100.0% $406,651 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1995
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
(000'S) OF TOTAL (000'S) OF TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Commercial and Agricultural $ 82,331 24.3% $ 63,821 22.3%
Real Estate- Construction 33,986 10.0 26,623 9.3
Real Estate - Other 187,575 55.4 171,342 59.9
Installment 34,639 10.2 24,429 8.5
-------- -------- -------- --------
Total Loans $338,531 100.0% $286,215 100.0%
======== ======== ======== ========
</TABLE>
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, certain past due
loans not on non-accrual, and properties taken in foreclosure. Non-accrual loans
include loans that are past due 90 days or more as to principal or interest, or
where reasonable doubt exists as to timely collectibility. At the time a loan is
placed on non-accrual status, previously accrued and uncollected interest is
reversed against interest income in the current period. Interest collections on
non-accrual loans are generally credited to interest income when received.
However, if ultimate collectibility of principal is in doubt, interest
collections are applied as principal reductions.
Interest accruals cease on commercial, mortgage and consumer loans,
excluding home equity loans, when they are 90 days past due. At that time,
previously accrued and uncollected interest is reversed against income. These
loans are charged off when they are 120 days past due. For home equity loans,
accruals cease at 180 days and uncollected interest is reversed against interest
income. Thereafter, these loans are continually reviewed and charged off when
deemed uncollectible.
The following table provides information with respect to components of
the Company's non-performing loans. The Company had $3.9 million and $4.9
million in restructured loans outstanding as of December 31, 1999 and 1998,
respectively. There were $7.3 million in restructured loans outstanding at
December 31, 1997.
49
<PAGE> 50
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
(000'S) (000's) (000's) (000's) (000'S)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans $ 6,185 $ 4,315 $ 5,194 $ 6,519 $ 6,822
Loans Past Due 90 Days or More
But Not on Non-Accrual Basis 16 567 525 967 1,691
-------- -------- -------- -------- --------
Total $ 6,201 $ 4,882 $ 5,719 $ 7,486 $ 8,513
======== ======== ======== ======== ========
</TABLE>
The following table sets forth the gross interest income that would have
been recorded for the period indicated if the non-accrual loans had been current
in accordance with their terms and the amount of interest income recognized on
these loans:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------
<S> <C>
Interest Income - Original Terms $525,289
Interest Income - Recorded 305,831
--------
Forgiven Interest Income $219,458
========
</TABLE>
Properties taken in foreclosure, or other real estate owned, constitute
another category of non-performing assets. Other real estate owned increased
from $1,071,064 at December 31,1998 to $1,304,729 at December 31, 1999. The
Company is actively marketing these properties for sale.
INVESTMENTS
Total investments averaged $176.2 million in 1999, representing an
increase of $71.1 million from 1998. At December 31, 1999, the investment
portfolio amounted to $162.0 million, an increase of $42.2 million compared to
December 31, 1998. At December 31, 1999, the yield of the available for sale
portfolio on a tax-equivalent basis decreased 11 basis points to 6.10%. This
decrease was the result of the reinvestment of maturities in a lower interest
rate environment partially offset by a greater proportionate growth in higher
yielding state and municipal securities.
The investment strategy employed during 1999 was the investment of
temporarily idle deposit growth funds and investment maturities primarily into
short-term callable Federal Agency obligations and state and municipal
securities. The nature of these securities has provided liquidity through
periodic repayment of principal and interest. The callable characteristic of
these investments also provide liquidity to fund anticipated loan growth in the
future.
U.S. Government and federal agencies averaged $93.2 million during 1999,
an increase of $35.1 million, or 60.4%. This increase reflected the strategy to
provide liquidity for anticipated loan growth. The yield on the portfolio
decreased 13 basis points to 5.95% at December 31, 1999, compared to 6.08% at
December 31, 1998.
State and municipal securities increased on average $30.5 million to
$55.5 million. The tax-equivalent yield on this portfolio declined 3 basis
points to 6.29% at December 31, 1999, compared with 6.32% at December 31, 1998.
Federal funds sold averaged $9.9 million in 1999, an increase of $1.6
million, or 19.2%, compared to 1998. At December 31, 1999, there were no Federal
funds sold outstandings. These funds represent excess funds temporarily
invested. The yield on Federal funds decreased 75 basis points to 5.37% in 1999.
The decrease in yield was reflective of the lower overnight investment interest
rate environment.
50
<PAGE> 51
The investment portfolio averaged $105.0 million during 1998,
representing an increase of $15.6 million from 1997. At December 31, 1998, total
investments amounted to $119.8 million, an increase of $25.7 million compared to
December 31, 1997. The available for sale portfolio yield on a tax-equivalent
basis decreased 66 basis points in 1998 to 6.01% as a result of the lower
interest rate environment during 1998.
Securities are pledged to meet security requirements imposed as a
condition to receipt of public fund deposits. At December 31, 1999 and December
31, 1998, the market value of securities pledged to secure public deposits was
approximately $14.2 million and $14.0 million, respectively.
The following tables summarize the amounts and distribution of the
Company's investment securities held as of the dates indicated, and the weighted
tax-equivalent average yield.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
BOOK MARKET WEIGHTED BOOK MARKET WEIGHTED
VALUE VALUE AVERAGE VALUE VALUE AVERAGE
(000'S) (000'S) YIELD (000'S) (000'S) YIELD
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
U.S. TREASURY & GOVERNMENT AGENCIES:
Within One Year $ 597 $ 607 8.22% $ 3,653 $ 3,663 6.21%
One to Five Years 63,661 61,580 5.76 30,525 30,513 5.85
Over Five Years 38,120 36,693 6.24 35,967 35,936 6.26
-------- -------- -------- --------
TOTAL U.S. TREASURY & GOVERNMENT AGENCIES 102,378 98,880 5.95 70,145 70,112 6.08
STATE AND POLITICAL SUBDIVISIONS:
Within One Year 340 342 7.78 498 502 7.24
One to Five Years 17,998 17,522 5.94 3,664 3,731 6.54
Over Five Years 38,661 35,871 6.44 33,890 34,006 6.28
-------- -------- -------- --------
TOTAL STATE AND POLITICAL SUBDIVISIONS 56,999 53,735 6.29 38,052 38,239 6.32
TOTAL OTHER SECURITIES 7,269 6,472 6.76 8,500 8,521 6.77
-------- -------- -------- --------
TOTAL AVAILABLE FOR SALE SECURITIES $166,646 $159,087 6.10 $116,697 $116,872 6.21
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------
BOOK MARKET WEIGHTED
VALUE VALUE AVERAGE
(000'S) (000'S) YIELD
------- ------- --------
<S> <C> <C> <C>
U.S. TREASURY & GOVERNMENT AGENCIES:
Within One Year $ 3,618 $ 3,620 5.89%
One to Five Years 11,235 11,285 6.69
Over Five Years 53,046 53,074 6.76
------- -------
TOTAL U.S. TREASURY & GOVERNMENT AGENCIES 67,899 67,979 6.71
STATE AND POLITICAL SUBDIVISIONS:
Within One Year 130 130 9.40
One to Five Years 1,568 1,599 8.03
Over Five Years 16,869 17,173 7.48
------- -------
TOTAL STATE AND POLITICAL SUBDIVISIONS 18,567 18,902 7.54
TOTAL OTHER SECURITIES 5,620 5,583 7.03
------- -------
TOTAL AVAILABLE FOR SALE SECURITIES $92,086 $92,464 6.90
======= =======
</TABLE>
DEPOSITS
Total deposits averaged $685.0 million during 1999, an increase of
$138.5 million, or 25.4%, compared with 1998. At December 31, 1999 total
deposits were $701.3 million,
51
<PAGE> 52
representing an increase of $101.2 million, or 16.9%, over December 31, 1998.
Deposit growth was primarily utilized to fund loan growth.
During 1999 demand deposits averaged $153.0 million, an increase of
$19.3 million, or 14.5%, from the average $133.7 million for 1998. Demand
deposits amounted to $174.7 million at year-end 1999, representing an increase
of $11.9 million, or 7.3%, compared to the prior year end.
Money market and NOW accounts averaged $140.4 million, an increase of
$15.5 million, or 12.4%, over 1998. These accounts totaled $133.6 million at
year-end, a decrease of $8.6 million, or 6.0%, from 1998. Regular savings
deposits increased $18.3 million, or 33.8%, over 1998 to average $72.7 million.
At year end these deposits amounted to $64.0 million, an increase of $8.9
million, or 16.1%, compared to the prior year. Total time deposits averaged
$318.9 million in 1999, an increase of $85.3 million, or 36.5%, compared with
1998. At December 31, 1999 these balances totaled $329.0 million, an increase of
$89.1 million, or 37.1%, from the prior year-end. The cost of total
interest-bearing deposits decreased to 3.06% in 1999 from 3.08% in 1998, or 2
basis points. This decline in overall cost was primarily the result of a
slightly lower interest rate environment.
In 1998 total deposits averaged $546.5 million, representing an increase
of $71.1 million, or 15.0%, compared to 1997. At December 31, 1998 total
deposits amounted to $600.1 million, an increase of $80.2 million, or 15.4% from
the prior year end. The cost of interest-bearing deposits was 3.08% in 1998 and
represented a decrease of 19 basis point from 3.27% in 1997.
The following schedules reflect the Company's deposits, based upon
average balances, for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1999 1998
------------------------------------- -------------------------------------
AVERAGE PERCENT AVERAGE AVERAGE PERCENT AVERAGE
BALANCE OF RATE BALANCE OF RATE
(000'S) TOTAL PAID (000'S) TOTAL PAID
-------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
DEMAND:
Non-Interest Bearing $153,027 22.3% N/A $133,688 24.5% N/A
Money Market and NOW 140,425 20.5 2.39% 124,897 22.9 2.58%
SAVINGS: 72,658 10.6 2.03 54,310 9.9 2.09
TIME:
Under $100,000 194,901 28.5 4.89 128,028 23.4 4.27
$100,000 or More 123,974 18.1 5.13 105,534 19.3 5.58
-------- ------ -------- -------- -------- --------
TOTAL DEPOSITS $684,985 100.0% 3.06 $546,457 100.0% 3.08
======== ====== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------
AVERAGE PERCENT AVERAGE
BALANCE OF RATE
(000'S) TOTAL PAID
-------- -------- ----------
<S> <C> <C> <C>
DEMAND:
Non-Interest Bearing $108,771 22.9% N/A
Money Market and NOW 96,396 20.3 2.43%
SAVINGS: 49,612 10.4 2.21
TIME:
Under $100,000 127,482 26.8 4.58
$100,000 or More 93,085 19.6 5.50
-------- --------
TOTAL DEPOSITS $475,346 100.0% 3.27
======== ========
</TABLE>
52
<PAGE> 53
BORROWED FUNDS
Borrowed funds, which consist of Federal funds purchased and other forms
of borrowing, were utilized primarily for funding loans and investments. During
1999, as a result of increases in loan funding and investments, there was an
increase in the use of borrowed funds for these purposes.
In 1999 borrowed funds averaged $84.0 million, an increase of $76.9
million, or 1,091.1% from 1998. At year-end there was $153.1 million outstanding
in borrowed funds, an increase of $121.2 million from the prior year end. The
cost of borrowed funds decreased 303 basis points to 6.53% in 1999 from 9.56% in
1998. The decrease in cost was reflective of the increase in the use of lower
cost advances from the Federal Home Loan Bank and to a lesser degree by a lower
interest rate environment.
Borrowed funds in 1998 averaged $7.0 million, an increase of $3.7
million, or 109.9%, compared to 1997. At year-end 1998 there was $31.9 million
outstanding in borrowed funds. This represented an increase of $29.0 million
from year-end 1997. The cost of borrowed funds increased 152 basis points to
9.56% from 8.04% in 1997 as a result of the increase in the Company's capital
lease obligations offset slightly by a lower interest rate environment.
PROVISION FOR CREDIT LOSSES
The allowance for credit losses at December 31, 1999 was $5.7 million,
compared to $4.3 million at December 31, 1998, an increase of $1.4 million, or
32.6%. As a percent of total loans, the allowance was .87% at year-end 1999 and
.86% at year-end 1998. At year-end 1997, the allowance was $3.1 million or .78%
of total loans.
Management believes the allowance at December 31, 1999, was adequate
based on present economic conditions and its ongoing evaluation of the risks
inherent in the subsidiary banks' loan portfolios. In evaluating the adequacy of
the allowance for credit losses the Company considers the special risks involved
in agriculture because the agriculturally related loans in the Imperial,
Coachella and Central Valleys are dependent upon the success of their
agricultural businesses. These risks include fluctuations in commodity prices
which do not necessarily match the general rate of inflation; dependence of the
agricultural community on the export market and the adverse impact which the
dollar's strength against other currencies has had on such exports; variability
of production costs, weather and climatic changes; and the fact that, in any
downturn in the economy, agriculture is usually one of the last sectors of the
economy to recover. Furthermore, agricultural businesses are extremely sensitive
to actions of governmental agencies regarding price supports, subsidies and
import or export policies, the impact of which cannot be predicted.
The subsidiary banks have an established standard process for assessing
the adequacy of the allowance for credit losses. In addition to reviewing the
inherent risks of their respective loan portfolios, consideration is given to
exposures such as economic conditions, credit concentrations, collateral
coverage, the composition of the loan portfolio and trends in delinquencies.
Specific allocations are identified by individual loans with general allocations
assigned to the various loan categories. Loans classified by the subsidiary
bank's internal review or by the regulatory authorities are included in the
process of assessing the adequacy of the allowance for credit losses. This
process seeks to maintain an allowance level adequate to provide for potential
losses.
The provision for credit losses was $2.7 million in 1999 and $2.6
million in 1998. The provision expense in 1997 was $2.3 million.
53
<PAGE> 54
Net charge-offs were $1.3 million, or .22% of average loans, in 1999 as
compared to $1.4 million or .33%, in 1998. In 1997 net charge-offs were $2.9
million, or .80% of average loans. Net charge-offs are projected to be $1.14
million in 2000. Based upon the known risks in the subsidiary bank portfolios as
well as historical trends, 60% of the projected 2000 net charge-offs are
anticipated to be commercial and agricultural and 20% are anticipated to be real
estate construction loans. The 20% balance of the projected 2000 charge-offs is
anticipated to be installment loans to individuals.
At December 31, 1999, the subsidiary bank loan portfolios were not
subject to any known significant risks except the non-performing loans
previously identified. The Company's subsidiary bank loan portfolios at December
31, 1999 did not have any outstandings in international loans and, accordingly,
did not have any direct risk associated with currency fluctuations in Mexico or
the financial crisis in Asia.
The following table summarizes, for the periods indicated, loan balances
at the end of each period and average loans for the period, changes in the
allowance for credit losses arising from loans charged off, recoveries on loans
previously charged off, and additions to the allowance which have been charged
to operating expense and certain ratios relating to the allowance for credit
losses. While management has attributed reserves to various portfolio segments,
the allowance is general in nature and is available for the entire portfolio.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCES (000'S)
Average Loans $569,471 $432,834 $362,024 $299,593 $261,385
Total Loans at end of Period 652,929 497,829 404,986 337,071 287,934
ALLOWANCE FOR CREDIT LOSSES (000'S)
BALANCE - BEGINNING OF PERIOD $ 4,296 $ 3,145 $ 3,792 $ 3,504 $ 3,345
Charge -Offs
Commercial and Agricultural 377 1,066 1,983 257 1,446
Real Estate - Construction 527 73 770 1,298 195
Installment 432 476 438 334 304
-------- -------- -------- -------- --------
TOTAL CHARGE - OFFS 1,336 1,615 3,191 1,889 1,945
Recoveries:
Commercial and Agricultural 12 38 63 575 272
Real Estate - Construction 14 2 33 71 18
Installment 35 145 183 42 34
-------- -------- -------- -------- --------
TOTAL RECOVERIES 61 185 279 688 324
-------- -------- -------- -------- --------
Net Charge - Offs 1,275 1,430 2,912 1,201 1,621
Provision for Credit Losses 2,675 2,581 2,265 1,489 1,482
Reserves Acquired by Acquisition 298
-------- -------- -------- -------- --------
BALANCE - END OF PERIOD $ 5,696 $ 4,296 $ 3,145 $ 3,792 $ 3,504
======== ======== ======== ======== ========
RATIOS
Net Loans Charged Off to Average Loans 0.22% 0.33% 0.80% 0.40% 0.62%
Net Loans Charged Off to Total Loans
at End of Period 0.20 0.29 0.72 0.36 0.56
Allowance for Credit Losses to Average Loans 1.00 0.99 0.87 1.27 1.34
Allowance for Credit Losses to Total Loans
at End of Period 0.87 0.86 0.78 1.12 1.22
Net Loans Charged Off to Allowance
for Credit Losses 22.38 33.29 92.59 31.67 46.26
Net Loans Charged Off to Provision
for Credit Losses 47.66 55.40 128.57 80.66 109.38
</TABLE>
54
<PAGE> 55
NON-INTEREST INCOME
Total non-interest income was $7.0 million in 1999, $7.2 million in 1998
and $7.2 million in 1997. Service charges and fees on deposits were $4.6 million
in 1999, an increase of $160,000, or 3.7%, over 1998. In 1998 service charge
income rose $387,000, representing an increase of 9.7%, from 1997. The increases
in service charge income have been directly related to VIB's various
acquisitions as well as the internal growth in the number and volume of deposit
accounts.
Other income amounted to $729,000 in 1999, an increase of $50,000, or
7.3%, compared to the prior year. In 1998 other income totaled $679,000,
representing an increase of $149,000, or 28.0%, from 1997. The increases in
other income for both years were primarily the result of increases of dividends
on insurance policies utilized to fund deferred compensation programs.
Income generated through the sale of small business government
guaranteed loans provides an additional source of earnings. In 1999, the gain on
sale of these loans and related servicing fees totaled $1.7 million, an increase
of $83,000, or 5.1%, from 1998. Loan sale gains in 1998 amounted to $1.6
million, a decrease of $.5 million, or 23.3%, from 1997.
For the year ended December 31, 1999, the gain on sale of investment
securities was $2,000, compared to $489,000 in 1998. Investment securities gains
in 1997 were $551,000.
NON-INTEREST EXPENSE
Total non-interest expense for the year ended December 31, 1999 was
$33.5 million, an increase of $4.0 million, or 13.7%, as compared to 1998. After
adjusting for $.7 million in merger and one-time related expenses, non-interest
expense for the year ended December 31, 1999 was $32.8 million, an increase of
$3.3 million, or 11.2%. These expenditures amounted to $29.5 million in 1998,
representing an increase of $4.1 million, or 16.1%, over 1997.
Salary expense during the year ended December 31, 1999 was $13.2
million, an increase of $1.6 million, or 14%, over 1998. The growth in salary
expense is attributable to staffing additions related to the 1998 Palm Springs,
California branch acquisition from Palm Desert National Bank, the previously
discussed Hemet, California branch acquisition from Fremont Investment & Loan,
merit increases, paid commissions and performance incentives. In 1998, salary
expense was $11.6 million, an increase of $1.9 million, or 19.3%, compared to
1997.
Employee benefits expense was $3.1 million for the year ended December
31, 1999, an increase of $.5 million, or 20.8% compared to 1998. The increase in
benefits was attributable primarily to the previously discussed staffing
additions, increases in the Company's funding of the ESOP and 401K plans and
increases in medical insurance expenses. In 1998, employee benefit expense
amounted to $2.6 million, representing an increase of $80,000, or 3.2%, compared
to 1997.
Occupancy expenses were $2.6 million in 1999, an increase of $.2
million, or 7.8%, compared to 1998. In 1998, occupancy expense amounted to $2.5
million representing an increase of $.4 million, or 20.6%, compared to 1997.
Furniture and equipment expense totaled $2.6 million in both 1998 and 1999. In
1998, furniture and equipment expense increased $.5 million, or 21.7%, compared
with 1997. These increases were primarily the result of the acquisitions
previously discussed.
Other operating expense amounted to $12.0 million during the year ended
December 31, 1999, an increase of $1.7 million, or 16.6%, from 1998. Increases
in data processing,
55
<PAGE> 56
professional fees, advertising, business promotional expenses, intangible asset
amortization, as well as $661,000 in merger and related non-recurring expenses
were the primary causes for the increases. All other non-interest expenses in
1998 were $10.3 million, representing an increase of $1.3 million, or 13.9%,
over 1997.
INCOME TAX EXPENSE
Income tax expense for the year ending December 31, 1999 was $2.7
million as compared with $2.9 million for 1998, a decrease of $.3 million, or
9.7%. The decrease in tax expense was primarily attributable to a decrease in
the Company's effective tax rate from 34.5% for the year ended December 31, 1998
to 31.1% for the year ended December 31, 1999. The effective tax rate decrease
was primarily the result of a $1.2 million increase in non-taxable income from
municipal securities, partially offset by increases in non-deductible intangible
asset amortization and non-deductible merger and related non-recurring expenses.
Income tax expense for the year ending December 31, 1998 was $2.9
million as compared with $1.9 million for 1997, an increase of $1.0 million, or
54.7%. The increase in tax expense was primarily attributed to a $2.5 million
increase in taxable operating income as well as an increase in the Company's
effective tax rate from 31.6% for the year ended December 31, 1997 to 34.5% for
the year ended December 31, 1998. The effective tax rate increase was primarily
the result of increases in non-deductible intangible asset amortization expense
partially offset by increases in non-taxable income from state and municipal
securities.
CAPITAL RESOURCES
Total shareholders' equity averaged $56.4 million in 1999, an increase
of $3.5 million, or 6.5%, compared to 1998. At December 31, 1999 shareholders'
equity amounted to $58.2 million, an increase of $2.6 million, or 4.8%, over the
prior year end. During 1998 shareholders' equity averaged $52.9 million, an
increase of $17.4 million, or 48.9%, compared to 1997. At December 31, 1998,
shareholders' equity totaled $55.6 million, representing an increase of $6.3
million, or 12.8%, compared to year-end 1997. Per common share book value
increased to $5.09 at year end 1999 from $5.01 the prior year end. Book value
per common share at year-end 1997 was $4.68.
Under regulatory guidelines, capital adequacy is measured as a
percentage of risk-adjusted assets in which risk percentages are applied to
assets on as well as off the balance sheet. At December 31, 1999, the Tier I and
total risk based capital ratios were 10.93% and 11.94%, respectively, compared
to 9.27% and 10.01%, respectively, at December 31, 1998. The current minimum
regulatory guidelines for Tier I and total risk-based capital ratios are 4.0%
and 8.0%, respectively. The leverage ratio, which is a measure of average Tier I
capital to adjusted average assets was 8.87% at December 31, 1999, compared to
7.81% at year-end 1998. The leverage ratio at December 31, 1997 was 10.85%. The
Company's leverage ratio exceeds the current regulatory minimum of 3.0%. The
Company's capital ratios exceed all regulatory minimums and support future
planned growth, but may not be adequate to support additional acquisitions.
LIQUIDITY AND LIABILITY MANAGEMENT
The Company's consolidated liquidity position, enhanced by the Fremont
Investment & Loan branch acquisition, remained adequate to meet future
contingencies. At December 31, 1999 the Company had $115.9 million in net
Federal funds purchased and FHLB advances outstanding. This compared to $24.0
million in net Federal funds outstanding at December 31, 1998. Since December
31, 1998, net Federal funds purchased and FHLB advances have increased $91.9
56
<PAGE> 57
million. The Company's consolidated liquidity ratio at December 31, 1999 was
25.59%. This ratio represented a decrease from 23.09% at December 31, 1998.
The subsidiary banks' Asset/Liability Committees ("ALCO") function is to
oversee the maintenance of liquidity and the preservation of net interest income
when subjected to fluctuations in market interest rates. The ability to meet
existing and future funding commitments is the measure of liquidity. Liquidity
is also required to meet borrowing needs, deposit withdrawals and asset growth.
The subsidiaries develop liquidity through deposit growth, maturities and
repayments of loans and investments, net interest income, fee income and access
to purchase funds through correspondent banks or other entities.
The subsidiaries' ALCO manage the interest rate sensitivity or repricing
characteristics of their assets and liabilities. The primary source of earnings
for the subsidiaries is net interest income, which is subject to movements in
interest rates. To minimize the effect of changes in rates, the balance sheet
requires structuring in order that the repricing opportunities for both assets
and liabilities exist in nearly equivalent amounts and at approximately similar
time intervals. Interval differences may exist at times creating interest
sensitivity gaps, which represent the difference between interest sensitive
assets and interest sensitive liabilities. These gaps are static in nature and
do not consider future activity. As such, these gap measurements serve best as
an indicator for potential interest rate exposure.
The sensitivity to interest rate fluctuations is measured in several
time frames. Various strategies such as liability cost administration and
redeployment of asset maturities are utilized to preserve interest income from
the effect of changes in interest rates. The gap positions are monitored as a
function of the asset and liability management process. The monitoring process
includes the use of periodic simulated business forecasts, which incorporate
various interest rate environments. Financial modeling is utilized to assist
management in maintaining consistent earnings in an environment of changing
interest rates.
The following table sets forth the relative maturities of the
commercial, agricultural and construction loan portfolios and provides a
breakout relative to fixed and variable rate loan maturities:
<TABLE>
<CAPTION>
OVER ONE
YEAR
BUT LESS
ONE YEAR THAN OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
LOANS (000'S)
Commercial and Agricultural $ 84,731 $ 54,829 $ 40,569 $180,129
Real Estate - Construction 68,009 9,984 11,175 89,168
Real Estate - Other 24,103 94,775 225,501 344,379
Consumer 7,824 16,347 18,912 43,083
-------- -------- -------- --------
TOTAL $184,667 $175,935 $296,157 $656,759
======== ======== ======== ========
Loans With Predetermined (Fixed) Interest Rates $ 21,757 $ 89,122 $211,165 $322,044
Loans With Variable (Floating) Interest Rates 162,910 86,813 84,992 334,715
-------- -------- -------- --------
TOTAL $184,667 $175,935 $296,157 $656,759
======== ======== ======== ========
</TABLE>
The following schedule sets forth the maturities of time certificates of
deposit over $100,000 and their relative mix:
57
<PAGE> 58
<TABLE>
<CAPTION>
BALANCE PERCENT
(000'S) OF TOTAL
-------- --------
<S> <C> <C>
Less Than Three Months $ 60,800 41.9%
Three Months Through Six Months 39,040 26.9
Seven Months Through Twelve Months 31,678 21.8
Over Twelve Months 13,644 9.4
-------- --------
TOTAL $145,162 100.0%
======== ========
</TABLE>
The Company's subsidiaries do not maintain trading accounts for any
class of financial instrument nor do they engage in hedging activities or
purchase high-risk derivative instruments. Furthermore, the subsidiaries are not
subject to foreign currency exchange rate risk or commodity price risk.
In addition to gap measurement, the subsidiaries' ALCO are further
responsible for the measurement of interest rate risk, i.e., the risk of loss in
value due to changes in interest rates. The subsidiaries' ALCO monitor and
consider methods of managing interest rate risk by monitoring changes in net
portfolio value ("NPV") and net interest income under various interest rate
scenarios. The subsidiaries' ALCO attempts to manage the various components of
their respective balance sheets to minimize the impact of sudden and sustained
changes in interest rates on NPV and net interest income.
The subsidiary banks' exposure to interest rate risk is reviewed on a
periodic basis by their respective Boards of Directors and ALCO. If potential
changes to NPV and net interest income resulting from hypothetical interest rate
swings are not within the limits established by the Board, the Board may direct
management to adjust its assets and liability mix to bring interest rate risk
within Board-approved limits.
The subsidiary banks utilize interest rate sensitivity analysis to
measure interest rate risk by computing estimated changes in NPV of its cash
flows from assets and liabilities within a range of assumed changes in market
interest rates. NPV represents the market value of portfolio equity and is equal
to the market value of assets minus the market value of liabilities. This
analysis assesses the risk of loss in market rate sensitive instruments in the
event of sudden and sustained increases and decreases in market interest rates
ranging from one hundred to three hundred basis points. The subsidiary banks'
Boards of Directors have adopted interest rate risk policies, which establish a
maximum limit of decrease in the NPV in the event of sudden and sustained
increases, and decreases in market interest rates.
The following tables present VIB's and Bank of Stockdale's projected
changes in NPV and net interest income for the various rate shock levels as of
December 31, 1999:
58
<PAGE> 59
VALLEY INDEPENDENT BANK
CHANGE IN NET PORTFOLIO VALUE
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
NET PORTFOLIO ACTUAL PERCENTAGE
CHANGE IN INTEREST RATES VALUE (000'S) CHANGE (000'S) CHANGE
------------- ------------- -----------
<S> <C> <C> <C>
300 basis point rise $ 131,025 $ (6,610) (4.80)
200 basis point rise 135,336 (2,299) (1.67)
100 basis point rise 137,866 231 0.17
Base Rate Scenario 137,635 -- --
100 basis point decline 135,700 (1,935) (1.41)
200 basis point decline 128,840 (8,795) (6.39)
300 basis point decline 115,851 (21,784) (15.83)
</TABLE>
CHANGE IN NET INTEREST INCOME
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
NET INTEREST ACTUAL PERCENTAGE
CHANGE IN INTEREST RATES INCOME (000'S) CHANGE (000'S) CHANGE
------------- ------------- -----------
<S> <C> <C> <C>
300 basis point rise $ 34,221 $ 804 2.41
200 basis point rise 34,342 925 2.77
100 basis point rise 33,918 501 1.50
Base Rate Scenario 33,417 -- --
100 basis point decline 32,743 (674) (2.02)
200 basis point decline 31,527 (1,890) (5.66)
300 basis point decline 29,762 (3,655) (10.94)
</TABLE>
BANK OF STOCKDALE
CHANGE IN NET PORTFOLIO VALUE
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
NET PORTFOLIO ACTUAL PERCENTAGE
CHANGE IN INTEREST RATES VALUE (000'S) CHANGE (000'S) CHANGE
------------- ------------- -----------
<S> <C> <C> <C>
300 basis point rise $ 19,638 $ (4,994) (20.27)
200 basis point rise 21,731 (2,901) (11.78)
100 basis point rise 23,397 (1,235) (5.01)
Base Rate Scenario 24,632 -- --
100 basis point decline 24,968 336 1.36
200 basis point decline 24,473 (159) (0.65)
300 basis point decline 23,031 (1,601) (6.50)
</TABLE>
59
<PAGE> 60
CHANGE IN NET INTEREST INCOME
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
NET INTEREST ACTUAL PERCENTAGE
CHANGE IN INTEREST RATES INCOME (000'S) CHANGE (000'S) CHANGE
------------- ------------- -----------
<S> <C> <C> <C>
300 basis point rise $ 6,239 $ (155) (2.42)
200 basis point rise 6,350 (44) (0.69)
100 basis point rise 6,410 16 0.25
Base Rate Scenario 6,394 -- --
100 basis point decline 6,284 (110) (1.72)
200 basis point decline 6,154 (240) (3.75)
300 basis point decline 6,067 (327) (5.11)
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Although certain assets and liabilities may have similar
maturities or periods within which they will reprice, they may react differently
to changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. There may also be repayment risk if interest rates rise on loans.
Computation of forecasted effects of hypothetical interest rate changes
should not be relied upon as indicative of actual future results. Further, the
computations do not contemplate any actions the ALCO could undertake in response
to change in interest rates.
The Company is a legal entity, separate and distinct from its
subsidiaries. Although there exists the ability to raise capital on its own
behalf (such as the recent private placement of Capital Securities) or borrow
from external sources, the Company may obtain additional funds through dividends
paid by, and fees for services provided to, its subsidiaries. Regulations limit
the amount of dividends as well as service fees paid by subsidiaries. The
Company's expenses have been primarily covered by fees charged to and dividends
received from VIB and it is anticipated that the Company will be able to
continue to rely on dividends from its subsidiaries to fund its separate
operations and obligations. The Company may not always be able to rely solely on
its current or future subsidiaries to meet its obligations, including
obligations under the Capital Securities, or to maintain its separate liquidity.
Under such circumstances, the Company would be forced to seek other means to
raise capital. At December 31, 1999 the Company had adequate liquidity to meet
its anticipated funding needs.
INFLATION
The impact of inflation on a financial institution differs significantly
from that exerted on an industrial concern, primarily because its assets and
liabilities consist largely of monetary items. The relatively low proportion of
the Company's fixed assets to total assets of 1.3% at December 31, 1999, and
1.8% at December 31, 1998, reduces both the potential for inflated earnings
resulting from understated depreciation changes, and the potential for
significant understatement of absolute asset values. However, financial
institutions are affected by inflation's impact on non-interest expenses, such
as salaries and occupancy expense, and to some extent, by inflative impact on
interest rates.
60
<PAGE> 61
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information in response to this Item is included in "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Financial Statements are included in this Annual Report on
Form 10-K:
<TABLE>
<CAPTION>
INDEX PAGE
----
<S> <C>
Independent Auditors' Report - Vavrinek, Trine, Day & Co. LLP 62
Independent Auditors' Report - KPMG, LLP 63
Consolidated Balance Sheets as of December 31, 1999 and 1998 64
Consolidated Statements of Income for the Years Ended December 31, 1999,
1998 and 1997 66
Consolidated Statement of Changes in Shareholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997 67
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997 68
Notes to Consolidated Financial Statements 69
</TABLE>
The following table provides selected quarterly financial information
for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED FOR THE
----------------------------------------------------- YEAR ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
--------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1999
Net interest income $ 8,086 $ 8,686 $ 9,139 $ 9,127 $ 35,038
Other income 1,483 1,742 1,612 2,171 7,008
Net income 664 1,729 1,711 1,762 5,866
Basic earnings per share 0.06 0.16 0.16 0.14 0.52
Diluted earnings per share 0.06 0.16 0.16 0.14 0.52
1998
Net interest income $ 6,894 $ 7,306 $ 7,692 $ 6,912 $ 30,804
Other income 1,556 1,829 2,019 1,797 7,201
Net income 1,159 1,361 1,427 1,629 5,576
Basic earnings per share 0.11 0.13 0.11 0.16 0.51
Diluted earnings per share 0.11 0.12 0.11 0.15 0.49
</TABLE>
Although the foregoing selected quarterly data for 1998 varies from the
quarterly information filed during 1998 on Forms 10-Q, as a result of a pooling
of interests transaction in January, 1999, the foregoing information is
consistent with the quarterly information for 1998 filed during 1999 on Forms
10-Q.
61
<PAGE> 62
To the Shareholders and Board of Directors
of VIB Corp and Subsidiaries
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of VIB Corp and
Subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for the
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the VIB Corp's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the 1998 and 1997 financial
statements of Bank of Stockdale, FSB, a wholly owned subsidiary, a bank acquired
during 1999 in a transaction accounted for as a pooling of interests, as
discussed in Note R to the accompanying financial statements. Such statements
reflect total assets of $144,682,097 as of December 31, 1998, and total interest
and noninterest income of $12,484,303 and $11,275,754 for the two years ended
December 31, 1998. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for Bank of Stockdale, FSB as December 31, 1998, and for the two years
then ended, is based solely on 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VIB Corp and Subsidiaries as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
Laguna Hills, California
January 20, 2000
62
<PAGE> 63
To the Board of Directors
of Bank of Stockdale, FSB
INDEPENDENT AUDITORS' REPORT
We have audited the statements of financial condition of Bank of Stockdale, FSB
as of December 31, 1998, and the related statements of income, changes in
shareholders' equity, and cash flows for the years ended December 31, 1998 and
1997. These financial statements, which are not presented separately herein, are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bank of Stockdale, FSB as of
December 31, 1998, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
KPMG, LLP
Sacramento, California
February 19, 1999
63
<PAGE> 64
VIB CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 45,392,374 $ 32,828,883
Money Market Mutual Funds 366,296 2,656,481
------------- -------------
TOTAL CASH AND CASH EQUIVALENTS 45,758,670 35,485,364
Interest-Bearing Deposits 523,243 722,559
Investment Securities:
Securities Available for Sale 159,086,627 116,871,998
Securities Held to Maturity 2,921,978 2,925,793
------------- -------------
TOTAL INVESTMENT SECURITIES 162,008,605 119,797,791
Federal Home Loan and Federal Reserve Bank Stock, at cost 11,885,800 4,981,200
Loans:
Commercial 129,275,430 72,302,695
Agricultural 50,853,898 44,331,588
Real Estate - Construction 89,167,767 61,679,821
Real Estate - Other 344,378,738 276,808,778
Consumer 43,082,863 46,719,192
------------- -------------
TOTAL LOANS 656,758,696 501,842,074
Net Deferred Loan Fees (3,303,169) (3,517,179)
Allowance for Credit Losses (5,696,222) (4,296,415)
------------- -------------
NET LOANS 647,759,305 494,028,480
Premises and Equipment 12,130,243 12,426,156
Other Real Estate Owned 1,304,729 1,071,064
Cash Surrender Value of Life Insurance 14,294,521 8,642,738
Deferred Tax Assets 7,622,616 3,026,856
Goodwill 5,139,322 4,419,687
Accrued Interest and Other Assets 9,700,618 6,865,425
------------- -------------
$ 918,127,672 $ 691,467,320
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
64
<PAGE> 65
VIB CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Deposits:
Noninterest-Bearing Demand $ 174,711,805 $ 162,838,115
Money Market and NOW 133,592,522 142,157,859
Savings 64,004,639 55,128,551
Time Deposits Under $100,000 183,862,025 124,456,370
Time Deposits $100,000 and Over 145,161,883 115,522,088
------------- -------------
TOTAL DEPOSITS 701,332,874 600,102,983
Federal Funds Purchased 15,550,000 -
Federal Home Loan Bank Advances 112,200,000 29,000,000
Capitalized Lease Obligation 2,924,310 2,886,342
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures 22,400,000 -
Accrued Interest and Other Liabilities 5,475,128 3,875,848
------------- -------------
TOTAL LIABILITIES 859,882,312 635,865,173
Commitments and Contingencies - Notes D and J
Shareholders' Equity:
Preferred Stock - Authorized 10,000,000 Shares,
None Outstanding
Common Shares - Authorized
25,000,000 Shares; Issued and
Outstanding: 11,443,037 in 1999 and
10,513,543 in 1998 57,449,500 50,445,799
Retained Earnings 5,252,469 5,052,918
Accumulated Other Comprehensive Income-Net
Unrealized Gains (Losses) on Available-for-Sale
Securities, net of Taxes of $3,102,348 in 1999
and $71,437 in 1998 (4,456,609) 103,430
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 58,245,360 55,602,147
------------- -------------
$ 918,127,672 $ 691,467,320
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
65
<PAGE> 66
VIB CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $53,590,352 $43,980,944 $35,775,622
Interest on Investment Securities - Taxable 6,816,409 4,939,555 4,722,925
Interest on Investment Securities - Nontaxable 2,373,456 1,198,145 1,031,879
Other Interest Income 1,076,476 764,613 731,210
----------- ----------- -----------
TOTAL INTEREST INCOME 63,856,693 50,883,257 42,261,636
INTEREST EXPENSE
Interest on Money Market and NOW 3,363,120 3,216,888 2,344,493
Interest on Savings Deposits 1,476,627 1,135,760 1,095,779
Interest on Time Deposits 15,899,901 12,471,797 12,100,917
Interest on Trust Preferred Securities 1,845,925 - -
Interest on Other Borrowings 3,640,228 674,075 270,151
----------- ----------- -----------
TOTAL INTEREST EXPENSE 26,225,801 17,498,520 15,811,340
----------- ----------- -----------
NET INTEREST INCOME 37,630,892 33,384,737 26,450,296
Provision for Credit Losses 2,592,464 2,581,149 2,264,817
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 35,038,428 30,803,588 24,185,479
NONINTEREST INCOME
Service Charges and Fees 4,556,788 4,395,284 4,008,258
Gain on Sale of Loans and Servicing Fees 1,719,904 1,636,682 2,134,078
Gain on Sale of Securities 1,755 489,323 551,024
Other Income 729,283 679,427 530,663
----------- ----------- -----------
7,007,730 7,200,716 7,224,023
----------- ----------- -----------
42,046,158 38,004,304 31,409,502
NONINTEREST EXPENSE
Salaries and Employee Benefits 16,338,098 14,180,572 12,228,460
Occupancy Expenses 2,644,348 2,452,281 2,033,195
Furniture and Equipment 2,583,302 2,595,085 2,133,111
Data Processing 2,004,070 1,396,145 1,279,168
Advertising 552,079 557,116 364,645
Legal and professional 2,819,771 2,147,067 1,608,494
Regulatory Assessments 321,290 275,541 308,220
Insurance 214,228 213,612 197,201
Office Expenses 2,046,631 1,912,678 1,658,652
Promotion 1,157,333 1,106,430 1,187,247
Other Real Estate Owned 98,111 111,274 324,105
Amortization of Goodwill and Core Deposit Intangibles 401,813 490,783 349,961
Other Expenses 2,346,170 2,052,081 1,734,443
----------- ----------- -----------
33,527,244 29,490,665 25,406,902
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 8,518,914 8,513,639 6,002,600
Income Taxes 2,653,191 2,938,033 1,899,385
----------- ----------- -----------
NET INCOME $ 5,865,723 $ 5,575,606 $ 4,103,215
=========== =========== ===========
Per Share Data
Net Income - Basic $ 0.52 $ 0.51 $ 0.44
Net Income - Diluted $ 0.52 $ 0.49 $ 0.42
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
66
<PAGE> 67
VIB CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
Common Shares
Number of Comprehensive Retained
Shares Amount Income Earnings
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997
AS PREVIOUSLY REPORTED 6,823,615 $ 24,286,693 $ 2,473,963
Bank of Stockdale Pooling of Interests 1,472,152 7,678,214 (1,892,521)
------------ ------------ ------------
BALANCE AT JANUARY 1, 1997 AS RESTATED 8,295,767 31,964,907 581,442
Stock Dividends 150,637 2,199,307 (2,199,307)
Cash Dividends (21,724)
Exercise of Stock Options,
Including the Realization of
Tax Benefits of $96,000 121,669 637,470
Issuance of Common Shares
net of expenses of $143,917 1,521,507 11,788,886
COMPREHENSIVE INCOME:
Net Income for the Year $ 4,103,215 4,103,215
Unrealized gain on Available-for-Sale
Securities, net of Taxes of $257,651 368,453
Less Reclassification Adjustments
for Gains Included in Net Income,
net of Taxes of $225,920 (325,104)
------------
TOTAL COMPREHENSIVE INCOME $ 4,146,564
------------ ------------ ============ ------------
BALANCE AT DECEMBER 31, 1997 10,089,580 46,590,570 2,463,626
Stock Dividends 235,559 2,958,621 (2,958,621)
Cash Dividends (27,693)
Exercise of Warrants 2,496 38,513
Exercise of Stock Options,
Including the Realization of
Tax Benefits of $180,000 185,908 858,095
COMPREHENSIVE INCOME:
Net Income for the Year $ 5,575,606 5,575,606
Unrealized gain on Available-for-Sale
Securities, net of Taxes of $116,764 166,891
Less Reclassification Adjustments
for Gains Included in Net Income,
net of Taxes of $200,622 (288,701)
------------
TOTAL COMPREHENSIVE INCOME $ 5,453,796
------------ ------------ ============ ------------
BALANCE AT DECEMBER 31, 1998 10,513,543 50,445,799 5,052,918
Stock Dividends 646,076 5,639,846 (5,639,846)
Cash Dividends (26,326)
Exercise of Warrants 10 181
Exercise of Stock Options, Including the
Realization of Tax Benefits of $224,000 283,408 1,363,674
COMPREHENSIVE INCOME:
Net Income for the Year $ 5,865,723 5,865,723
Unrealized loss on Available-for-Sale
Securities, net of Taxes of $3,173,065 (4,559,004)
Less Reclassification Adjustments
for Gains Included in Net Income,
net of Taxes of $720 (1,035)
------------
TOTAL COMPREHENSIVE INCOME $ 1,305,684
------------ ------------ ============ ------------
BALANCE AT DECEMBER 31, 1999 11,443,037 $ 57,449,500 $ 5,252,469
============ ============ ============
</TABLE>
<TABLE>
Accumulated
Other
Comprehensive
Income Total
------------ ------------
<S> <C> <C>
BALANCE AT JANUARY 1, 1997
AS PREVIOUSLY REPORTED $ 278,877 $ 27,039,533
Bank of Stockdale Pooling of Interests (96,986) 5,688,707
------------ ------------
BALANCE AT JANUARY 1, 1997 AS RESTATED 181,891 32,728,240
Stock Dividends
Cash Dividends (21,724)
Exercise of Stock Options,
Including the Realization of
Tax Benefits of $96,000 637,470
Issuance of Common Shares
net of expenses of $143,917 11,788,886
COMPREHENSIVE INCOME:
Net Income for the Year 4,103,215
Unrealized gain on Available-for-Sale
Securities, net of Taxes of $257,651 368,453 368,453
Less Reclassification Adjustments
for Gains Included in Net Income,
net of Taxes of $225,920 (325,104) (325,104)
TOTAL COMPREHENSIVE INCOME
------------ ------------
BALANCE AT DECEMBER 31, 1997 225,240 49,279,436
Stock Dividends -
Cash Dividends (27,693)
Exercise of Warrants 38,513
Exercise of Stock Options,
Including the Realization of
Tax Benefits of $180,000 858,095
COMPREHENSIVE INCOME:
Net Income for the Year 5,575,606
Unrealized gain on Available-for-Sale
Securities, net of Taxes of $116,764 166,891 166,891
Less Reclassification Adjustments
for Gains Included in Net Income,
net of Taxes of $200,622 (288,701) (288,701)
TOTAL COMPREHENSIVE INCOME
------------ ------------
BALANCE AT DECEMBER 31, 1998 103,430 55,602,147
Stock Dividends -
Cash Dividends (26,326)
Exercise of Warrants 181
Exercise of Stock Options, Including the
Realization of Tax Benefits of $224,000 1,363,674
COMPREHENSIVE INCOME:
Net Income for the Year 5,865,723
Unrealized loss on Available-for-Sale
Securities, net of Taxes of $3,173,065 (4,559,004) (4,559,004)
Less Reclassification Adjustments
for Gains Included in Net Income,
net of Taxes of $720 (1,035) (1,035)
TOTAL COMPREHENSIVE INCOME
------------ ------------
BALANCE AT DECEMBER 31, 1999 $ (4,456,609) $ 58,245,360
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
67
<PAGE> 68
VIB CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
OPERATING ACTIVITIES 1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net Income $ 5,865,723 $ 5,575,606 $ 4,103,215
Adjustments to Reconcile Net Income
to Net Cash Provided (used) by Operating Activities:
Depreciation and Amortization 3,003,625 2,928,858 2,380,307
Deferred Income Taxes (1,265,000) (389,122) (122,751)
Net Realized Gains in Available-for-Sale Securities (1,755) (489,423) (551,024)
Provision for Credit Losses 2,592,464 2,704,143 2,530,900
Proceeds From Loans Sold 71,816,484 80,964,007 53,421,315
Originations of Loans Held for Sale (70,539,401) (71,691,964) (61,182,670)
Gain on Sale of Loans (1,326,451) (1,229,464) (1,691,968)
Loss (Gain) on Sale of Other Real Estate Owned 5,325 (106,993) (94,787)
Net Increase in Cash Surrender Value of Life Insurance (571,906) (394,222) (274,847)
Net Change in Accrued Interest, Other Assets
and Other Liabilities (1,636,755) (3,100,294) 461,920
------------- ------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 7,942,353 14,771,132 (1,020,390)
INVESTING ACTIVITIES
Proceeds from Sales of Other Real Estate Owned 549,405 666,448 2,752,683
Purchases of Available-for-Sale Securities (76,979,320) (112,017,855) (101,872,096)
Proceeds from Sales of Available-for-Sale Securities 2,455,316 18,581,915 29,927,064
Proceeds from Maturities of Available-for-Sale Securities 24,311,579 65,787,129 36,046,198
Purchases of Held-to-Maturities Securities (1,491,563) (1,952,420) -
Proceeds from Maturities of Held-to-Maturity Securities 1,490,207 3,163,671 2,090,801
Net Decrease in Interest-Bearing Deposits 199,316 263,381 293,000
Purchase of Federal Home Loan and Federal Reserve Bank Stock (6,667,700) (3,131,250) (742,950)
Purchase of Cash Surrender Value Life Insurance (5,079,877) - -
Net Increase in Loans (156,792,499) (102,824,958) (63,056,388)
Purchases of Premises and Equipment (2,035,884) (2,454,075) (3,726,175)
------------- ------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (220,041,020) (133,918,014) (98,287,863)
FINANCING ACTIVITIES
Net Increase in Demand Deposits and Savings Accounts 12,184,441 63,247,163 77,343,696
Net Increase in Time Deposits 87,924,003 15,719,122 20,250,515
Repayments of Capitalized Lease Obligation - - (7,664)
Net Change in Federal Funds Purchased 15,550,000 - -
Net Change in Federal Home Loan Bank Advances 83,200,000 29,000,000 (4,000,000)
Proceeds from Issuance of Trust Preferred Securities 22,400,000 - -
Proceeds from Issuance of Common Shares - - 11,788,886
Payments for Dividends (26,326) (27,693) (21,724)
Proceeds from Exercise of Warrants 181 38,513 -
Proceeds from Exercise of Stock Options 1,139,674 678,095 541,095
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 222,371,973 108,655,200 105,894,804
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,273,306 (10,491,682) 6,586,551
Cash and Cash Equivalents at Beginning of Year 35,485,364 45,977,046 39,390,495
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 45,758,670 $ 35,485,364 $ 45,977,046
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 25,663,098 $ 17,520,981 $ 15,759,077
Income Taxes Paid $ 3,670,284 $ 3,362,226 $ 1,046,000
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
68
<PAGE> 69
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of VIB Corp and its wholly owned
subsidiaries, Valley Independent Bank ("VIB") and Bank of Stockdale, FSB
("BOS"), (together the "Banks"), and Valley Capital Trust, collectively referred
to herein as the "Company". All significant intercompany transactions have been
eliminated.
Nature of Operations
The Banks have been organized as a single reporting segment and operate
seventeen branches throughout the Imperial and Coachella Valleys and in Blythe,
Tecate, Julian, and Bakersfield, California. The Banks also operate business
loan centers in El Centro, Rancho Mirage, Orange, Carlsbad, Bakersfield, Fresno,
California, Las Vegas, Nevada and Yuma, Arizona. The Banks' primary source of
revenue is providing loans to customers, who are predominately small and
middle-market businesses and individuals.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash,
due from banks and money market mutual funds.
Cash and Due From Banks
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit with the Federal Reserve Bank. The
Banks complied with the reserve requirements as of December 31, 1999.
The Company maintains amounts due from banks that exceed federally insured
limits. The Company has not experienced any losses in such accounts.
Investment Securities
Bonds, notes, and debentures for which the Company has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity.
69
<PAGE> 70
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Investment Securities - Continued
Investments not classified as trading securities nor as held to maturity
securities are classified as available-for-sale securities and recorded at fair
value. Unrealized gains or losses on available-for-sale securities are excluded
from net income and reported as an amount net of taxes as a separate component
of other comprehensive income included in shareholders' equity. Premiums or
discounts on held-to-maturity and available-for-sale securities are amortized or
accreted into income using the interest method. Realized gains or losses on
sales of held-to-maturity or available-for-sale securities are recorded using
the specific identification method.
Loans Held for Sale
Mortgage and SBA loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
Loans
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances reduced by any charge-offs or specific valuation
accounts and net of any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
For impairment recognized in accordance with Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118,
the entire change in the present value of expected cash flows is reported as
either provision for loan losses in the same manner in which impairment
initially was recognized, or as a reduction in the amount of provision for loan
losses that otherwise would be reported.
70
<PAGE> 71
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Allowance for Credit Losses
The allowance for credit losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Quarterly detailed reviews are performed to
identify the risks inherent in the loan portfolio, assess the overall quality of
the loan portfolio and to determine the adequacy of the allowance for credit
losses and the related provision for loan losses to be charged to expense. Loans
identified as less than "acceptable" are reviewed individually to estimate the
amount of probable losses that need to be included in the allowance. These
reviews include analysis of financial information as well as evaluation of
collateral securing the credit. Additionally, the Company considers the inherent
risk present in the "acceptable" portion of the loan portfolio taking into
consideration historical losses on pools of similar loans, adjusted for trends,
conditions and other relevant factors that may affect repayment of the loans in
these pools.
Premises and Equipment
Land is carried at cost. Bank premises, furniture and equipment, and leasehold
improvements are carried at cost, less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated service lives, which ranges from three to ten years for furniture and
fixtures and forty years for buildings. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the
improvements or the remaining lease term, whichever is shorter. Expenditures for
betterments or major repairs are capitalized and those for ordinary repairs and
maintenance are charged to operations as incurred.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of cost, or fair value
minus estimated costs to sell. Revenue and expenses from operations and changes
in the valuation allowance are included in other expenses.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the estimated fair
value of net assets associated with acquisition transactions of the Company
accounted for as purchases and is amortized over fifteen years. Core deposit
intangibles represent the intangible value of depositor relationships resulting
from deposit liabilities assumed in acquisitions and are amortized not more than
fifteen years. Goodwill and other intangibles are evaluated periodically for
other than temporary impairment. Should such an assessment indicate that the
undiscounted value of an intangible may be impaired, the net book value of the
intangible would be written down to net estimated recoverable value.
71
<PAGE> 72
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Income Taxes
Deferred income taxes are computed using the asset and liability method, which
recognizes a liability or asset representing the tax effects, based on current
tax law, of future deductible or taxable amounts attributable to events that
have been recognized in the consolidated financial statements. A valuation
allowance is established to reduce the deferred tax asset to the level at which
it is "more likely than not" that the tax asset or benefits will be realized.
Realization of tax benefits of deductible temporary differences and operating
loss carryforwards depends on having sufficient taxable income of an appropriate
character within the carryforward periods.
Disclosure About Fair Value of Financial Instruments
SFAS No. 107 specifies the disclosure of the estimated fair value of financial
instruments. The Company's estimated fair value amounts have been determined by
the Company using available market information and appropriate valuation
methodologies.
However, considerable judgment is required to develop the estimates of fair
value. Accordingly, the estimates are not necessarily indicative of the amounts
the Company could have realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since the balance sheet date
and, therefore, current estimates of fair value may differ significantly from
the amounts presented in the accompanying notes.
Earnings Per Shares (EPS)
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock. The pro forma effects of adoption are disclosed in
Note K.
72
<PAGE> 73
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Comprehensive Income
Beginning in 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires the disclosure of comprehensive income and its
components. Changes in unrealized gains (losses) on available-for-sale
securities, net of income taxes, are the only component of accumulated other
comprehensive income for the Company.
Accounting for Valley Capital Trust
Valley Capital Trust is a statutory business trust created for the exclusive
purpose of issuing and selling Cumulative Trust Preferred Securities (the "Trust
Preferred Securities") and using the proceeds to acquire the junior subordinated
debentures issued by VIB Corp.
For financial reporting purposes, Valley Capital Trust is treated as a
subsidiary of VIB Corp and, accordingly, the accounts are included in the
consolidated financial statements of the Company. The Trust Preferred Securities
are presented as a separate line item in the consolidated balance sheet under
the caption "Company Obligated Mandatory Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures." For financial
reporting purposes, the Company records the dividend distributions payable on
the Trust Preferred Securities as interest expense in the consolidated statement
of income.
Current Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
new standard was originally effective for 2000. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivatives Instruments and Hedging Activities -
Deferral of the Effective Dated of FASB Statement No. 133". This Statement
establishes the effective date of SFAS No. 133 for 2001 and is not expected to
have a material impact on the Company's financial statements.
Reclassifications
Certain reclassifications were made to prior years' presentations to conform to
the current year. These classifications are of a normal recurring nature.
73
<PAGE> 74
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE B - INVESTMENT SECURITIES
Debt and equity securities have been classified in the balance sheets according
to management's intent. The carrying amount of securities and their approximate
fair values at December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
DECEMBER 31, 1999:
U.S. Treasury Securities $ 596,686 $ 10,315 $ - $ 607,001
U.S. Government and
Agency Securities 77,889,751 10,888 2,921,273 74,979,366
States and Political
Subdivisions 56,999,219 9,689 3,273,750 53,735,158
Mortgage-Backed Securities 29,409,929 6,790 778,198 28,638,521
Other 1,750,000 - 623,419 1,126,581
------------ ------------ ------------ ------------
$166,645,585 $ 37,682 $ 7,596,640 $159,086,627
============ ============ ============ ============
DECEMBER 31, 1998:
U.S. Treasury Securities $ 550,010 $ 37,068 $ - $ 587,078
U.S. Government and
Agency Securities 44,401,733 114,408 133,312 44,382,829
States and Political
Subdivisions 38,051,649 449,660 262,406 38,238,903
Mortgage-Backed Securities 32,943,739 97,694 128,245 32,913,188
Other 750,000 - - 750,000
------------ ------------ ------------ ------------
$116,697,131 $ 698,830 $ 523,963 $116,871,998
============ ============ ============ ============
HELD-TO MATURITY SECURITIES:
DECEMBER 31, 1999:
Mortgage-Backed Securities $ 2,921,978 $ 197 $ 86,685 $ 2,835,490
------------ ------------ ------------ ------------
$ 2,921,978 $ 197 $ 86,685 $ 2,835,490
============ ============ ============ ============
DECEMBER 31, 1998:
Mortgage-Backed Securities $ 2,925,793 $ 2,635 $ 5,314 $ 2,923,114
------------ ------------ ------------ ------------
$ 2,925,793 $ 2,635 $ 5,314 $ 2,923,114
============ ============ ============ ============
</TABLE>
74
<PAGE> 75
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE B - INVESTMENT SECURITIES - CONTINUED
Gross realized gains and gross realized losses on sales of available-for-sale
securities were:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
GROSS REALIZED GAINS:
U.S. Government and Agency Securities $ - $ 11,409 $ 63,250
States and Political Subdivisions 1,755 485,893 498,480
-------- -------- --------
$ 1,755 $497,302 $561,730
======== ======== ========
GROSS REALIZED LOSSES:
U.S. Government and Agency Securities $ - $ - $ 10,706
Mortgage-Backed Securities - 7,876 -
-------- -------- --------
$ - $ 7,876 $ 10,706
======== ======== ========
</TABLE>
Investment securities carried at approximately $146,002,000 and $81,968,000, at
December 31, 1999 and 1998, respectively, were pledged to secure public
deposits, Federal Home Loan Bank advances and other purposes as required by law.
The scheduled maturities of securities available for sale and held-to-maturity
at December 31, 1999, were as follows:
<TABLE>
<CAPTION>
Available-for-Sale Securities Held-to-Maturity Securities
--------------------------------- -------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due in One Year or Less $ 936,869 $ 948,737 $ - $ -
Due from One Year to Five Years 79,447,755 76,908,966 - -
Due from Five to Ten Years 25,540,244 24,452,575 - -
Due after Ten Years 31,310,788 28,137,828 - -
Mortgage-Backed Securities 29,409,929 28,638,521 2,921,978 2,835,490
------------ ------------ ------------ ------------
$166,645,585 $159,086,627 $ 2,921,978 $ 2,835,490
============ ============ ============ ============
</TABLE>
75
<PAGE> 76
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE C - LOANS
The Banks loan portfolios consist primarily of loans to borrowers within
Imperial, Riverside, Kern, Orange and San Diego counties, California, Las Vegas,
Nevada and Yuma, Arizona. Although the Banks seek to avoid concentrations of
loans to a single industry or based upon a single class of collateral, real
estate and agricultural associated businesses are among the principal industries
in the Banks market areas. As a result, the Banks loan and collateral portfolios
are, to some degree, concentrated in those industries.
The Banks also originate real estate related and farmland loans for sale to
governmental agencies and institutional investors. At December 31, 1999 and
December 31, 1998, the Banks were servicing approximately $126,218,000 and
$111,712,000, respectively, in loans previously sold.
A summary of the changes in the allowance for credit losses follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at Beginning of Year $ 4,296,415 $ 3,144,623 $ 3,792,365
Additions to the Allowance Charged to Expense 2,592,464 2,581,149 2,264,817
Recoveries on Loans Charged Off 61,363 175,642 259,000
----------- ----------- -----------
6,950,242 5,901,414 6,316,182
Less Loans Charged Off (1,254,020) (1,604,999) (3,171,559)
----------- ----------- -----------
Balance at End of Year $ 5,696,222 $ 4,296,415 $ 3,144,623
=========== =========== ===========
</TABLE>
The following is a summary of the investment in impaired loans, the related
allowance for credit losses, and income recognized thereon as of December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Recorded Investment in Impaired Loans $ 8,964,000 $ 9,134,000 $11,340,000
=========== =========== ===========
Related Allowance for Credit Losses $ 1,515,000 $ 1,427,000 $ 1,559,000
=========== =========== ===========
Average Recorded Investment in Impaired Loans $ 8,362,000 $ 9,659,000 $10,814,000
=========== =========== ===========
Interest Income Recognized from Cash Payments $ 582,000 $ 443,000 $ 789,000
=========== =========== ===========
</TABLE>
76
<PAGE> 77
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE C - LOANS - CONTINUED
Loans having carrying values of $1,251,895, $1,967,810, and $4,156,485 were
transferred to other real estate owned in 1999, 1998 and 1997, respectively.
During 1999, 1998 and 1997, loans totaling $463,500, $2,228,121, and $3,598,475,
respectively, were made to facilitate the sale of other real estate owned.
NOTE D - PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31 follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land $ 2,024,128 $ 2,024,128
Buildings and Improvements 3,405,372 3,322,762
Leased Property under Capital Lease 2,850,000 2,850,000
Furniture, Fixtures, and Equipment 11,032,377 9,288,613
Leasehold Improvements 2,181,706 1,997,144
------------ ------------
21,493,583 19,482,647
Less Accumulated Depreciation and Amortization (9,363,340) (7,056,491)
------------ ------------
$ 12,130,243 $ 12,426,156
============ ============
</TABLE>
During 1997, VIB entered into a twenty-year lease agreement for administrative
offices that expires June 30, 2017. Total accumulated amortization on property
under capital lease at December 31, 1999 and 1998 was $356,250 and $213,750,
respectively.
The future lease payments under the capitalized lease obligation, together with
the present value of the net minimum lease payments as of December 31, 1999, are
as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 347,670
2001 359,839
2002 372,433
2003 385,468
2004 398,960
Thereafter 6,336,102
-----------
Net Minimum Lease Payments 8,200,472
Less Amount Representing Interest (5,276,162)
-----------
Present Value of Net Minimum Lease Payments $ 2,924,310
===========
</TABLE>
77
<PAGE> 78
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE D - PREMISES AND EQUIPMENT -CONTINUED
The Banks have entered into leases for their branches and operating facilities,
which expire at various dates through 2015. These leases include provisions for
periodic rent increases as well as payment by the lessee of certain operating
expenses. Rental expense relating to these leases was approximately $1,072,000
in 1999, $937,000 in 1998, and $687,000 in 1997.
The approximate future minimum annual payments for these leases by year are as
follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $1,209,000
2001 985,000
2002 777,000
2003 455,000
2004 241,000
Thereafter 1,303,000
----------
$4,970,000
==========
</TABLE>
The minimum rental payments shown above are given for the existing lease
obligations and are not a forecast of future rental expense.
NOTE E - DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $298,567,652
2001 18,586,474
2002 7,254,418
2003 2,633,031
Thereafter 1,982,333
------------
$329,023,908
============
</TABLE>
78
<PAGE> 79
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE F - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank Advances consist of the following as of December 31,
1999:
<TABLE>
<CAPTION>
Maturity Rate Amount
- ------------- ----------- --------------
<S> <C> <C>
1/03/00 5.01% $ 12,000,000
1/10/00 6.02% 24,000,000
1/18/00 5.92% 8,200,000
2/01/00 5.92% 25,000,000
2/01/00 6.05% 15,000,000
10/19/00 5.77% 25,000,000
10/29/01 4.85% 2,000,000
9/10/03 5.01% 1,000,000
------------
$112,200,000
============
</TABLE>
NOTE G - MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
On February 5, 1999, Valley Capital Trust, a wholly owned subsidiary of VIB
Corp, issued $22,400,000 of 9% Cumulative Trust Preferred Securities. Valley
Capital Trust invested the gross proceeds of $22,400,000 from the offering in
the junior subordinated debentures issued by VIB Corp. The subordinated
debentures were issued concurrent with the issuance of the Trust Preferred
Securities. VIB Corp will pay the interest on the junior subordinated debentures
to Valley Capital Trust, which represents the sole revenues and the sole source
of dividend distributions by Valley Capital Trust to the holders of the Trust
Preferred Securities. VIB Corp has guaranteed, on a subordinated basis, payment
of Valley Capital Trust's obligations. VIB Corp has the right, assuming no
default has occurred, to defer payments of interest on the junior subordinated
debentures at any time for a period not to exceed 20 consecutive quarters. The
Trust Preferred Securities will mature on February 5, 2029, but can be called
after February 5, 2009.
79
<PAGE> 80
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE H - INCOME TAXES
The provisions for income taxes included in the statements of income consist of
the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 2,915,326 $ 2,524,423 $ 1,592,536
State 1,002,865 802,732 429,600
----------- ----------- -----------
3,918,191 3,327,155 2,022,136
Deferred (1,265,000) (389,122) (122,751)
----------- ----------- -----------
$ 2,653,191 $ 2,938,033 $ 1,899,385
=========== =========== ===========
</TABLE>
Deferred taxes are a result of differences between income tax accounting and
generally accepted accounting principles with respect to income and expense
recognition.
The following is a summary of the components of the deferred tax asset and
liability accounts recognized in the accompanying statements of financial
condition:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Allowance for Credit Losses Due to Tax Limitations $ 1,508,000 $ 883,000
Valuation Allowance for Other Real Estate Owned 197,000 222,000
Premises and Equipment Due to Depreciation Difference 551,000 520,000
State Taxes 332,000 183,000
Net Operating Loss and Tax Credit Carryforwards 402,000 477,000
Capital Loss Carryforward - 56,000
Reserve for Deferred Compensation 1,265,000 817,000
Market Value Adjustment on Investment Securities 3,102,000 -
Other Assets/Liabilities 508,000 544,000
----------- -----------
7,865,000 3,702,000
Less Valuation Allowance (206,000) (307,000)
Deferred Tax Liabilities:
Federal Home Loan Bank Stock (132,000) (189,000)
Market Value Adjustment on Investment Securities - (71,000)
Other Assets/Liabilities (68,000) (114,000)
----------- -----------
(200,000) (374,000)
----------- -----------
Net Deferred Taxes $ 7,459,000 $ 3,021,000
=========== ===========
</TABLE>
80
<PAGE> 81
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE H - INCOME TAXES - CONTINUED
At December 31, 1999, the Banks had net operating loss carryforwards for federal
and state income tax purposes of approximately $1,173,000 and $44,000,
respectively, which expire beginning in the years 2011 and 2001, respectively.
The net operating loss carryforwards are subject to an ownership change, which
limits the amount that can be used annually to $260,000. Alternative minimum tax
credit carryforwards for tax purposes, which do not expire, are $12,000 as of
December 31, 1999.
A comparison of the federal statutory income tax rates to the Company's
effective income tax rates follow:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- -----------------------
Amount Rate Amount Rate Amount Rate
----------- ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Federal Tax Rate $ 2,897,000 34.0% $ 2,894,000 34.0% $ 2,041,000 34.0%
California Franchise Taxes,
Net of Federal Tax Benefit 468,000 5.4 530,000 6.2 326,000 5.4
Tax Savings from Exempt
Loan and Investment Interest (726,000) (8.5) (442,000) (5.2) (334,000) (5.6)
Low Income Housing Credit - - (77,000) (.9) (103,000) (1.7)
Change in Valuation Allowance (101,000) (1.1) (210,000) (2.5) 34,000 .5
Merger Costs 223,000 2.6 112,000 1.3 -
Other Items - Net (107,809) (1.3) 126,033 1.5 (64,615) (1.0)
----------- ---- ----------- ---- ----------- ----
Company's Effective Rate $ 2,653,191 31.1% $ 2,938,033 34.4% $ 1,899,385 31.6%
=========== ==== =========== ==== =========== ====
</TABLE>
NOTE I - EARNINGS PER SHARE (EPS)
The following is a reconciliation of net income and shares outstanding to the
income and number of share used to compute EPS:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- ------------------------------
Income Shares Income Shares Income Shares
------------- ------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Income as Reported $ 5,865,723 $ 5,575,606 $ 4,103,215
Weighted Average Shares
Outstanding During the Year 11,207,510 11,010,485 9,315,722
----------- ----------- ----------- ----------- ----------- ----------
USED IN BASIC EPS 5,865,723 11,207,510 5,575,606 11,010,485 4,103,215 9,315,722
Dilutive Effect of Outstanding
Stock Options 100,538 403,749 488,575
----------- ----------- ----------- ----------- ----------- ----------
USED IN DILUTIVE EPS $ 5,865,723 11,308,048 $ 5,575,606 11,414,234 $ 4,103,215 9,804,297
=========== =========== =========== =========== =========== ==========
</TABLE>
Warrants to purchase 137,955 shares of common stock at $14.00 per share were
outstanding during 1999 but were not included in the computation of diluted EPS
because the exercise price was greater than the average market price and
considered anitdilutive.
81
<PAGE> 82
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE J - COMMITMENTS AND CONTINGENCIES
The Company has established a salary continuation plan for certain key
executives and a deferred compensation plan for directors and key officers.
Benefits under the salary continuation plan are payable for a period of fifteen
years upon retirement or death. The Company expenses annually an amount
sufficient to accrue the present value of the benefits to be paid to the
executives upon their retirement. Additionally, the key executives'
beneficiaries are entitled to certain death benefits under the plan in the event
the executive dies while employed by the Company.
In accordance with the provisions of the deferred compensation plan, directors
and officers may choose to defer a portion of the annual compensation. The
Company expenses the compensation annually regardless of whether or not the
director or officer has chosen to defer compensation. Benefits under the plan
are payable over a ten year period. In the event of death, while a member of the
Board of Directors or an employee, the beneficiary will receive an amount that
would have been paid to the director or employee.
Death benefits payable under both plans is funded by life insurance policies
purchased by the Company. Compensation expense associated with the plans was
approximately $851,000 in 1999, $173,000 in 1998 and $138,000 in 1997.
The Company is involved in various litigation which has arisen in the ordinary
course of its business. In the opinion of management, the disposition of such
pending litigation will not have a material effect on the Company's financial
statements.
In the ordinary course of business, the Banks enter into financial commitments
to meet the financing needs of their customers. These financial commitments
include commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk not recognized in the statements of condition.
The Banks exposure to credit loss in the event of nonperformance on commitments
to extend credit and standby letters of credit is represented by the contractual
amount of those instruments. The Banks use the same credit policies in making
commitments as they do for loans reflected in the financial statements.
As of December 31, 1999, the Banks had the following outstanding financial
commitments whose contractual amount represents credit risk:
<TABLE>
<CAPTION>
<S> <C>
Commitments to Extend Credit $ 221,501,000
Standby Letters of Credit 1,592,000
-------------
$ 223,093,000
=============
</TABLE>
82
<PAGE> 83
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE J - COMMITMENTS AND CONTINGENCIES - CONTINUED
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. Standby
letters of credit are conditional commitments to guarantee the performance of a
bank customer to a third party. Since many of the commitments and standby
letters of credit are expected to expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. The Banks
evaluated each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained if deemed necessary by the Banks is based on management's
credit evaluation of the customer. The majority of the Banks commitments to
extend credit and standby letters of credit are secured by real estate.
NOTE K - STOCK OPTION PLAN
At December 31, 1999, the Company has a fixed stock option plan, which is
described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for its fixed stock option plan.
In 1997, the Company adopted a stock option plan (the "1997 Plan"), under which
2,731,817 shares of the Company's common shares may be issued to directors,
officers, and key employees at not less than 100% of the fair market value at
the date the options are granted.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for 1999, 1998
and 1997, respectively: risk-free rates of 5%, 4.5%, and 5.8%, volatility of
29.80%, 24.5%, and 17.5%, and expected lives of 3 years for 1999, 2.5 years for
1998 and 3 years for 1997.
83
<PAGE> 84
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE K - STOCK OPTION PLAN - CONTINUED
A summary of the status of the Company's fixed stock option plan as of December
31, 1999, 1998, and 1997, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at Beginning
of Year 844,554 $ 7 901,963 $ 6 849,506 $ 4
Granted 278,014 9 165,680 12 206,460 10
Exercised (290,830) 4 (204,712) 4 (135,299) 4
Forfeited ( 32,175) 10 ( 18,377) 8 ( 18,704) 5
------------- ------------- -------------
Outstanding at End of year 799,563 9 844,554 7 901,963 6
============= ============= =============
Options Exercisable
at Year-End 239,033 8 371,731 5 464,278 4
Weighted-Average Fair Value
of Options Granted During
the Year $ 2.37 $ 2.51 $ 2.02
</TABLE>
The following table summarizes information about fixed options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------ ---------------------------------
Weighted- Weighted Weighted-
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- -------------------- -------------- -------------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$ 3.00 to $ 4.99 64,529 3.25 $ 4.21 54,656 $ 4.08
$ 5.00 to $ 6.99 90,067 0.96 6.39 59,742 6.40
$ 7.00 to $ 8.99 168,817 4.17 8.08 17,883 7.89
$ 9.00 to $10.99 303,975 3.00 9.64 67,222 9.52
$11.00 to $13.99 172,175 3.06 12.37 39,530 12.39
-------------- --------------
799,563 3.05 9.09 239,033 7.85
============== ==============
</TABLE>
84
<PAGE> 85
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE K - STOCK OPTION PLAN - CONTINUED
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net income
would have been reduced to the following pro forma amount:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net Income:
As Reported $ 5,865,723 $ 5,575,606 $ 4,103,215
Pro Forma $ 5,487,464 $ 5,329,126 $ 3,939,817
Per Share Data:
Net Income - Basic
As Reported .52 .51 .44
Pro Forma .49 .48 .42
Net Income - Diluted
As Reported .52 .49 .42
Pro Forma .49 .47 .40
</TABLE>
NOTE L - STOCK OFFERING AND WARRANTS
In 1997, the Company completed a supplemental stock offering of 676,854 shares
of common stock at $13.19 per share. In connection with the offering, the
Company also issued 140,899 warrants. Each warrant was exercisable for one share
of common stock at an exercise price of $14.00 per share through October 31,
1998 and $16.15 thereafter. All unexpired warrants expired on October 29, 1999.
NOTE M - EMPLOYEE STOCK OWNERSHIP AND RETIREMENT SAVINGS PLANS
The Company has adopted an Employee Stock Ownership Plan and a Retirement
Savings Plan for the benefit of its employees. Contributions to the Plans are
determined annually by the Board of Directors. The combined expenses for these
plans were $752,000 in 1999, $624,000 in 1998, and $264,000 in 1997.
85
<PAGE> 86
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE N - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Banks have granted loans to certain
officers and directors and the companies with which they are associated. In the
Banks opinion, all loans and loan commitments to such parties are made on
substantially the same terms including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons.
The following is an analysis of the activity of all such loans:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Beginning Balance $ 6,148,000 $ 5,658,000
Credits Granted, Including Renewals 3,524,000 2,067,000
Repayments (2,667,000) (1,577,000)
----------- -----------
$ 7,005,000 $ 6,148,000
=========== ===========
</TABLE>
NOTE O - STOCK DIVIDENDS
VIB Corp has issued stock dividends of 6%, 3%, and 2% in 1999, 1998, and 1997,
respectively, a five-for-four stock split in 1998 and a six-for-five stock split
in 1997. The per share data in the statements of income and the footnotes have
been adjusted to give retroactive effect to these dividends and splits.
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market value exists
for a significant portion of the financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involve uncertainties and
matters of judgment and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
86
<PAGE> 87
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business, and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the realization
of the unrealized gains and losses can have a potential effect on fair value
estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments:
Financial Assets
The carrying amounts of cash, short term investments, due from customers on
acceptances, and bank acceptances outstanding are considered to approximate fair
value. Short term investments include federal funds sold, securities purchased
under agreements to resell, and interest bearing deposits with banks. The fair
values of investment securities, including available for sale, are generally
based on quoted market prices. The fair value of loans are estimated using a
combination of techniques, including discounting estimated future cash flows and
quoted market prices of similar instruments where available.
Financial Liabilities
The carrying amounts of deposit liabilities payable on demand, commercial paper,
and other borrowed funds are considered to approximate fair value. For fixed
maturity deposits, fair value is estimated by discounting estimated future cash
flows using currently offered rates for deposits of similar remaining
maturities. The fair value of long term debt is based on rates currently
available to the Company for debt with similar terms and remaining maturities.
Off Balance Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of credit is
estimated using the fees currently charged to enter into similar agreements. The
fair value of these financial instruments is not material.
87
<PAGE> 88
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair value of financial instruments at December 31 is summarized
as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------- ------------------------
Carry Value Fair Value Carry Value Fair Value
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Due From Banks $ 45,758 $ 45,758 $ 35,486 $ 35,486
Interest-Bearing Deposits $ 523 $ 523 $ 723 $ 723
Investment Securities $162,009 $161,922 $119,798 $119,795
FHLB and FRB Stock, at cost $ 11,886 $ 11,886 $ 4,981 $ 4,981
Loans $647,759 $640,863 $494,029 $500,594
Cash Surrender Value - Life Insurance $ 14,295 $ 14,295 $ 8,643 $ 8,643
Financial Liabilities:
Deposits $701,333 $701,685 $600,103 $601,547
Federal Funds Purchased $ 15,550 $ 15,550 $ - $ -
Federal Home Loan Bank Advances $112,200 $112,200 $ 29,000 $ 29,000
Capitalized Lease Obligation $ 2,924 $ 2,924 $ 2,886 $ 2,886
Trust Preferred Securities $ 22,400 $ 22,400 $ - $ -
</TABLE>
NOTE Q - REGULATORY MATTERS
VIB Corp and the Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that the
Company meets all capital adequacy requirements to which it is subject.
88
<PAGE> 89
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE Q - REGULATORY MATTERS - CONTINUED
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the VIB as adequately-capitalized under the
regulatory framework for prompt corrective action (there are no conditions or
events since that notification that management believes have changed the Bank's
category). To be categorized as well-capitalized, the Company must maintain
minimum ratios as set forth in the table below. The following table also sets
forth the Company's and the Banks actual capital amounts and ratios (dollar
amounts in thousands):
<TABLE>
<CAPTION>
Amount of Capital Required
----------------------------------------------------
To Be To Be
Adequately Well-
Actual Capital Capitalized Capitalized
--------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk-Weighted Assets)
VIB Corp $85,576 11.9% $57,363 8.0% $71,703 10.0%
Valley I dependent Bank $58,984 10.0% $47,158 8.0% $58,947 10.0%
Bank of Stockdale, FSB $12,404 10.2% $ 9,712 8.0% $12,141 10.0%
Tier 1 Capital (to Risk-Weighted Assets)
VIB Corp $78,381 10.9% $28,681 4.0% $43,022 6.0%
Valley Independent Bank $54,597 9.3% $23,579 4.0% $35,368 6.0%
Bank of Stockdale, FSB $11,349 9.4% $ 4,856 4.0% $ 7,284 6.0%
Tier 1 Capital (to Average Assets)
VIB Corp $78,381 8.9% $35,330 4.0% $44,163 5.0%
Valley Independent Bank $54,597 7.5% $29,118 4.0% $36,397 5.0%
Bank of Stockdale, FSB $11,349 7.0% $ 6,483 4.0% $ 8,103 5.0%
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets)
VIB Corp $55,102 10.0% $44,016 8.0% $55,020 10.0%
Valley Independent Bank $43,390 9.4% $36,566 8.0% $45,707 10.0%
Bank of Stockdale, FSB $10,901 11.8% $ 7,386 8.0% $ 9,232 10.0%
Tier 1 Capital (to Risk-Weighted Assets)
VIB Corp $51,031 9.3% $22,008 4.0% $33,012 6.0%
Valley Independent Bank $40,452 8.8% $18,283 4.0% $27,424 6.0%
Bank of Stockdale, FSB $ 9,775 10.6% $ 3,693 4.0% $ 5,539 6.0%
Tier 1 Capital (to Average Assets)
VIB Corp $51,031 7.8% $26,150 4.0% $32,687 5.0%
Valley Independent Bank $40,452 7.9% $20,544 4.0% $25,680 5.0%
Bank of Stockdale, FSB $ 9,775 6.8% $ 5,775 4.0% $ 7,219 5.0%
</TABLE>
89
<PAGE> 90
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE R - MERGERS AND ACQUISITIONS
On January 22, 1999, VIB completed the acquisition of the Hemet branch office
from Fremont Investment & Loan by assuming approximately $111,095,000 in
deposits. Goodwill arising from the transaction totaled approximately $1,139,000
and will be amortized over fifteen years.
On January 28, 1999, VIB Corp completed its acquisition of Bank of Stockdale,
FSB. The transaction was structured as a merger under which the Company issued
common shares in exchange for the common shares of Bank of Stockdale, FSB. The
transaction is accounted for by the pooling of interest method, whereby the
Company's financial statements have been restated as if the two companies were
historically one unit. A total of 2,355,334 common shares were issued to the
shareholders of Bank of Stockdale, FSB.
The following table summarizes the separate revenue and net income of the
Company and Bank of Stockdale, FSB that have been reported in the restated
financial statements included herein:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Interest and Noninterest Income:
VIB Corp $ 69,681,913 $ 45,599,670 $ 38,209,905
Bank of Stockdale, FSB 1,182,510 12,484,303 11,275,754
------------ ------------ ------------
$ 70,864,423 $ 58,083,973 $ 49,485,659
============ ============ ============
Net Income (Loss):
VIB Corp $ 6,260,523 $ 4,868,441 $ 3,800,989
Bank of Stockdale, FSB (394,800) 707,165 302,226
------------ ------------ ------------
$ 5,865,723 $ 5,575,606 $ 4,103,215
============ ============ ============
</TABLE>
On March 12, 1998, VIB Corp acquired Valley Independent Bank by issuing
7,742,645 shares of common stock in exchange for the surrender of all
outstanding shares of VIB's common stock. There was no cash involved in this
transaction. The acquisition was accounted for as a pooling of interest and the
consolidated financial statements contained herein have been restated to give
full effect to this transaction.
On March 2, 1998 VIB acquired the Palm Springs Branch office of Palm Desert
National Bank by assuming $16,121,000 in deposits and purchasing approximately
$8,308,000 in loans. Goodwill arising from the transaction totaled approximately
$1,282,000 and is being amortized over seven years on a straight-line basis.
90
<PAGE> 91
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE S - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
VIB Corp operates Valley Independent Bank, Bank of Stockdale, FSB, and Valley
Capital Trust. VIB Corp commenced operations during 1998. The earnings of the
subsidiaries are recognized on the equity method of accounting. Condensed
financial statements of VIB Corp only are presented below:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS:
Cash $ 94,083 $ 56,859
Federal Funds Sold - Valley Independent Bank 12,100,000 500,000
Investment in Valley Independent Bank 55,527,272 45,037,408
Investment in Bank of Stockdale FSB 11,165,278 9,759,620
Investment in Valley Capital Trust 693,000 -
Other Assets 1,758,727 248,260
----------- -----------
$81,338,360 $55,602,147
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Trust Preferred Securities $23,093,000 $ -
Shareholders' Equity 58,245,360 55,602,147
----------- -----------
$81,338,360 $55,602,147
=========== ===========
</TABLE>
91
<PAGE> 92
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE S - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
INCOME:
Interest Income $ 629,256 $ 11,113
Cash Dividends from Subsidiaries 56,133 350,000
----------- -----------
TOTAL INCOME 685,389 361,113
EXPENSES:
Interest on Trust Preferred Securities 1,902,058 -
Other 821,362 327,246
Allocated Tax Benefit (772,191) (92,695)
----------- -----------
TOTAL EXPENSES 1,951,229 234,551
----------- -----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES (1,265,840) 126,562
EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 7,131,563 5,449,044
----------- -----------
NET INCOME $ 5,865,723 $ 5,575,606
=========== ===========
</TABLE>
92
<PAGE> 93
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE S - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,865,723 $ 5,575,606
Noncash Items Included in Net Income:
Equity in Income of Subsidiaries (7,187,696) (5,799,044)
Other (1,510,465) (248,260)
------------ ------------
NET CASH USED
IN OPERATING ACTIVITIES (2,832,438) (471,698)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Subsidiaries (9,793,000) -
Dividends Received from Subsidiaries 56,133 350,000
------------ ------------
NET CASH (USED) PROVIDED
BY INVESTING ACTIVITIES (9,736,867) 350,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Trust Preferred Securities 23,093,000 -
Proceeds from Exercise of Stock Options and Warrants 1,139,855 706,225
Dividends Paid (26,326) (27,668)
------------ ------------
NET CASH PROVIDED
BY FINANCING ACTIVITIES 24,206,529 678,557
------------ ------------
NET INCREASE IN
CASH AND CASH EQUIVALENTS 11,637,224 556,859
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 556,859 -
------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 12,194,083 $ 556,859
============ ============
</TABLE>
93
<PAGE> 94
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE T - SUBSEQUENT EVENTS
On January 7, 2000 the Company acquired 100% of the outstanding common stock of
Kings River Bancorp (KRB) for $21,728,000 in cash. For the year ended December
31, 1999 KRB had total assets of approximately $87,227,000, interest and
noninterest income of approximately $7,956,000 and pretax income of
approximately $1,920,000. The acquisition will be accounted for using the
purchase method of accounting in accordance with APB No. 16, "Business
Combinations". Under this method of accounting, the purchase price is allocated
to the assets acquired and deposits and liabilities assumed based on their fair
values as of the acquisition date. Goodwill arising from this transaction
totaled approximately $12,400,000 and will be amortized over fifteen years on a
straight-line basis. The results of KRB's operations will be included in those
reported by the Company beginning on January 10, 2000.
94
<PAGE> 95
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with the Company's accountants on accounting
or financial disclosure.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from
Pages 4 to 7 and Page 16 of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held April 27, 2000.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
Pages 7 to 15 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 27, 2000.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from
Pages 2 to 4 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 27, 2000.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
Pages 15 to 16 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 27, 2000.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. FINANCIAL STATEMENTS
The Financial Statements listed on the Index included under "ITEM 8 -
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" are filed as a part of this Annual
Report on Form 10-K.
B. EXHIBITS
The following exhibits are filed as a part of this Report:
95
<PAGE> 96
<TABLE>
<CAPTION>
REG. S-K,
ITEM 601
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Plan of Reorganization and Merger Agreement, dated November 18,
1997, by and between Valley Independent Bank and VIB Merger
Company
2.2 Agreement and Plan of Reorganization by and between VIB Corp and
Bank of Stockdale, F.S.B. dated September 15, 1998
2.3 Agreement and Plan of Reorganization by and between VIB Corp,
Kings River Bancorp and Kings River State Bank dated September 7,
1999
3.1 Articles of Incorporation of VIB Corp, as amended November 20,
1999
3.2 Bylaws of VIB Corp
4.1 Form of Common Stock Certificate
4.2 Form of Warrant Certificate
4.3 Junior Subordinated Indenture dated as of February 5, 1999 by and
between the Registrant and Wilmington Trust Company, as trustee
4.4 Form of Junior Subordinated Debenture included in Article Two of
Exhibit 4.3
4.5 Trust Agreement of Valley Capital Trust dated as of December 10,
1998 (included as Exhibit A to Exhibit 4.6)
4.6 Amended and Restated Trust Agreement of Valley Capital Trust
dated as of February 5, 1999 among the Registrant, Wilmington
Trust Company, as Property Trustee, and Richard D. Foss, Harry G.
Gooding, III, and Dennis L. Kern, as Administrative Trustees
4.7 Form of Common Security Certificate of Valley Capital Trust
(included as Exhibit B to Exhibit 4.6)
4.8 Form of Capital Security Certificate of Valley Capital Trust
(included as Exhibit C to Exhibit 4.6)
4.9 Guarantee Agreement dated February 5, 1999 between the
Registrant, as Guarantor, and Wilmington Trust Company, as
Guarantee Trustee
4.10 Agreement as to Expenses and Liabilities dated February 5, 1999
between the Registrant and Valley Capital Trust
10.1 Agreement to Assume Liabilities and to Acquire Branch Banking
Office (Calexico)
10.2 Agreement and Plan of Reorganization Dated April 29, 1996 (Bank
of the Desert, N.A.)
10.3 Purchase and Assumption Agreement Dated October 15, 1996 (Blythe
and Tecate)
10.4 VIB Corp 1997 Stock Option Plan
10.5 Form of VIB Corp Stock Option Agreement
10.6 Form of VIB Corp Indemnity Agreement
10.7 Profit Sharing and 401(k) Plan
10.8 Amendment to 401(k) Plan
10.9 1994 Amendments to 401(k) Plan
10.10 Employee Stock Ownership Plan
10.11 Form of Directors Deferred Compensation Agreement
10.12 Form of Officers Deferred Compensation Agreement
10.13 El Centro Lease
10.14 Agreement to Assume Liabilities and to Acquire Assets of Branch
Banking Office Dated January 22, 1998 (Palm Springs)
10.15 Agreement to Assume Liabilities and to Acquire Assets of Branch
Office between Fremont Investment & Loan and Valley Independent
Bank dated September 22, 1998
</TABLE>
96
<PAGE> 97
B. EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
REG. S-K,
ITEM 601
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.16 VIB Corp 401(k) Plan (restated effective January 1, 1999)
10.17 Valley Independent Bank form of Executive Supplemental
Compensation Agreement
10.18 Bank of Stockdale, F.S.B. form of Executive Supplemental
Compensation Agreement
10.19 Bank of Stockdale, F.S.B. form of Life Insurance Endorsement
Method Split Dollar Plan Agreement (executive officers)
10.20 Bank of Stockdale, F.S.B. form of Director Supplemental
Compensation Benefits Agreement
10.21 Bank of Stockdale, F.S.B. form of Life Insurance Endorsement
Method Split Dollar Agreement (directors)
13 VIB Corp's 1999 Annual Report to Shareholders (incorporated
portion only)
21 Subsidiaries of the Registrant
23.1 Consent of Vavrinek, Trine, Day & Co., LLP
23.2 Consent of KPMG, LLP
27 Financial Data Schedule
</TABLE>
C. REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of 1999.
97
<PAGE> 98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VIB CORP
Date: March 20, 2000 By: /s/ Harry G. Gooding, III
--------------------------------------------
Harry G. Gooding, III,
Executive Vice President and Chief Financial
Officer
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
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
- ---------------------------------- Director March ___, 2000
Charles Ellis
/s/ Robert S. Ellison Director March 20, 2000
- ----------------------------------
Robert S. Ellison
/s/ Richard D. Foss Chairman of the Board March 20, 2000
- ---------------------------------- of Directors
Richard D. Foss
/s/ Harry G. Gooding, III Executive Vice President March 20, 2000
- ---------------------------------- and Chief Financial
Harry G. Gooding, III Officer (and Principal
Accounting Officer)
Director March ___, 2000
- ----------------------------------
Ed L. Hickman
/s/ Dennis L. Kern Director, President and March 20, 2000
- ---------------------------------- Chief Executive Officer
Dennis L. Kern
/s/ Edward McGrew Director March 20, 2000
- ----------------------------------
Edward McGrew
/s/ Ronald A. Pedersen Vice Chairman of the March 20, 2000
- ---------------------------------- Board of Directors
Ronald A. Pedersen
/s/ Alice Helen Lowery Westerfield Vice Chairman of the March 20, 2000
- ---------------------------------- Board of Directors
Alice Helen Lowery Westerfield
</TABLE>
98
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
REG. S-K, PAGE (OR
ITEM 601 FOOTNOTE
EXHIBIT NO. DESCRIPTION REFERENCE)
- ----------- ----------- ----------
<S> <C> <C>
2.1 Plan of Reorganization and Merger Agreement, dated November 18, 1997,
by and between Valley Independent Bank and VIB Merger Company............... (1)
2.2 Agreement and Plan of Reorganization by and between VIB Corp and
Bank of Stockdale, F.S.B. dated September 15, 1998.......................... (2)
2.3 Agreement and Plan of Reorganization by and between VIB Corp, Kings River
Bancorp and Kings River State Bank dated September 7, 1999.................. (3)
3.1 Articles of Incorporation of VIB Corp, as amended November 20, 1999......... 101
3.2 Bylaws of VIB Corp.......................................................... (4)
4.1 Form of Common Stock Certificate............................................ (5)
4.2 Form of Warrant Certificate ................................................ (5)
4.3 Junior Subordinated Indenture dated as of February 5, 1999 by and
between the Registrant and Wilmington Trust Company, as trustee............. (6)
4.4 Form of Junior Subordinate Debenture included in Article Two of
Exhibit 4.3................................................................. (6)
4.5 Trust Agreement of Valley Capital Trust dated as of December 10, 1998
(included as Exhibit A to Exhibit 4.6)...................................... (6)
4.6 Amended and Restated Trust Agreement of Valley Capital Trust dated as
of February 5, 1999 among the Registrant, Wilmington Trust Company, as
Property Trustee, and Richard D. Foss, Harry G. Gooding, III, and Dennis
L. Kern, as Administrative Trustees......................................... (6)
4.7 Form of Common Security Certificate of Valley Capital Trust (included as
Exhibit B to Exhibit 4.6)................................................... (6)
4.8 Form of Capital Security Certificate of Valley Capital Trust (included as
Exhibit C to Exhibit 4.6)................................................... (6)
4.9 Guarantee Agreement dated February 5, 1999 between the Registrant, as
Guarantor, and Wilmington Trust Company, as Guarantee Trustee............... (6)
4.10 Agreement as to Expenses and Liabilities dated February 5, 1999 between
the Registrant and Valley Capital Trust..................................... (6)
10.1 Agreement to Assume Liabilities and to Acquire Branch Banking
Office (Calexico)(P)....................................................... (7)
10.2 Agreement and Plan of Reorganization Dated April 29, 1996
(Bank of the Desert, N.A.)(P)............................................... (7)
10.3 Purchase and Assumption Agreement Dated October 15, 1996
(Blythe and Tecate)(P)...................................................... (7)
10.4 VIB Corp 1997 Stock Option Plan............................................. (4)
10.5 Form of VIB Corp Stock Option Agreement..................................... (4)
10.6 Form of VIB Corp Indemnity Agreement........................................ (4)
10.7 Profit Sharing and 401(k) Plan(P)........................................... (7)
10.8 Amendment to 401(k) Plan(P)................................................. (7)
10.9 1994 Amendments to 401(k) Plan(P)........................................... (7)
10.10 Employee Stock Ownership Plan(P)............................................ (7)
10.11 Form of Directors Deferred Compensation Agreement(P)........................ (7)
10.12 Form of Officers Deferred Compensation Agreement(P)......................... (7)
10.13 El Centro Lease(P).......................................................... (7)
10.14 Agreement to Assume Liabilities and to Acquire Assets of Branch Banking
Office Dated January 22, 1998 (Palm Springs)................................ (8)
</TABLE>
99
<PAGE> 100
EXHIBIT INDEX (CONTINUED)
<TABLE>
<CAPTION>
REG. S-K, PAGE (OR
ITEM 601 FOOTNOTE
EXHIBIT NO. DESCRIPTION REFERENCE)
- ----------- ----------- ----------
<S> <C> <C>
10.15 Agreement to Assume Liabilities and to Acquire Assets of Branch
Office between Fremont Investment & Loan and Valley Independent
Bank dated September 22, 1998............................................... (2)
10.16 VIB Corp 401(k) Plan (restated effective January 1, 1999)................... 109
10.17 Valley Independent Bank form of Executive Supplemental Compensation
Agreement................................................................... (9)
10.18 Bank of Stockdale, F.S.B. form of Executive Supplemental Compensation
Agreement................................................................... (9)
10.19 Bank of Stockdale, F.S.B. form of Life Insurance Endorsement Method
Split Dollar Plan Agreement (executive officers)............................ (9)
10.20 Bank of Stockdale, F.S.B. form of Director Supplemental Compensation
Benefits Agreement.......................................................... (9)
10.21 Bank of Stockdale, F.S.B. form of Life Insurance Endorsement Method
Split Dollar Agreement (directors) ......................................... (9)
13 VIB Corp's 1999 Annual Report to Shareholders (incorporated
portion only)............................................................... 217(10)
21 Subsidiaries of the Registrant.............................................. 218
23.1 Consent of Vavrinek, Trine, Day & Co., LLP ................................. 219
23.2 Consent of KPMG, LLP........................................................ 220
27 Financial Data Schedule..................................................... 221
</TABLE>
- ----------------
(1) Filed as Exhibit "A" to the Proxy Statement/Prospectus included in the
Registrant's Registration Statement on Form S-4 dated December 23, 1997
(the "1997 S-4 Registration Statement").
(2) Filed as an exhibit to the Registrant's Form 8-K dated September 29,
1998.
(3) Filed as an exhibit to the Registrant's Form 8-K dated September 16,
1999.
(4) Filed as an exhibit to the 1997 S-4 Registration Statement.
(5) Filed as an exhibit to the Registrant's Registration Statement on Form
8-A dated March 19, 1998.
(6) Filed as an exhibit to the Registrant's Form 8-K dated February 5, 1999.
(7) Filed as an exhibit to the Registrant's Form 10-K for the year ended
December 31, 1997.
(8) Filed as an exhibit to the Registrant's Form 10-K for the year ended
December 31, 1998.
(9) Filed as an exhibit to the Registrant's Form 10-Q for the quarterly
period ended September 30, 1999.
(10) The Company's Annual Report to Shareholders, a portion of which is
incorporated by reference, will be submitted under separate cover.
Except that portion incorporated by reference, the Annual Report to
Shareholders is not to be deemed "filed" as a part of this Form 10-K.
(P) Filed in paper format under cover of Form SE.
100
<PAGE> 1
Exhibit 3.1
ARTICLES OF INCORPORATION
OF
VIB CORP
[as amended November 20, 1999]
ARTICLE I: NAME
The name of this corporation is:
VIB CORP
ARTICLE II: PURPOSE
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III: AGENT
The name and complete business address in the State of California of this
corporation's initial agent for service of process is:
S. Alan Rosen, Esq.
Horgan, Rosen, Beckham & Coren, L.L.P.
21700 Oxnard Street, Suite 1400
Woodland Hills, California 91365
ARTICLE IV: CAPITAL
(a) The corporation is authorized to issue two classes of shares designated
"Preferred Stock" and "Common Stock," respectively. The number of shares of
Preferred Stock authorized to be issued is 10,000,000 and the number of shares
of Common Stock, no par value per share, authorized to be issued is 20,000,000.
(b) The Preferred Stock may be divided into such number of series as the
Board of Directors may determine. The Board of Directors is authorized to
determine and alter the rights, preferences, privileges and restrictions granted
to and imposed upon any wholly unissued series of Preferred Stock, and to fix
the number of shares of any series of Preferred Stock and the designation of any
such series of Preferred Stock. The Board of Directors, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, may increase or
decrease (but not below the number of
<PAGE> 2
shares of such series then outstanding) the number of shares of any series
subsequent to the issue of shares of that series.
ARTICLE V: RANGE OF DIRECTORS
(a) The business and affairs of the corporation shall be managed under the
direction of the Board of Directors. The authorized number of directors of the
corporation shall be not less than six (6) nor more than ten (10). The exact
number of directors shall be determined within the limits specified above by a
bylaw or by a resolution duly adopted by the Board of Directors or by the
shareholders.
(b) Notwithstanding any other provisions of these Articles of
Incorporation, the range of authorized directors of the corporation set forth in
Section (a) of Article V may only be amended by the vote of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares entitled to vote
thereon; provided, however, that an amendment reducing the minimum number of
directors to a number less than five (5) cannot be adopted if the votes cast
against its adoption at a meeting, or the shares not consenting in the case of
an action by written consent, are equal to more than sixteen and two-thirds
percent (16 2/3%) of the outstanding shares entitled to vote thereon.
ARTICLE VI: LIABILITY OF DIRECTORS
(a) The liability of directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
(b) The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) through Bylaw
provisions, agreements with agents, vote of shareholders or disinterested
directors, or otherwise, to the fullest extent permissible under California law.
(c) The corporation is authorized to purchase and maintain insurance on
behalf of its agents against any liability asserted against or incurred by the
agent in such capacity or arising out of the agent's status as such from a
company, the shares of which are owned in whole or in part by the corporation,
provided that any policy issued by such company is limited to the extent
provided by applicable law.
(d) Any amendment, repeal or modification of any provision of this Article
VI shall not adversely affect any right or protection of an agent of this
corporation existing at the time of such amendment, repeal or modification.
ARTICLE VII: FAIR PRICE PROTECTION
(a) Definitions. For the purposes of this Article VII:
2
<PAGE> 3
1. The term "Beneficial Owner" and correlative terms shall have the meaning
as set forth in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, or any similar successor Rule. Without limitation and in addition to
the foregoing, any Voting Stock of this corporation which any Major Shareholder
has the right to vote or to acquire: (i) pursuant to any agreement; (ii) by
reason of tenders of shares by shareholders of the corporation in connection
with or pursuant to a tender offer made by such Major Shareholder (whether or
not any tenders have been accepted, but excluding tenders which have been
rejected); or (iii) upon the exercise of conversion rights, warrants, options or
otherwise, shall be deemed "beneficially owned" by such Major Shareholder.
2. The term "Business Combination" shall mean:
A. Any merger or consolidation (whether in a single transaction or a
series of related transactions, including a series of separate transactions with
a Major Shareholder, any Affiliate or Associate thereof, or any Person acting in
concert therewith) of this corporation or any Subsidiary with or into a Major
Shareholder or of a Major Shareholder with or into this corporation or a
Subsidiary;
B. Any sale, lease, exchange, transfer, distribution to shareholders
or other disposition, including without limitation, a mortgage, pledge or any
other security device, to or with a Major Shareholder by the corporation or any
of its Subsidiaries (in a single transaction or a series of related
transactions) of all, substantially all or any Substantial Part of the assets of
this corporation or a Subsidiary (including, without limitation, any securities
of a Subsidiary);
C. The purchase, exchange, lease or other acquisition by the
corporation or any of its Subsidiaries (in a single transaction or a series of
related transactions) of all, substantially all or any Substantial Part of the
assets or business of a Major Shareholder;
D. The issuance of any securities, or of any rights, warrants or
options to acquire any securities, of this corporation or a Subsidiary, eighty
percent (80%) or more of which are issued to a Major Shareholder, or the
acquisition by this corporation or a Subsidiary of any securities, or of any
rights, warrants or options to acquire any securities, of a Major Shareholder;
E. Any reclassification of Voting Stock, recapitalization or other
transaction (other than a redemption in accordance with the terms of the
security redeemed) which has the effect, directly or indirectly, of increasing
the proportionate amount of Voting Stock of the corporation or any Subsidiary
thereof which is beneficially owned by a Major Shareholder, or any partial
liquidation, spin off, split off or split up of the corporation or any
Subsidiary thereof; provided, however, that this Section (a)2.E of Article VII
shall not relate to any transaction of the types specified herein that has been
approved by eighty percent (80%) of the Board of Directors; and
3
<PAGE> 4
F. Any Agreement, contract or other arrangement providing for any of
the transactions described herein.
3. The term "Major Shareholder" shall mean any Person which, together with
its "Affiliates" and "Associates" (as defined in Rule 12b-2 of the Securities
Exchange Act of 1934, as amended, or any similar successor Rule) and any Person
acting in concert therewith, is the beneficial owner of shares possessing ten
percent (10%) or more of the voting power of the Voting Stock of this
corporation, and any Affiliate or Associate of a Major Shareholder, including a
Person acting in concert therewith. The term "Major Shareholder" shall not
include a Subsidiary of this corporation.
4. The term "other consideration to be received" shall include, without
limitation, Voting Stock of this corporation retained by its existing
shareholders in the event of a Business Combination which is a merger or
consolidation in which this corporation is the surviving corporation.
5. The term "Person" shall mean any individual, corporation, partnership or
other person, group or entity (other than this corporation, any Subsidiary of
this corporation or a trustee holding stock for the benefit of employees of this
corporation or its Subsidiaries, or any one of them, pursuant to one or more
employee benefit plans or arrangements). When two or more Persons act as a
partnership, limited partnership, syndicate, association or other group for the
purpose of acquiring, holding or disposing of shares of stock, such partnership,
syndicate, association or group will be deemed a "Person."
6. The term "Subsidiary" shall mean any business entity fifty percent (50%)
or more of which is beneficially owned by this corporation.
7. The term "Substantial Part," as used in reference to the assets of the
corporation, of any Subsidiary or of any Major Shareholder means assets having a
value of more than five percent (5%) of the total consolidated assets of the
corporation and its Subsidiaries as of the end of the corporation's most recent
fiscal year ending prior to the time the determination is made.
8. The term "Voting Stock" shall mean stock or other securities entitled to
vote upon any action to be taken in connection with any Business Combination or
entitled to vote generally in the election of directors, and shall also include
stock or other securities convertible into Voting Stock.
(b) Notwithstanding any other provisions of these Articles of
Incorporation and except as set forth in Section (c) of Article VII, neither the
corporation nor any Subsidiary shall be party to a Business Combination unless:
1. The Business Combination was approved by the Board of
Directors of the corporation prior to the Major Shareholder involved in the
Business Combination becoming such; or
4
<PAGE> 5
2. The Major Shareholder involved in the Business Combination
sought and obtained the unanimous prior approval of the Board of Directors to
become a Major Shareholder and the Business Combination was approved by not less
than eighty percent (80%) of the Board of Directors; or
3. The Business Combination was approved by not less than ninety
percent (90%) of the Board of Directors of the corporation.
(c) The approval requirements of Section (b) of Article VII shall not
apply if the Business Combination is approved by the vote of at least sixty-six
and two-thirds percent (66 2/3%) of the shares of the Voting Stock of this
corporation and all of the following conditions are satisfied:
1. The aggregate of the cash and the fair market value of other
consideration to be received per share (as adjusted for stock splits, stock
dividends, reclassification of shares into a lesser number and similar events)
by holders of the Voting Stock of this corporation in the Business Combination
is not less than the higher of: (i) the highest per share price (including
brokerage commissions, soliciting dealers' fees, dealer-management compensation,
and other expenses, including, but not limited to, costs of newspaper
advertisements, printing expenses and attorneys' fees) paid by the Major
Shareholder in acquiring any of this corporation's Voting Stock; or (ii) an
amount which bears the same or a greater percentage relationship to the market
price of this corporation's Voting Stock immediately prior to the announcement
of such Business Combination as the highest per share price determined in (i)
above bears to the market price of this corporation's Voting Stock immediately
prior to the commencement of acquisition of this corporation's Voting Stock by
such Major Shareholder;
2. The consideration to be received in such Business Combination
by holders of the Voting Stock of this corporation shall be, except to the
extent that a shareholder agrees otherwise as to all or a part of his or her
shares, in the same form and of the same kind as paid by the Major Shareholder
in acquiring his Voting Stock of the corporation;
3. After becoming a Major Shareholder and prior to consummation
of such Business Combination: (i) such Major Shareholder shall not have acquired
any newly-issued shares of capital stock, directly or indirectly, from this
corporation or a Subsidiary (except upon conversion of convertible securities
acquired by it prior to becoming a Major Shareholder or upon compliance with the
provisions of this Article VII or as a result of a pro rata share dividend or
share split); and (ii) such Major Shareholder shall not have received the
benefit, directly or indirectly (except proportionately as a shareholder), of
any loans, advances, guarantees, pledges or other financial assistance or tax
credits provided by this corporation or a Subsidiary, or made any major changes
in this corporation's business or equity capital structure; and
4. A proxy statement responsive to the requirements of the
Securities Exchange Act of 1934 and Rules promulgated thereunder, whether or not
this corporation is then subject to such requirements, shall be mailed to all
shareholders of this corporation for the purpose of soliciting shareholders'
approval of such Business Combination and shall contain at the front
5
<PAGE> 6
thereof, in a prominent place: (i) any recommendations as to the advisability
(or inadvisability) of the Business Combination which any one or more members of
Board of Directors may choose to state; and (ii) the opinion of a reputable
national investment banking firm as to the fairness (or lack thereof) of the
terms of such Business Combination, from the point of view of the remaining
shareholders of this corporation (such investment banking firm to be engaged
solely on behalf of the remaining shareholders, to be paid a reasonable fee for
their services by this corporation upon receipt of such opinion, to be one of
the so-called major bracket investment banking firms which has not previously
been associated with such Major Shareholder and to be selected by the Board of
Directors).
(d) The affirmative vote required by this Article VII is in addition
to the vote of the holders of any class or series of stock of the corporation
otherwise required by law, these Articles of Incorporation, or any resolution
which has been adopted by the Board of Directors providing for the issuance of a
class or series of Preferred Stock.
(e) Nothing contained in this Article VII shall be construed as
relieving any Major Shareholder or any Affiliate or Associate thereof from any
fiduciary obligation imposed by law.
(f) The fact that any action or transaction complies with the
provisions of this Article VII shall not be construed as imposing any fiduciary
duty, obligation or responsibility on the Board of Directors or any member
thereof to approve such action or transaction or recommend its adoption or
approval to the shareholders of the corporation, nor shall such compliance
limit, prohibit or otherwise restrict in any manner the Board of Directors, or
any member thereof, with respect to evaluations of, or action and responses
taken with respect to, such action or transaction.
(g) Any amendment, change or repeal of this Article VII or any other
amendment of these Articles of Incorporation which would have the effect of
modifying or permitting circumvention of the provisions of this Article VII
shall require approval by at least a sixty-six and two-thirds percent (66 2/3%)
vote of the Voting Stock of the corporation.
ARTICLE VIII: CLASSIFICATION OF DIRECTORS
(a) This Article VIII shall become effective only when the corporation
becomes a listed corporation within the meaning of Section 301.5 of the
Corporations Code, which provision refers to a corporation whose shares are
traded on the New York Stock Exchange, American Stock Exchange, or Nasdaq
National Market System.
(b) In the event the authorized number of directors shall be fixed at
nine (9) or more, the Board of Directors shall be classified into three (3)
classes, the members of each class to serve for a term of three (3) years. In
the event the authorized number of directors shall be fixed at six (6) or more,
but less than nine (9), the Board of Directors shall be classified into two (2)
classes, the members of each class to serve for a term of two (2) years.
6
<PAGE> 7
(c) The election of directors by the shareholders shall not be by
cumulative voting. At each election of directors, each shareholder entitled to
vote may vote all the shares held by that shareholder for each of several
nominees for director up to the number of directors to be elected. The
shareholder may not cast more votes for any single nominee than the number of
shares held by that shareholder.
(d) At the first annual meeting of shareholders held after the
corporation qualifies as a listed corporation within the meaning of Section
301.5 of the Corporations Code the nominees elected as directors will be
classified on the basis of the number of votes received; the nominees receiving
the highest number of votes will be elected to the class(es) with the longest
initial terms, as follows: (i) if there shall be three (3) classes one-third
(1/3) of the directors shall be elected for a term of three (3) years, one-third
(1/3) of the directors shall be elected for a term of two (2) years, and
one-third (1/3) of the directors shall be elected for a term of one (1) year. If
the number of directors is not divisible by three (3), the first extra director
shall be elected for a term of three (3) years and a second extra director, if
any, shall be elected for a term of two (2) years; and (ii) if there shall be
two (2) classes, one-half (1/2) of the directors shall be elected for a term of
two (2) years and one-half (1/2) of the directors shall be elected for a term of
one (1) year. If the number of directors is not divisible by two (2), the first
extra director shall be elected for a term of two (2) years.
(e) Subject to the provisions of Section (a) of Article V providing
for a change in the authorized number of directors, at subsequent annual
meetings of shareholders, a number of directors shall be elected equal to the
number of directors with terms expiring at that annual meeting. If there shall
be three (3) classes, at each subsequent annual meeting the directors elected
shall be elected for a term of three (3) years. If there shall be two (2)
classes, at each subsequent annual meeting the directors elected shall be
elected for a term of two (2) years. In the event the authorized number of
directors changes necessitating a change in the number of classes, the directors
of the corporation shall be reclassified in accordance with California law and
the principles of Section (d) of this Article VIII; provided, however, any
change in the number of classes shall not operate to shorten the term of any
director.
(f) If the number of directors is changed, any increase or decrease
shall be apportioned among the classes so as to maintain the number of directors
in each class as nearly equal as possible, and any additional directors of any
class elected to fill a vacancy resulting from an increase in such class shall
hold office for a term that shall coincide with the remaining term of that
class, but in no case will a decrease in the number of directors shorten the
term of any incumbent director. A director shall hold office until the annual
meeting for the year in which his term expires and until his successor shall be
elected and shall qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office. Any vacancy on the Board of
Directors, howsoever resulting, may be filled by a majority of the directors
then in office, even if less than a quorum, or by a sole remaining director. Any
director elected to fill a vacancy shall hold office for a term that shall
coincide with the term of the class to which such director shall have been
elected.
7
<PAGE> 8
(g) Notwithstanding the foregoing provisions of this Article VIII,
whenever the holders of any one or more classes or series of Preferred Stock
issued by the corporation shall have the right, voting separately by class or
series, to elect directors at an annual or special meeting of shareholders, the
election, term of office, filling of vacancies and other features of such
directorships shall be governed by the terms of these Articles of Incorporation
or the resolution or resolutions adopted by the Board of Directors pursuant to
Article IV applicable thereto, and such directors so elected shall not be
divided into classes pursuant to this Article VIII unless expressly provided by
such terms.
(h) Notwithstanding any other provision of these Articles of
Incorporation, any amendment, change or repeal of this Article VIII shall
require the vote of at least sixty-four and four-tenths percent (64.4%) of the
outstanding shares entitled to vote thereon.
/s/ S. Alan Rosen
---------------------------------
S. Alan Rosen, Incorporator
8
<PAGE> 1
EXHIBIT 10.16
VIB CORP.
401(k) PLAN
Originally Effective January 1, 1989
Restated Effective January 1, 1999
<PAGE> 2
VIB CORP.
401(K) PLAN
<TABLE>
<S> <C>
ARTICLE I - PURPOSE...................................................................1
1.1 Exclusive Benefit......................................................1
1.2 No Rights Of Employment Granted........................................2
ARTICLE II - DEFINITIONS..............................................................2
2.1 Accrued Benefit........................................................2
2.2 Actual Deferral Percentage.............................................2
2.3 Administrative Committee...............................................3
2.4 Affiliated Employer....................................................3
2.5 Average Actual Deferral Percentage.....................................4
2.6. Average Contribution Percentage........................................4
2.7 Board..................................................................4
2.8 Beneficiary............................................................4
2.9 Cash-Out...............................................................4
2.10 Code...................................................................5
2.11 Company................................................................5
2.12 Compensation...........................................................5
2.13 Elective Deferrals.....................................................6
2.14 Elective Deferrals Account.............................................7
2.15 Eligible Employee......................................................7
2.16 Eligibility Computation Period.........................................7
2.17 Employee...............................................................7
2.18 Employer...............................................................8
2.19 Employer Account.......................................................8
2.20 ERISA................................................................. 9
2.21 Excess Aggregate Contributions........................................ 9
2.22 Excess Contributions.................................................. 9
2.23 Excess Deferral Amount................................................ 9
2.24 Forfeiture............................................................ 9
2.25 Highly Compensated Employee........................................... 9
2.26 Hour Of Service.......................................................11
2.27 In-Service Distribution...............................................13
2.28 Leave Of Absence......................................................14
2.29 Matching Contributions................................................14
2.30 Matching Contributions Account........................................14
2.31 Member Company........................................................14
2.32 Nonhighly Compensated Employee........................................14
</TABLE>
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2.33 Normal Retirement Age.................................................15
2.34 One (1) Year Break In Service.........................................15
2.35 Participant...........................................................16
2.36 Plan..................................................................16
2.37 Plan Administrative Committee.........................................16
2.36 Plan Year.............................................................16
2.39 Predecessor Employer..................................................16
2.40 Qualified Joint And Survivor Annuity..................................16
2.41 Qualified Matching Contributions......................................16
2.42 Qualified Matching Contributions Account..............................17
2.43 Qualified Nonelective Contributions...................................17
2.44 Qualified Nonelective Contributions Account...........................17
2.45 Qualified Pre-Retirement Survivor Annuity.............................17
2.46 Retirement............................................................17
2.47 Rollover Account......................................................17
2.48 Rollover Contribution.................................................17
2.49 Termination Date......................................................18
2.50 Total And Permanent Disability........................................18
2.51 Total Service For Vesting.............................................18
2.52 Trust.................................................................19
2.53 Trust Fund............................................................19
2.54 VIB Corp..............................................................20
2.55 Year Of Service For Accrual Of Benefits...............................20
2.56 Year Of Service For Vesting...........................................20
ARTICLE III - ELIGIBILITY TO PARTICIPATE.............................................20
3.1 Initial Entry.........................................................20
3.2 Resumption Of Participation...........................................20
ARTICLE IV - CONTRIBUTIONS TO THE TRUST..............................................21
4.1 Elective Deferrals By Participants....................................21
4.2 Matching Contributions................................................21
4.3 Employer Discretionary Contributions To Participants..................22
4.4 Manner Of Allocation Of Employer Discretionary
Contributions.........................................................23
4.5 Annual Limitation On Participant Elective Deferrals...................23
4.6 Average Actual Deferral Percentage Limitation.........................25
4.7 Average Contribution Percentage Limitation............................29
4.8 Multiple Use of Alternative Limitation................................33
4.9 Permissible Types Of Employer Contributions...........................35
4.10 Loans To Participants.................................................35
4.11 Rollover Contributions................................................37
ARTICLE V - ADMINISTRATION OF ACCOUNTS...............................................38
</TABLE>
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5.1 Investments...........................................................38
5.2 Invest In Single Fund And Reasonable Rules............................38
5.3 Valuation Of Assets And Allocation Of Changes.........................39
5.4 Limitations On Allocations To Each Participant........................40
5.5 Designation Of Beneficiary............................................47
ARTICLE VI - VESTING.................................................................48
6.1 Certain Accounts One Hundred Percent (100%)Vested.....................48
6.2 Employer Account Vesting On Death, Retirement, Or Total
And Permanent Disability..............................................48
6.3 Employer Account Vesting On Termination...............................48
6.4 Employer Account And Matching Contributions Account
Vesting On Termination................................................49
6.5 Forfeiture For Certain Acts...........................................49
6.6 Restoration Of Forfeitures............................................49
ARTICLE VII - DISTRIBUTION OF BENEFITS...............................................50
7.1 Method Of Distribution Of Participant Rollover Account Before
Termination of Service................................................50
7.2 Hardship Distribution.................................................50
7.3 Method Of Distribution Of Accounts....................................52
7.4 Time of Distribution..................................................54
7.5 Qualified Joint and Survivor Annuity or Pre-Retirement
Survivor Annuity.....................................................60
7.6 Segregation If Installment Distribution...............................68
7.7 Non-Segregation If Installment Distribution...........................69
7.8 Distribution After Death Of Participant...............................69
7.9 Distribution After Death Of Beneficiary...............................69
7.10 Rollover From Plan....................................................69
7.11 Suspense Account For Terminated Participants..........................69
7.12 Unable To Locate Participant Or Beneficiary...........................70
7.13 Repayment Of Cash-Out.................................................71
7.14 Qualified Domestic Relations Orders...................................71
7.15 Direct Rollover.......................................................72
ARTICLE VIII - DUTIES AND AUTHORITY OF TRUSTEE.......................................73
8.1 Receive Payments......................................................73
8.2 Value Assets..........................................................73
8.3 Segregation Of Accounts...............................................73
8.4 Tax Returns And Reports...............................................75
8.5 Powers................................................................75
8.6 Expenses..............................................................76
8.7 Litigation............................................................77
8.8 Written Instructions..................................................77
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8.9 Appointment of Investment Manager.....................................77
8.10 Removal And Resignation Of The Trustee................................77
8.11 Participant Directed Accounts.........................................77
ARTICLE IX - DUTIES AND AUTHORITY OF ADMINISTRATIVE
COMMITTEE...............................................................78
9.1 Appointment...........................................................78
9.2 No Discrimination.....................................................78
9.3 Majority Action.......................................................78
9.4 Powers................................................................79
9.5 Filing Reports........................................................79
9.6 Records And Information...............................................79
9.7 Information To Participants...........................................79
9.8 Compensation Of Members...............................................79
9.9 Review Of Participant's Claims........................................81
ARTICLE X - MODIFICATIONS FOR TOP-HEAVY PLANS........................................81
10.1 Application Of Article................................................81
10.2 Definitions...........................................................81
A. Key employee......................................................81
B. Annual Compensation...............................................82
C. Top-Heavy plan....................................................82
D. Top-Heavy ratio...................................................82
E. Permissive Aggregation Group......................................84
F. Required Aggregation Group........................................84
G. Determination Date................................................84
H. Non-Key Employee..................................................84
10.3 Accelerated Vesting...................................................84
10.4 Minimum Contributions.................................................85
10.5 Limitation On Compensation Taken Into Account Under
Plan..................................................................86
10.6 Modification Of Defined Benefit And Defined Contribution
Fraction..............................................................87
ARTICLE XI - AMENDMENT AND TERMINATION...............................................88
11.1 Rights To Suspend Or Terminate Plan...................................88
11.2 Successor Corporation.................................................88
11.3 Amendment.............................................................88
11.4 One Hundred Percent (.89%) Vesting On Termination Of Plan.............89
11.5 Plan Merger Or Consolidation..........................................89
ARTICLE XII - MISCELLANEOUS..........................................................89
12.1 Laws of California To Apply..........................................89
12.2 Credit For Qualified Military Service.................................90
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12.3 Participant Cannot Transfer Or Assign Benefits........................90
12.4 Right To Perform Alternative Acts.....................................90
12.5 Reversion Of Contributions Under Certain Circumstances................90
12.6 Plan Administrative Committee Agent For Service of Process............91
12.7 Filing Tax Returns And Reports........................................91
12.8 Indemnification.......................................................91
12.9 Number And Gender.....................................................92
</TABLE>
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<PAGE> 7
AMENDED AND RESTATED
VIB CORP.
401(K) PLAN
This Profit Sharing Plan and Trust Agreement with 401(k) and 401(m) features by
and between VIB Corp., a corporation of the State of California, having its
principal place of business at 1498 Main Street, El Centro, California 92243,
herein called "Employer" and Dennis L. Kern, Stephen Ellison, Janice S. Grady
and R. A. Pederson, herein called "Trustee," is hereby amended and restated.
RECITALS
WHEREAS, the Employer adopted a profit sharing plan with 401(k) and 401(m)
features effective January 1, 1989;
WHEREAS, the Employer amended and restated the profit sharing plan with 401(k)
and 401(m) features effective January 1, 1995;
WHEREAS, Employer desires to amend and restate the profit-sharing plan with
401(k) and 401(m) features it has previously established to rename the Plan the
VIB Corp. 401(k) Plan and to conform to changes required by the Uniformed
Service Employment and Reemployment Rights Act (USERRA), the Uruguay Round
Agreements Act of '94 (GATT), the Small Business Job Protection Act of 1996
(SBJPA '96) and the Taxpayer Relief Act of 1997 (TRA '97) and other applicable
laws, regulations, and administrative authority;
THEREFORE, effective January 1, 1999 with certain provisions effective
retroactively to January 1, 1997, and, except as otherwise stated in the Plan,
Employer hereby amends and restates its existing profit-sharing plan with 401(k)
and 401(m) features and trust as follows:
ARTICLE I - PURPOSE
1.1 Exclusive Benefit.
This Plan has been executed for the exclusive benefit of the
Participants hereunder and their Beneficiaries. This Plan shall be
interpreted in a manner consistent with this intent and with the
intention of the Employer that this Plan satisfy Internal Revenue Code
(Code) section 401 and section 501. Under no circumstances shall the
Trust Fund ever revert to or be used or enjoyed by the Employer, except
as provided in the Reversion Of Contributions section of Article XII.
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This Plan is an individual account plan and is intended to qualify as an
"Eligible Individual Account Plan" as defined in ERISA section 407(d).
As such, this Plan (i) shall not constitute a component of any
floor-offset arrangement of qualified plans, (ii) shall be eligible to
invest any or all of its trust assets in "Qualifying Employer
Securities" as defined in section 407(d)(5) of ERISA, and (iii) shall be
otherwise exempt from the diversification requirements of ERISA section
404(a)(1)(C) and the prohibited transaction rules of Code section
4975(c) with regard to such Qualifying Employer Securities pursuant to
Code section 4975(d)(13) and ERISA section 408(e).
1.2 No Rights Of Employment Granted.
The establishment of this Plan shall not be considered as giving any
employee the right to be retained in the service of the Employer.
ARTICLE II - DEFINITIONS
2.1 Accrued Benefit.
The "Accrued Benefit" is the amount credited to the Employer Account,
Elective Deferrals Account, Matching Contributions Account, Participant
After-Tax Account, Qualified Nonelective Contributions Account and
Rollover Account (collectively the "Accounts") of the Participant, as
applicable.
2.2 Actual Deferral Percentage.
The "Actual Deferral Percentage" of each Highly Compensated Employee who
is a Participant is the ratio, expressed as a percentage, of
A. The amount of Employer contributions actually paid over to the
Trust on behalf of such Participant for the current Plan Year;
to
B. The Participant's Compensation for such Plan Year (whether or
not the Employee was a Participant for the entire Plan Year).
The Actual Deferral Percentage of each Nonhighly Compensated Employee
(as of the prior Plan Year) who is a Participant is the ratio, expressed
as a percentage, of
A. The amount of Employer contributions actually paid over to the
Trust on behalf of such Participant for the prior Plan Year to
B. The Participant's Compensation for such current Plan Year
(whether or not the Employee was a Participant for the entire
Plan Year).
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Employer contributions on behalf of any Participant shall include:
A. Any Elective Deferrals made pursuant to the Participant's
deferral election (including Excess Deferral Amounts of Highly
Compensated Employees), but excluding
(1) Excess Deferral Amounts of Nonhighly Compensated
Employees that arise solely from Elective Deferrals made
under the Plan or plans of this Employer and
(2) Elective Deferrals that are taken into account in the
Average Contribution Percentage test (provided the
Average Actual Deferral Percentage test is satisfied
both with and without exclusion of these Elective
Deferrals); and
B. At the election of the Employer, Qualified Nonelective
Contributions and/or Qualified Matching Contributions.
For purposes of computing the Actual Deferral Percentage, an Employee
who would be a Participant but for the failure to make Elective
Deferrals shall be treated as a Participant on whose behalf no Elective
Deferrals are made. The Actual Deferral Percentage of each Eligible
Employee shall be rounded to the nearest hundredth (100th) of one
percent (1%) of such Employee's Compensation.
If elected by the Employer in writing in the form of a Plan amendment,
the Actual Deferral Percentage for Nonhighly Compensated Employees will
be determined based on the ratio of the Employer contributions for the
current Plan Year (rather than the prior Plan Year) to the Participant's
Compensation for the current Plan Year (rather than the prior Plan
Year). Once made, this election can only be undone if the plan meets the
requirements for changing to Prior Year Testing set forth in Notice 98-1
(or superseding guidance).
A Participant is a Highly Compensated Employee for a particular Plan
Year if he meets the definition of a Highly Compensated Employee in
effect for that Plan Year. Similarly, a Participant is a Nonhighly
Compensated Employee for a particular Plan Year if he does not meet the
definition of a Highly Compensated Employee in effect for that Plan
Year.
2.3 Administrative Committee.
The "Administrative Committee" shall refer to the Administrative
Committee, as defined in Article IX.
2.4 Affiliated Employer.
"Affiliated Employer" shall mean the Employer and any corporation which
is a member of a controlled group of corporations (as defined in Code
section 414(b)) which includes the Employer;
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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).
2.5 Average Actual Deferral Percentage.
"Average Actual Deferral Percentage" shall mean, for a specified group
of Eligible Employees for a Plan Year, the average of the Actual
Deferral Percentages (calculated separately for each Participant in such
group). The Average Actual Deferral Percentage of the Eligible Employees
shall be rounded to the nearest hundredth (100th) of one percent (1%).
2.6. Average Contribution Percentage.
"Average Contribution Percentage" shall mean, for a specified group of
Eligible Employees for a Plan Year, the average of the Contribution
Percentages (calculated separately for each Participant in such group).
The Average Contribution Percentage of the Eligible Employees shall be
rounded to the nearest one hundredth (100th) of one percent (1%).
2.7 Board.
"Board" or "Board Of Directors" shall mean the Board Of Directors of VIB
Corp. as constituted from time to time.
2.8 Beneficiary.
A "Beneficiary" is any person, estate or trust who by operation of law,
or under the terms of the Plan, or otherwise, is entitled to receive any
Accrued Benefit of a Participant under the Plan. A "designated
Beneficiary" is any individual designated or determined in accordance
with Article V, except that it shall not include any person who becomes
a beneficiary by virtue of the laws of inheritance or intestate
succession.
2.9 Cash-Out.
A "Cash-Out" may be involuntary or voluntary.
An involuntary Cash-Out is a distribution of the Accrued Benefit to a
former Participant which meets the following requirements:
A. The former Participant's entire non-forfeitable Accrued Benefit
is distributed to him,
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B. The present value of the non-forfeitable Accrued Benefit of the
Participant does not exceed, or at the time of any prior
distribution did not exceed, thirty-five hundred dollars
($3,500) in Plan Years beginning before August 6, 1997 or five
thousand dollars ($5,000) in Plan Years beginning after August
5, 1997, and
C. The distribution is made on account of the Employee's
termination of participation in the Plan.
A voluntary Cash-Out is a distribution of the entire Accrued Benefit to
a former Participant which meets the following requirements:
A. The former Participant has voluntarily elected to receive the
distribution, and
B. The distribution is made on account of the Employee's
termination of participation in the Plan.
2.10 Code.
"Code" refers to the Internal Revenue Code of 1986, as amended.
2.11 Company.
"Company" shall mean VIB Corp. and any other Affiliated Employer that is
a Member Company designated by the Board Of Directors as participating
in this Plan.
2.12 Compensation.
"Compensation" refers to all Compensation paid during the year under
consideration as W-2 income by the Employer to an Employee but excluding
director's fees and including amounts deferred pursuant to Code section
402(e)(3) (with respect to cash or deferred arrangements as defined in
Code section 401(k)(2)), Code section 402(h) (with respect to simplified
employee pension plans) or Code section 403(b), or contributed to any
welfare benefit plans maintained by the Employer through a reduction in
the Employee's Compensation which, pursuant to Code section 125, are not
included in the gross income of the Employee for the taxable year in
which such amounts are contributed. It excludes all contributions by the
Employer to the Plan and to any other retirement or deferred
compensation plan maintained by the Employer.
Compensation shall include only that Compensation which is actually paid
to the Participant during the determination period. For purposes of this
section, the determination period shall mean the Plan Year.
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If the Compensation for any prior determination period is taken into
account in determining an Employee's allocations or benefits for the
current determination period, the Compensation for such prior year is
subject to the applicable annual Compensation limit in effect for that
prior year.
For years beginning after December 31, 1988 and before January 1, 1994,
the annual Compensation of each Participant taken into account for
determining all benefits provided under the Plan for any determination
period shall not exceed two hundred thousand dollars ($200,000). This
limitation shall be adjusted by the Secretary at the same time and in
the same manner as under Code section 415(d), except that the dollar
increase in effect on January 1 of any calendar year is effective for
years beginning in such calendar year and the first adjustment to the
two hundred thousand dollars ($200,000) limitation is effected on
January 1, 1990.
For Plan Years beginning on or after January 1, 1994, the annual
Compensation of each Employee taken into account under the Plan shall
not exceed one hundred fifty thousand dollars ($150,000), as adjusted by
the Commissioner for increases in the cost of living in accordance with
Code section 401(a)(17)(B). The cost-of-living adjustment in effect for
a calendar year applies to any period, not exceeding twelve (12) months,
over which Compensation is determined (determination period) beginning
in such calendar year.
If Compensation for any prior determination period is taken into account
in determining an Employee's benefits accruing in the current Plan Year,
the Compensation for that prior determination period is subject to the
OBRA '93 annual compensation limit in effect for that prior
determination period. For this purpose, for determination periods
beginning before the first (1st) day of the first (1st) Plan Year
beginning on or after January 1, 1994, the OBRA '93 annual compensation
limit is one hundred fifty thousand dollars ($150,000).
If the period for determining Compensation used in calculating an
Employee's allocation for a determination period is a short Plan Year
(i.e., shorter than twelve (12) months), the annual Compensation limit
is an amount equal to the otherwise applicable annual Compensation limit
multiplied by the fraction, the numerator of which is the number of
months in the short Plan Year, and the denominator of which is twelve
(12).
Net earnings shall be determined with regard to the deduction allowed to
the taxpayer by Code section 164(f) for taxable years beginning after
December 31, 1989.
2.13 Elective Deferrals.
"Elective Deferrals" shall mean any Employer contributions made to the
Plan at the election of the Participant, in lieu of cash compensation,
and shall include contributions made pursuant to a salary reduction
agreement or other deferral mechanism. With respect to any taxable year,
a Participant's Elective Deferral is the sum of all Employer
contributions made on behalf of such Participant pursuant to an election
to defer under any qualified cash or deferred arrangement as described
in Code section 401(k), any simplified employee pension cash or deferred
arrangement
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as described in Code section 402(h)(1)(B), any eligible deferred
compensation plan under Code section 457, any plan as described under
Code section 501(c)(18), and any Employer contributions made on the
behalf of a Participant for the purchase of an annuity contract under
Code section 403(b) pursuant to a salary reduction agreement. Elective
Deferrals shall not include any deferrals properly distributed as excess
annual additions.
2.14 Elective Deferrals Account.
The "Elective Deferrals Account" is the separate account maintained for
each Participant to which all Elective Deferrals shall be allocated.
2.15 Eligible Employee.
"Eligible Employee" shall mean any Employee of the Employer who is
otherwise authorized under the terms of the Plan to have Elective
Deferrals allocated to his account for all or any portion of the Plan
Year with respect to computing the Average Actual Deferral Percentage.
An Employee who would be eligible to make Elective Deferrals but for a
suspension due to a distribution, a loan, or an election not to
participate in the Plan, will not fail to be an Eligible Employee for
purposes of the Annual Limitation On Participant Elective Deferrals,
Average Actual Deferral Percentage Limitation, Average Contribution
Percentage Limitation and Multiple Use Of Alternative Limitation
sections in Article IV below for a Plan Year merely because the Employee
may not make an Elective Deferral by reason of such suspension. Further,
an Employee will not fail to be an Eligible Employee merely because the
Employee may receive no additional annual additions pursuant to the
Limitations On Allocations To Each Participant section of Article V.
2.16 Eligibility Computation Period.
An "Eligibility Computation Period" means the three (3) consecutive
month period during which the Employee is continuously employed by the
Company or a Member Company, beginning on the Employees employment
commencement date. This shall also be referred to as the Employee's
Eligibility Period.
The Plan credits Hours of Service for this definition with the following
Predecessor Employers: First National Bank (Coachella), California
Commerce Bank, Bank of the Desert, N.A., Wells Fargo Bank, Palm Desert
National Bank, Fremont Investment and Loan, Bank of Stockdale, F.S.B.,
and Kings River State Bank.
2.17 Employee.
"Employee" shall mean any employee of the Employer or of any other
employer required to be aggregated with such Employer under Code
sections 414(b), (c), (m) or (o). An "Employee" is an individual who
would be an Employee but who is on a Leave of Absence. Directors acting
solely in that capacity, "On-Call employees," and independent
contractors shall not be Employees.
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The term Employee shall also include any leased employee deemed to be an
employee of any employer described in the previous paragraph as provided
in Code sections 414(n) or (o).
The term "leased employee" means any person (other than an employee of
the recipient) who, pursuant to an agreement between the recipient and
any other person (leasing 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 (1) 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:
A. Such employee is covered by a money purchase pension plan
maintained by the leasing organization providing:
1. A nonintegrated employer contribution rate of at least
ten percent (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
section 125, Code section 402(e)(3), Code section
402(h), or Code section 403(b),
2. Immediate participation, and
3. Full and immediate vesting; and
B. Leased employees do not constitute more than twenty percent
(20%) of the recipient's nonhighly compensated workforce.
No Eligible Employee of an Affiliated Employer shall become a
Participant in the Plan for purposes of counting Compensation or for
purposes of accrual of benefits prior to the effective date such
Affiliated Employee is designated by the Board Of Directors as a Member
Company whose employees may participate in the Plan.
2.18 Employer.
The "Employer" shall mean the Company or the Member Company which
employs the Employee.
2.19 Employer Account.
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The "Employer Account" is the separate account maintained for each
Participant to which all Employer contributions (excluding Elective
Deferrals) shall be allocated and to which Forfeitures may be
reallocated.
2.20 ERISA.
"ERISA" refers to the Employee Retirement Income Security Act of 1974,
as amended.
2.21 Excess Aggregate Contributions.
"Excess Aggregate Contributions" shall mean the amount described in the
Matching Contributions section.
2.22 Excess Contributions.
"Excess Contributions" shall mean the amount described in the Matching
Contributions section.
2.23 Excess Deferral Amount.
"Excess Deferral Amount" shall mean the amount described in the Matching
Contributions section.
2.24 Forfeiture.
"Forfeiture" refers to the amount of non-vested Accrued Benefits in a
Participant's Employer Account and the Matching Contributions Account
which are reallocated to reduce Employer Contributions.
2.25 Highly Compensated Employee.
A "Highly Compensated Employee" means a Highly Compensated Active
Employee and a Highly Compensated Former Employee.
For this purpose the applicable year of the Plan for which a
determination is being made is called a determination year and the
preceding twelve (12) month period is called a look-back year. The
determination year shall be the Plan Year. The look-back year shall be
the twelve (12) month period immediately preceding the determination
year, or, if elected by the Employer, the calendar year ending with or
within the applicable determination year (or, in the case of a
determination year that is shorter than twelve (12) months, the calendar
year ending with or within the twelve (12) month period ending with the
end of the applicable determination year).
For Plan Years before 1997, a Highly Compensated Active Employee
includes any Employee who performs service for the Employer during the
determination year and who, during the look-back year:
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A. Received Compensation from the Employer in excess of
seventy-five thousand dollars ($75,000) (as adjusted pursuant to
Code section 415(d));
B. Received Compensation from the Employer in excess of fifty
thousand dollars ($50,000) (as adjusted pursuant to Code section
415(d)) and was a member of the top-paid group for such year; or
C. Was an officer of the Employer or an Affiliated Employer and
received Compensation during such year that is greater than
fifty percent (50%) of the dollar limitation in effect under
Code section 415(b)(1)(A).
The term "Highly Compensated Active Employee" also includes:
A. Employees who are both described in the preceding sentence if
the term "determination year" is substituted for the term
"look-back year" and the employee is one of the one hundred
(100) Employees who received the most Compensation from the
Employer or Affiliated Employer during the determination year;
and
B. Employees who are five percent (5%) owners at any time during
the look-back year or determination year.
If no officer has satisfied the Compensation requirement of paragraph C
above during either a determination year or look-back year, the highest
paid officer for such year shall be treated as a Highly Compensated
Employee.
The determination of who is a Highly Compensated Employee, including the
determinations of the number and identity of Employees in the top-paid
group, the top one hundred (100) Employees, the number of Employees
treated as officers, and the Compensation that is considered, will be
made in accordance with Code section 414(q) and the regulations
thereunder.
Effective for years beginning after December 31, 1996, the term Highly
Compensated Employee means any Employee who:
A. Was a five percent (5%) owner at any time during the Plan Year
or the preceding Plan Year, or
B. For the preceding Plan Year had Compensation from the Employer
in excess of eighty thousand dollars ($80,000) and was in the
top-paid group for the preceding Plan Year. The eighty thousand
dollars ($80,000) amount is adjusted at the same time and in the
same manner as under Code section 415(d), except that the base
period is the calendar quarter ending September 30, 1996.
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The term "top-paid group" includes all employees who are among the
highest paid twenty percent (20%), but excluding the following employees
unless the Employer elects not to exclude them:
A. Employees who have not completed six (6) months of service;
B. Employees who normally work less than seventeen and one-half
(17-1/2) hours per week;
C. Employees who normally work not more than six (6) months a year;
D. Employees who are included in a unit of employees covered by a
collective bargaining agreement, except as otherwise provided in
the regulations;
E. Employees who have not attained the age of twenty-one (21); and
F. Employees who are nonresident aliens and receive no U.S.-source
earned income from the Employer.
For purposes of this section, "Compensation" has the meaning given that
term by Code section 415(c)(3), and includes amounts deferred pursuant
to Code section 402(e)(3) (with respect to cash or deferred arrangements
as defined in Code section 401(k)(2)), Code section 402(h) (with respect
to simplified employee pension plans) or Code section 403(b), or
contributed to any welfare benefit plans maintained by the Employer
through a reduction in the Employee's Compensation which, pursuant to
Code section 125, are not included in the gross income of the Employee
for the taxable year in which such amounts are contributed.
A Highly Compensated Former Employee is based on the rules applicable to
determining Highly Compensated Employee status as in effect for that
determination year, in accordance with temporary Treasury Regulations
section 1.414(q)-1T, A-4 and IRS Notice 97-45.
In determining whether an employee is a Highly Compensated Employee for
years beginning in 1997, the amendments to Code section 414(q) stated
above are treated as having been in effect for years beginning in 1996.
A highly Compensated Former Employee includes any Employee who separated
from service (or was deemed to have separated) prior to the
determination year, performs no service for the Employer during the
determination year, and was a Highly Compensated Active Employee for
either the separation year or any determination year ending on or after
the Employee's fifty-fifth (55th) birthday.
2.26 Hour Of Service.
"Hour of Service" means:
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A. Each hour for which an Employee is paid, or entitled to payment,
for the performance of duties for the Employer. These hours will
be credited to the Employee for the computation period in which
the duties are performed;
B. Each hour for which an Employee is paid, or entitled to payment,
by the Employer on account of a period of time during which no
duties are performed (irrespective of whether the employment
relationship has terminated) due to vacation, holiday, illness,
incapacity (including disability), layoff, jury duty, military
duty or Leave of Absence with pay. No more than five hundred one
(501) Hours of Service will be credited under this subsection B
for any single continuous period (whether or not such period
occurs in a single computation period). Hours under this
subsection B will be calculated and credited pursuant to section
2530.200b-2 of the Department of Labor Regulations which is
incorporated herein by this reference;
C. Each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by the Employer. The
same Hours of Service will not be credited both under subsection
A or subsection B, as the case may be, and under this subsection
C. These hours will be credited to the Employee for the
computation periods to which the award or agreement pertains
rather than the computation period in which the award, agreement
or payment is made; and
D. Each hour prior to or after the effective date of this Plan for
which an Employee was directly or indirectly paid or entitled to
be paid by the Predecessor Employer, except that such hours
prior to the effective date of this Plan shall not be considered
for the purposes of determining Hours of Service for Accrual of
Benefits or Years of Service for Vesting.
Hours of Service will be credited for employment with other members of
an affiliated service group (under Code section 414(m)), a controlled
group of corporations (under Code section 414(b)), or a group of trades
or businesses under common control (under Code section 414(c)) of which
the adopting Employer is a member, and any other entity required to be
aggregated with the Employer pursuant to Code section 414(o).
Hours of Service will also be credited for any individual considered an
Employee for purposes of this Plan under Code section 414(n) or Code
section 414(o).
Solely for purposes of determining whether a One (1) Year Break in
Service, as defined in the One (1) Year Break In Service section below,
for participation and vesting purposes has occurred in a computation
period, an individual who is absent from work for maternity or paternity
reasons shall receive credit for the Hours of Service in accordance with
the second paragraph of the One (1) Year Break In Service section below.
Service will be determined on the basis of actual hours for which an
Employee is paid or entitled to payment.
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"Hour of Service" shall mean each hour for which an Employee is paid or
entitled to payment for the performance of duties for the Employer.
For purposes of determining an Employee's initial or continued
eligibility to participate in the Plan or the nonforfeitable interest in
the Participant's Accrued Benefit in the Employer Account, an Employee
will receive credit for the aggregate of all time period(s) commencing
with the Employee's first (1st) day of employment or reemployment and
ending on the date a One (1) Year Break in Service begins. The first
(1st) day of employment or reemployment is the first (1st) day the
Employee performs an Hour of Service. An Employee will also receive
credit for any period of severance of less than twelve (12) consecutive
months. Fractional periods of a year will be expressed in terms of days.
A period of severance is a continuous period of time during which the
Employee is not employed by the Employer. Such period begins on the date
the Employee retires, dies, quits or is discharged, or if earlier, the
twelve (12) month anniversary of the date on which the Employee was
otherwise first absent from service.
In the case of an individual who is absent from work for maternity or
paternity reasons, as further defined in the Leave Of Absence section in
this Article, the twelve (12) consecutive month period beginning on the
first (1st) anniversary of the first (1st) date of such absence shall
not constitute a One (1) Year Break in Service.
If the Employer is a member of an affiliated service group (under Code
section 414(m)), a controlled group of corporations (under Code section
414(b)), a group of trades or businesses under common control (under
Code section 414(c)) or any other entity required to be aggregated with
the Employer pursuant to Code section 414(o), service will be credited
for any employment for any period of time for any other member of such
group. Service will also be credited for any individual required under
Code section 414(n) or Code section 414(o) to be considered an Employee
of any Employer aggregated under Code section 414(b), (c), or (m).
If the Employer maintains the plan of a predecessor employer, service
with such employer will be treated as service for the Employer.
2.27 In-Service Distribution.
An "In-Service Distribution" is a distribution which is made to an
active Employee who has attained the age of fifty-nine and one-half
(59-1/2). The Participant must request in writing directed to the
Administrative Committee an In-Service Distribution. An In-Service
Distribution may only be made from the Participant's Employer Account
and his Matching Contributions Account. In-Service Distributions are
only allowed from Accounts that are one hundred percent (100%) vested.
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2.28 Leave Of Absence.
A "Leave of Absence" shall refer to that period during which the
Participant is absent without Compensation and for which the
Administrative Committee, in its sole discretion has determined him to
be on a "Leave of Absence" instead of having terminated his employment.
(However, such discretion of the Administrative Committee shall be
exercised in a nondiscriminatory manner.) In all events, a Leave of
Absence by reason of service in the armed forces of the United States
shall end no later than the time at which a Participant's reemployment
rights as a member of the armed forces cease to be protected by law and
a Leave of Absence for any other reason shall end after six (6) months,
except that if the Participant resumes employment with the Employer
prior thereto, the Leave of Absence shall end on such date of resumption
of employment. The date that the Leave of Absence ends shall be deemed
the Termination Date if the Participant does not resume employment with
the Employer. In determining a Year of Service for Accrual of Benefits,
all such Leaves of Absence shall be considered to be periods when the
Employee is a Participant.
2.29 Matching Contributions.
"Matching Contributions" are contributions by the Employer which are
made to Participants who have made Elective Deferrals for the Plan Year,
as further described in the Eligibility To Participate Article, below.
2.30 Matching Contributions Account.
The "Matching Contributions Account" is the separate account maintained
for each Participant to which all Matching Contributions shall be
allocated and to which Forfeitures may be reallocated.
2.31 Member Company.
"Member Company" shall mean VIB Corp., Valley Independent Bank, First
National Bank (Coachella), California Commerce Bank, Bank of the Desert,
N.A., Wells Fargo Bank, Palm Desert National Bank, Fremont Investment
and Loan, and the Bank of Stockdale, F.S.B., and beginning in the year
2000, Kings River State Bank and any Affiliated Company later designated
by the Board Of Directors in this section as participating in this Plan.
2.32 Nonhighly Compensated Employee.
A "Nonhighly Compensated Employee" shall mean an Employee of the
Employer who is neither a Highly Compensated Employee nor a Family
Member.
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2.33 Normal Retirement Age.
The "Normal Retirement Age" shall be the time at which the Participant
attains sixty-five (65) years of age.
2.34 One (1) Year Break In Service.
A "One (1) Year Break In Service" means a Plan Year in which the
Participant has not completed more than five hundred (500) Hours of
Service, except that in determining a One (1) Year Break In Service for
purposes of eligibility, the initial eligibility computation period is
the twelve (12) consecutive month period beginning on the date the
Employee first (1st) performs an Hour of Service for the Employer
(employment commencement date) and each anniversary thereof. For
purposes of determining a One (1) Year Break In Service for
Participation, the succeeding twelve (12) consecutive month periods
commence with the first (1st) Plan Year which commences prior to the
first (1st) anniversary of the Employee's employment commencement date
(regardless of whether the Employee is entitled to be credited with one
thousand (1,000) Hours of Service during the initial eligibility
computation period).
Solely for purposes of determining whether a One (1) Year Break In
Service, as defined in this section, for participation and vesting
purposes has occurred in a computation period, an individual who is
absent from work for maternity or paternity reasons shall receive credit
for the Hours of Service which would otherwise have been credited to
such individual but for such absence, or in any case in which such hours
cannot be determined, eight (8) Hours of Service per day of such
absence. For purposes of this paragraph, an absence from work for
maternity or paternity reasons means an absence
A. By reason of the pregnancy of the individual,
B. By reason of a birth of a child of the individual,
C. By reason of the placement of a child with the individual in
connection with the adoption of such child by such individual,
or
D. For purposes of caring for such child for a period beginning
immediately following such birth or placement.
The Hours of Service credited under this paragraph shall be credited
A. In the computation period in which the absence begins if the
crediting is necessary to prevent a One (1) Year Break in
Service in that period, or
B. In all other cases, in the following computation period.
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2.35 Participant.
A "Participant" shall refer to every Employee or former Employee who has
met the applicable participation requirements of Article III.
2.36 Plan.
"Plan" refers to this VIB Corp. 401(k) Plan.
2.37 Plan Administrative Committee.
The "Plan Administrative Committee" shall be the Administrative
Committee, unless a different person is designated Plan Administrative
Committee in a resolution adopted by the board of directors of the
Employer, and such person accepts the designation in writing.
2.38 Plan Year.
A "Plan Year" is the period from the first (1st) day of January to the
last day of December, annually.
2.39 Predecessor Employer.
"Predecessor Employer" refers to the First National Bank (Coachella),
California Commerce Bank, Bank of the Desert, N.A., Wells Fargo Bank,
Palm Desert National Bank, Fremont Investment and Loan, the Bank of
Stockdale, F.S.B., and beginning in the year 2000 Plan Year, Kings River
State Bank.
2.40 Qualified Joint And Survivor Annuity.
A "Qualified Joint and Survivor Annuity" is an immediate annuity for the
life of the Participant with a survivor annuity for the life of the
Participant's spouse which is one hundred percent (100%) of the amount
of the annuity which is payable during the joint lives of the
Participant and the Participant's spouse and which is the amount of
benefit which can be purchased with the Participant's vested Accrued
Benefit. However, if the Participant so elects, the percentage(s) of the
survivor annuity of the Qualified Joint and Survivor Annuity under the
Plan shall be fifty percent (50%), seventy-five percent (75%), one
hundred percent (100%); provided that the Qualified Joint and Survivor
Annuity shall be the actuarial equivalent of the Qualified Joint and
Survivor Annuity described in the first (1st) sentence of this section.
2.41 Qualified Matching Contributions.
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"Qualified Matching Contributions" shall mean Matching Contributions
which are subject to the distribution and nonforfeitability requirements
under Code section 401(k) when made, and the eligibility for, and
allocation of, are in accordance with section entitled Matching
Contributions.
2.42 Qualified Matching Contributions Account.
The "Qualified Matching Contributions Account" is the separate account
maintained for each Participant to which all Qualified Matching
Contributions shall be allocated.
2.43 Qualified Nonelective Contributions.
"Qualified Nonelective Contributions" are contributions (other than
Elective Deferrals, Matching Contributions, or Qualified Matching
Contributions) made by the Employer and allocated to Participants'
Accounts that are nonforfeitable when made; and that are allocable in
accordance with the Manner Of Allocation section below and distributable
only in accordance with the distribution provisions that are applicable
to Elective Deferrals.
2.44 Qualified Nonelective Contributions Account.
The "Qualified Nonelective Contributions Account" is the separate
account maintained for each Participant to which all Qualified
Nonelective Contributions shall be allocated.
2.45 Qualified Pre-Retirement Survivor Annuity.
A "Qualified Pre-Retirement Survivor Annuity" is a survivor annuity for
the life of the surviving spouse of the Participant which is the
actuarial equivalent of the vested Accrued Benefit of the Participant.
2.46 Retirement.
"Retirement" refers to the termination of employment of a Participant
who has attained at least the Normal Retirement Age. The Participant may
work beyond Normal Retirement Age, in which case Employer contributions
(and Forfeitures as applicable under the Plan) shall continue to be
allocated to the Employer Account of the Participant.
2.47 Rollover Account.
The "Rollover Account" is a separate account maintained for any
Participant to which all Rollover Contributions, if any, shall be
allocated.
2.48 Rollover Contribution.
"Rollover Contribution" means:
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A. Amounts transferred to this Plan directly from another qualified
corporate or qualified noncorporate plan;
B. Lump sum distributions received by an Employee from another
qualified plan which are eligible for tax-free rollover
treatment 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 such account has no assets
other than assets which were previously distributed to the
Employee by another qualified plan; and further provided that
such amounts met the applicable requirements of Code section
408(d)(3) for rollover treatment on transfer to the conduit
individual retirement account; and
D. Amounts distributed to an Employee from a conduit individual
retirement account meeting the requirements of subsection C
above which are transferred by the Employee to this Plan within
sixty (60) days of his receipt from such account.
2.49 Termination Date.
The "Termination Date" shall be the date on which the earliest of the
following events occurs:
A. A Participant's retirement,
B. A Participant's termination of employment as a result of Total
and Permanent Disability,
C. A Participant's death, or
D. A Participant's termination of employment for any other reason.
2.50 Total And Permanent Disability.
"Total and Permanent Disability" shall refer to the Participant
suffering from a physical or mental condition as determined by the
Administrative Committee in a nondiscriminatory manner, based upon
appropriate medical reports and examinations, which may be expected to
result in death or be of long and indefinite duration and which renders
the Participant incapable of performing any substantial gainful activity
for purposes of Code section 72(m)(7).
2.51 Total Service For Vesting.
"Total Service for Vesting" shall mean the sum of each separate Year of
Service for Vesting credited to the Participant. In the case of a
Participant who has five (5) consecutive One (1) Year Breaks in Service,
all Years of Service for Vesting after such One (1) Year Breaks in
Service will
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be disregarded for the purpose of vesting the Accrued Benefit in the
Employer Account that accrued before such breaks, but both pre-break and
post-break service will count for the purposes of vesting the Accrued
Benefit in the Employer Account that accrues after such breaks. Both
accounts will share in the earnings and losses of the Trust Fund.
In the case of a Participant who does not have five (5) consecutive One
(1) Year Breaks in Service, both the pre-break and post-break service
will count in vesting both the pre-break and post-break Accrued Benefit
in the Employer Account.
2.52 Trust.
"Trust" means the Trust created under this Profit-Sharing Plan and Trust
Agreement.
2.53 Trust Fund.
The "Trust Fund" consists of the assets of the Plan held in the Trust.
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2.54 VIB Corp.
"VIB Corp." shall mean VIB Corp., the holding company of Valley
Independent Bank.
2.55 Year Of Service For Accrual Of Benefits.
A "Year Of Service For Accrual of Benefits" means a Plan Year during
which the Employee had not less than one thousand (1,000) Hours of
Service as a Participant. If the Participant entered the Plan other than
on the first (1st) day of the Plan Year, all Hours of Service rendered
by the Participant during that Plan Year, whether or not rendered as a
Participant, shall be treated as if they were Hours of Service as a
Participant.
2.56 Year Of Service For Vesting.
A "Year of Service for Vesting" shall mean a Plan Year during which the
Employee had not less than one thousand (1,000) Hours of Service as an
Employee of the Company, a Member Company, or the following Predecessor
Employers: First National Bank (Coachella), California Commerce Bank,
Bank of the Desert, N.A., Wells Fargo Bank, Palm Desert National Bank,
Fremont Investment and Loan, the Bank of Stockdale F.S.B., and Kings
River State Bank.
ARTICLE III - ELIGIBILITY TO PARTICIPATE
3.1 Initial Entry.
Every Employee who has attained the age of eighteen (18) and completed
an Eligibility Computation Period will be eligible to participate in the
Plan on the next following January 1st, April 1st, July 1st, or October
1st on or next following such completion, provided that he is an
Employee at such date. An Employee who is eligible to participate will
be treated as a Participant for all purposes unless he informs the
Administrative Committee, in writing, that he does not wish to be a
Participant, in which case he shall not be treated as a Participant
under the Plan. A decision by the Employee not to participate cannot be
changed after the first day of the first Plan Year to which it is first
(1st) effective. All Participants shall be required to furnish such
information to the Administrative Committee as it may reasonably request
for the proper administration of the Plan.
Each Employee will share in Employer contributions for the period
beginning on the date the Employee commences participation under the
plan and ending on the Employee's Termination Date with the Employer or
is no longer a member of an eligible class of Employees.
3.2 Resumption Of Participation.
A Participant who is reemployed by the Employer without having incurred
a One (1) Year Break In Service shall be a Participant as of the first
(1st) quarterly Entry Date following the date of his
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reemployment. If an Employee incurs at least a One (1) Year Break In
Service, his active participation in the Plan shall be suspended until
he completes an Eligibility Computation Period beginning with his date
of reemployment following such One (1) Year Break In Service. Upon
completing an Eligibility Computation Period after such One (1) Year
Break In Service, measured from his re-employment commencement date, the
Participant will be readmitted to active participation in the Plan as of
the first (1st) quarterly Entry Date following the date the Participant
completes such Eligibility Computation Period.
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
One (1) Year Break in Service, such employee will participate
immediately upon returning to an eligible class of Employees. If such
Participant incurs a One (1) Year Break in Service, eligibility will be
determined under the break in service rules of the Plan.
The Committee may adjust the above service requirement, as necessary, to
make the Plan available to a newly-acquired Employee group, provided
that the adjustment (1) is not more restrictive than the above
requirement, and (2) does not discriminate in favor of Highly
Compensated Employees.
ARTICLE IV - CONTRIBUTIONS TO THE TRUST
4.1 Elective Deferrals By Participants.
For a period of thirty (30) days prior to each Plan Year, and for such
other periods as it may establish in a nondiscriminatory manner, the
Administrative Committee will permit each Participant (including
Employees who are expected to be Participants during the following Plan
Year) to elect to defer up to fifteen percent (15%) of his Compensation.
Such deferred amount will be contributed to the Plan and allocated to
the Elective Deferral Account. The Participant may only defer amounts
which are not currently available to him. No Participant shall be
required to make a deferral.
A Participant who has received a hardship distribution pursuant to the
Hardship Distribution section shall be suspended from making an Elective
Deferral, and shall be limited in the amount of Elective Deferrals he
may make in the taxable year immediately following the taxable year of
the hardship distribution, in accordance with the Hardship Distribution
section.
4.2 Matching Contributions.
A. The Company and each Member Company respectively, may make a
Matching Contribution to the Trust for the exclusive benefit of
Employees of the Company and the employees of each Member
Company, in such amount as shall be determined annually for each
Member Company in the discretion of the Board of Directors.
Alternatively, the Board
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of Directors may elect to cause the Company to make the
contribution to the Plan for all Member Companies, in an amount
it determines in its discretion, and on the internal books and
records of the Associated Companies, charge the expense of the
contribution to the respective Member Companies. In either case,
the Matching Contributions for each Member Company's employees
shall be equal to a discretionary percentage of the Member
Company's Participant's Elective Deferrals, subject to the
limitations contained in the Average Contribution Percentage
Limitation, the Multiple Use Of Alternative Limitation and the
Limitations On Allocations To Each Participant sections.
Matching Contributions shall be vested in accordance with the
Plan's general vesting schedule contained in the Employer
Account and Matching Contributions Account Vesting On
Termination. In any event, Matching Contributions shall be fully
vested at Normal Retirement Age, upon the complete or partial
termination of the profit sharing portion of this Plan, or upon
the complete discontinuance of Employer contributions.
Matching Contributions shall only be made on behalf of
Participants who are Employees on the last day of the Plan Year.
Forfeitures of Matching Contributions for any Plan Year shall be
used to reduce the Employer Matching Contributions for each
respective Member Company Matching Contribution for the Plan
Year and shall be allocated to the Matching Contributions
Account accordingly.
Matching Contributions related to excess deferrals shall be
treated as, and allocated as Forfeitures.
B. Qualified Nonelective Contributions.
With respect to any Plan Year the Employer may make Qualified
Nonelective Contributions to Nonhighly Compensated Employees, as
provided in the Average Deferral Percentage Limitation section
of this Article.
C. Qualified Matching Contributions.
With respect to any Plan Year the Employer may make, in its sole
discretion, Qualified Matching Contributions to Nonhighly
Compensated Employees as provided in the Average Contribution
Percentage Limitation section of this Article.
4.3 Employer Discretionary Contributions To Participants.
As of the last day of each Fiscal Year, the Company and each Member
Company respectively, may make a Contribution to the Trust for the
exclusive benefit of Employees of the Company and the employees of each
Member Company, in such amount as shall be determined for each
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<PAGE> 29
Member Company by the Board of Directors. Alternatively, the Board of
Directors may elect to cause the Company to make the contribution to the
Plan for all Member Companies, in an amount it determines in its
discretion, and on the internal books and records of the Member
Companies, charge the expense of the contribution to the respective
Member Companies. The Contributions for each Member Company's employees
shall be allocated in accordance with the Manner of Allocation of
Employer Discretionary Contributions article.
The amount of all contributions shall be paid to the Trustee on or
before the time required by law for filing the Employer's federal income
tax return (including extensions) for the year with respect to which the
contribution is made. However, no Employer contributions may be made in
any Plan Year to the extent that they would be directly allocated to the
suspense account created pursuant to the Limitation on Allocations to
Each Participant section below, or the maximum amount deductible from
the Employer's income for such year under Code section 404(a)(3) or
404(a)(9) would be exceeded, whichever is applicable, unless such excess
contribution is necessary to make payments on an Exempt Loan.
Notwithstanding any other provision contained herein, the Employer shall
make a contribution each year in an amount not less than the amount
required to make any payment due during such year under any Exempt Loan.
Discretionary Employer contributions shall be in an amount decided upon
and fixed (in dollar amount or by formula) by the Board of Directors and
declared to all Participants,
4.4 Manner Of Allocation Of Employer Discretionary Contributions.
Employer Discretionary Contributions from each Member Company and the
respective Forfeitures from accounts of a Member Company, if any, during
such year shall be added together and allocated as of the last day of
such year to the Employer Accounts of the respective Member Company, to
each Participant who is an Employee on the last day of such Plan Year,
and who has a Year of Service for Accrual of Benefits for the Plan Year,
(except an Employee who terminated employment before the last day of the
Plan Year on account of death, Total and Permanent Disability, or
Retirement), in the same proportion that each such Participant's
Compensation for the Plan Year bears to the total Compensation of all
Participants of the respective Member Company for the Plan Year.
4.5 Annual Limitation On Participant Elective Deferrals.
A. No Participant shall be permitted to make Elective Deferrals
under this Plan during any calendar year in excess of ten
thousand dollars ($10,000) (including any other elective
deferrals within the meaning of Code section 402(g)(3) in the
case of all other plans, contracts, or arrangements of the
Employer), adjusted in the manner described in Code section
402(g)(5) for the calendar year.
B. Notwithstanding any other provision of the Plan, Excess Deferral
Amounts and income allocable thereto shall be distributed no
later than each April 15th to Participants for the
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preceding calendar year. A distribution pursuant to the Time Of
Distribution section of Excess Deferral Amounts and income,
gains and losses allocable thereto shall be made without regard
to any consent otherwise required under the Time Of Distribution
section or any other provision of the Plan. A distribution
pursuant to this subsection of Excess Deferral Amounts and
income, gains and losses allocable thereto shall not be treated
as a distribution for purposes of determining whether the
distribution required by subsections B through H of the Time Of
Distribution section is satisfied. Any distribution under this
subsection of less than the entire Excess Deferral Amount and
income, gains and losses allocable thereto shall be treated as a
pro rata distribution of Excess Deferral Amounts and income,
gains and losses allocable thereto. In no case may an Employee
receive from the Plan as a corrective distribution for a taxable
year under this subsection an amount in excess of the
individual's total Elective Deferrals under the Plan for the
taxable year.
C. "Excess Deferral Amount" shall mean those Elective Deferrals
that are includable in a Participant's gross income under Code
section 402(g) to the extent such Participant's Elective
Deferrals for a taxable year exceed the dollar limitation under
Code section 402(g). An Excess Deferral Amount shall be treated
as annual additions under the Plan, unless such amounts are
distributed no later than the first April 15 following the close
of the Participant's taxable year.
D. The Excess Deferral Amount shall be adjusted for income or loss.
The income or loss allocable to the Excess Deferral Amount is
equal to the allocable income or loss for the taxable year of
the individual, plus the allocable income or loss for the period
between the end of the taxable year and the date of
distribution.
(1) The income or loss allocable to the Excess Deferral
Amount for the taxable year of the individual is equal
to the income or loss for the taxable year of the
individual allocable to the Participant's Elective
Deferrals multiplied by a fraction, the numerator of
which is such Participant's Excess Deferral Amount for
the taxable year, and the denominator is equal to the
sum of the Participant's Elective Deferral Account as of
the beginning of the taxable year, plus the
Participant's Elective Deferrals for the taxable year.
(2) Ten percent (10%) of the amount determined under the
preceding paragraph multiplied by the number of whole
calendar months between the end of the Plan Year and the
date of distribution, counting the month of distribution
if distribution occurs after the fifteenth (15th) of
such month.
E. The Excess Deferral Amount which may be distributed under this
section with respect to an Employee for a taxable year shall be
reduced by any Excess Contributions previously distributed with
respect to such Employee for the Plan Year beginning with or
within such taxable year. In the event of a reduction under this
subsection, the amount of Excess
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Contributions included in the gross income of the Employee and
reported by the Employer as a distribution of Excess
Contributions shall be reduced by the amount of the reduction
under this subsection.
4.6 Average Actual Deferral Percentage Limitation.
A. The Average Actual Deferral Percentage for a Plan Year for
Eligible Employees who are Highly Compensated Employees may not
exceed the greater of:
(1) The Average Actual Deferral Percentage for all Eligible
Employees who were Nonhighly Compensated Employees for
the prior Plan Year multiplied by 1.25, or
(2) The Average Actual Deferral Percentage for all Eligible
Employees who were Nonhighly Compensated Employees for
the prior Plan Year multiplied by 2.0, but not more than
two (2) percentage points in excess of the Average
Actual Deferral Percentage of Eligible Employees who
were Nonhighly Compensated Employees.
This method of testing is referred to as the "Prior Year Testing
Method," and is effective for Plan Years beginning after, unless
otherwise specifically provided in the Plan.
If any Highly Compensated Employee is eligible to make Elective
Deferrals, to make after-tax contributions or to receive
Matching Contributions, the disparities between the Average
Actual Deferral Percentages of the respective groups shall be
reduced as described in the Multiple Use Limitation Percentage
Limitation section below.
If the Employer elects, in this Paragraph or in a Plan
Amendment, to use the "Current Year Testing Method," the Average
Actual Deferral Percentage tests in (1) and (2), above (and for
the Average Contribution Percentage test in subsection A of the
Average Contribution Percentage Limitation section below), will
be applied by comparing the current Plan Year's Average Deferral
Percentage for Participants who are Highly Compensated Employees
for each Plan Year with the current Plan Year's Average Deferral
Percentage for Participants who are Nonhighly Compensated
Employees. Once made, this election can only be undone if the
Plan meets the requirements for changing to prior year testing
set forth in Notice 98-1 (or superseding guidance).
For the first Plan Year the Plan permits any Participant to make
Elective Deferrals and this is not a successor plan, for
purposes of the foregoing tests, the prior year's Nonhighly
Compensated Employees' Actual Deferral Percentage shall be the
greater of three percent (3%) or the Plan Year's Actual Deferral
Percentage for these Participants.
B. Should neither limitation in the previous subsection be met with
respect to a Plan Year, Excess Contributions, plus any income
and minus any loss allocable thereto, shall be distributed no
later than the last day of each Plan Year to Participants to
whose accounts
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such Excess Contributions were allocated for the preceding Plan
Year. Any Matching Contributions made on account of the Elective
Deferrals which are distributed shall be forfeited. The amount
of Excess Contributions of Highly Compensated Employees to be
distributed is determined as follows:
(1) The amount of the Excess Contribution for each Highly
Compensated Employee is determined, in accordance with
the subsection of the Average Actual Deferral Percentage
Limitation section above, by computing the excess of
(a) The aggregate amount of Employer contributions
actually taken into account in computing the
Average Actual Deferral Percentage of all Highly
Compensated Employees for such Plan Year, over
(b) The Actual Deferral Percentage for the Highly
Compensated Employee;
(2) The Elective Deferrals of the Highly Compensated
Employee with the highest dollar amount of elective
contributions are reduced by the amount required to
cause that Highly Compensated Employee's Elective
Deferrals to equal the dollar amount of the Elective
Deferrals of the Highly Compensated Employee with the
next highest dollar amount of Elective Deferrals. (For
purposes of the preceding sentence, the "highest dollar
amount" is determined after distribution of any Excess
Contributions.) This amount is then distributed to the
Highly Compensated Employee with the highest dollar
amount of Elective Contributions. However, if a lesser
reduction, when added to the total dollar amount of
Excess Contributions already distributed pursuant to
this Subparagraph (2) would equal the total Excess
Contributions, the lesser reduction amount shall be
distributed instead.
(3) If the total amount distributed pursuant to Subparagraph
(2), is less than the total dollar amount of Excess
Contributions, then the procedure in Subparagraph (2) is
repeated as to the Highly Compensated Employee with the
next highest Elective Deferral Amount and this process
is repeated until the total dollar amount of Excess
Contributions distributed equals the total dollar amount
of all Excess Contributions.
If such excess amounts are distributed more than two and
one-half (2-1/2) months after the last day of the Plan Year in
which such excess amounts arose, a ten percent (10%) excise tax
will be imposed on the Employer maintaining the Plan with
respect to such amounts. Such distributions shall be made to
Highly Compensated Employees on the basis of the respective
portions of the Excess Contributions attributable to each of
such Employees.
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<PAGE> 33
C. The Average Actual Deferral Percentage for any
Participant who is a Highly Compensated Employee for the
Plan Year and who is eligible to have Elective Deferrals
(and Qualified Nonelective Contributions or Qualified
Matching Contributions, or both, if treated as Elective
Deferrals for purposes of the test described in
Subsection (a)) allocated to his or her accounts under
two (2) or more arrangements described in Code section
401(k), that are maintained by the Employer, shall be
determined as if such Elective Deferrals (and, if
applicable, such Qualified Nonelective Contributions or
Qualified Matching Contributions, or both) were made
under a single arrangement. If a Highly Compensated
Employee participates in two (2) or more cash or
deferred arrangements that have different Plan Years,
all cash or deferred arrangements ending with or within
the same calendar year shall be treated as a single
arrangement. Notwithstanding the foregoing, certain
plans shall be treated as separate if mandatorily
disaggregated under regulations under Code section
401(k).
In the event that this Plan satisfies the requirements
of Code sections 401(k), 401(a)(4), or 410(b) only if
aggregated with one (1) or more other plans, or if one
(1) or more other plans satisfy the requirements of such
sections of the Code only if aggregated with this Plan,
then this Section shall be applied by determining the
Average Actual Deferral Percentage of employees as if
all such plans were a single plan. Any adjustments to
the Nonhighly Compensated Employee Actual Deferral
Percentage for the prior year will be made in accordance
with Notice 98-1 and any superseding guidance, unless
the Employer is using the current year testing method.
Plans may be aggregated in order to satisfy Code section
401(k) only if they have the same Plan Year and use the
same Actual Deferral Percentage testing method.
D. For purposes of this Plan, "Excess Contributions" shall
mean, with respect to any Plan Year, the excess of:
(1) The aggregate amount of Employer contributions
actually taken into account in computing the
Average Actual Deferral Percentage of Highly
Compensated Employees for such Plan Year, over
(2) The maximum amount of such contributions
permitted by the Average Actual Deferral
Percentage test (determined by reducing
contributions made on behalf of Highly
Compensated Employees in order of the Average
Deferral Percentages, beginning with the highest
of such percentages).
In no case shall the amount of Excess Contributions for
a Plan Year with respect to any Highly Compensated
Employee exceed the amount of Elective Deferrals made on
behalf of such Highly Compensated Employee for such Plan
Year.
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<PAGE> 34
E. Excess Contributions shall be adjusted for income or loss. The
income or loss allocable to Excess Contributions allocated to
each Participant is equal to the allocable income or loss for
the taxable year of the individual as described below.
(1) The income or loss allocable to Excess Contributions is
equal to the income or loss allocable to the
Participant's Participant Deferral Account (and, if
applicable, the Qualified Nonelective Contribution
Account or the Qualified Matching Contributions Account
or both) for the Plan Year multiplied by a fraction, the
numerator of which is such Participant's Excess
Contributions for the year, and the denominator is equal
to the sum of the Participant's account balance
attributable to Elective Deferrals (and Qualified
Nonelective Contributions or Qualified Matching
Contributions, or both, if any of such contributions are
included in the Average Actual Deferral Percentage test)
as of the beginning of the Plan Year, plus the
Participant's Elective Deferrals (and Qualified
Nonelective Contributions or Qualified Matching
Contributions, or both, if any of such contributions are
included in the Average Actual Deferral Percentage test)
for the Plan Year.
F. Coordination of Excess Contributions with Distribution of Excess
Deferrals.
(1) The amount of Excess Contributions to be distributed
under Subsection B of the Average Actual Deferral
Percentage Limitation section above with respect to a
Highly Compensated Employee for a Plan Year shall be
reduced by any Excess Deferral Amount previously
distributed in accordance with Subsection B of the
Annual Limitation On Participant Elective Deferrals
section above to such Participant for the Participant's
taxable year ending with or within such Plan Year.
(2) The Excess Deferral Amount that may be distributed under
Subsection B of the Annual Limitation On Participant
Elective Deferrals section above with respect to an
Employee for a taxable year shall be reduced by any
Excess Contributions previously distributed with respect
to such Employee for the Plan Year beginning with or
within such taxable year. In the event of a reduction
under this Paragraph F(2), the amount of Excess
Contributions included in the gross income of the
Employee and the amount of Excess Contributions reported
by the Employer as includable in the gross income of the
Employee shall be reduced by the amount of the reduction
under Subsection B of the Average Actual Percentage
Limitation section above.
G. Should Subsection B of the Average Actual Deferral Percentage
Limitation section above be applicable with respect to a Plan
Year, the Employer may, in its discretion, in lieu of or in
conjunction with the reductions described in Subsection B of the
Average Actual Percentage Limitation section above, contribute
an additional amount (not limited to the amount needed to meet
limitation (1) or (2)) as a Qualified Nonelective Contribution.
Such
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<PAGE> 35
contribution shall be allocated to the extent necessary to meet
the nondiscrimination tests of this section to the Accounts of
Participants who were Nonhighly Compensated Employees on the
last day of such year beginning first with the Nonhighly
Compensated Employee(s), with the lowest deferral percentage
until his (their) deferral percentage equals the deferral
percentage of the Nonhighly Compensated Employee(s) with the
next highest deferral percentage, or until the forgoing
nondiscrimination tests are met, whichever occurs first.
Contributions made pursuant to this subsection shall be one
hundred percent (100%) vested at all times and shall be subject
to the same limitations as to withdrawal and distribution as
Elective Deferrals. If the Plan is using the Prior Year Testing
Method, Qualified Nonelective Contributions for a prior Plan
Year must be made no later than the end of the following Plan
Year.
H. For purposes of determining the test described in this
Subsection, Elective Deferrals, Qualified Nonelective
Contributions and Qualified Matching Contributions must be made
before the last day of the twelve (12)-month period immediately
following the Plan Year to which contributions relate.
I. The Employer shall maintain records sufficient to demonstrate
satisfaction of the test described in this Section and the
amount of Qualified Nonelective Contributions or Qualified
Matching Contributions, or both, used in such test.
J. The determination and treatment of the Average Actual Deferral
Percentage amounts of any Participant shall satisfy such other
requirements as may be prescribed by the Secretary of the
Treasury.
4.7 Average Contribution Percentage Limitation.
A. The Average Contribution Percentage for a Plan Year for Eligible
Employees who are Highly Compensated Employees for such Plan
Year and the prior Plan Year's Average Contribution Percentage
for Participants who were Nonhighly Compensated Employees for
the prior Plan Year may not exceed the greater of:
(1) The Average Contribution Percentage for a Plan Year for
Participants who are Highly Compensated Employees for
the Plan Year shall not exceed the prior Plan Year's
Average Contribution Percentage for Participants who
were Nonhighly Compensated Employees for the prior Plan
Year multiplied by one and twenty-five one hundredths
(1.25); or
(2) The Average Contribution Percentage for a Plan Year for
Participants who are Highly Compensated Employees for
the Plan Year shall not exceed the prior Plan Year's
Average Contribution Percentage for Participants who
were Nonhighly Compensated Employees for the prior Plan
Year multiplied by two (2.0), provided that the Average
Contribution Percentage for Participants who are Highly
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<PAGE> 36
Compensated Employees does not exceed the Average
Contribution Percentage for Participants who were
Nonhighly Compensated Employees in the prior Plan Year
by more than two (2) percentage points.
This method of testing is referred to as the "Prior Year Testing
Method," and is effective for Plan Years beginning after 1996,
unless otherwise specifically provided in the Plan.
If any Highly Compensated Employee is eligible to make Elective
Deferrals and is eligible to make After-Tax Contributions or to
receive Matching Contributions, the disparities between the
Average Contribution Percentages of the respective groups will
be reduced in accordance with the Multiple Use Of Alternate
Limitation section below.
If the Employer elects to use the "Current Year Testing Method"
the Contribution Percentage in the Early Retirement Age section,
and the Average Contribution Percentages tests in (1) and (2),
above (and in for the Average Actual Deferral Test section),
will be applied by comparing the current Plan Year's Average
Contributions Percentage for Participants who are Highly
Compensated Employees for each Plan Year with the current Plan
Year's Average Contributions Percentage for Participants who are
Nonhighly Compensated Employees. Once made, this election can
only be undone if the Plan meets the requirements for changing
to prior year testing set forth in Notice 98-1 (or superseding
guidance).
B. The Contribution Percentage for any Eligible Employee who is a
Highly Compensated Employee for the Plan Year and who is
eligible to make after-tax contributions or to receive matching
contributions allocated to his account under two (2) or more
plans to which contributions to which Code section 401(m)
applies that are maintained by the Employer or an Affiliated
Employer shall be determined as if all such after-tax
contributions and matching contributions were made under a
single plan for purposes of this section. Notwithstanding the
foregoing, certain plans shall be treated as separate if
mandatorily disaggregated under regulations under Code section
401(m).
C. In the event that this Plan satisfies the requirements of Code
section 401(m), 401(a)(4) or 410(b) only if aggregated with one
(1) or more other plans, or if one (1) or more other plans
satisfy the requirements of such sections of the Code only if
aggregated with this Plan, then this section shall be applied by
determining the Contribution Percentage of Employees as if all
such plans were a single plan. Any adjustments to the Nonhighly
Compensated Employee Average Contributions Percentage for the
prior year will be made in accordance with Notice 98-1 and any
superseding guidance, unless the Employer is using the current
year testing method. Plans may be aggregated in order to satisfy
Code section 401(m) only if they have the same Plan Year and use
the same Average Contributions Percentage testing method.
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<PAGE> 37
D. Notwithstanding any other provision of this Plan, Excess
Aggregate Contributions, plus any income and minus any loss
allocable thereto, shall be forfeited, if forfeitable, or if not
forfeitable, distributed no later than the last day of each Plan
Year to Participants to whose accounts such Excess Aggregate
Contributions were allocated for the preceding Plan Year. Excess
Aggregate Contributions are allocated to the Highly Compensated
Employees with the largest Contribution Percentage Amounts taken
into account in calculating the Average Contributions Percentage
test for the year in which the excess arose, beginning with the
Highly Compensated Employee with the largest amount of such
Contribution Percentage Amounts and continuing in descending
order until all the Excess Aggregate Contributions have been
allocated. For purposes of the preceding sentence, the "largest
amount" is determined after distribution of any Excess Aggregate
Contributions. If such Excess Aggregate Contributions are
distributed more than two and one-half (2-1/2) months after the
last day of the Plan Year in which such excess amounts arose, a
ten percent (10%) excise tax will be imposed on the Employer
maintaining the Plan with respect to those amounts. Excess
Aggregate Contributions shall be treated as annual additions
under the Plan. A distribution of Excess Aggregate Contributions
and income, gains and losses allocable thereto shall be made
without regard to any consent otherwise required under the Time
of Distribution section or any other provision of the Plan. A
distribution pursuant to this subsection of Excess Aggregate
Contributions and income, gains and losses allocable thereto
shall not be treated as a distribution for purposes of
determining whether the distributions required by the Time Of
Distribution subsections B through H are satisfied.
E. For purposes of this Plan, "Excess Aggregate Contributions"
shall mean, with respect to any Plan Year, the excess of:
(1) The aggregate Contribution Percentage Amounts taken into
account in computing the numerator of the Average
Contribution Percentage actually made on behalf of
Highly Compensated Employees for such Plan Year, over
(2) The maximum Contribution Percentage Amounts permitted by
the Average Contribution Percentage test (determined by
reducing contributions made on behalf of Highly
Compensated Employees in order of their Contribution
Percentages beginning with the highest of such
percentages).
Such determination shall be made after first determining Excess
Deferral Amounts pursuant to the Annual Limitation On
Participant Elective Deferrals section and then determining
Excess Contributions pursuant to the Annual Limitation On
Participant Elective Deferrals section. In no case shall the
amount of Excess Aggregate Contributions with respect to any
Highly Compensated Employee exceed the amount of after-tax
contributions and matching contributions made on behalf of such
Highly Compensated Employee for such Plan Year.
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<PAGE> 38
F. Should the limitations of the Average Contribution Percentage
Limitation section be exceeded with respect to a Plan Year, the
Employer may, in its discretion, in lieu of the distribution of
Excess Aggregate Contributions described in the Average
Contribution Percentage Limitation section, contribute an
additional amount (not limited to the amount needed to meet the
Average Contribution Percentage Limitation section) as a
Qualified Matching Contribution, which shall be allocated only
to Nonhighly Compensated Employees who made Elective Deferrals
for such Plan Year and who have at least one thousand (1,000)
Hours of Service for the Plan Year and are Employees on the last
day of the Plan Year. Such amounts shall, at the election of the
Employer, be allocated in proportion to the Elective Deferrals
and After-Tax Contributions of such individual or pro rata to
each of such individuals. Contributions made pursuant to this
subsection shall be one hundred percent (100%) vested at all
times and shall be subject to the same limitations as to
withdrawal and distribution as Elective Deferrals. If the Plan
is using the Prior Year Testing Method, Qualified Matching
Contributions for a prior Plan Year must be made no later than
the end of the following Plan Year.
G. Excess Aggregate Contributions shall be adjusted for income or
loss. The income or loss allocable to Excess Aggregate
Contributions Amounts allocable to each Participant is equal to
the allocable income or loss for the taxable year of the
individual as described below plus the allocable income or loss
for the period between the end of the taxable year and the date
of distribution as described below.
(1) The income or loss allocable to Excess Aggregate
Contributions is equal to the Participant After-Tax
Account, Matching Contributions Account and, if
applicable, Qualified Nonelective Contribution Account
and Elective Deferral Account of the Plan Year
multiplied by a fraction, the numerator of which is such
Participant's Excess Aggregate Contributions for the
Plan Year, and the denominator is equal to the sum of
the Participant's account balance(s) attributable to
after-tax contributions, matching contributions and, if
applicable, Qualified Nonelective Contributions and
Elective Deferrals as of the beginning of the Plan Year,
plus the after-tax contributions, matching contributions
and, if applicable, Qualified Nonelective Contributions
and Elective Deferrals for the Plan Year.
(2) Ten percent (10%) of the amount determined under G(1)
multiplied by the number of whole calendar months
between the end of the Plan Year and the date of
distribution, counting the month of distribution if
distribution occurs after the fifteenth (15th) of such
month.
H. Excess Aggregate Contributions shall be forfeited, if
forfeitable or distributed on a pro-rata basis from the
Participant After-Tax Account, Matching Contributions Account,
and Qualified Matching Contributions Account (and, if
applicable, the Participant's Qualified Nonelective Contribution
Account or Elective Deferral Account, or both).
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<PAGE> 39
I. Forfeitures of Excess Aggregate Contributions shall be applied
to reduce Employer contributions.
J. Notwithstanding the foregoing, no forfeitures arising under this
section shall remain unallocated or be allocated to a suspense
account for allocation to one (1) or more Employees in any
future Plan Year.
K. Nothing contained in this Article IV shall prevent the
Administrative Committee from reducing the rate of after-tax
contributions during the Plan Year for Highly Compensated
Employees in order to meet the test of subsection A of this
section.
4.8 Multiple Use of Alternative Limitation.
A. The Average Actual Deferral Percentage or Average Contribution
Percentage of Highly Compensated Employees shall be adjusted as
described below if all of the following conditions of this
subsection are met:
(1) One (1) or more Highly Compensated Employees of the
Employer or an Affiliated Employer are eligible to
participate both in an Code section 401(k) arrangement
and in a plan maintained by the Employer or an
Affiliated Employer subject to Code section 401(m);
(2) The sum of the Average Actual Deferral Percentage of all
Eligible Employees under the plans who are Highly
Compensated Employees and the Average Contribution
Percentage of the entire group of Eligible Employees who
are Highly Compensated Employees exceeds the Aggregate
Limit;
(3) The Average Actual Deferral Percentage of the entire
group of Eligible Employees who are Highly Compensated
Employees exceeds the amount described above; and
(4) The Average Contribution Percentage of the entire group
of Eligible Employees who are Highly Compensated
Employees exceeds the amount described above.
B. The Administrative Committee shall elect to reduce either the
Average Actual Deferral Percentage or the Average Contribution
Percentage of the entire group of Eligible Employees who are
Highly Compensated Employees in accordance with this subsection.
The amount of the reduction to the Average Actual Deferral
Percentage of the entire group of Eligible Employees who are
Highly Compensated Employees shall, if elected, be calculated
and accomplished in the manner described in subsection the
Average Actual Deferral Percentage Limitation section or the
amount of the reduction to the Average Contribution Percentage
of the entire group of Eligible Employees who are Highly
Compensated Employees shall, if elected, be calculated and
accomplished in the manner
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described in the Average Contribution Percentage Limitation
section above, so that in either case the Aggregate Limit
described in subsection D shall not be exceeded. The
Administrative Committee may elect to reduce the Actual Deferral
Percentage or the Contribution Percentage either for all Highly
Compensated Employees under the Plan who are subject to
reduction or for only those Highly Compensated Employees who are
eligible in both the arrangements subject to Code section 401(k)
and the plan subject to Code section 401(m).
C. The required reduction described in subsection the Multiple Use
Of Alternative Limitation section shall be treated as an Excess
Contribution or Excess Aggregate Contribution under the Plan as
the case may be.
D. For purposes of applying subsection A of the Multiple Use Of
Alternative Limitation section, the Average Actual Deferral
Percentage and Average Contribution Percentage of the group of
Eligible Employees who are Highly Compensated Employees shall be
determined after any corrective distribution of Excess Deferral
Amounts pursuant to subsection B of the Annual Limitation On
Participant Elective Deferrals section above, Excess
Contributions, or Excess Aggregate Contributions pursuant to the
Annual Limitation On Participant Elective Deferrals section
above and after any recharacterization of Excess Contributions
of the Average Actual Deferral Percentage Limitation section
above required without regard to this section, and such
corrections are deemed to be the maximum permitted under such
tests for the Plan Year. Only plans and arrangements maintained
by the same Employer or an Affiliated Employer shall be taken
into account under this section.
E. For purposes of this section, the "Aggregate Limit" shall mean
the greater of (1) or (2) where
(1) Is the sum of:
(a) One hundred twenty-five percent (125%) of the
greater of
(i) The Average Actual Deferral Percentage
of the group of Eligible Employees who
are Nonhighly Compensated Employees for
the prior Plan Year (beginning with or
within the prior Plan Year of the 401(k)
deferrals), or
(ii) The Average Contribution Percentage of
the group of Eligible Employees who are
Nonhighly Compensated Employees for the
Plan Year (beginning with or within the
prior Plan Year of the 401(k) deferrals,
and
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<PAGE> 41
(b) Two (2) percentage points plus the lesser of the
amounts determined under Subparagraphs
E(1)(a)(i) or (ii) above. In no event, however,
shall the amount described in this Subparagraph
exceed two hundred percent (200%) of the lesser
of the amounts determined under Subparagraphs
E(1)(a)(i) or (ii) above; and
(2) Is the sum of:
(a) One hundred twenty-five percent (125%) of the
lesser of
(i) The Average Actual Deferral Percentage
of the group of Eligible Employees who
are Nonhighly Compensated Employees for
the prior Plan Year (beginning with or
within the prior Plan Year of the 401(k)
deferrals), or
(ii) The Average Contribution Percentage of
the group of Eligible Employees who are
Nonhighly Compensated Employees for the
Plan Year beginning with or within the
prior Plan Year of the 401(k) deferrals,
and
(b) Two (2) percentage points plus the greater of
the amounts determined under Subparagraphs
E(2)(a)(i) or E(2)(a)(ii) above. In no event,
however, shall the amount described in this
Subparagraph E(2)(b) exceed two hundred percent
(200%) of the lesser of the amounts determined
under Subparagraph E(2)(A)(i) or (ii) above.
If the Employer has elected to use the Current Year Testing
Method, then, in calculating the Aggregate Limit for a
particular Plan Year, the Nonhighly Compensated Employees'
Actual Deferral Percentage and Average Contributions Percentage
for that Plan Year, instead of for the prior Plan Year, shall be
used.
4.9 Permissible Types Of Employer Contributions.
Payments on account of the contributions due from the Employer for any
year may be made in cash or in kind; except that assets may not be
contributed if such contribution violates the prohibited transaction
rules of Code section 4975, or the corresponding rules under ERISA
section 406, if applicable.
4.10 Loans To Participants.
A. No loan to any Participant or Beneficiary can be made to the
extent that such loan when added to the outstanding balance of
all other loans to the Participant or Beneficiary would exceed
the lesser of
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<PAGE> 42
(1) Fifty thousand dollars ($50,000) reduced by the excess
(if any) of the highest outstanding balance of loans
during the one-year period ending on the day before the
loan is made, over the outstanding balance of loans from
the Plan on the date the loan is made, or
(2) One-half (1/2) of the present value of the vested
Accrued Benefit of the Participant.
For the purpose of the above limitation, all loans from all
plans of the Employer and any Affiliated Employer are
aggregated. Furthermore, any loan shall by its terms require
that repayment (principal and interest) be amortized in level
payments, not less frequently than quarterly, over a period not
extending beyond five (5) years from the date of the loan,
unless such loan is used to acquire a dwelling unit which within
a reasonable time (determined at the time the loan is made) will
be used as the principal residence of the Participant. An
assignment or pledge of any portion of the Participant's
interest in the Plan and a loan, pledge, or assignment with
respect to any insurance contract purchased under the Plan, will
be treated as a loan under this subsection A.
B. Loans may not be made to Participants or Beneficiaries who are
Highly Compensated Employees in percentage amounts greater than
amounts made available to other Participants and Beneficiaries,
and such loans must be made available to all Participants and
Beneficiaries on a reasonably equivalent basis. However, loans
will not be made in an amount less than one thousand dollars
($1,000). Any loans made must bear a reasonable rate of
interest, considering all relevant factors, specifically
including current bank interest rates, and must be adequately
secured, as determined by the Administrative Committee. No
Participant loan shall exceed the lesser of
(1) The present value of the Participant's vested Accrued
Benefit, or
(2) The applicable amount described in subsection A.
The Elective Deferral Account and Rollover Account of the
borrower may be pledged as security for such loans. All costs
and expenses in connection with obtaining the loans and
perfecting the Plan's security interest therein, including but
not limited to taxes, recording fees, filing fees and attorney's
fees shall be prepaid by the Participant or Beneficiary or shall
be deducted from the total proceeds of the loan.
C. Any loan shall be allocated to the accounts of the Participant
to whom the loan is made and repayment of principal and interest
on the loan shall be allocated to such accounts in the
proportion in which the funds were borrowed.
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<PAGE> 43
D. The Administrative Committee may adopt a loan policy, provided
that it shall not conflict with the Plan.
E. In the event of default, foreclosure on the note and attachment
of security will not occur until a distributable event occurs in
the Plan.
F. A Participant must obtain the consent of his or her spouse, if
any, to use the Accrued Benefit as security for the loan.
Spousal consent shall be obtained no earlier than the beginning
of the ninety (90)-day period that ends on the date on which the
loan is to be so secured. The consent must be in writing, must
acknowledge the effect of the loan, and must be witnessed by a
Plan representative or notary public. Such consent shall
thereafter be binding with respect to the consenting spouse or
any subsequent spouse with respect to that loan. A new consent
shall be required if the Accrued Benefit is used for
renegotiation, extension, renewal, or other revision of the
loan.
Loan repayments will be suspended under this Plan as permitted
under Code section 414(u)(4).
4.11 Rollover Contributions.
A. Any Employee may make a Rollover Contribution to this Plan,
provided, however, that the trust from which the funds are to be
transferred must permit the transfer to be made, and provided,
further, the Employer is reasonably satisfied that such transfer
will not jeopardize the tax exempt status of this Plan or Trust
or create adverse tax consequences for the Employer. Rollover
Contributions shall be made by delivery to the Trustee (or to
the Employer for delivery to the Trustee) for deposit in the
Trust. All Rollover Contributions must be in cash or property
satisfactory to the Trustee, whose decision in this regard shall
be final. The Trustee will not accept rollovers of accumulated
deductible employee contributions from a simplified employee
pension plan nor will the Trustee accept rollovers in the form
of a direct transfer from any qualified plan that is required to
provide benefits in the form of a qualified joint and survivor
annuity or a qualified pre-retirement survivor annuity, as
defined in Code section 417(b) and (c).
B. If the Administrative Committee accepts such transfer of funds,
it shall allocate them to the Rollover Account of the transfer.
Such funds shall be one hundred percent (100%) vested.
C. Rollover Contributions shall not be considered to be Participant
contributions for the purpose of calculating the limitations
under the Limitations On Allocations To Each Participant below.
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ARTICLE V - ADMINISTRATION OF ACCOUNTS
5.1 Investments.
The amounts allocated to the Employer and Elective Deferral and
After-Tax Accounts shall be invested by the Trustee (except as provided
in Article IX) in accordance with Article VIII.
5.2 Invest In Single Fund And Reasonable Rules.
The Trustee may cause all contributions paid to it by the Employer and,
if applicable the Participants, and the income therefrom, without
distinction between principal and income, to be held and administered as
a single fund, and the Trustee shall not be required to invest
separately any share of any Participant except as provided in Loans to
Participants, Rollover Contributions, Segregation If Installment
Distribution and the Participant Directed Accounts sections. The Trustee
may adopt reasonable rules for the administration of such common fund
and for the determination of the proportionate interest of each
Participant in the fund.
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5.3 Valuation Of Assets And Allocation Of Changes.
Any assets of the Trust Fund held in pooled investment vehicles will be
valued as of the close of the last day of each Plan Year, (which shall
be the Plan's annual valuation date) at their fair market value. The
Employer Account of each Participant (or Employer Accounts if the
Participant has Accrued Benefits for service incurred both prior and
subsequent to five (5) consecutive One (1) Breaks in Service), including
any Employer Account held in suspense, and, if applicable, the Elective
Deferral Account and Rollover Account of each Participant shall be
adjusted for any net appreciation or net depreciation in such assets of
the Plan and any net income or net loss of the Trust for such year, with
each account being credited or charged in the ratio that the amount of
the account (as of the close of the last day of the preceding Plan Year)
bears to the total (as of the close of the last day of the preceding
Plan Year) of all such remaining non-segregated accounts. For the
purpose of such adjustment of accounts, any contribution made by the
Employer with respect to a Plan Year shall be considered as having been
made immediately after such valuation and adjustment, unless such
contributions are actually allocated to a Participant's account prior to
such valuation. In making the adjustments required by this section the
cash value of any life insurance, and the value of any amounts
segregated in accordance with Loans to Participants, Segregation If
Installment Distribution and the Participant Directed Accounts sections
shall not be considered in determining the amount of net appreciation,
depreciation, gain or loss to be allocated to such account. The amount
of any net appreciation, depreciation, gain or loss with respect to such
cash value or segregated account shall be allocated to the individual
account with respect to which it arose.
In addition to the valuations required by the first paragraph of this
section, the Trust Fund and/or various investment options within the
Trust Fund may be valued at such other times during the Plan Year as the
Administrative Committee deems prudent. The Administrative Committee may
establish procedures whereby certain funds and investments may be valued
on a varied basis including quarterly and daily valuation with the
individual accounts of Participants valued and adjusted accordingly for
any net appreciation or net depreciation in such Plan assets.
For purposes of valuing company stock, which is one of the Plan's
investment options, fair market value shall mean the closing price on
the Valuation Date (or, if there is no closing price, then the closing
bid price) of Qualifying Employer Securities as reported on the
Composite Tape, or if not reported thereon, then such price as reported
in the trading reports of the principal securities exchange in the
United States on which such Qualifying Employer Securities are listed,
or if the Qualifying Employer Securities are not listed on a securities
exchange in the United States, the mean between the dealer closing "bid"
and "ask" prices on the over-the-counter market as reported by the
National Association of Securities Dealers Automated Quotation System
(NASDAQ), or NASDAQ's successor, or if not reported on NASDAQ, the Fair
Market Value of the Qualifying Employer Securities as determined by a
qualified independent appraiser meeting requirements similar to those
contained in Treasury regulations under Code section 170(a)(1) and
Department of Labor Regulations under ERISA section 3(18). Qualifying
Employer Security shall mean the common stock of the Employer which
meets the requirements of Code section 409(l).
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<PAGE> 46
For purposes of all computations required by this section, the accrual
method of accounting shall be used to value the Trust Fund and the
assets thereof at their fair market value as of each valuation date.
Qualifying Employer Securities shall be accounted for as provided in
Treasury Regulations section 1.402(a)-1(b)(2)(ii), as amended, or any
regulation or statute of similar import. A stock split of the securities
held by the Plan, whether they are Employer Securities, or whether
issued by another corporation shall not be considered income or
appreciation of the Trust Fund. All stock splits, in contrast to stock
dividends, shall be recorded on the books of the Trust and shall adjust
the number of securities held in any account of the Plan effective on
the legal effective date of the stock split as determined by the issuer.
5.4 Limitations On Allocations To Each Participant.
A. If the Participant does not participate in, and has never
participated in, another qualified plan maintained by the
Employer or a welfare benefit fund, as defined in Code section
419(e) maintained by the Employer, or an individual medical
account, as defined in Code section 415(l)(2), maintained by the
Employer or a simplified employee pension, as defined in Code
section 408(k), maintained by the Employer which provides an
annual addition as defined in Paragraph D(1), the amount of
annual additions which may be credited to the Participant's
account for any limitation year will not exceed the lesser of
the maximum permissible amount or any other limitation contained
in this Plan. If the Employer contribution that would otherwise
be contributed or allocated to the Participant's account would
cause the annual additions for the limitation year to exceed the
maximum permissible amount, the amount contributed or allocated
will be reduced so that the annual additions for the limitation
year will equal the maximum permissible amount.
B. Prior to determining the Participant's actual Compensation for
the limitation year, the Employer may determine the maximum
permissible amount for a Participant on the basis of a
reasonable estimation of the Participant's Compensation for the
limitation year, uniformly determined for all Participants
similarly situated.
C. As soon as administratively feasible after the end of the
limitation year, the maximum permissible amount for the
limitation year will be determined on the basis of the
Participant's actual Compensation for the limitation year.
D. If, pursuant to Paragraph C or as a result of an allocation of
Forfeitures there is an excess amount the excess will be
disposed of as follows:
(1) Any nondeductible voluntary employee contributions (plus
Attributable earnings), to the extent they would reduce
the excess amount, will be returned to the Participant;
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(2) If after the application of Subparagraph A an excess
amount still exists, any elective deferrals (plus
attributable earnings), to the extent they would reduce
the excess amount, will be distributed to the
Participant;
(3) If after the application of Subparagraph (2) an excess
amount still exists, and the Participant is covered by
the Plan at the end of the limitation year, the excess
amount in the Participant's account will be used to
reduce Employer contributions (including any allocation
of Forfeitures) for such Participant in the next
limitation year, and each succeeding limitation year if
necessary.
(4) If after the application of Subparagraph (2) an excess
amount still exists, and the Participant is not covered
by the Plan at the end of a limitation year, the excess
amount will be held unallocated in a suspense account.
The suspense account will be applied to reduce Employer
contributions for all remaining Participants in the next
limitation year, and each succeeding limitation year if
necessary.
(5) If a suspense account is in existence at any time during
a limitation year pursuant to this section, it will not
participate in the allocation of the Trust's investment
gains and losses. If a suspense account is in existence
at any time during a particular limitation year, all
amounts in the suspense account must be allocated and
reallocated to Participants' accounts before any
Employer or Employee contributions may be made to the
Plan for that limitation year. Excess amounts may not be
distributed to Participants or former Participants.
E. This subsection applies if, in addition to this Plan, the
Participant is covered under another qualified defined
contribution plan maintained by the Employer, a welfare benefit
fund, as defined in Code section 419(e) maintained by the
Employer, or an individual medical account, as defined in Code
section 415(l)(2), maintained by the Employer or a simplified
employee pension, as defined in Code section 408(k), maintained
by the Employer which provides an annual addition as defined in
Paragraph D(1), during any limitation year. The annual additions
which may be credited to a Participant's account under this Plan
for any such limitation year will not exceed the maximum
permissible amount reduced by the annual additions credited to a
Participant's account under the other plans and welfare benefit
funds for the same limitation year. If the annual additions with
respect to the Participant under the other defined contribution
plans and welfare benefit funds maintained by the Employer are
less than the maximum permissible amount and the Employer
contribution that would otherwise cause the annual additions for
the limitation year to exceed this limitation, the amount
contributed or allocated will be reduced so that the annual
additions under all such plans and funds for the limitation year
will equal the maximum permissible amount. If the annual
additions with respect to the Participant under such other
defined contribution plans and welfare benefit funds in the
aggregate are equal to or greater than the maximum permissible
amount, no amount will be contributed or allocated to the
Participant's account under this Plan for the limitation year.
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<PAGE> 48
F. Prior to determining the Participant's actual Compensation for
the limitation year, the Employer may determine the maximum
permissible amount for a Participant in the manner described in
Paragraph A(2).
G. As soon as is administratively feasible after the end of the
limitation year, the maximum permissible amount for the
limitation year will be determined on the basis of the
Participant's actual Compensation for the limitation year.
H. If, as a result of the allocation of forfeitures, a
Participant's annual additions under this Plan and such other
plans would result in an excess amount for a limitation year,
the excess amount will be deemed to consist of the annual
additions last allocated, except that annual additions
attributable to a welfare fund or individual medical account
will be deemed to have been allocated first regardless of the
actual allocation date.
I If an excess amount was allocated to a Participant on an
allocation date of this Plan which coincides with an allocation
date of another plan, the excess amount attributed to this Plan
will be the product of:
(1) The total excess amount allocated as of such date, times
(2) The ratio of
(a) The annual additions allocated to the
Participant for the limitation year as of such
date under this Plan to
(b) The total annual additions allocated to the
Participant for the limitation year as of such
date under this and all the other qualified
defined contribution plans.
J. Any excess amount attributed to this Plan will be disposed in
the manner described in Paragraph D.
K. If the Employer maintains, or at any time maintained, a
qualified defined benefit plan covering any Participant in this
Plan, the sum of the Participant's defined benefit fraction and
defined contribution fraction will not exceed one (1.0) in any
limitation year. The annual additions which may be credited to
the Participant's account under this Plan for any limitation
year are limited as follows: If the Participant's defined
benefit fraction and defined contribution fraction would
otherwise exceed one (1.0), the Participant's accruals under the
defined benefit plan will be reduced to the extent necessary to
prevent such combined fraction from exceeding one (1.0) before
any annual additions to this Plan or any other defined
contribution plan maintained by the Employer are reduced.
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For Plan Years beginning after December 31, 1999, this paragraph
K shall not apply.
L. For purposes of this section, the following words and terms
shall have the meanings indicated:
(1) Annual Additions.
Annual additions means the sum of the following credited
to a Participant's account for the limitation year:
(a) Employer contributions;
(b) Employee contributions;
(c) Forfeitures;
(d) Amounts allocated, after March 31, 1984, to an
individual medical account, as defined in Code
section 415(l)(2), which is part of a pension or
annuity plan maintained by the Employer are
treated as annual additions to a defined
contribution plan. Also amounts derived from
contributions paid or accrued after December 31,
1985, in taxable years ending after such date,
which are attributable to post-retirement
medical benefits, allocated to the separate
account of a key employee, as defined in Code
section 419A(d)(3), under a welfare benefit
fund, as defined in Code section 419(e),
maintained by the Employer are treated as annual
additions to a defined contribution plan; and
(e) Allocations under a simplified employee pension.
For this purpose, any excess amount applied under A(4)
or B(6) in the limitation year to reduce Employer
contributions will be considered annual additions for
such limitation year.
(2) Compensation.
Compensation means wages as defined in Code section
3401(a) and all other payments of Compensation to an
employee by the Employer (in the course of the
Employer's trade or business) for which the Employer is
required to furnish the employee 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)).
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<PAGE> 50
For any self-employed individual Compensation will mean
earned income.
For limitation years beginning after December 31, 1991,
for purposes of applying the limitations of this section
Compensation for a limitation year is the Compensation
actually paid or made available during such limitation
year.
Notwithstanding the preceding sentence, Compensation for
a Participant in a defined contribution plan who is
permanently and totally disabled (as defined in Code
section 22(e)(3)) is the Compensation such Participant
would have received for the limitation year before
becoming permanently and totally disabled; for
limitation years beginning before January 1, 1997, but
not for limitation years beginning after December 31,
1996, such imputed compensation for the disabled
Participant may be taken into account only if the
Participant is not a Highly Compensated Employee (as
defined in Code section 414(q)) and contributions made
on behalf of such Participant are nonforfeitable when
made.
For limitation years beginning after December 31, 1997,
for purposes of applying the limitations of this
Article, Compensation paid or made available during such
limitation years shall include any amounts deferred
pursuant to Code section 402(e)(3) (with respect to cash
or deferred arrangements as defined in Code section
401(k)(2)), section 402(h) (with respect to simplified
employee pension plans), section 403(b), section 408(p)
(with respect to simple retirement accounts), or section
457, or contributed to any welfare benefit plans
maintained by the Employer through a reduction in the
Employee's Compensation which, pursuant to Code section
125, are not included in the gross income of the
Employee for the taxable year in which such amounts are
contributed.
(3) Defined Benefit Fraction.
Defined benefit fraction means 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 one
hundred twenty-five percent (125%) of the dollar
limitation determined for the limitation year under Code
sections 415(b) and (d) or one hundred forty percent
(140%) of the highest average Compensation, including
any adjustments under Code section 415(b).
Notwithstanding the above, if the Participant was a
Participant as of the first day of the first limitation
year beginning after December 31, 1986, in one (1) 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 one hundred
twenty-five percent (125%) of the sum of the annual
benefits under such plans which the
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<PAGE> 51
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.
(4) Defined Contribution Dollar Limitation.
The defined contribution dollar limitation is thirty
thousand dollars ($30,000), as adjusted from the 1995
limitation year under Code section 415(d).
(5) Defined Contribution Fraction.
Defined contribution fraction means 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), individual
medical accounts, as defined in Code section 415(l)(2),
maintained by the Employer and simplified employee
pensions 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). The maximum aggregate amount in any
limitation year is the lesser of one hundred twenty-five
percent (125%) of the dollar limitation determined under
Code sections 415(b) and (d) in effect under Code
section 415(c)(1)(A) or thirty-five percent (35%) of the
Participant's Compensation for such year.
If the Employee was a Participant as of the end of the
first day of the limitation year beginning after
December 31, 1986, in one (1) 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
one (1.0) under the terms of this Plan. Under the
adjustment, an amount equal to the product of
(a) The excess of the sum of the fractions over one
(1.0) times
(b) The denominator of this fraction, will be
permanently subtracted from the numerator of
this fraction.
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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 computed to treat
all employee contributions as annual additions.
(6) Employer.
Employer shall mean the employer that adopts this Plan,
and all members of a controlled group of corporations
(as defined in Code section 414(b) as modified by Code
section 415(h)), all commonly controlled trades or
businesses (as defined in Code section 414(c) as
modified by Code section 415(h), or affiliated service
groups (as defined in Code section 414(m)) of which the
adopting Employer is a part, and any other entity
required to be aggregated with the Employer pursuant to
regulations under Code section 414(o).
(7) Excess Amount.
Excess amount means the excess of the Participant's
annual additions for the limitation year over the
maximum permissible amount.
(8) Highest Average Compensation.
Highest average Compensation means the average
Compensation for the three (3) consecutive years of
service with the Employer that produces the highest
average. A year of service with the Employer is the
twelve (12)-consecutive month period used for measuring
Compensation in the second paragraph of section 2.8.
(9) Limitation Year.
The limitation year is the Plan Year, unless the
Employer elects in writing a different twelve (12)
consecutive month period. All qualified plans maintained
by the Employer must use the same limitation year. If
the limitation year is amended to a different twelve
(12) consecutive month period, the new limitation year
must begin on a date within the limitation year in which
the amendment is made.
(10) Maximum Permissible Amount.
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The maximum permissible amount is the maximum annual
addition that may be contributed or allocated to a
Participant's account under the Plan for any limitation
year which shall not exceed the lesser of:
(a) The defined contribution dollar limitation, or
(b) Twenty-five percent (25%) of the Participant's
Compensation for the limitation year.
The Compensation limitation referred to in (2) shall not
apply to any contribution for medical benefits (within
the meaning of Code section 401(h) or Code section
419A(f)(2)) which is otherwise treated as an annual
addition under Code section 415(l)(1) or section
419A(d)(2).
If a short limitation year is created because of an
amendment changing the limitation year to a different
twelve (12)-consecutive month period, the maximum
permissible amount will not exceed the defined
contribution dollar limitation multiplied by the
following fraction:
Number of months in the short limitation year
12
(11) Projected Annual Benefit.
The projected annual benefit means the annual retirement
benefit (adjusted to an actuarially equivalent straight
life annuity if such benefit is expressed in a form
other than a straight life annuity or Qualified Joint
and Survivor Annuity) to which the Participant would be
entitled under the terms of the plan assuming:
(a) The Participant will continue employment until
normal retirement age under the plan (or current
age, if later), and
(b) The Participant's Compensation for the current
limitation year and all other relevant factors
used to determine benefits under the plan will
remain constant for all future limitation years.
5.5 Designation Of Beneficiary.
Each Participant may designate from time to time in writing one (1) or
more Beneficiaries, who will receive the Participant's vested Accrued
Benefit in the event of the Participant's death. If the Participant dies
without having made a Beneficiary designation, the Trustee shall
distribute such benefits in the following order of priority to the
deceased Participant's:
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A. Spouse,
B. Lineal descendants,
C. Parents, or
D. Estate.
However, in the event of the death of a married Participant, the
surviving spouse must be the sole Beneficiary unless the surviving
spouse has consented in writing to a different election, has
acknowledged the effect of such election, and the consent and
acknowledgement are witnessed by a member of the Administrative
Committee or a notary public. The consent of the spouse shall not be
necessary if it is established to the satisfaction of the Administrative
Committee that there is no spouse, the spouse cannot reasonably be
located, or for such other reasons as the regulations may prescribe. The
consent of a spouse or reason for not requiring such consent shall be
applicable only to that spouse. If the spouse of a Participant becomes
locatable or if a Participant remarries, it shall be the duty of the
Participant to bring that fact to the attention of the Administrative
Committee. If the Participant so notifies the Administrative Committee,
the Administrative Committee shall then, if applicable, proceed to make
available to such spouse the consent of spouse procedures described in
this section.
ARTICLE VI - VESTING
6.1 Certain Accounts One Hundred Percent (100%)Vested.
The Accrued Benefit in the Elective Deferral Account and Rollover
Account shall be one hundred percent (100%) vested at all times.
6.2 Employer Account Vesting On Death, Retirement, Or Total And Permanent
Disability.
If a Participant's employment is terminated for death, for Total and
Permanent Disability, or upon a Participant attaining Normal Retirement
Age, one hundred percent (100%) of the Accrued Benefit in his Employer
Account shall vest in the Participant (or in his Beneficiary, as the
case may be) and shall be distributed in accordance with the provisions
of Article VII.
6.3 Employer Account Vesting On Termination.
During the course of a Participant's employment, the following
percentages of the Accrued Benefit in the Employer Account of the
Participant shall vest in the Participant and shall, if a Participant's
employment is terminated prior to attaining Normal Retirement Age except
for death or Total and Permanent Disability, be distributed to or set
aside for him (or his Beneficiary) in accordance with the provisions of
Article VII:
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<PAGE> 55
6.4 Employer Account And Matching Contributions Account Vesting On
Termination.
A. During the course of a Participant's employment, the following
percentages of the Accrued Benefit in the Employer and Matching
Accounts of the Participant shall vest in the Participant and
shall, if a Participant's employment is terminated prior to
attaining Normal Retirement Age except for death or Total and
Permanent Disability, be distributed to or set aside for him (or
his Beneficiary) in accordance with the provisions of Article
VII:
<TABLE>
<CAPTION>
Years of Vested
Service Percentage
----------- ----------
<S> <C>
Less than 3 0%
3 20%
4 40%
5 60%
6 80%
7 100%
</TABLE>
The Accrued Benefit in the Employer Matching Accounts of a
Participant which is not vested as above provided and which is
forfeited shall be retained by the Trustee for allocation as a
Forfeiture, in accordance with the provisions of the Manner Of
Allocation, Restoration of Forfeitures, Suspense Account For
Terminated Participants and the Repayment of Cash-Out sections.
6.5 Forfeiture For Certain Acts.
Notwithstanding the provisions of section 6.3, a Participant who has
less than five (5) years of Total Service for Vesting shall forfeit any
amount accrued in his Employer Account and Matching Account if he should
commit any criminal act or willful or malicious act which damages the
Employer or other Employees, except that this shall not apply to the
extent the top-heavy vesting schedule (as set forth in Article X)
applies.
6.6 Restoration Of Forfeitures.
If a Participant is less than one hundred percent (100%) vested, and
either
A. He receives a distribution from the Plan and then the
Participant resumes employment with the Employer before the
occurrence of five (5) consecutive One (1) Breaks in Service, or
B. The Participant receives an in-service distribution, then until
such time as there is a fifth (5th) consecutive One (1) Break in
Service, the Participant's vested portion of the balance
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<PAGE> 56
in his account at any time shall be equal to an amount ("X")
determined by the formula X = P(AB + (R X D)) _ (R X D), where
"P" is the vested percentage of the Participant at such time,
"AB" is the balance in the Participant's account at such time,
"D" is the amount of the distribution not previously repaid by
the Participant in accordance with the Repayment Of Cash-Out
section (if applicable), and "R" is the ratio of the account
balance at the relevant time to the account balance after
distribution.
If an Employee who is zero percent (0%) vested is deemed to receive a
distribution pursuant to the Method Of Distribution Of Accounts section
below, and that Employee resumes employment covered under this Plan
before the date he or she incurs five (5) consecutive One (1) Breaks in
Service, upon the reemployment of such Employee, the Employer-derived
account balance of the Employee will be restored to the amount on the
date of such deemed distribution.
If the Participant's forfeited Accrued Benefit is restored pursuant to
this section, the restoration shall be made first out of Forfeitures, if
any, and then by additional Employer contributions.
ARTICLE VII - DISTRIBUTION OF BENEFITS
7.1 Method Of Distribution Of Participant Rollover Account Before
Termination of Service.
A Participant with the consent of his spouse in accordance with the
Hardship Distribution section may, upon ninety (90) days notice to the
Administrative Committee, withdraw part or all of his Accounts which are
one hundred percent (100%) vested.
7.2 Hardship Distribution.
A Participant with the consent of his spouse in accordance with the
Method Of Distribution Of Accounts section may apply in writing to the
Administrative Committee for a hardship withdrawal of part or all of his
net distributable amount. The net distributable amount is equal to the
distributable amount, reduced by the amount of previous distributions on
account of hardship. The distributable amount is equal to the sum of
A. The Participant's Employer contributions which are one hundred
percent (100%) as of the date of distribution,
B. Income allocable to Employer contributions that is credited to
the Participant's Elective Deferral Account before the end of
the last Plan Year ending before July 1, 1989,
C. Amounts treated as Employer contributions that are credited to
the Participant's Account before the end of the last Plan Year
ending before July 1, 1989, and
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D. Income allocable to amounts treated as Employer contributions
that is credited to the Participant's Account before the end of
the last Plan Year ending before July 1, 1989.
The Administrative Committee in its discretion and in accordance with
the provisions of this section shall determine what portion or all of
such vested Account Balance is necessary to alleviate the hardship. A
distribution is on account of hardship only if the distribution both is
made on account of an immediate and heavy financial need of the
Participant as determined in accordance with subsection A below and is
necessary to satisfy such financial need as determined in accordance
with subsection B below. The determination by the Administrative
Committee of the existence of an immediate and heavy financial need and
of the amount necessary to meet the need shall be made in a
nondiscriminatory and uniform manner. The determination of hardship by
the Administrative Committee shall be final and binding.
A. A distribution will be deemed to be made on account of an
immediate and heavy financial need of the Participant if the
distribution is for:
(1) Expenses for medical care described in Code section
213(d) incurred by the Participant, the Participant's
spouse, or any dependents of the Participant (as defined
in Code section 152), or necessary for these persons to
obtain medical care described in Code section 213(d);
(2) Costs directly related to the purchase of a principal
residence for the Participant (excluding mortgage
payments);
(3) Payment of tuition and related educational fees for the
next twelve (12) months of post-secondary education for
the Participant, the Participant's spouse, children, or
dependents of the Participant;
(4) Payments necessary to prevent the eviction of the
Participant from his principal residence or foreclosure
on the mortgage of that residence; or
(5) Such other financial needs as prescribed by the
Commissioner of the Internal Revenue Service.
B. A distribution will be deemed to be necessary to satisfy an
immediate and heavy financial need of a Participant if all of
the following requirements are satisfied:
(1) The distribution is not in excess of the amount of the
immediate and heavy financial need of the Participant.
The amount of an 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;
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(2) 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;
(3) The Participant does not make an Elective Deferral for
his taxable year immediately following the taxable year
of the hardship distribution in excess of the seven
thousand dollar ($7,000) limit (adjusted for the cost of
living) for such next taxable year less the amount of
such Participant's Elective Deferral for the taxable
year of the hardship distribution; and
(4) The Participant does not make an Elective Deferral
after-tax contribution or contribution to the Plan and
to all other plans maintained by the Employer for a
twelve (12) month period following the date of receipt
of the hardship distribution. For this purpose, the
phrase "all other plans maintained by the Employer"
means all qualified and nonqualified plans of deferred
compensation maintained by the Employer. The phrase
includes a stock option, stock purchase, or similar
plan, or a cash or deferred arrangement that is part of
a cafeteria plan within the meaning of Code section 125.
However, such phrase does not include a health or
welfare benefit plan, including one that is part of a
cafeteria plan.
If additional methods for distributions are prescribed by the
Commissioner of the Internal Revenue Service, such additional
methods for distributions are hereby incorporated by reference.
7.3 Method Of Distribution Of Accounts.
A. Except as otherwise provided in the Method Of Distribution Of
Rollover Account Before Termination Of Service section, the
Participant shall elect to receive distribution of his vested
Accrued Benefit, if it exceeds five thousand dollars ($5,000),
in one of the following forms:
(1) An annuity (including a Qualified Joint and Survivor
Annuity or Qualified Pre-Retirement Survivor Annuity as
provided in this section) for benefits accrued in this
Plan on or before January 1, 1999, and excluding
Rollover Accounts,
(2) A lump-sum distribution (Cash-Out),
(3) An installment distribution consisting of approximately
equal annual or more frequent installments (subject to
the limitations of the Time Of Distribution section
above) over a term certain not to exceed five (5) years,
or
(4) A Direct Rollover.
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B. If an Employee terminates service, and the value of the
Employee's vested Accrued Benefit is not greater than five
thousand dollars ($5,000), and subject to the Direct Rollover
section, the Employee will receive a distribution of the value
of the entire vested portion of such Accrued Benefit and the
nonvested portion will be treated as a Forfeiture. The entire
amount of such vested Accrued Benefit shall be distributed in
the form of a Cash-Out within the time specified in Article 7.
For purposes of this section, if the value of an Employee's
vested Accrued Benefit is zero (0), the Employee shall be deemed
to have received a Cash-Out of such vested Accrued Benefit.
C. If the value of a Participant's vested Accrued Benefit exceeds
(or at the time of any prior distribution exceeded) five
thousand dollars ($5,000), and the vested Accrued Benefit is
immediately distributable, the Participant (and the
Participant's spouse or where either the Participant or the
spouse has died, the survivor in the case of an Accrued Benefit
that is subject to the Annuity Forms Of Distribution) must
consent to any distribution of such vested Accrued Benefit. The
consent of the Participant (and the Participant's spouse) shall
be obtained in writing within the ninety (90)-day period ending
on the annuity starting date. The annuity starting date is the
first day of the first period for which an amount is paid as an
annuity or any other form. The Plan Administrative Committee
shall notify the Participant and the Participant's spouse of the
right to defer any distribution until the Participant's vested
Accrued Benefit is no longer immediately distributable (as
described in Paragraph (2) below). Such notification shall
include a general description of the material features and an
explanation of the relative values of, the optional forms of
benefit available under the Plan in a manner that would satisfy
the notice requirements of Code section 417(a)(3), and shall be
provided no less than thirty (30) days and no more than ninety
(90) days prior to the annuity starting date.
(1) Notwithstanding the foregoing, only the Participant need
consent to the commencement of a distribution in the
form of a Qualified Joint and Survivor Annuity while the
vested Accrued Benefit is immediately distributable.
(Furthermore, if payment in the form of a Qualified
Joint and Survivor Annuity is not required with respect
to the Participant pursuant to Article VII of the Plan,
only the Participant need consent to the distribution of
the vested Accrued Benefit that is immediately
distributable.) Neither the consent of the Participant
nor the Participant's spouse shall be required to the
extent that a distribution is required to satisfy Code
section 401(a)(9) or Code section 415. In addition, upon
termination of this Plan if the Plan does not offer an
annuity option (purchased from a commercial provider)
and if neither the Employer nor any Affiliated Employer
maintains another defined contribution plan (other than
an employee stock ownership plan as defined in Code
section 4975(e)(7)), the Participant's vested Accrued
Benefit will, without the Participant's consent, be
distributed to the Participant. However, if any
Affiliated Employer maintains another defined
contribution plan (other than an employee stock
ownership plan as defined in Code section 4975(e)(7)),
then the Participant's vested Accrued Benefit will be
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transferred, without the Participant's consent, to the
other plan if the Participant does not consent to an
immediate distribution.
(2) The Participant's vested Accrued Benefit is immediately
distributable if any part of the vested Accrued Benefit
could be distributed to the Participant (or surviving
spouse) before the Participant attains (or would have
attained if not deceased) the later of Normal Retirement
Age or age sixty-two (62).
D. For purposes of determining the applicability of the foregoing
consent requirements to distributions made before the first day
of the first Plan Year beginning after December 31, 1988, the
Participant's vested Accrued Benefit shall not include amounts
attributable to accumulated deductible employee contributions
within the meaning of Code section 72(o)(5)(B).
E. If distributions are made in installments rather than a
Qualified Joint and Survivor Annuity or a Pre-Retirement
Survivor Annuity, lump-sum distribution or a Cash-Out, then
(1) The installments must be over a term certain not to
exceed five (5) years, or
(2) The amount of the installment to be distributed each
year must be at least an amount equal to the quotient
obtained by dividing the Participant's entire interest
by the life expectancy of the Participant or the joint
and last survivor expectancy of the Participant and his
designated Beneficiary.
Life expectancy and joint and last survivor expectancy are
computed by the use of the return multiples contained in
Treasury Regulations section 1.72-9, Table V and VI or, in the
case of payments under a contract issued by an insurance
company, by use of the life expectancy tables of the insurance
company. For purposes of this computation, a Participant's life
expectancy may be recalculated no more frequently than annually,
but the life expectancy of a nonspouse Beneficiary may not be
recalculated. If the Participant's spouse is not the designated
Beneficiary, the method of distribution selected must assure
that at least fifty percent (50%) of the present value of the
amount available for distribution is paid within the life
expectancy of the Participant.
F. Any annuity distributed herefrom must be nontransferable. The
terms of any annuity contract purchased and distributed by the
Plan to a Participant or spouse shall comply with the
requirements of this Plan.
7.4 Time of Distribution.
All distributions required under this section shall be determined and
made in accordance with the proposed regulations under Code section
401(a)(9), including the minimum distribution incidental benefit
requirement of proposed Treasury Regulation section 1.401(a)(9)-2.
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A. After the Participant has attained the Normal Retirement Age or
has met the requirements for an In-Service Distribution, has
died, or has terminated his employment, then the lump-sum
payment, or the Direct Rollover, shall be made as soon as
administratively feasible after requested by the Participant. If
the distribution is made prior to the time the Participant
attains the later of age sixty-two (62) or the Normal Retirement
Age under the Plan, the Participant must consent to the
distribution, unless it is in the form of a Cash-Out of five
thousand dollars ($5,000) or less. If the Participant is zero
percent (0%) vested in his Accrued Benefit, his vested Accrued
Benefit will be deemed to have been distributed to him in the
form of a Cash-Out. However, in all events such distributions
shall begin no later than sixty (60) days after the end of the
Plan Year in which occurs the latest of the following:
(1) The date on which the Participant attains the earlier of
age sixty-five (65) or the Normal Retirement Age;
(2) The tenth (10th) anniversary of the year in which the
Participant commenced participation in the Plan; or
(3) The Termination Date.
B. The entire interest of a Participant must be distributed or
begin to be distributed no later than the Participant's required
beginning date.
C. As of the first distribution calendar year, distributions, if
not made in a single sum, may only be made over one of the
following periods (or a combination thereof):
(1) The life of the Participant,
(2) The life of the Participant and a designated
Beneficiary,
(3) A period certain not extending beyond the life
expectancy of the Participant, or
(4) A period certain not extending beyond the joint and last
survivor expectancy of the Participant and a designated
Beneficiary.
D. If the Participant's interest is to be distributed in other than
a single sum, the following minimum distribution rules shall
apply on or after the required beginning date:
(1) Individual account.
(a) If a Participant's benefit is to be distributed
over
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(i) A period not extending beyond the life
expectancy of the Participant or the
joint life and last survivor expectancy
of the Participant and the Participant's
designated Beneficiary or
(ii) A period not extending beyond the life
expectancy of the designated
Beneficiary,
(b) The amount required to be distributed for each
calendar year, beginning with distributions for
the first distribution calendar year, must at
least equal the quotient obtained by dividing
the Participant's benefit by the applicable life
expectancy.
(c) For calendar years beginning before January 1,
1989, if the Participant's spouse is not the
designated Beneficiary, the method of
distribution selected must assure that at least
fifty percent (50%) of the present value of the
amount available for distribution is paid within
the life expectancy of the Participant.
(d) For calendar years beginning after December 31,
1988, the amount to be distributed each year,
beginning with distributions for the first
distribution calendar year shall not be less
than the quotient obtained by dividing the
Participant's benefits by the lesser of
(i) The applicable life expectancy or
(ii) If the Participant's spouse is not the
designated Beneficiary,
(iii) The applicable divisor determined from
the table set forth in Q & A-4 of
section 1.401(a)(9)-2 of the proposed
Treasury Regulations. Distributions
after the death of the Participant shall
be distributed using the applicable life
expectancy in Subparagraph D(1)(a) above
as the relevant divisor without regard
to proposed Treasury Regulations section
1.401(a)(9)-2.
(e) The minimum distribution required for the
Participant's first distribution calendar year
must be made on or before the Participant's
required beginning date. The minimum
distribution for other calendar years, including
the minimum distribution for the distribution
calendar year in which the employee's required
beginning date occurs, must be made on or before
December 31 of that distribution calendar year.
(2) If the Participant's benefit is distributed in the form
of an annuity purchased from an insurance company,
distributions thereunder shall be made in accordance
with
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the requirements of Code section 401(a)(9) and the
proposed regulations thereunder.
E. If the Participant dies after distributions to him have begun
but before his entire vested Accrued Benefit has been
distributed to him, the remaining portion of his vested Accrued
Benefit shall be distributed from the Plan at least as rapidly
as under the method of distribution previously established for
him.
F. If the Participant dies before distribution of his interest
commences, then distributions of the Participant's remaining
vested Accrued Benefit must be completed by the end of the fifth
(5th) calendar year following the year of his death. However,
installment distributions to a designated Beneficiary which
begin not later than the end of the calendar year following the
death of the Participant shall be treated as complying with this
five (5) year distribution requirement (even though the
installment payments are not completed within five (5) years of
the Participant's death) if the distributions are made at a rate
which is not longer than that calculated to provide payment of
all the Participant's vested Accrued Benefit during the
anticipated life expectancy of the designated Beneficiary.
Provided that if the designated Beneficiary is the surviving
spouse of the deceased Participant, the distributions can begin
as long after the Participant's death as the date on which the
deceased Participant would have attained the age of seventy and
one-half (70-1/2). If the surviving spouse dies after the
Participant, but before payments to such spouse begin, the
provisions of this subsection shall be applied as if the
surviving spouse were the Participant.
If the Participant has not made an election pursuant to this
subsection F. by the time of his or her death, the Participant's
designated Beneficiary must elect the method of distribution no
later than the earlier of
(1) December 31 of the calendar year in which distributions
would be required to begin under this subsection, or
(2) December 31 of the calendar year which contains the
fifth (5th) anniversary of the date of death of the
Participant. If the Participant has no designated
Beneficiary, or if the designated Beneficiary does not
elect a method of distribution, distribution of the
Participant's entire interest must be completed by
December 31 of the calendar year containing the fifth
(5th) anniversary of the Participant's death.
G. For purposes of this section, any amount paid to a child of a
Participant will be treated as if it had been paid to the
surviving spouse of the Participant if such remaining amount
becomes payable to the surviving spouse when the child reaches
the age of majority.
H. For the purposes of this section, distribution of a
Participant's interest is considered to begin on the
Participant's required beginning date. If distribution in the
form of an annuity
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irrevocably commences to the Participant before the required
beginning date, the date distribution is considered to begin is
the date distribution actually commences.
I. For purposes of this section, the following words and terms
shall have the meanings indicated:
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(1) Applicable Life Expectancy.
The Applicable Life Expectancy (or joint and last survivor
expectancy) calculated using the attained age of the
Participant (or designated Beneficiary) as of the
Participant's (or designated Beneficiary's) birthday in
the applicable calendar year reduced by one (1) for each
calendar year which has elapsed since the date Applicable
Life Expectancy was first calculated. If Applicable Life
Expectancy is being recalculated, the applicable life
expectancy shall be the life expectancy as so
recalculated. The applicable calendar year shall be the
first distribution calendar year, and if Applicable Life
Expectancy is being recalculated such succeeding calendar
year.
(2) Designated Beneficiary.
The individual who is designated as the Beneficiary under
the Plan in accordance with Code section 401(a)(9) and the
proposed regulations thereunder.
(3) Distribution Calendar Year.
A calendar year for which a minimum distribution is
required. For distributions beginning before the
Participant's death, the first distribution calendar year
is the calendar year immediately preceding the calendar
year which contains the Participant's required beginning
date. For distributions beginning after the Participant's
death, the first distribution calendar year is the
calendar year in which distributions are required to begin
pursuant to subsection D above.
(4) Life expectancy.
Life expectancy and joint and last survivor expectancy are
computed by use of the expected return multiples in Tables
V and VI of Treasury Regulations section 1.72-9, or, in
the case of payments under a contract issued by an
insurance company, by use of the life expectancy tables of
the insurance company.
Unless otherwise elected by the Participant (or
Participant's spouse, if applicable), by the time
distributions are required to begin, life expectancies
shall be recalculated annually. Such election shall be
irrevocable as to the Participant (or spouse) and shall
apply to all subsequent years. The life expectancy of a
nonspouse Beneficiary may not be recalculated.
(5) Participant's benefit.
(a) The vested Accrued Benefit as of the last valuation
date in the calendar year immediately preceding the
distribution calendar year (valuation
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calendar year) increased by the amount of any
contributions or forfeitures allocated to the
vested Accrued Benefit as of dates in the valuation
calendar year after the valuation date and
decreased by distributions made in the valuation
calendar year after the valuation date.
(b) For purposes of Subparagraph (a) above, if any
portion of the minimum distribution for the first
distribution calendar year is made in the second
distribution calendar year on or before the
required beginning date, the amount of the minimum
distribution made in the second distribution
calendar year shall be treated as if it had been
made in the immediately preceding distribution
calendar year.
(6) Required beginning date.
(a) For calendar years beginning after 1996, the
required beginning date of a Participant is the
later of
(i) The first day of April of the calendar year
following the calendar year in which the
Participant attains age seventy and one-half
(70-1/2), or
(ii) The calendar year in which the Participant
retires if the Participant is not a five (5)
percent owner of the Employer.
(b) For calendar years beginning on or before 1996 the
required beginning date of a Participant is the
first day of April of the calendar year following
the calendar year in which the Participant attains
age seventy and one half (70-1/2).
(c) Five percent (5%) Owner." A Participant is treated
as a five percent (5%) owner for purposes of this
section if such Participant is a five percent (5%)
owner as defined in Code section 416(i) (determined
in accordance with Code section 416 but without
regard to whether the Plan is top-heavy) at any
time during the Plan Year in which such owner
attains age sixty-six and one-half (66-1/2) or any
subsequent Plan Year.
(d) Once distributions have begun to a five percent
(5%) owner under this section, they must continue
to be distributed, even if the Participant ceases
to be a five percent (5%) owner in a subsequent
year.
7.5 Qualified Joint and Survivor Annuity or Pre-Retirement Survivor Annuity
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A. The provisions of this section shall apply to those Accrued
Benefits specified in the Method Of Distribution Article.
B. Unless an optional form of benefit is selected pursuant to a
qualified election within the ninety (90) day period ending on
the annuity starting date, a married Participant's vested Accrued
Benefit will be paid in the form of a Qualified Joint and
Survivor Annuity and an unmarried Participant's vested Accrued
Benefit will be paid in the form of a life annuity. The
Participant may elect to have such annuity distributed upon
attainment of the earliest retirement age under the Plan.
C. Unless an optional form of benefit has been selected within the
election period pursuant to a qualified election, if a
Participant dies before the annuity starting date, then the
Participant's vested Accrued Benefit shall be applied toward the
purchase of an annuity for the life of the surviving spouse. The
surviving spouse may elect to have such annuity distributed
within a reasonable period after the Participant's death.
D. For purposes of this section, the following words and terms shall
have the meanings indicated:
(1) Election Period.
The period which begins on the first day of the Plan Year
in which the Participant attains age thirty-five (35) and
ends on the date of the Participant's death. If a
Participant separates from service prior to the first day
of the Plan Year in which age thirty-five (35) is
attained, with respect to the Accrued Benefit as of the
date of separation, the election period shall begin on the
date of separation.
(2) Pre-age 35 Waiver.
A Participant who will not yet attain age thirty-five (35)
as of the end of any current Plan Year may make a special
qualified election to waive the Qualified Pre-Retirement
Survivor Annuity for the period beginning on the date of
such election and ending on the first day of the Plan Year
in which the Participant will attain age thirty-five (35).
Such election shall not be valid unless the Participant
receives a written explanation of the Qualified
Pre-Retirement Survivor Annuity in such terms as are
comparable to the explanation required under Paragraph
E(1) automatically reinstated as of the first day of the
Plan Year in which the Participant attains age thirty-five
(35). Any new waiver on or after such date shall be
subject to the full requirements of this section.
(3) Earliest Retirement Age.
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The earliest date on which, under the Plan, the
Participant could elect to receive retirement benefits.
(4) Qualified Election.
A waiver of a Qualified Joint and Survivor Annuity or a
Qualified Pre-Retirement Survivor Annuity. Any waiver of a
Qualified Joint and Survivor Annuity or a Qualified
Pre-Retirement Survivor Annuity shall not be effective
unless:
(a) The Participant's spouse consents in writing to the
election;
(b) The election designates a specific Beneficiary
including any class of Beneficiaries or any
contingent Beneficiaries, which may not be changed
without spousal consent (or the spouse expressly
permits designations by the Participant without any
further spousal consent);
(c) The spouse's consent acknowledges the effect of the
election; and
(d) The spouse's consent is witnessed by a Plan
representative or notary public.
Additionally, a Participant's waiver of the Qualified
Joint and Survivor Annuity shall not be effective unless
the election designates a form of benefit payment which
may not be changed without spousal consent (or the spouse
expressly permits designations by the Participant without
any further spousal consent). If it is established to the
satisfaction of a Plan representative that there is no
spouse or that the spouse cannot be located, a waiver will
be deemed a qualified election.
Any consent by a spouse obtained under this provision (or
establishment that the consent of a spouse may not be
obtained) shall be effective only with respect to such
spouse. A consent that permits designations by the
Participant without any requirement of further consent by
such spouse must acknowledge that the spouse has the right
to limit consent to a specific Beneficiary, and a specific
form of benefit where applicable, and that the spouse
voluntarily elects to relinquish either or both of such
rights. A revocation of a prior waiver may be made by a
Participant without the consent of the spouse at any time
before the commencement of benefits. The number of
revocations shall not be limited. No consent obtained
under this provision shall be valid unless the Participant
has received notice as provided in subsection E below.
(5) Qualified Joint And Survivor Annuity.
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An immediate annuity for the life of the Participant with
a survivor annuity for the life of the spouse which is not
less than fifty percent (50%) and not more than one
hundred percent (100%) of the amount of the annuity which
is payable during the joint lives of the Participant and
the spouse and which is the amount of benefit which can be
purchased with the Participant's vested Accrued Benefit,
and is further defined in the Qualified Joint and Survivor
Annuity section above.
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(6) Spouse (Surviving Spouse).
The spouse or surviving spouse of the Participant,
provided that a former spouse will be treated as the
spouse or surviving spouse and a current spouse will not
be treated as the spouse or surviving spouse to the extent
provided under a qualified domestic relations order as
described in Code section 414(p).
(7) Annuity Starting Date.
The first day of the first period for which an amount is
paid as an annuity or any other form.
(8) Vested Accrued Benefit.
The aggregate value of the Participant's vested Accrued
Benefit, whether vested before or upon death, including
the proceeds of insurance contracts, if any, on the
Participant's life.
E. Notice Requirements.
(1) In the case of a Qualified Joint and Survivor Annuity, the
Administrative Committee shall, no less than thirty (30)
days and no more than ninety (90) days prior to the
annuity starting date, provide each Participant a written
explanation of:
(a) The terms and conditions of a Qualified Joint and
Survivor Annuity;
(b) The Participant's right to make and the effect of
an election to waive the Qualified Joint and
Survivor Annuity form of benefit;
(c) The rights of a Participant's spouse; and
(d) The right to make, and the effect of, a revocation
of a previous election to waive the Qualified Joint
and Survivor Annuity.
(2) In the case of a Qualified Pre-Retirement Survivor Annuity
as described in subsection C, the Plan Administrative
Committee shall provide each Participant within the
applicable period for such Participant a written
explanation of the Qualified Pre-Retirement Survivor
Annuity in such terms and in such manner as would be
comparable to the explanation provided for meeting the
requirements of Paragraph E(1).
The applicable period for a Participant is whichever of
the following periods ends last:
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(a) The period beginning with the first day of the Plan
Year in which the Participant attains age
thirty-two (32) and ending with the close of the
Plan Year preceding the Plan Year in which the
Participant attains age thirty-five (35);
(b) A reasonable period ending after the individual
becomes a Participant;
(c) A reasonable period ending after Paragraph E(3)
ceases to apply to the Participant;
(d) A reasonable period ending after this section first
applies to the Participant.
Notwithstanding the foregoing, notice must be provided
within a reasonable period ending after separation from
service in the case of a Participant who separates from
service before attaining age thirty-five (35).
For purposes of applying the preceding paragraph, a
reasonable period ending after the enumerated events is
the end of the two (2) year period beginning one (1) year
prior to the date the applicable event occurs, and ending
one (1) year after that date. In the case of a Participant
who separates from service before the Plan Year in which
age thirty-five (35) is attained, notice shall be provided
within the two (2) year period beginning one (1) year
prior to separation and ending one (1) year after
separation. If such a Participant thereafter returns to
employment with the Employer, the applicable period for
such Participant shall be redetermined.
(3) Notwithstanding the other requirements of this subsection,
the respective notices prescribed by this subsection need
not be given to a Participant if:
(a) The Plan "fully subsidizes" the costs of a
Qualified Joint and Survivor Annuity or Qualified
Pre-Retirement Survivor Annuity, and
(b) The Plan does not allow the Participant to waive
the Qualified Joint and Survivor Annuity or
Qualified Pre-Retirement Survivor Annuity and does
not allow a married Participant to designate a
nonspouse beneficiary.
For purposes of this Paragraph, a plan fully subsidizes
the costs of a benefit if no increase in cost, or decrease
in benefits to the Participant may result from the
Participant's failure to elect another benefit.
F. Safe harbor rules.
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(1) This subsection F shall apply to a Participant in a
profit-sharing plan, and to any distribution, made on or
after the first day of the first Plan Year beginning after
December 31, 1988 from or under a separate account
attributable solely to accumulated deductible employee
contributions, as defined in Code section 72(o)(5)(B) and
maintained on behalf of a Participant in a money purchase
pension plan, (including a target benefit plan) if the
following conditions are satisfied:
(a) The Participant does not or cannot elect payments
in the form of a life annuity; and
(b) On the death of a Participant, the Participant's
vested Accrued Benefit will be paid to the
Participant's surviving spouse, but if there is no
surviving spouse, or if the surviving spouse has
consented in a manner conforming to a qualified
election, then to the Participant's designated
Beneficiary.
The surviving spouse may elect to have distribution of the
vested Accrued Benefit commence within the ninety (90)-day
period following the date of the Participant's death. The
Accrued Benefit shall be adjusted for gains or losses
occurring after the Participant's death in accordance with
the provisions of the Plan governing the adjustment of
Accrued Benefits for other types of distributions. This
subsection F shall not be operative with respect to a
Participant in a profit-sharing plan if the plan is a
direct or indirect transferee of a defined benefit plan,
money purchase plan, a target benefit plan, stock bonus,
or profit-sharing plan which is subject to the survivor
annuity requirements of Code section 401(a)(11) and Code
section 417. If this subsection F is operative, then the
provisions of this section, other than subsection G, shall
be inoperative.
(2) The Participant may waive the spousal death benefit
described in this subsection F at any time provided that
no such waiver shall be effective unless it satisfies the
conditions of Paragraph D(3) (other than the notification
requirement referred to therein) that would apply to the
Participant's waiver of the Qualified Pre-Retirement
Survivor Annuity.
G. Transitional Rules.
(1) Any living Participant not receiving benefits on August
23, 1984, who would otherwise not receive the benefits
prescribed by the previous subsections of this section
must be given the opportunity to elect to have the prior
provisions of this section apply if such Participant is
credited with at least one (1) Hour of Service under this
Plan or a predecessor plan in a Plan Year beginning on or
after
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January 1, 1976, and such Participant had at least ten
(10) Years of Service for Vesting when he or she separated
from service.
(2) Any living Participant not receiving benefits on August
23, 1984, who was credited with at least one Hour of
Service under this Plan or a predecessor plan on or after
September 2, 1974, and who is not otherwise credited with
any service in a Plan Year beginning on or after January
1, 1976, must be given the opportunity to have his or her
benefits paid in accordance with Paragraph G(4).
(3) The respective opportunities to elect (as described in
Paragraphs G(1) and (2) above must be afforded to the
appropriate Participants during the period commencing on
August 23, 1984, and ending on the date benefits would
otherwise commence to said Participants.
(4) Any Participant who has elected pursuant to Paragraph G(2)
and any Participant who does not elect under Paragraph
G(1) or who meets the requirements of Paragraph G(1)
except that such Participant does not have at least ten
(10) Years of Service for Vesting when he or she separates
from service, shall have his or her benefits distributed
in accordance with all of the following requirements if
benefits would have been payable in the form of a life
annuity.
(A) If benefits in the form of a life annuity become
payable to a married Participant who:
(i) Begins to receive payments under the Plan on
or after Normal Retirement Age; or
(ii) Dies on or after Normal Retirement Age while
still working for the Employer; or
(iii) Begins to receive payments on or after the
qualified early retirement age; or
(iv) Separates from service on or after attaining
Normal Retirement Age (or the qualified
early retirement age) and after satisfying
the eligibility requirements for the payment
of benefits under the Plan and thereafter
dies before beginning to receive such
benefits;
then such benefits will be received under this Plan
in the form of a Qualified Joint and Survivor
Annuity, unless the Participant has elected
otherwise during the election period. The election
period must begin at least six (6) months before
the Participant attains qualified early retirement
age and end not more than ninety (90) days before
the
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commencement of benefits. Any election hereunder
will be in writing and may be changed by the
Participant at any time.
(B) A Participant who is employed after attaining the
qualified early retirement age will be given the
opportunity to elect, during the election period,
to have a survivor annuity payable on death. If the
Participant elects the survivor annuity, payments
under such annuity must not be less than the
payments which would have been made to the spouse
under the Qualified Joint and Survivor Annuity if
the Participant had retired on the day before his
or her death. Any election under this provision
must be in writing and may be changed by the
Participant at any time. The election period begins
on the later of
(i) The ninetieth (90th) day before the
Participant attains the qualified early
retirement age, or
(ii) The date on which participation begins, and
ends on the date the Participant terminates
employment.
(C) For purposes of this Paragraph G(4), "qualified
early retirement age" is the latest of:
(i) The earliest date, under the Plan, on which
the Participant may elect to receive
retirement benefits,
(ii) The first day of the one hundred twentieth
(120th) month beginning before the
Participant reaches Normal Retirement Age,
or
(iii) The date the Participant begins
participation.
7.6 Segregation If Installment Distribution.
The Administrative Committee may determine that the Accounts of a
Participant who is no longer an Employee shall be segregated and set
aside, in which event the Administrative Committee shall direct the
Trustee to segregate the vested portion (as defined in Article VI) of
the entire balance of the Participant's Employer Account and Elective
Deferral Account, if applicable, and to deposit such portion in a
separate interest bearing account at a bank or savings and loan
association, and said account shall cease to participate in the income
or net loss or appreciation or depreciation of the Trust Fund, as of the
beginning of the Plan Year in which such segregation occurs, and instead
will be credited with the full amount of interest earned thereon.
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7.7 Non-Segregation If Installment Distribution.
In the event the Administrative Committee does not segregate (as
provided in the Segregation Of Installment Distribution section above)
the Participant's Accounts, the Accounts shall continue to be treated,
without interruption, in the same manner as when the Participant was an
Employee, in which case the installment distributions shall be adjusted
upward or downward to reflect appreciation or depreciation, or income or
loss in the Accrued Benefit.
7.8 Distribution After Death Of Participant.
In the event of the death of a Participant after installment payments
have begun, but prior to completion of such payments, the full amount of
such unpaid benefits shall continue to be paid in the form of the
previously established installments except that the Beneficiary may
request that the remaining Accrued Benefit be paid in a lump sum.
In the event of the death of the Participant prior to the start of any
payment of his Accrued Benefit, distributions shall be made in the form
and at the time or times selected by the Beneficiary.
7.9 Distribution After Death Of Beneficiary.
In the event of the death of a Beneficiary (or a contingent Beneficiary,
if applicable) prior to the completion of payment of benefits due the
Beneficiary from the Plan, the full amount of such unpaid benefits shall
at once vest in and become the property of the estate of said
Beneficiary. In determining the amount of such unpaid benefits, no
adjustment shall be made by reason of any net income, or net loss, of
the Trust, or any net appreciation or net depreciation by the Trust's
assets subsequent to the beginning of the Plan Year in which such final
distribution occurs.
7.10 Rollover From Plan.
The Administrative Committee may, in its sole discretion, but only with
the prior written consent of the Participant, transfer part or all of
the funds credited to such Participant's Accounts to a retirement plan,
as described in Code section 401(a) or 403(a) as to which the individual
is a Participant at the time of such distribution.
7.11 Suspense Account For Terminated Participants.
If a Participant has terminated his employment but his Employer Account
is not one hundred percent (100%) vested and he has not had five (5)
consecutive One (1) Breaks in Service subsequent to his termination, all
funds in his Employer Account shall be held in suspense until the
happening of the soonest of the following:
A. The Cash-Out of the Participant's vested interest in his Accrued
Benefit, or
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B. The occurrence of five (5) consecutive One (1) Breaks in Service,
or
C. The Participant returning to employment with the Employer, or
D. The Participant attaining Normal Retirement Age.
At such time the Participant's Employer Account shall cease to be held
in suspense. If a Participant has returned to employment prior to
incurring five (5) consecutive One (1) Year Breaks in Service, his
Employer Account which has been held in suspense shall be restored to
his credit, less any distribution which is not repaid in accordance with
this section if his Employer Account is no longer held in suspense at
such time, the amounts required to restore the balance to his credit
shall be provided through Forfeitures and Employer contributions, in
that order. If five (5) consecutive One (1) Year Breaks In Service
occur, or a Cash-Out of the Participant's vested Accrued Benefit occurs,
the non-vested portion of the Employer Account held in suspense will be
forfeited and reallocated in accordance with the Manner Of Allocation
section for the Plan Year in which such Forfeiture occurs; the vested
portion shall be distributed in accordance with the provisions of
Article VII. In the case of a Participant attaining Normal Retirement
Age while his Employer Account is being held in suspense, the entire
amount will be distributed in accordance with the provisions of Article
VII.
Such suspense account shall share in any appreciation, depreciation, or
net income or loss as if it were not in suspense, except that an account
which is in suspense shall have no Forfeitures allocated to it for a
Plan Year in which the Employee does not have a Year of Service for
Accrual of Benefits.
Notwithstanding anything contained in this section to the contrary, upon
the payment of a Participant's vested Accrued Benefit through a
Cash-Out, the non-vested portion of such Participant's Accrued Benefit
shall be immediately forfeited and shall be reallocated for the Plan
Year in accordance with the Manner of Allocation section of Article IV.
If an Employee terminates service, and elects, in accordance with the
requirements of subsection of The Time Of Distribution section, above),
to receive the value of the Employee's vested Accrued Benefit, the
nonvested portion will be treated as a Forfeiture. If the Employee
elects to have distributed less than the entire vested portion of the
Accrued Benefit derived from Employer contributions, the part of the
nonvested portion that will be treated as a Forfeiture (which will be
reallocated for the Plan Year in accordance with the Manner Of
Allocation section above) is the total nonvested portion multiplied by a
fraction, the numerator of which is the amount of the distribution
attributable to Employer contributions and the denominator of which is
the total value of the vested Employer derived Accrued Benefit.
7.12 Unable To Locate Participant Or Beneficiary.
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If the Participant or Beneficiary to whom benefits are to be distributed
cannot be located, and reasonable efforts have been made to find him,
including the sending of notification by certified or registered mail to
his last known address, the Administrative Committee may direct the
Trustee to take any of the following actions:
A. Distribute the benefits in question to an interest bearing
savings account established in the name of the Participant or
Beneficiary; or, if the benefits are payable to a Participant (as
reasonably determined by the Administrative Committee) the
Administrative Committee may instruct the Trustee to distribute
the funds to the Participant by placing them in a savings account
in the Participant's name or by purchasing U.S. Savings Bonds in
the Participant's name and holding them for the Participant;
B. If the Administrative Committee has taken the reasonable efforts
to locate the Participant, the Administrative Committee may
allocate the Participant's Accrued Benefits to a segregated
account in the manner described in the Segregation If Installment
Distribution section, as if an installment distribution were
being made; however, such funds shall be held in the segregated
account for distribution to the Participant when located.
7.13 Repayment Of Cash-Out.
If an Employee receives a distribution pursuant to the Method Of
Distribution Of Accounts section and the Employee resumes employment
covered under this Plan, the Employee's Employer-Derived Accrued Benefit
will be restored to the amount on the date of distribution if the
Employee repays to the Plan the full amount of the distribution
attributable to Employer contributions before the earlier of five (5)
years after the first date on which the Participant is subsequently
re-employed by the Employer, or the date the Participant incurs five (5)
consecutive One (1) Breaks in Service following the date of the
distribution. The permissible sources of restoration of the forfeited
portion of a Cash-Out distribution are Forfeitures and Employer
contributions.
7.14 Qualified Domestic Relations Orders.
Notwithstanding any other provisions of Article VII, any Accrued Benefit
of a Participant may be apportioned between the Participant and the
alternate payee (as defined in Code section 414(p)(8)) either through
separate Accounts or by providing the alternate payee a percentage of
the Participant's accounts. The Administrative Committee may direct
distributions to an alternate payee pursuant to a qualified domestic
relations order as defined in Code section 414(p)(1)(A) prior to the
date on which the Participant attains the earliest retirement age,
provided that the Administrative Committee has properly notified the
affected Participant and each alternate payee of the order and has
determined that the order is a qualified domestic relations order as
defined in Code section 414(p)(1)(A). The alternate payee shall be paid
his separate Account or his percentage of the Participant's accounts,
computed as of the valuation date described in the Valuation Of Assets
And Allocation Of Changes section, in a lump sum payment notwithstanding
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the value of such lump sum payment unless the domestic relations order
specifies a different manner of payment permitted by the Plan; the
alternate payee shall not be required to consent to such lump sum
payment. The Administrative Committee shall adopt reasonable procedures
to determine the qualified status of domestic relations orders and to
administer the distributions thereunder.
7.15 Direct Rollover.
Notwithstanding any other provision of the Plan, for distributions made
after December 31, 1992 the Plan Administrative Committee shall advise
any distributee entitled to receive an eligible rollover distribution,
at the same time as the notice required to be given pursuant to Article
VII (or such other time as is permitted by law) of his right to elect a
direct rollover to an eligible retirement plan, pursuant to the
provisions of this section. To elect a direct rollover the distributee
must request in writing to the Plan Administrative Committee that all or
a specified portion of the eligible rollover distribution be transferred
directly to an eligible retirement plan. If a distribution will be made
on behalf of the distributee in more than one (1) year, the notice
specified in the first sentence of this section must be given to the
distributee in each year in which there is an eligible rollover
distribution, and the distributee must file a new election with the Plan
Administrative Committee if he wishes to have the eligible rollover
distribution transferred directly to an eligible retirement plan.
The distributee shall not be entitled to elect a direct rollover
pursuant to this section unless he has obtained a waiver of any
applicable Qualified Joint and Survivor Annuity, as required pursuant to
the Qualified Joint And Survivor Annuity section above in Article VII.
For purposes of this section, the following definitions shall apply:
A, A "direct rollover" is a payment by the Plan to the eligible
retirement plan specified by the distributee.
B. 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 Code section 414(p), are distributees with
regard to the interest of the spouse or former spouse.
C. An "eligible retirement plan" is a retirement plan which meets
the requirements of Code section 401(a), an annuity described in
Code section 403(a), an individual retirement account described
in Code section 408(a), or an individual retirement annuity
(other than an endowment contract) described in Code section
408(b), the terms of which permit the acceptance of a direct
rollover of 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 an individual retirement annuity. The
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Administrative Committee may establish reasonable procedures for
ascertaining that the eligible retirement plan meets the
preceding requirements.
D. An "eligible rollover distribution" is any distribution from this
Plan on or after January 1, 1993 of all or any portion of the
balance to the credit of the distributee, except for
distributions (or portions thereof) which are
(1) Part of a series of substantially equal periodic payments
(not less frequently than annually) made over the life of
the Employee (or the joint lives of the Employee and the
Employee's designated beneficiary), the life expectancy of
the Employee (or the joint life and last survivor
expectancy of the Employee and the Employee's designated
beneficiary), or a specified period of ten (10) years or
more;
(2) Required under Code section 401(a)(9) (relating to the
minimum distribution requirements); or
(3) The portion of any distribution that is not includable in
gross income (determined without regard to the exclusion
for net unrealized appreciation in employer securities
described in Code section 402(e)(4)).
ARTICLE VIII - DUTIES AND AUTHORITY OF TRUSTEE
8.1 Receive Payments.
The Trustee shall receive from the Employer the payments made by it on
account of its contributions under the Plan, and made by Participants,
if any, but the Trustee shall have no duty to compute any amount due
from the Employer or to collect the same.
8.2 Value Assets.
The Trustee shall value the assets of the Trust Fund as of the close of
the last day of each Plan Year at their fair market value and the
Administrative Committee or its agent will allocate the sums contributed
by the Employer and by Participants, if any, plus the net income or
minus the net loss of the Trust Fund and plus the net appreciation or
minus the net depreciation in the Trust Fund to separate bookkeeping
accounts in the names of the respective Participants under the Plan in
accordance with the provisions of Article V.
8.3 Segregation Of Accounts.
When directed in writing by the Administrative Committee, the Trustee
shall segregate the accounts of terminated Participants in accordance
with the provisions of the Rollover Contribution section of Article IV
and of the Segregation Of Installment Distribution section of Article
VII, and
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make payments out of the Trust Fund from time to time to the
Participants or their Beneficiaries, such payments to be made in the
manner and in the amounts as may be specified in the written
instructions of the Administrative Committee.
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8.4 Tax Returns And Reports.
If the Trustee is a corporate fiduciary, then such Trustee shall prepare
or cause to have prepared and filed, all tax returns, reports, and
related documents, except as otherwise specifically provided in this
Plan or unless the Administrative Committee, in writing, relieves the
Trustee of such obligation, in part or entirely, in which case the
Administrative Committee, or the person or persons it designates, shall
be responsible for filing the tax returns, reports, and related filings,
as provided by the Administrative Committee. The Trustee shall be
entitled to rely on the accuracy of any written statement from the
Administrative Committee or from an officer of the Employer as to those
matters provided in Article IX.
8.5 Powers.
The Trustee is authorized and empowered to:
A. Invest and reinvest the Trust Fund, without distinction between
principal and income, in bank accounts, certificates of deposit,
common stocks, preferred stocks, bonds, notes, debentures,
mortgages, U.S. retirement plan bonds, and in other property,
real or personal, so long as the incidents of ownership of such
property are within the jurisdiction of the United States, and so
long as such investments do not violate applicable law;
B. Sell, exchange, convey, transfer, or otherwise realize the value
of any property held by it;
C. Convert 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 warrants, conversion privileges,
subscription rights, or other options and to make any payment
incidental thereto; to consent to or otherwise participate in
corporate reorganizations or other changes affecting corporate
securities and to delegate discretionary powers 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 properties held in the Trust Fund;
D. Make, execute, acknowledge, and deliver any and all documents of
transfer and conveyance and any other instruments that may be
necessary or appropriate to carry out the powers herein granted;
E. Register any investments held in the Trust Fund in its own name
or in the name of a nominee or nominees and to hold any
investment 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;
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F. Invest all or a part of the Trust Fund in deposits which bear a
reasonable rate of interest in a bank or similar financial
institution, even though such institution is a Trustee or other
fiduciary, as defined in Code section 4975(e)(3);
G. Invest in a common or collective trust fund or pooled investment
fund maintained by a bank or trust company or a pooled investment
fund of an insurance company qualified to do business in a State
even though such bank, trust company or insurance company is a
disqualified person, as defined in Code section 4975(e)(2);
H. Make distributions to Participants or Beneficiaries in cash,
insurance policies or any other property; and
I. Perform all such acts, although not specifically mentioned
herein, as the Trustee may deem necessary to administer the Trust
Fund and to carry out the purpose of the Trust; and
J. Borrow or loan sums, except as prohibited by Code section 4975(c)
(without reference to Code section 4975(d)), as the Trustee deems
desirable, and for that purpose, to mortgage or pledge all or
part of the Trust Fund.
8.6 Expenses.
All brokerage costs, transfer taxes and similar expenses incurred in
connection with the investment and reinvestment of the Trust Fund and
all taxes of any kind whatsoever which may be levied or assessed under
existing or future laws upon or in respect of the Trust Fund, and any
interest which may be payable on money borrowed by the Trustee for the
purpose of the Trust, shall be paid from the Trust Fund, and, until
paid, shall constitute a charge upon the Trust Fund. All other
administrative expenses incurred by the Trustee in the performance of
its duties, including such Compensation to the Trustee as may be agreed
upon from time to time between the Employer and the Trustee (in
accordance with the Trustee's standard schedule of fees in effect from
time to time during the time it administers this Trust, if applicable)
and all proper charges and disbursements of the Trustee, may be paid by
the Employer, and if not paid by the Employer shall be paid from the
Trust Fund, and until paid shall constitute a charge upon the Trust
Fund. If the Employer advises the Trustee in writing of its
determination to make no further contribution to this Trust, the
expenses of the Trustee shall thereafter be charged against and paid out
of the Trust Fund and a lien for the payment thereof shall be impressed
upon the assets of the Trust to be charged proportionately against the
amount standing to the credit of each Participant. However, no person
who is a disqualified person (as defined in Code section 4975(e)(2)) and
who received full-time pay from the Employer, may receive Compensation
from the Trust except for reimbursement of expenses properly and
actually incurred.
The Trustee may inspect the records of the Employer whenever such
inspection may be reasonably necessary in order to determine any fact
pertinent to the performance of its duties as
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the Trustee. The Trustee, however, shall not be required to make such
inspection, but may, in good faith, rely on any statement of the
Employer or any of its officers.
8.7 Litigation.
The Trustee shall not be required to participate in any litigation
either for the collection of monies or other property due the Trust
Fund, or in defense of any claim against the Trust Fund unless the
Trustee shall have been indemnified to its satisfaction against all
expenses and liability to which the Trustee might become subject.
8.8 Written Instructions.
When any act of the Trustee is based upon instructions of the Employer
or the Administrative Committee, the Trustee may rely upon instructions
in writing, signed by an officer of the Employer, or upon written
instructions from the Administrative Committee or the Plan
Administrative Committee, as appropriate.
8.9 Appointment of Investment Manager.
The Trustee, with the written concurrence of the Plan Administrative
Committee, may appoint an Investment Manager (as defined in ERISA
section 3(38)), who shall have responsibility for investment of the
Trust Fund. The Investment Manager shall have the investment powers
granted the Trustee in the Powers section of this Article VIII above
except to the extent the Investment Manager's powers are specifically
limited by an agreement between the Trustee and Investment Manager.
8.10 Removal And Resignation Of The Trustee.
The Employer may at any time remove any Trustee acting hereunder or
appoint a corporation and/or an individual or individuals to be
successor Trustee hereunder in the place of any removed or resigning
Trustee. Any Trustee may at any time resign by giving written notice to
the Employer, which resignation shall take effect on the date therein
specified and which shall not be less than thirty (30) days from the
date of notice unless the Employer shall agree to an earlier date.
8.11 Participant Directed Accounts.
Notwithstanding the Invest In Single Fund And Reasonable Rules section
of Article V, the Administrative Committee may at any time determine
that the Plan will permit each Participant (and the Beneficiary of a
Participant) to invest all or a part of the one hundred percent (100%)
vested funds in his Employer Account, Matching Contributions Account,
Participant After-Tax Account, Elective Deferral Account, Qualified
Matching Contributions Account, Qualified Nonelective Contributions
Account and, Rollover Account in a range of specified options beginning
at the time specified by the Administrative Committee, but only
following written notification to the
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Trustee of such action. Provided, however, that such investments shall
not include "collectibles" as defined in Code section 408(m). After the
effective date of such action the Participant may, from time to time,
instruct the Trustee, or person designated by the Administrative
Committee to purchase and/or sell assets of the type permitted for his
Employer Account, Matching Contributions Account, Participant After-Tax
Account, Elective Deferral Account, Qualified Matching Contributions
Account, Qualified Nonelective Contributions Account and, Rollover
Account. Notwithstanding the preceding, the Administrative Committee may
establish reasonable rules limiting the investment discretion and
investment timing of a Participant and similar matters. Accounts which
have been individually directed will be segregated for the purpose of
allocating earnings and expenses pursuant to the Valuation Of Assets and
Allocation Of Changes section of Article V above. All expenses incurred
pursuant to a Participant's directing investments, including brokerage
fees, state and federal income taxes arising from unrelated business
taxable income and any other incidental expenses shall be paid solely
with funds from the accounts of such Participant. Neither the Trustee
nor the Administrative Committee will be held liable for the
Participant's investment choice, so long as the investment is made
pursuant to this section 8.11.
ARTICLE IX - DUTIES AND AUTHORITY OF ADMINISTRATIVE COMMITTEE
9.1 Appointment.
This Plan shall be administered by an Administrative Committee, which
shall consist of at least one (1) but not more than seven (7) persons
appointed by the board of directors of the Employer, who shall signify
in writing their acceptance of such appointment. Any member of the
Administrative Committee may resign upon giving written notice to the
board of directors of the Employer. Each appointee shall hold office at
the pleasure of the board of directors of the Employer. Vacancies
arising in the Administrative Committee from death, resignation, removal
or otherwise, shall be filled by the board of directors of the Employer,
but the Administrative Committee may act notwithstanding the existence
of vacancies so long as there is at least one (1) member of the
Administrative Committee.
9.2 No Discrimination.
The Administrative Committee shall not take any action nor direct the
Trustee to take any action that would result in benefiting one (1)
Participant or group of Participants at the expense of another, or
discriminating between Participants similarly situated, or applying
different rules to substantially similar sets of facts.
9.3 Majority Action.
The Administrative Committee shall act by a majority (or by all members
if there be only one (1) or two (2) members) of the number of members
constituting the Administrative Committee at the time
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of such action, and such action may be taken either by vote at a meeting
or in writing without a meeting.
9.4 Powers.
Except as otherwise provided in the Plan, the Administrative Committee
shall have control of the administration of the Plan, with all powers
necessary to enable it to carry out its duties in that respect. Not in
limitation, but in amplification of the foregoing, the Administrative
Committee shall have the power, in its sole discretion, to interpret or
construe the Plan and to determine all questions that may arise
hereunder as to the status and rights of Participants and others
hereunder. The Administrative Committee shall have the right,
exercisable at any time by delivery to the Trustee of an instrument in
writing, to instruct or direct the Trustee with respect to the
investment of the Trust Fund. The Administrative Committee may inspect
the records of the Employer or Trustee whenever such inspection may be
reasonably necessary in order to determine any fact pertinent to the
performance of the duties of the Administrative Committee. The
Administrative Committee, however, shall not be required to make such
inspection, but may, in good faith, rely on any statement of the Trustee
or Employer or any of its officers or employees.
9.5 Filing Reports.
The Administrative Committee shall furnish, or shall see that the
Employer furnishes, a summary of this Plan to all Employees, as required
by applicable Federal law. The Administrative Committee shall furnish to
the Trustee the names of all Employees who become eligible as
Participants, and the Administrative Committee shall notify each
Employee of his eligibility.
9.6 Records And Information.
The Administrative Committee shall keep a complete record of all its
proceedings and all data necessary for the administration of the Plan.
9.7 Information To Participants.
The Administrative Committee shall direct the maintenance of separate
accounts of the Participants. It shall give each Participant, at least
once every year, information as to the balance of his Employer Account
and Elective Deferral Account, if applicable.
9.8 Compensation Of Members.
The members of the Administrative Committee shall serve without
Compensation for their services as such, but shall be reimbursed by the
Employer for all necessary expenses incurred in the discharge of their
duties. If the Employer advises the Administrative Committee in writing
of its determination to make no further contributions to the Plan, the
expenses of the Administrative Committee shall thereafter be charged
against and paid out of the Trust Fund and a lien for the
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payment thereof shall be impressed upon the assets of the Trust to be
charged proportionately against the amount standing to the credit of
each Participant.
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9.9 Review Of Participant's Claims.
In case the claim of any Participant or Beneficiary for benefits under
the Plan is denied, the Administrative Committee shall provide within
ninety (90) days of receipt of such written claim adequate notice in
writing to such claimant, setting forth the specific reasons for such
denial. The notice shall be written in a manner calculated to be
understood by the claimant. The Administrative Committee shall afford a
Participant or Beneficiary, whose claim for benefits has been denied,
sixty (60) days from the date notice of such denial is delivered or
mailed in which to appeal the decision in writing to the Administrative
Committee. If the Participant or Beneficiary appeals the decision in
writing within sixty (60) days, the Administrative Committee shall
review the written comments and any submissions of the Participant or
Beneficiary and render its decision regarding the appeal within sixty
(60) days of receipt of such appeal.
ARTICLE X - MODIFICATIONS FOR TOP-HEAVY PLANS
10.1 Application Of Article.
The provisions in this Article X shall take precedence over any other
provisions in the Plan with which they conflict.
10.2 Definitions.
For purposes of this Article X, the following words and terms shall have
the meanings indicated:
A. Key employee.
A "key employee" is any Employee or former Employee (and the
beneficiaries of such Employee) who at any time during the
determination period was
(1) An officer of the Employer if such individual's annual
Compensation exceeds fifty percent (50%) of the dollar
limitation under Code section 415(b)(1)(A),
(2) An owner (or considered an owner under Code section 318) of
one (1) of the ten (10) largest interests in the Employer if
such individual's Compensation exceeds one hundred percent
(100%) of the dollar limitation under Code section
415(c)(1)(A),
(3) A five percent (5%) owner of the Employer, or
(4) A one percent (1%) owner of the Employer who has an annual
Compensation of more than one hundred fifty thousand dollars
($150,000).
-81-
<PAGE> 88
B. Annual Compensation.
Annual Compensation means Compensation as defined in Code section
415(c)(3), and for all Plan Years includes amounts contributed by
the Employer pursuant to a salary reduction agreement which are
excludable from the employee's gross income under Code section
125, section 402(e)(3), section 402(h) or section 403(b). The
determination period is the Plan Year containing the
determination date and the four (4) preceding Plan Years.
The determination of who is a key employee will be made in
accordance with Code section 416(i)(1) and the regulations
thereunder.
C. Top-Heavy plan.
A "top heavy plan" or any Plan Year beginning after December 31,
1983, this Plan is top-heavy if any of the following conditions
exists:
(1) If the top-heavy ratio for this Plan exceeds sixty percent
(60%) and this Plan is not part of any required
aggregation group or permissive aggregation group of
plans.
(2) If this Plan is a part of a required aggregation group of
plans but not part of a permissive aggregation group and
the top-heavy ratio for the group of plans exceeds sixty
percent (60%).
(3) If this Plan is a part of a required aggregation group and
part of a permissive aggregation group of plans and the
top-heavy ratio for the permissive aggregation group
exceeds sixty percent (60%).
D. Top-Heavy ratio.
(1) If the Employer maintains one (1) or more defined
contribution plans (including any simplified employee
pension plan) and the Employer has not maintained any
defined benefit plan which during the five (5)-year period
ending on the determination date(s) has or has had accrued
benefits, the top-heavy ratio for this Plan alone or for
the required or permissive aggregation group as
appropriate is a fraction, the numerator of which is the
sum of the account balances of all key employees as of the
determination date(s) (including any part of any account
balance distributed in the five (5) year period ending on
the determination date(s)), and the denominator of which
is the sum of all account balances (including any part of
any account balance distributed in the five (5) year
period ending on the determination date(s)), both computed
in accordance with Code section 416 and the regulations
thereunder. Both the numerator and denominator of the
top-heavy ratio are increased to reflect any contribution
not actually made
-82-
<PAGE> 89
as of the determination date, but which is required to
be taken into account on that date under Code section
416 and the regulations thereunder.
(2) If the Employer maintains one (1) or more defined
contribution plans (including any simplified employee
pension plan) and the Employer maintains or has maintained
one (1) or more defined benefit plans which during the
five (5)-year period ending on the determination date(s)
has or has had any accrued benefits, the top-heavy ratio
for any required or permissive aggregation group as
appropriate is a fraction, the numerator of which is the
sum of all account balances under the aggregated defined
contribution plan or plans for all key employees,
determined in accordance with Paragraph (1) above, and the
present value of accrued benefits under the aggregated
defined benefit plan or plans for all key employees as of
the determination date(s), and the denominator of which is
the sum of the account balances under the aggregated
defined contribution plan or plans for all Participants,
determined in accordance with Paragraph (1) above, and the
present value of accrued benefits under the defined
benefit plan or plans for all Participants as of the
determination date(s), all determined in accordance with
Code section 416 and the regulations thereunder. The
accrued benefits under a defined benefit plan in both the
numerator and denominator of the top-heavy ratio are
increased for any distribution of an accrued benefit made
in the five (5)-year period ending on the determination
date.
(3) For purposes of Paragraphs (1) and (2) above the value of
account balances and the present value of accrued benefits
will be determined as of the most recent valuation date
that falls within or ends with the twelve (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. The account balances and accrued
benefits of a Participant
(a) Who is not a key employee but who was a key
employee in a prior year, or
(b) Who has not been credited with at least one (1)
Hour of Service with any Employer maintaining the
Plan at any time during the five (5)-year period
ending on the determination date will be
disregarded. The calculation of the top-heavy
ratio, and the extent to which distributions,
rollovers, and transfers are taken into account
will be made in accordance with Code section 416
and the regulations thereunder.
Deductible employee contributions will not be taken into
account for purposes of computing the top-heavy ratio.
When aggregating plans the value of account balances and
accrued benefits will be calculated with reference to the
determination dates that fall within the same calendar
year.
-83-
<PAGE> 90
The accrued benefit of a Participant other than a key
employee shall be determined under
(a) The method, if any, that uniformly applies for
accrual purposes under all defined benefit plans
maintained by the Employer, or
(b) If there is no such method, as if such benefit
accrued not more rapidly than the slowest accrual
rate permitted under the fractional rule of Code
section 411(b)(1)(C).
E. Permissive Aggregation Group.
The required aggregation group of plans plus any other plan or
plans of the Employer which, when considered as a group with the
required aggregation group, would continue to satisfy the
requirements of Code sections 401(a)(4) and 410.
F. Required Aggregation Group.
"Required Aggregation Group." A group consisting of
(1) Each qualified plan of the Employer in which at least one
(1) key employee participated at any time during the
determination period (regardless of whether the plan has
terminated), and
(2) Any other qualified plan of the Employer which enables a
plan described in (1) to meet the requirements of Code
sections 401(a)(4) or 410.
G. Determination Date.
The date, for any Plan Year subsequent to the first Plan Year,
which is the last day of the preceding Plan Year; and in the case
of the first (1st) year of the Plan, the last day of that year.
H. Non-Key Employee.
Any Employee who is not a key employee.
10.3 Accelerated Vesting.
Unless the Plan provides for full and immediate vesting of Employer and
Elective Deferral Accounts upon participation, then for any Plan Year in
which this Plan is deemed to be a top-heavy plan, the vesting schedule
contained in Article VI shall be modified as follows:
-84-
<PAGE> 91
<TABLE>
<CAPTION>
=========================================================
Total Service for Vesting
(excluding Years of Service
prior to effective date Vested
of this Plan Percentage
=========================================================
<S> <C>
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 more 100%
=========================================================
</TABLE>
Should this Plan not be deemed to be a top-heavy plan after previously
being so categorized, the vesting schedule contained in the Employer
Account Vesting On Termination section of Article VI shall again be
effective except that the vested percentage attained by Participants
shall not be reduced thereby and Participants with three (3) or more
Years of Service for Vesting shall have the right to select the vesting
schedule under which their vested Accrued Benefit will be determined.
10.4 Minimum Contributions.
For any Plan Year in which this Plan is determined to be a top-heavy
plan, a minimum Employer contribution shall be made pursuant to the
maintained by the Employer to the account of each non-key employee
(except those who are separated from service with the Employer at the
end of the Plan Year). If the top-heavy minimum allocation is not
satisfied with respect to a Participant by the other plan of the
Employer, the Employer will provide under this Plan any additional
contributions required to satisfy the minimum contribution under Code
section 416 for such Participant. If the top-heavy minimum benefit is
not satisfied with respect to a Participant by the other plan of the
Employer, the Employer will provide under this Plan any additional
contributions required to satisfy the top-heavy minimum contribution
under Code section 416 for such Participant.
For the purposes of this section, the minimum Employer contribution
provided to each non-key employee Participant (except those who are
separated from service with the Employer at the end of the Plan Year)
shall be equal to three percent (3%) of such non-key employee's annual
Compensation. If, however, the Employer contribution and any Employee
deferrals, under this and any other defined contribution plan required
to be included in the permissive or required aggregation group and
maintained by the Employer, for any key employee for such Plan Year is
less than three percent (3%) of such key employee's total annual
Compensation not in excess of two hundred thousand dollars ($200,000)
(for Plan Years beginning before 1989), then the Employer contribution
to each Participant (except those who are separated from service with
the Employer at the end of the Plan Year) shall equal the amount which
results from multiplying such Participant's annual Compensation times
the highest contribution rate of any key employee (taking
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<PAGE> 92
into account both Employer contributions and Employee deferrals) covered
by the Plan. In determining the amount of Employer contributions which
are needed to satisfy the requirements of this section, employee
deferrals and employer matching contributions for non-key employees
shall not be taken into account.
For the purposes of this section, the minimum non-integrated benefit
provided by the Employer to each non-key employee Participant (except
those who have less than a Year of Service for Accrual of Benefits for
the Plan Year) is an amount, which when expressed as an annual
retirement benefit, shall be no less than two percent (2%) of such
non-key employee's average annual Compensation for his five (5) highest
consecutive Years of Service for Vesting, multiplied by the Employee's
Years of Service for Vesting with the Employer, not to exceed ten (10)
years. For the purposes of the preceding sentence, Years of Service for
Vesting with the Employer shall not include Years of Service for Vesting
completed during any Plan Year which begins before January 1, 1984, or
Years of Service for Vesting completed during a Plan Year for which the
Plan is not a top-heavy plan. For the purposes of this section, the
minimum benefit provided above shall be computed in the form of a single
life annuity, with no ancillary benefits, beginning at Normal Retirement
Age.
Notwithstanding the other provisions of this section, if the Employer
maintains both this Plan and a defined benefit plan, for Employees
covered under both plans the minimum Employer contribution or minimum
non-integrated benefit for top-heavy purposes shall be one of the
following:
A. The minimum non-integrated benefit, as described above, provided
under a defined benefit plan,
B. The minimum non-integrated benefit, as described above, provided
under a defined benefit plan, but offset by Employer
contributions, as permitted by Treasury Regulation section
1.416-1(e), M-12,
C. A combination of Employer contributions under the defined
contribution plan and benefits under the defined benefit plan
which results, under comparability analysis, in the equivalent of
a minimum non-integrated benefit, as permitted by Treasury
Regulation section 1.416-1(e), M-12, or
D. The minimum Employer contribution, as described above, increased
to five percent (5%) (from three percent (3%)) of an Employee's
annual Compensation.
The minimum allocation required (to the extent required to be
nonforfeitable under Code section 416(b)) may not be forfeited under
Code section 411(a)(3)(B) or 411(a)(3)(D).
10.5 Limitation On Compensation Taken Into Account Under Plan.
-86-
<PAGE> 93
For any Plan Year prior to Plan Years beginning before January 1, 1989,
in which this Plan is deemed to be a top-heavy plan the definition of
annual Compensation contained in the subsection of the Definitions
section of Article X shall exclude amounts in excess of two hundred
thousand dollars ($200,000). For any Plan Year beginning on or after
January 1, 1993 annual Compensation shall exclude amounts in excess the
limitation under Code section 401(a)(17) (i.e., one hundred fifty
thousand dollars ($150,000) adjusted for the cost of living).
10.6 Modification Of Defined Benefit And Defined Contribution Fraction.
For any Plan Year in which the Plan is deemed to be a top-heavy plan,
the denominators of the defined benefit fraction and the defined
contribution fraction contained in subsection of the Limitations On
Allocations To Each Participant section of Article V, shall be deemed to
be modified by substituting one hundred percent (100%) for one hundred
twenty-five percent (125%). Notwithstanding the above, if this Plan
would not be deemed to be a top-heavy plan if ninety percent (90%) were
substituted for sixty percent (60%) in the Definitions section of
Article X and if the Employer provides benefits and/or makes
contributions to the Employer Accounts of non-key employees who
participate in defined benefit and/or defined contribution plans
maintained by the Employer, in amounts at least equal to that which
would be required by the Minimum Contributions section of this Article X
after substituting four percent (4%) for three percent (3%) in the
second (2nd) paragraph thereof, and by substituting three percent (3%)
for two percent (2%) in the third (3rd) paragraph thereof, then the
reduction in the defined benefit fraction and the defined contribution
fraction as set forth in the preceding sentence shall not be made.
For any Plan Year in which the Plan is deemed to be a top-heavy plan,
for any Employee who is covered by both a defined contribution and a
defined benefit plan maintained by the Employer, if the top-heavy
minimum is provided under a defined contribution plan, the minimum
nonelective contribution percentage is increased to seven and one half
percent (7.5%) of annual Compensation.
-87-
<PAGE> 94
ARTICLE XI - AMENDMENT AND TERMINATION
11.1 Rights To Suspend Or Terminate Plan.
It is the present intention of the Employer to maintain this Plan
throughout its corporate existence. Nevertheless, the Employer reserves
the right, at any time, to discontinue or terminate the Plan, to
terminate the Employer's liability to make further contributions to this
Plan, to suspend contributions for a fixed or indeterminate period of
time. In any event, the liability of the Employer to make contributions
to this Plan shall automatically terminate upon its legal dissolution or
termination, upon its adjudication as a bankrupt, upon the making of a
general assignment for the benefit of creditors, or upon its merger or
consolidation with any other corporation or corporations.
11.2 Successor Corporation.
In the event of the termination of the liability of the Employer to make
further contributions to this Plan, the Employer's liability may be
assumed by any other corporation or organization which employs a
substantial number of the Participants of this Plan. Such assumption of
liability shall be expressed in an agreement between such other
corporation or organization and the Trustee under which such other
corporation or organization assumes the liabilities of this Trust with
respect to the Participants employed by it.
11.3 Amendment.
To provide for contingencies which may require the clarification,
modification, or amendment of this Plan, the Employer reserves the right
to amend this Plan at any time.
No amendment to the Plan shall be effective to the extent that it has
the effect of decreasing a Participant's Accrued Benefit.
Notwithstanding the preceding sentence, a Participant's Accrued Benefit
may be reduced to the extent permitted under Code section 412(c)(8). For
purposes of this paragraph, a Plan amendment which has the effect of
decreasing a Participant's Accrued Benefit or eliminating an optional
form of benefit, with respect to benefits attributable to service before
the amendment shall be treated as reducing an Accrued Benefit.
Furthermore, if the vesting schedule of the Plan is amended, in the case
of an Employee who is a Participant as of the later of the date such
amendment is adopted or the date it becomes effective, the
nonforfeitable percentage (determined as of such date) of such
Employee's Employer derived Accrued Benefit will not be less than the
percentage computed under the Plan without regard to such amendment.
Each Participant having at least three (3) Years of Service for Vesting
at the time of the adoption of any amendment changing any vesting
schedule under the Plan, or prior to the end of the election period set
forth by this paragraph, shall have the right to elect at any time, but
no later than sixty (60) days after the later of
-88-
<PAGE> 95
A. The date the amendment is adopted,
B. The date on which the amendment is effective, or
C. The date on which the Participant is given written notice of the
amendment, to have his vested percentage computed under the Plan
without regard to such amendment.
11.4 One Hundred Percent (100%) Vesting On Termination Of Plan.
Upon termination or partial termination of the Plan by formal action of
the Employer or for any other reason, or if Employer contributions to
the Plan and Trust are permanently discontinued for any reason, there
shall be vested one hundred percent (100%) in each Participant directly
affected by such action the amount allocated to the accounts of each
such Participant, and payment to such Participant shall be made in cash
or in kind as soon as practicable after liquidation of the assets of the
Trust. Provided, however, that an amount from a Participant's Elective
Deferral Account, Qualified Nonelective Contributions Account, or
Qualified Matching Contributions Account may only be distributed if the
Employer does not maintain or establish another defined contribution
plan at the time the Plan is terminated or within the twelve (12) month
period ending after distribution of all assets from the Plan, other than
an employee stock ownership plan (as defined in Code section 4975(e) or
Code section 409), a simplified employee pension plan as defined in Code
section 408(k), maintained by the Employer or a defined contribution
plan if fewer than two percent (2%) of the Employees who are eligible
under the Plan at the time of its termination are or were eligible under
such other defined contribution plan at any time during the twenty-four
(24) month period beginning twelve (12) months before the time of the
termination. In addition, distributions made after March 31, 1988 on
account of the termination of the Plan must be made in a lump sum (as
defined in Treasury Regulation section 1.401(k)-1(d)(5)).
11.5 Plan Merger Or Consolidation.
In the case of any merger or consolidation with, or transfer of any
assets or liabilities to, any other plan, each Participant in this Plan
must be entitled to receive (if the surviving plan is then terminated) a
benefit immediately after the merger, consolidation, or transfer which
is equal to or greater than the benefit he would have been entitled to
receive immediately before the merger, consolidation, or transfer (if
this Plan had terminated).
ARTICLE XII - MISCELLANEOUS
12.1 Laws of California To Apply.
This Plan shall be construed according to the laws of California, to the
extent Federal laws do not control.
-89-
<PAGE> 96
12.2 Credit For Qualified Military Service.
Notwithstanding any provision of this Plan to the contrary, effective as
required by USERRA (i.e., December 12, 1994), contributions, benefits
and service credit with respect to qualified military service will be
provided in accordance with Code section 414(u).
12.3 Participant Cannot Transfer Or Assign Benefits.
None of the benefits, payments, proceeds, claims, or rights of any
Participant hereunder shall be subject to any claim of any creditor of
the Participant, nor shall any Participant have any right to transfer,
assign, encumber, or otherwise alienate, any of the benefits or proceeds
which he may expect to receive, contingently or otherwise under this
Plan.
Notwithstanding any restrictions on the time of distribution which would
otherwise apply under this Plan, distributions with respect to a
Qualified Domestic Relations Order may be made at any time required by
the order.
12.4 Right To Perform Alternative Acts.
In the event it becomes impossible for the Employer, the Administrative
Committee or the Trustee to perform any act required by this Plan, then
the Employer, the Administrative Committee or the Trustee may perform
such alternative act which most clearly carries out the intent and
purpose of this Plan.
12.5 Reversion Of Contributions Under Certain Circumstances.
In the event that the Commissioner of Internal Revenue determines that
the Plan is not initially qualified under the Code, any contribution
made incident to that initial qualification by the Employer must be
returned to the Employer within one (1) year after the date the initial
qualification is denied, but only if the application for the
qualification is made by the time prescribed by law for filing the
Employer's return for the taxable year in which the Plan is adopted, or
such later date as the Secretary of the Treasury may prescribe.
All contributions made pursuant to Article IV are conditioned on
deductibility of such contributions under Code section 404. To the
extent that the deduction under Code section 404 for any year is
disallowed, the contribution shall be returned to the Employer within
one (1) year after disallowance of the deduction.
If a contribution is made by an Employer by a mistake of fact, the
contribution may be returned to the Employer within one (1) year after
the payment of the contribution.
-90-
<PAGE> 97
Notwithstanding the above, earnings attributable to amounts described in
paragraphs two and three of this section shall not be returned to the
Employer; losses attributable to such amounts shall reduce the amount
returned.
12.6 Plan Administrative Committee Agent For Service of Process.
The Plan Administrative Committee is designated agent to receive service
of legal process on behalf of the Plan.
12.7 Filing Tax Returns And Reports.
If the Trustee is not a corporate fiduciary, the Plan Administrative
Committee shall prepare, or cause to have prepared, all tax returns,
reports, and related documents, except as otherwise specifically
provided in this Plan or unless the Administrative Committee provides to
the contrary in the manner prescribed in the Tax Returns And Reports
section of Article VIII.
12.8 Indemnification.
The Employer agrees to indemnify all Employees who serve as members of
the Administrative Committee or Trustee against all liability arising in
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<PAGE> 98
connection with their duties under the Plan, except that this
indemnification shall not include acts of embezzlement, or diversion of
Trust Funds by the Employee, nor shall it include acts of gross
negligence.
12.9 Number And Gender.
When appropriate the singular as used in this Plan shall include the
plural and vice versa; and the masculine shall include the feminine.
IN WITNESS WHEREOF, the parties have executed this agreement this ____ day of
_________, 1999.
EMPLOYER
VIB CORP.
By
---------------------------------
Dennis L. Kern
President
TRUSTEES
------------------------------------
Dennis L. Kern
------------------------------------
R. A. Pedersen
------------------------------------
Steve Ellison
------------------------------------
Janice S. Grady
-92-
<PAGE> 1
EXHIBIT 13
SHAREHOLDER & MARKETING INFORMATION
<TABLE>
<S> <C> <C>
CORPORATE HEADQUARTERS: LEGAL COUNSEL: Common Stock Information:U
1498 Main Street S. Alan Rosen, Esquire NASDAQ Symbol - VIBC
El Centro, California 92243 Horgan, Rosen, Beckham & Coren, LLP
(760) 370-3601 21700 Oxnard Street, Suite 1400 MARKET MAKERS:
web: http://www.vibcorp.com Woodland Hills, California 91367 Sutro & Company, Inc.
(818) 340-6100 (800) 288-2811
INDEPENDENT AUDITORS: TRANSFER AGENT AND REGISTRAR: Pacific Crest Securities
Vavrinek, Trine, Day & Company, LLP U.S. Stock Transfer Corporation (800) 473-3775
25231 Paseo De Alicia, Suite 100 1745 Gardena Avenue
Laguna Hills, California 92653 Glendale, California 91204-2991 Sandler O'Neill and Partners, L.P.
(714) 768-0833 (818) 502-1404 (800) 635-6860
</TABLE>
CORPORATE PROFILE
VIB Corp, a bank holding company incorporated under the laws of the state of
California, is headquartered in El Centro, Calif. The accounts of the subsidiary
banks, Valley Independent Bank and Bank of Stockdale, F.S.B., are insured by the
FDIC. Valley Independent Bank is a member of the Federal Reserve System. Each
offers a comprehensive range of deposits and loans while emphasizing personal
service. Valley Independent Bank operates 15 branches in Imperial, Riverside and
San Diego counties and six loan production offices. Bank of Stockdale operates
three branches in Bakersfield and one loan production office.
FORM 10-K ANNUAL REPORT
For information beyond that shown in this Summary Annual Report, shareholders
also receive the Company's Form 10-K Annual Report for 1999, including the
audited financial statements and the financial statement schedules, which is
required to be filed with the Securities and Exchange Commission. Additional
copies are available upon request to:
Harry G. Gooding III
Executive Vice President and Chief Financial Officer
P.O. Box 1845, El Centro, CA 92244
Phone (760) 370-3601
STOCK
The equity securities of VIB Corp consist of one class of common stock. At
December 31, 1999 there were 11,443,037 shares outstanding, held by
approximately 2,268 shareholders of record. VIB Corp's common stock is listed on
the Nasdaq National Stock Market, trading under the symbol "VIBC". Although VIB
Corp is legally able to pay cash dividends, it is the Company's present policy
to retain earnings to support growth.
The quarterly market trend price ranges for each of the last two years are shown
in the following table. The following information is provided by Nasdaq:
<TABLE>
<CAPTION>
Sales Price (1)
-----------------------
Quarter Ended High Low Shares Traded
------------- ------ ------- -------------
<S> <C> <C> <C>
March 31, 1998 $13.45 $11.81 178,938
June 30, 1998 13.18 11.35 462,637
September 30, 1998 12.93 9.84 273,700
December 31, 1998 12.84 10.07 246,130
March 31, 1999 11.78 8.13 562,911
June 30, 1999 9.71 8.01 454,689
September 30, 1999 9.47 6.80 569,722
December 31, 1999 9.22 7.13 579,637
</TABLE>
(1) Does not include nominal amounts traded directly by shareholders. The
figures have been adjusted to reflect the 3% stock dividend effective November
11, 1998, the 3% stock dividend effective May 12, 1999, the 3% stock dividend
effective December 6, 1999, and the five-for-four stock split effective June 12,
1998.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
- ---- ----------------------
<S> <C>
Bank of Stockdale, F.S.B. Federal charter (California)
Kings River State Bank California
Valley Independent Bank California
Valley Capital Trust Delaware
</TABLE>
218
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent, to the inclusion of our Independent Auditor's Report dated
January 20, 2000 regarding the consolidated balance sheets of VIB Corp and
Subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999, incorporated by
reference in the Registration Statements on Form S-8 (Registration No.
333-50701) of the VIB Corp Stock Option Plan and (Registration No. 333-91735) of
the VIB Corp 401(k) Plan, filed with the Securities and Exchange Commission.
/s/ Vavrinek, Trine, Day & Co., LLP
------------------------------------
Vavrinek, Trine, Day & Co., LLP
March 21, 2000
Laguna Hills, California
<PAGE> 1
EXHIBIT 23.2
[LOGO OF KPMG]
400 Capitol Mall
Sacramento, CA 95814
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors
Bank of Stockdale, FSB:
We consent to incorporation by reference in the registration statement (No.
333-50701) on Form S-8 and the registration statement (No. 333-91735) on Form
S-8 of VIB Corp of our report dated February 19, 1999, relating to the
statement of financial condition of Bank of Stockdale, FSB as of December 31,
1998, and the related statements of income, changes in stockholders' equity,
and cash flows for the years ended December 31, 1998 and 1997, which report
appears in the December 31, 1999, annual report on From 10-K of VIB Corp.
KPMG LLP
Sacramento, California
March 22, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 45,392,374
<INT-BEARING-DEPOSITS> 523,243
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 159,452,923
<INVESTMENTS-CARRYING> 2,921,978
<INVESTMENTS-MARKET> 2,799,321
<LOANS> 653,455,527
<ALLOWANCE> (5,696,222)
<TOTAL-ASSETS> 918,127,672
<DEPOSITS> 701,332,874
<SHORT-TERM> 124,750,000
<LIABILITIES-OTHER> 5,475,128
<LONG-TERM> 28,324,310
0
0
<COMMON> 57,449,500
<OTHER-SE> 796,860
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<INTEREST-LOAN> 53,590,352
<INTEREST-INVEST> 9,189,865
<INTEREST-OTHER> 1,076,476
<INTEREST-TOTAL> 63,856,693
<INTEREST-DEPOSIT> 20,739,648
<INTEREST-EXPENSE> 5,486,153
<INTEREST-INCOME-NET> 37,630,892
<LOAN-LOSSES> 2,592,464
<SECURITIES-GAINS> 1,755
<EXPENSE-OTHER> 33,527,244
<INCOME-PRETAX> 8,518,914
<INCOME-PRE-EXTRAORDINARY> 8,518,914
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,865,723
<EPS-BASIC> 0.520
<EPS-DILUTED> 0.520
<YIELD-ACTUAL> 8.44
<LOANS-NON> 6,185,143
<LOANS-PAST> 15,791
<LOANS-TROUBLED> 3,928,706
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<ALLOWANCE-OPEN> 4,296,414
<CHARGE-OFFS> 1,336,556
<RECOVERIES> 61,364
<ALLOWANCE-CLOSE> 5,696,222
<ALLOWANCE-DOMESTIC> 5,696,222
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
