<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CAPITAL CORP OF THE WEST
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 6022 77-0405791
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
1160 WEST OLIVE AVENUE, SUITE A, MERCED, CALIFORNIA 95348
(209) 725-2200
(Address, including ZIP code, and telephone number, including
area code, of registrant's principal executive offices)
THOMAS T. HAWKER
CAPITAL CORP OF THE WEST
1160 WEST OLIVE AVENUE, SUITE A
MERCED, CALIFORNIA 95348
(209) 725-2200
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)
------------------------
COPIES OF COMMUNICATIONS TO:
THOMAS G. REDDY HENRY M. FIELDS
JAMES M. ROCKETT KRISTIAN E. WIGGERT
McCutchen, Doyle, Brown & Enersen, LLP Morrison & Foerster LLP
Three Embarcadero Center 555 West Fifth Street, Suite 3500
San Francisco, California 94111 Los Angeles, California 90013
Fax: 415-393-2286 Fax: 213-892-5454
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) PRICE(1),(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value................ 1,600,000 shares $12.25 $19,600,000 $5,940
</TABLE>
(1) Includes 208,163 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee based
on the average of the high and low prices for the Common Stock as reported
on the Nasdaq National Market on July 11, 1997, pursuant to Rule 457 of the
Securities Act of 1933, as amended.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
1,387,755 SHARES
CAPITAL CORP OF THE WEST
COMMON STOCK
Capital Corp of the West ("Capital Corp" or the "Company"), a bank holding
company organized under the laws of the State of California, is offering for
sale 1,387,755 shares of its Common Stock, no par value (the "Offering"). The
Company's Common Stock is quoted on the Nasdaq National Market under the symbol
"CCOW." On July 11, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $12.25 per share. See "Price Range of Common
Stock."
THE PURCHASE OF SECURITIES IN THE OFFERING INVOLVES CERTAIN SIGNIFICANT
INVESTMENT RISKS. PROSPECTIVE INVESTORS ARE URGED TO READ AND CONSIDER
CAREFULLY THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 11.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO PUBLIC UNDERWRITING DISCOUNT(1) PROCEEDS TO COMPANY(2)
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total (3).............................. $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriter.
(2) Before deducting expenses payable by the Company estimated at $400,000.
(3) The Company has granted to the Underwriter a 30-day option to purchase up to
an aggregate of 208,163 additional shares of Common Stock, solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriter subject to prior
sale, receipt and acceptance by them and subject to the right of the Underwriter
to reject any order in whole or in part and certain other conditions. It is
expected that certificates for such shares will be made available for delivery
on or about , 1997.
SUTRO & CO.
INCORPORATED
The date of this Prospectus is , 1997
<PAGE>
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THE LEVEL THAT MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET,
INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS
OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER OR ITS AFFILIATES MAY
ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN, OR INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS. EXCEPT AS OTHERWISE
NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITER'S OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." ALL SHARE AND PER SHARE
INFORMATION IS ADJUSTED TO REFLECT THE THREE-FOR-TWO STOCK SPLIT EFFECTED IN MAY
1997. THIS PROSPECTUS AND CERTAIN INFORMATION INCORPORATED BY REFERENCE HEREIN
CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). DISCUSSIONS
CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET
FORTH UNDER "PROSPECTUS SUMMARY," "BRANCH ACQUISITION," "CAPITALIZATION,"
"UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS OF
CAPITAL CORP OF THE WEST" AND "REGULATION AND SUPERVISION" AS WELL AS IN THE
PROSPECTUS GENERALLY. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF
FACTORS, INCLUDING THOSE SET FORTH IN THE SECTION ENTITLED "RISK FACTORS" AND
ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS.
THE COMPANY
Capital Corp is a corporation organized under the laws of the State of
California and has its principal office in Merced, California, in California's
Central Valley. At March 31, 1997, Capital Corp had consolidated assets of $286
million, deposits of $247 million and shareholders' equity of $22 million.
Capital Corp's principal subsidiary is County Bank, a state-licensed nonmember
commercial bank ("County Bank" or the "Bank"). County Bank was originally
founded in 1977, and in 1995 management reorganized the ownership of County Bank
into a holding company structure. County Bank conducts a general commercial
banking business through its nine banking offices throughout Merced, Stanislaus
and Tuolumne counties. At March 31, 1997, County Bank had assets of $255
million, deposits of $222 million and shareholder's equity of $17 million. Its
primary business is making commercial, agricultural, consumer and real estate
loans in its service area. In 1996, Capital Corp acquired an industrial loan
company, Town and Country Finance and Thrift Company ("Town & Country"), which
at March 31, 1997, had four offices in Turlock, Modesto, Visalia and Fresno,
assets of $31 million, deposits of $25 million and shareholder's equity of $5
million. Town & Country specializes in consumer lending, primarily automobile
dealer contract financing. Deposits at County Bank and Town & Country are
insured by the Federal Deposit Insurance Corporation (the "FDIC") up to
applicable limits. See "Business of Capital Corp of the West."
BRANCH ACQUISITION
County Bank and Bank of America have entered into a Branch Purchase and
Assumption Agreement dated June 25, 1997 (the "P&A Agreement") under which
County Bank will acquire three Bank of America branches (the "Branches") located
in Livingston, Dos Palos and Mariposa, California (the "Branch Acquisition").
Under the P&A Agreement, County Bank will pay the fair market value of the
premises and furniture, fixtures and equipment in the Branches and a premium of
7.28% of the deposits at the Branches at the time of closing, or approximately
$5.7 million based on transferable deposits of $78.9 million at the Branches at
March 31, 1997. Bank of America will pay to County Bank cash equal to the amount
of the assumed deposits at closing (net of amounts owed by County Bank for
premises, furniture, fixtures and equipment and the premium). County Bank will
not acquire any loans in the Branch Acquisition. County Bank has entered into
the P&A Agreement in order to expand its service area throughout the Central
Valley of California. County Bank views this geographic area as a natural
extension of its existing service area in Merced, Stanislaus and Tuolumne
counties. County Bank believes that this extension represents an opportunity for
County Bank to provide a level of service in the areas served by the Branches
that the major banks in California generally do not provide. Completion of the
Branch Acquisition is subject to satisfaction of numerous conditions, including
receipt of regulatory approvals. The
2
<PAGE>
Branch Acquisition raises numerous possible risks to the Company and to
investors. See "Risk Factors-- Branch Acquisition" and "Branch Acquisition."
RISK FACTORS
The purchase of Common Stock in the Offering involves certain significant
investment risks. Among others, these risks include the possibility that the
Company will not complete the Branch Acquisition; risks inherent in
implementation of the Branch Acquisition; risks related to the stability of
deposits at the Branches to be acquired in the Branch Acquisition; general risks
of commercial lending; risks related to asset quality; risks related to the
Company's dependence on key personnel and its ability to manage existing and
future growth; risks related to competition; risks posed by present and future
government regulation and legislation; risks resulting from federal monetary
policy; the lack of historical dividends, the Bank's undertaking not to pay cash
dividends to the Company for an indefinite period and the uncertain prospect for
future dividends; risks related to potential volatility of the price of the
Common Stock; and risks related to certain provisions of the Company's charter
documents that might delay or deter a change in control of the Company or
otherwise have an adverse effect on the price of the Common Stock. See "Risk
Factors."
OPERATING STRATEGIES
For 20 years, County Bank has engaged in traditional community banking
activities, including originating commercial, agricultural, consumer and real
estate loans, and gathering local deposits to fund these activities. The Bank
has nine branches in Merced, Stanislaus and Tuolumne counties. Four of the
branches have been established in the last two years. Town & Country, acquired
in 1996, also has branches in Fresno and Tulare counties.
The Bank's current operating strategy emphasizes personalized, quality
banking products and services to small and medium-sized businesses,
professionals, retail customers and the local communities. It also includes
plans for continued expansion within the existing market area and adjacent
counties. The Bank has received regulatory approval to open a branch in Madera,
California, located in Madera County, and intends to do so in late 1997. The
Bank is also committed to keeping current with modern banking technology. The
industry continues to increase its emphasis on technology as a means to stay
efficient and to provide convenient service delivery systems, and the Bank is
committed to keeping pace with these changes.
Factors affecting the Bank's performance include the following.
- STRONG CORE GROWTH. Over the last several years, the Bank has increased
its market share in Merced County by over 1% each year and, according to
the most recent data available, now holds over 16% of deposits in Merced
County. In addition, the Bank looks forward to making similar progress in
its newer markets--Stanislaus and Tuolumne counties. The Company believes
that the Branch Acquisition presents an opportunity to expand further
within Merced County and to expand to Mariposa County. The Branches
present unique marketing opportunities because the Bank is well known in
this geographic area and will be faced with limited competition. No
assurance can be given that the Bank will continue to increase its market
share of deposits in its market areas.
- STRATEGIC GROWTH OBJECTIVES. The Company seeks to grow strategically by
capturing meaningful market share in markets in which competition by other
independent bank competitors is relatively limited. Pursuant to this
strategy, the Company began to expand its service area in 1995. The
Company will seek growth by DE NOVO branching, strategic acquisitions such
as the acquisition of Town & Country in 1996, and branch acquisitions. The
pursuit of growth may initially have an adverse effect on earnings, but
management believes that achieving strong market share and strategically
expanding its service area are keys to long-term profitability.
3
<PAGE>
- DIVERSIFIED REVENUE SOURCES. The Bank has expanded through branching to
provide geographic and economic diversity to its revenue base. Over the
last two years, the Bank has opened offices in Turlock, Sonora and Modesto
to build a broader community base and a more economically diverse lending
function. In this period, the Bank has also introduced numerous lending
products, such as a professional line of credit product and an accounts
receivable financing program for small commercial businesses known as
"Business Manager." The Bank currently has certified lender status from
the U.S. Small Business Administration as a small business loan
originator.
- STABLE INTEREST MARGIN. The Bank has enjoyed stable levels of net interest
income throughout its 20-year history. Analysis of the Bank's risk to
changes in interest rates is conducted on a regular basis. A primary
reason for the Bank's stable interest margin is that most of its loan
portfolio earns interest at a variable rate that is indexed to the Bank's
own cost of funds. Another reason for the stable interest margin is that
the Bank's core deposits (defined as all deposits other than time deposits
over $100,000) currently equal approximately 95% of total deposits. Core
deposits are generally considered a more stable and lower cost source of
funds than certificates of deposit over $100,000 or outside borrowings.
- STABLE, EXPERIENCED MANAGEMENT. The Bank's and the Company's senior
officers have extensive and successful experience in managing commercial
banks in the Central Valley and in Northern California. The four senior
officers of the Company and the Bank have combined experience of over 80
years in community and commercial banking.
- PROGRESSIVE IN TECHNOLOGY. The Bank understands the need to keep systems
current in this world of changing technologies. Some of the enhancements
the Bank has made over the last few years include: an online and offline
debit card, customer statement imaging, an Internet home page, optical
storage and retrieval of documents and automated credit scoring. Progress
is being made towards electronic home banking and cash management programs
for both personal and business customers.
- SUCCESSFUL AGRICULTURAL LENDER. The Central Valley is primarily an
agricultural community. The Bank has been a profitable and successful
lender to the agricultural community over the years. Agricultural loans
comprised approximately 20.8% of the portfolio as of March 31, 1997.
Historical loan loss experience has been low; from 1992 through 1996,
annual agricultural loan losses averaged approximately .4% of the total
agricultural loan portfolio. In addition, the Bank makes long-term real
estate loans on agricultural properties for sale in the secondary market.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered......................... 1,387,755 shares (1)
Common Stock to be Outstanding after the 3,994,233 shares (1)(2). See
Offering................................... "Capitalization."
Use of Proceeds.............................. To provide capital necessary to maintain
capital ratios upon completion of the Branch
Acquisition and for general corporate
purposes. See "Branch Acquisition" and "Use
of Proceeds."
Nasdaq National Market symbol................ CCOW
</TABLE>
- ------------------------
(1) Excludes up to 208,163 shares of Common Stock that may be sold by the
Company pursuant to the Underwriter's over-allotment option. See
"Underwriting."
(2) Based on shares outstanding as of June 20, 1997. Excludes 175,603 shares of
Common Stock issuable upon exercise of stock options outstanding as of June
20, 1997 and exercisable within 60 days from
4
<PAGE>
such date with exercise prices ranging from $5.40 to $12.50 per share and
38,651 shares of Common Stock issuable upon exercise of options outstanding
but not exercisable within 60 days.
RECENT DEVELOPMENTS
At March 31, 1997, the Company's allowance for loan losses was $2,674,000,
of which $1,725,000 was specifically allocable to a particular real estate
development loan with a balance of $3,458,000. In the second quarter of 1997,
the project funded by the loan became involved in litigation among other
parties, and development was suspended for an undetermined period. Without the
imminent prospect for completion of the project, the Company made the judgment
that its collateral position, subordinate in large part to bonds used to finance
the project, should conservatively not be accorded any value and accordingly
charged off the entire balance of the loan. The Company will nonetheless
vigorously pursue efforts to realize a potential recovery on the loan.
In response to this action and as a result of adoption of a new loan loss
reserve policy discussed below, the Company made provisions to the allowance for
loan losses of $3,236,000 in the second quarter of 1997. At June 30, 1997, the
allowance for loan losses totaled $2,268,000 or 1.16% of total loans. The
write-off substantially reduced the Company's nonperforming assets. At June 30,
1997, nonperforming assets totaled $2,793,000 or .95% of total assets,
nonperforming loans totaled $2,377,000 or 1.22% of total loans and the allowance
for loan losses totaled 95.41% of nonperforming loans.
The decision to increase the reserve above previous levels resulted in part
from the adoption by the Company of a new loan loss reserve policy, which the
Company first implemented in the second quarter. Under its new methodology, the
Company is grading its loans and analyzing the migration of loans from grade to
grade over time to determine appropriate levels of the allowance. See "Business
of Capital Corp of the West--Allowance and Provisions for Loan Losses." No
assurance can be given that the new methodology will result in an allowance for
loan losses that is adequate to cover all losses that occur in the loan
portfolio from time to time.
In the second quarter, the Company also recognized a gain of approximately
$511,000 on asset sales in its real estate subsidiary that in part offset the
negative impact on earnings of the loan loss provision. See "Business of Capital
Corp of the West--Real Estate Development Activities."
After giving effect to the provision for loan losses and the gain on asset
sales, the Company expects to report a loss for the three months ended June 30,
1997, of approximately $940,000, or $0.36 per share, and a loss for the six
months ended June 30, 1997 of approximately $430,000, or $0.16 per share.
5
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables present selected historical consolidated financial
information, including per share information, for Capital Corp. The following
financial data should be read in conjunction with the consolidated financial
statements of Capital Corp included or incorporated by reference in this
Prospectus and the notes to such statements.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Interest income................ $ 5,601 $ 4,250 $ 19,351 $ 15,873 $ 12,807 $ 11,483 $ 11,370
Interest expense............... 2,072 1,512 6,865 5,717 3,850 3,061 3,948
Net interest income............ 3,529 2,738 12,486 10,156 8,957 8,422 7,422
Provision for loan losses...... 240 160 1,513 228 -- 254 162
Noninterest income (loss)...... 734 571 2,935 (1,224) 805 679 884
Noninterest expense............ 3,240 2,353 10,736 8,146 6,923 6,459 6,302
Net income..................... 513 501 2,009 335 1,736 1,783 1,166
BALANCE SHEET
Total assets................... $ 285,884 $ 214,512 $ 265,989 $ 209,033 $ 178,121 $ 155,178 $ 141,988
Net loans...................... 185,381 136,483 180,455 132,035 111,979 105,377 95,719
Intangible assets.............. 2,364 -- 2,404 -- -- -- --
Deposits....................... 247,446 194,499 238,345 192,601 163,199 141,730 130,508
Other borrowed funds........... 12,388 3,506 106 107 107 -- --
Shareholders' equity........... 21,669 15,243 20,974 15,093 14,082 12,633 10,853
FINANCIAL RATIOS
CAPITAL RATIOS (1)
Leverage ratio................. 7.19% 7.50% 7.31% 7.50% 8.38% 8.39% 7.74%
Tier 1 risk-based capital...... 9.04 9.10 8.95 9.22 10.50 10.20 9.44
Total risk-based capital....... 10.27 10.22 10.20 10.27 11.70 11.40 10.69
ASSET QUALITY RATIOS
Nonperforming loans/total loans
(2).......................... 3.54% 5.08% 3.04% 3.63% .62% 1.01% 1.24%
Nonperforming assets/total
assets (3)................... 2.84 3.96 2.64 2.34 .39 .70 1.33
Allowance for loan losses/
nonperforming loans.......... 40.11 26.48 50.14 35.07 231.90 161.31 133.66
PERFORMANCE RATIOS
Return on average assets....... 0.76% 0.99% 0.88% .18% 1.05% 1.24% .86%
Return on average equity....... 9.58 13.30 11.05 2.16 12.81 15.06 11.37
Net interest margin (4)........ 5.96 5.46 6.16 6.09 6.03 6.63 6.26
Net interest spread (5)........ 5.48 5.54 5.60 5.52 5.57 6.22 5.83
Average loans to average
deposits..................... 77.42 71.82 76.31 71.12 73.12 94.24 80.55
Efficiency ratio (6)........... 76.00 71.11 69.62 91.20 70.92 70.97 75.87
PER SHARE INFORMATION (7)
Net income (8)................. $0.20 $0.24 $0.85 $0.16 $0.83 $0.85 $0.56
Dividends declared............. -- -- .03 -- -- -- --
Book value (9)................. 8.31 7.25 8.06 7.16 6.69 6.01 5.16
Tangible book value (9)........ 7.41 7.25 7.14 7.16 6.69 6.01 5.16
Shares outstanding at period
end (000).................... 2,606 2,103 2,582 2,103 2,101 1,999 1,999
Weighted average shares
outstanding (000)............ 2,593 2,004 2,367 2,102 2,000 1,999 1,999
</TABLE>
- ------------------------
(1) The risk-based and leverage capital ratios are defined in "Regulation and
Supervision" and are set forth in "Capitalization." Based on preliminary
information, the Company expects its leverage, Tier 1
6
<PAGE>
risk-based and total risk-based capital ratios as of June 30, 1997, to be
6.85%, 8.44% and 9.45%, respectively.
(2) Nonperforming loans consist of loans on nonaccrual, loans past due 90 days
or more and restructured loans.
(3) Nonperforming assets consist of nonperforming loans and other real estate
owned.
(4) Net interest margin is net interest income expressed as a percentage of
average total interest-earning assets.
(5) Net interest spread is the difference between the yield on average total
interest-earning assets and cost of average total interest-bearing
liabilities.
(6) The efficiency ratio is the ratio of noninterest expense to the sum of net
interest income before provision for loan losses and total noninterest
income.
(7) Per share data reflects 15% stock dividends in June 1994 and June 1995, 5%
stock dividend in August 1996 and three-for-two stock split in May 1997.
(8) Based on weighted average shares outstanding excluding shares issuable upon
exercise of outstanding options.
(9) Based on shares outstanding at period end excluding shares issuable upon
exercise of outstanding options.
7
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following table presents a summary of the unaudited pro forma combined
financial information, which represents the pro forma accounting impacts of the
Branch Acquisition and the Offering on the Company's historical balance sheet at
March 31, 1997 and the Company's historical income statements for the three
months ended March 31, 1997 and the year ended December 31, 1996. The unaudited
pro forma financial information assumes approximately $15.4 million in net
proceeds is raised in the Offering and the Company assumes $78.9 million in
deposits and pays a $5.7 million deposit premium and $1.2 million for the branch
premises and furniture, fixture and equipment in connection with the Branch
Acquisition. Pro forma accounting impacts on the Company's historical balance
sheet and income statements for the three months ended March 31, 1997 are based
on the assumption that the Branch Acquisition and the Offering had been
completed on January 1, 1997. Pro forma accounting impacts on the historical
balance sheet and income statements for the year ended December 31, 1996 are
based on the assumption that the Branch Acquisition and the Offering had been
completed on January 1, 1996. Included in the pro forma income statements are
non-recurring charges that are related to the Branch Acquisition. These
non-recurring charges are expensed in the first three months of the pro forma
income statements. As a result, the impact to the pro forma income statement for
the three months ended March 31, 1997 is not indicative of on-going subsequent
pro forma quarterly impacts. The Branch Acquisition is expected to be accounted
for based on the purchase method of accounting. The following table should be
read in conjunction with the section entitled "Unaudited Pro Forma Combined
Financial Information" and the assumptions set forth therein. No assurance can
be given that the pro forma financial statements or the assumptions on which
they are based are accurate or will be realized.
8
<PAGE>
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE THREE FOR THE
MONTHS ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
(IN THOUSANDS)
RESULTS OF OPERATIONS
Total interest income......................................................... $ 6,922 $ 25,395
Total interest expense........................................................ 2,605 8,836
-------------- -------
Net interest income........................................................... 4,317 16,559
Provision for loan losses..................................................... 240 1,585
-------------- -------
Net interest income after provision........................................... 4,077 14,974
Total other income............................................................ 910 3,626
Total other expenses.......................................................... 4,100 13,485
-------------- -------
Net income before taxes....................................................... 887 5,116
Provision for income taxes.................................................... 311 1,941
-------------- -------
Net income.................................................................... $ 576 $ 3,174
-------------- -------
-------------- -------
<CAPTION>
AT MARCH 31,
1997
--------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET
ASSETS
Cash and noninterest-bearing deposits......................................... $ 105,314
Time deposits with other banks................................................ 1,288
Available-for-sale securities................................................. 46,046
Held-to-maturity securities................................................... 11,456
Loans, net.................................................................... 185,381
Interest receivable........................................................... 1,985
Premises and equipment, net................................................... 9,295
Intangibles................................................................... 8,106
Other assets.................................................................. 11,302
--------------
Total Assets................................................................ $ 380,173
--------------
--------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits...................................................................... $ 326,325
Fed funds purchased and repurchase agreements................................. 5,870
Borrowings.................................................................... 6,518
Other liabilities............................................................. 4,381
Shareholders' equity:
Common stock................................................................ 31,002
Retained earnings........................................................... 6,239
Investment securities unrealized loss....................................... (162)
--------------
Total shareholders' equity.................................................. 37,079
--------------
Total liabilities and shareholders'equity................................... $ 380,173
--------------
--------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31, 1997
----------------------
<S> <C> <C> <C> <C>
ACTUAL PRO FORMA
--------- -----------
FINANCIAL RATIOS
CAPITAL RATIOS (1)
Leverage ratio........................................................ 7.19% 7.98%
Tier 1 risk-based capital............................................. 9.04 12.37
Total risk-based capital.............................................. 10.27 13.51
ASSET QUALITY RATIOS
Nonperforming loans/total loans (2)................................... 3.54% 3.54%
Nonperforming assets/total assets (3)................................. 2.84 2.14
Allowance for loan losses/nonperforming loans......................... 40.11 40.11
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED FOR THE YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
---------------------- ----------------------
<S> <C> <C> <C> <C>
ACTUAL PRO FORMA ACTUAL PRO FORMA
--------- ----------- --------- -----------
PERFORMANCE RATIOS
Return on average assets.............................................. 0.76% 0.63% 0.88% 0.98%
Return on average equity.............................................. 9.58 6.25 11.05 9.45
Net interest margin (4)............................................... 5.96 5.34 6.16 5.69
Net interest spread (5)............................................... 5.48 4.93 5.60 5.26
Efficiency ratio (6).................................................. 76.00 78.45 69.62 66.80
PER SHARE INFORMATION (7)
Net income (8)........................................................ $ 0.20 $ 0.14 $ 0.85 $ 0.85
Dividends declared.................................................... -- -- 0.03 0.03
Book value (9)........................................................ 8.31 9.28 8.06 9.12
Tangible book value (9)............................................... 7.41 7.25 7.14 7.08
Shares outstanding at period-end (000)................................ 2,606 3,993 2,582 3,969
Weighted average shares outstanding (000)............................. 2,593 3,980 2,367 3,755
</TABLE>
- ------------------------
(1) The risk-based and leverage capital ratios are defined in "Regulation and
Supervision" and are set forth in "Capitalization." Based on preliminary
information, the Company expects its leverage, Tier 1 risk-based and total
risk-based capital ratios as of June 30, 1997, to be 6.85%, 8.44% and 9.45%,
respectively.
(2) Nonperforming loans consist of loans on nonaccrual, loans past due 90 days
or more and restructured loans.
(3) Nonperforming assets consist of loans on nonperforming loans and other real
estate owned.
(4) Net interest margin is net interest income expressed as a percentage of
average total interest-earning assets.
(5) Net interest spread is the difference between the yield on total
interest-earning assets and cost of total interest-bearing liabilities.
(6) The efficiency ratio is the ratio of noninterest expense to the sum of net
interest income before provision for loan losses and total noninterest
income.
(7) Per share data reflects 15% stock dividends in June 1994 and June 1995, 5%
stock dividend in August 1996 and three-for-two stock split in May 1997.
(8) Based on weighted average shares outstanding excluding shares issuable upon
exercise of outstanding options.
(9) Based on shares outstanding at period end excluding shares issuable upon
exercise of outstanding options.
10
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF
FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE
IN, OR INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS. IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY
THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER INFORMATION PRESENTED IN
THIS PROSPECTUS.
BRANCH ACQUISITION. The Branch Acquisition presents many possible risks to
the Company and to investors, whether or not it is completed.
RISKS OF NONCOMPLETION. The Company intends to invest approximately $14
million of the proceeds of the Offering as a capital contribution to County Bank
to help it finance the acquisition of three Branches from Bank of America and to
maintain its capital ratios after completion of the Branch Acquisition. The
Offering will be completed before completion of the Branch Acquisition.
Completion of the Branch Acquisition is subject to numerous conditions,
including receipt of approvals from the FDIC and the California Department of
Financial Institutions, formerly the State Banking Department (the
"Department"). No assurance can be given that such approvals will be received,
that the other conditions will satisfied, that the Branch Acquisition will be
completed or that it will be completed on the terms now anticipated by the
Company. In the event that County Bank fails to complete the purchase of one or
more Branches, it will be obligated to pay to Bank of America a break-up fee in
the amount of $75,000 per Branch for each Branch that is not acquired. Bank of
America may terminate the P&A Agreement and become entitled to the break-up fee
if the Offering is not completed by November 14, 1997.
If the Branch Acquisition is not completed, the Company has no current
specific plans for the use of the net proceeds of this Offering. As a
consequence, the Company's management will retain broad discretion in the
allocation of the net proceeds of this Offering. If the Branch Acquisition is
not completed, the Company reserves the right to use the proceeds that otherwise
would have been applied to the Branch Acquisition for other purposes, including
general corporate purposes or for other acquisitions or expansion opportunities.
At present, management has not identified any such acquisitions or expansion
opportunities. If the Company raises capital through the Offering but does not
promptly obtain additional deposits and/or borrowings and assets through the
Branch Acquisition or otherwise, the Company's capital will substantially exceed
its immediate needs. No assurance can be given that the Company will be able to
invest the proceeds of the Offering in a manner that will not result in a
decrease in return on equity and return on assets. If the Branch Acquisition is
not completed, no assurance can be given that the Company will use the proceeds
of the Offering for any particular purpose or in any particular manner. See
"Branch Acquisition" and "Use of Proceeds."
RISKS OF IMPLEMENTATION. If the Branch Acquisition is completed, the
assimilation of the Branches will place increased demands on management of the
Company. The significant increase in assets (initially in the form of cash), the
plan to increase County Bank's commercial lending activities over the next
several years and the Company's ability to integrate the Branches and implement
its operating strategy increase the possible risks inherent in an investment in
the Company. No assurance can be given that the Company will be able to invest
funds received on account of deposits assumed as a result of the Branch
Acquisition in assets earning any particular rate of return or that it will be
able to achieve and maintain satisfactory underwriting standards when seeking to
invest those funds in loans. Although the Company has experience in acquiring
individual branches and other smaller institutions, it has not previously
completed an acquisition as large as the Branch Acquisition. The successful
completion of large acquisitions imposes greater burdens on management and on
the systems and operations of a purchaser than a smaller acquisition, and the
risk of partial or complete failure and the economic consequences of failure are
greater. Additionally, completion of the Branch Acquisition will increase the
total asset size of the Company by 33% from $285 million to approximately $380
million based on assets at March 31, 1997. See "Branch Acquisition" and
"Selected Unaudited Pro Forma Combined Financial Information."
11
<PAGE>
STABILITY OF ACQUIRED DEPOSITS. Even if the Branch Acquisition is
completed, no assurance can be given that the amount of deposits at each of the
acquired Branches will not have decreased or increased between March 31, 1997
and the date the Branch Acquisition is completed, or after the date on which the
Branch Acquisition is completed. If the deposits decrease before or after
completion, the Company's return on equity and return on assets may be adversely
affected, since the amount of leverage on the capital raised in the Offering
will be less than currently anticipated by management. The P&A Agreement
prohibits Bank of America from opening a full-service branch within 10 miles of
a Branch for 12 months but does not prohibit it from establishing in-store
branch offices in the vicinity of the Branches to be acquired. No assurance can
be given that Bank of America will not open in-store branches to compete with
the Branches to be acquired for deposit and loan business or that the assumed
deposits will not be lost to other competing institutions. See "Branch
Acquisition" and "Business of Capital Corp of the West-- Competition."
GENERAL LENDING RISKS. The Company's subsidiaries are engaged primarily in
commercial and, to a lesser extent, consumer lending. The risk of nonpayment of
loans is inherent in the lending business. The ability of borrowers to repay
their obligations can be adversely affected by factors beyond the control of the
Company, including local market conditions and general market conditions. A
substantial portion of the Company's loans are secured by liens on real estate.
These same factors may adversely affect the value of real estate as collateral.
The Company maintains an allowance for loan losses and periodically makes
additional provisions to the allowance to reflect the level of losses determined
by management to be inherent in the loan portfolio from time to time. However,
the level of the allowance and the amount of such provisions are only estimates
based on management's judgment, and no assurance can be given that actual losses
incurred will not exceed the amount of the allowance or require substantial
additional provisions to the allowance. See "Business of Capital Corp of the
West--Nonperforming Assets" and
"--Allowance and Provisions for Loan Losses."
ASSET QUALITY. The economy in the Company's primary market area and the
real estate market in particular have suffered from the effects of a recession
in the first half of this decade. Some of the effects of the recession were
declines in defense and military programs (including a base closure in the
Company's service area), declines in property values, and decreased demand for
goods and services. These conditions have had an adverse effect on the ability
of certain borrowers to perform under the original terms of their obligations to
the Company. The Company's lending focus includes loans secured by real estate
and loans to the agricultural industry. Both of these types of loans have been
adversely affected by market conditions. The Company's level of nonperforming
loans increased from $699,000 at December 31, 1994, to $6,666,000 at March 31,
1997. During this same period, the allowance for loan losses increased from
$1,621,000 to $2,674,000, but it decreased as a percentage of nonperforming
loans from 232% to 40%.
In the three months ended June 30, 1997, the Company made a provision of
$3,236,000 for loan losses and charged off a real estate development loan with a
balance of $3,458,000. After giving effect to the charge-off, the provision
brought the allowance to approximately $2,268,000 or 1.16% of total loans. The
write-off substantially reduced the Company's nonperforming assets. At June 30,
1997, nonperforming assets totaled $2,793,000 or .95% of total assets,
nonperforming loans totaled $2,377,000 or 1.22% of total loans and the allowance
for loan losses totaled 95.41% of nonperforming loans. See "Prospectus
Summary--Recent Developments." No assurance can be given that nonperforming
loans will not increase or that the allowance for loan losses will be adequate
to cover losses inherent in the loan portfolio. See "Business of Capital Corp of
the West--Nonperforming Assets" and "--Allowance and Provisions for Loan
Losses."
California is prone to earthquakes and other natural disasters, including
floods and droughts. The Company's properties and substantially all of the real
and personal property securing loans in the Company's portfolio are located in
California. Its agricultural customers are dependent on consistent supplies of
water for irrigation purposes. The Company faces the risk that many of its
borrowers may experience uninsured property damage, sustained interruption of
their businesses or loss of their jobs from
12
<PAGE>
earthquakes, floods, droughts and other disasters. As a result of these events,
borrowers may be unable to repay their loans in accordance with their terms and
the collateral for such loans may decline significantly in value. No assurance
can be given that the allowance for loan losses will be adequate to cover losses
resulting from such natural disasters. See "Business of Capital Corp of the
West--External Factors Affecting Asset Quality."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent on the performance of its president and its executive officers, the loss
of any one of whom could have a materially adverse effect on the Company. The
Company believes that its success will depend, in large part, on its ability to
retain such personnel. Competition for these personnel is intense. There can be
no assurance that the Company will be successful in retaining such personnel or
in attracting additional personnel. The failure of any key employee to perform
in his or her current position or the Company's inability to attract and retain
qualified personnel could have a material adverse effect on the Company's
business, financial condition and results of operations.
MANAGEMENT OF GROWTH. The Company has recently experienced significant
growth. Total assets at March 31, 1997, were $285,884,000, compared with
$209,033,000 at December 31, 1995. Growth places, and is expected to continue to
place, demands on the Company's management, other personnel, systems, asset
quality, earnings, policies and procedures and presents problems of scale and
scope not faced when growth is more gradual. If the Branch Acquisition is
completed, the Company's asset growth will accelerate. The Company's failure to
manage growth effectively could have a material adverse impact on the Company's
business, financial condition and results of operations. See "Branch
Acquisition" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." No assurance can be given that the Company has made
all adjustments necessary or that the Company has personnel with adequate
training and experience to manage the Company's growth to date or future growth.
See "Business of Capital Corp of the West."
COMPETITION. In California generally, and in the Company's service area
specifically, major banks and local regional banks dominate the commercial
banking industry. By virtue of their larger capital bases, such institutions
have substantially greater lending limits than those of the Company, as well as
more locations, more products and services, greater economies of scale and
greater ability to make investments in technology for the delivery of financial
services. In obtaining deposits and in making loans, the Company competes with
these larger commercial banks and other financial institutions, such as savings
and loan associations and credit unions, which now can offer most services
traditionally offered only by banks. In addition, the Company competes with
other institutions such as money market funds, brokerage firms, and even retail
stores seeking to penetrate the financial services market. No assurance can be
given that customers in County Bank's branches will not withdraw their business
and establish a banking relationship with other competitors. In addition, no
assurance can be given, because of customer loyalty, available products and
services or other reasons, that customers of the Branches will not seek to
re-establish relationships with Bank of America. Moreover, while the P&A
Agreement prohibits the establishment of full-service Branches by Bank of
America within 10 miles of the Branches for 12 months, it does not prohibit Bank
of America from opening in-store branches in these areas. No assurance can be
given that Bank of America will not compete with the Branches by opening
in-store branches or by opening full-service branches 10 miles or more from a
Branch. See "Business of Capital Corp of the West-- Competition."
GOVERNMENT REGULATION AND LEGISLATION. The Company, County Bank and their
affiliates are subject to extensive state and federal regulation, supervision
and legislation, and the laws that govern the Bank and its operations are
subject to change from time to time. Applicable laws and regulations provide for
the regular examination and supervision of institutions; they can affect the
cost of funds through reserve requirements and assessments on deposits; they
limit or prohibit the payment of interest on demand deposits; they limit the
kinds of investments a bank or bank holding company can make and the kinds of
13
<PAGE>
activities in which it can engage; and they grant the regulatory agencies broad
enforcement authority in case of violations. These laws and regulations increase
the cost of doing business and have an adverse impact on the ability of a
regulated company to compete efficiently with other financial intermediaries
that are not similarly regulated. No assurance can be given that future
regulation or legislation will not impose additional requirements and
restrictions on the Company in a manner that will adversely affect its financial
condition and results of operations. See "Regulation and Supervision."
In response to regulatory concerns over the Bank's level of nonperforming
assets, in March 1997 the Board of Directors of County Bank adopted resolutions
under which the Bank committed to the following: (i) not to appoint a new
director or executive officer without prior written approval of the Department
and the FDIC; (ii) to reduce loans classified "Substandard" and "Doubtful" as of
December 2, 1996 from $11.8 million to $8.6 million by June 30, 1997 and to
maintain a ratio of shareholder's equity to total assets of 6.75% (or 6.50%
pursuant to the next clause); (iii) to reduce such "Substandard" and "Doubtful"
loans to $7.8 million by December 31, 1997, and thereafter to maintain a ratio
of shareholder's equity to total assets of 6.50%; (iv) to maintain an adequate
allowance for loan losses, to conduct a review prior to and at each quarter of
the adequacy of the allowance and to document the basis for changes in the
allowance; (v) not to pay cash dividends without the prior written consent of
the Department and the FDIC; and (vi) to furnish the Department and the FDIC
with a quarterly progress report on compliance with the resolutions. Failure to
comply with these commitments could result in the imposition of regulatory
restrictions or prohibitions on the Bank or its management and could adversely
affect its prospects for regulatory approval of the Branch Acquisition. See
"Regulation and Supervision--County Bank" and
"--Regulatory Capital Requirements."
At June 30, 1997, loans that were classified "Substandard" and "Doubtful" at
December 2, 1996 were reduced to $4.2 million, below both the $8.6 million
target level for June 30, 1997 and the $7.8 million target level for December
31, 1997. Accordingly, the Bank's commitment is to maintain a total equity to
total assets ratio of no less than 6.50%. However, in the second quarter of
1997, the Company incurred losses primarily as a result of making provisions of
$3,236,000 to the allowance for loan losses, which reduced the Bank's ratio of
total equity to total assets at June 30, 1997 to 6.15%, which was below the
6.50% commitment. The Bank has discussed this situation with its regulators,
which have agreed to forbear from taking any action against the Bank as a result
of its failure to meet the capital ratio commitment. The regulators have not
waived or given forbearance on this commitment for the Bank at September 30,
1997. No assurances can be given that any such waivers or forbearances will be
given in the future should the Bank fail to meet its commitments in the future.
MONETARY POLICY. The income of the Company depends to a great extent on the
difference between the interest rates earned on its loans, securities and other
interest-earning assets, and the interest rates paid on the Bank's deposits and
other interest-bearing liabilities. These rates are highly sensitive to many
factors which are beyond the Company's control, including general economic
conditions and the policies of various governmental and regulatory agencies, in
particular the Board of Governors of the Federal Reserve System (the "FRB"). See
"Regulation and Supervision."
DIVIDENDS. The Company has paid only nominal cash dividends in the past.
The ability of the Company to pay cash dividends in the future will depend on
the Company's profitability, growth and capital needs. The Company has no formal
dividend policy, and dividends are issued solely in the discretion of the
Company's Board of Directors subject to compliance with regulatory requirements.
In order to pay any cash dividends, the Company must receive payments of
dividends or management fees from County Bank or Town & Country. There are
certain limitations on the payment of cash dividends by banks and thrift and
loan companies. No assurances can be given that any dividends will be declared
or, if declared, what the amount of dividends will be or whether such dividends,
once declared, will continue. See "Dividend Policy" and "Regulation and
Supervision--Limitations on Dividends." In addition, in March 1997, in response
to regulatory concerns about the Bank's level of classified assets, the Bank's
14
<PAGE>
Board of Directors adopted a resolution not to pay cash dividends without the
prior written consent of the Department and the FDIC. See "Regulation and
Supervision--County Bank."
POSSIBLE VOLATILITY OF STOCK PRICE. The Company believes that factors such
as announcements of developments related to the Company's business,
announcements by competitors, quarterly fluctuations in the Company's financial
results and general conditions in the banking industry in which the Company
competes or economic conditions in the areas in which the Company does business,
and other factors could cause the price of the Company's Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
in general, and the market for shares of small capitalization stocks in
particular, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. Such fluctuations
could have a material adverse effect on the market price of the Company's Common
Stock.
POSSIBLE DECREASE IN LIQUIDITY ON NASDAQ. The NASD, Inc. recently announced
that price quotations for shares quoted on the Nasdaq National Market will be
made in increments in one-sixteenth of a dollar ($0.0625) rather than in
increments of one-eighth of a dollar ($0.125) as in the past. One possible
consequence of this change is that it may become less profitable for brokerage
firms to make a market in or effect trades in shares of companies with smaller
capitalizations and relatively light trading in their stock, and as a result
some brokerage firms may elect to discontinue making a market or effecting
trades in the shares of such companies. The withdrawal of any brokerage firms or
the decision of brokerage firms not to commence making a market in certain stock
could reduce the liquidity and the efficiency of the market for such shares.
Reduced liquidity and efficiency in the market for a company's shares can have a
materially adverse effect on the price of a company's shares. No assurance can
be given what effect, if any, this development will have on the Company's Common
Stock.
ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. The Board of Directors
has the authority to issue up to 10,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
shareholders. The rights of the holders of Common Stock may be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change of control of the Company
without further action by the shareholders and may adversely affect the voting
and other rights of the holders of Common Stock. The Company has no present
plans to issue shares of Preferred Stock. Further, certain provisions of the
Company's charter documents, including provisions eliminating the ability of
shareholders to take action by written consent, may have the effect of delaying
or preventing changes in control or management of the Company, which could have
an adverse effect on the market price of the Company's Common Stock. In
addition, the Company's charter documents eliminate cumulative voting and divide
the Company's Board of Directors into three classes, which may make it more
difficult for a third party to gain control of the Company's Board of Directors.
See "Description of Capital Stock."
15
<PAGE>
USE OF PROCEEDS
The Company intends to invest approximately $14,000,000 of the proceeds of
the Offering as a capital contribution to County Bank to help it finance the
acquisition of three Branches of Bank of America and to maintain its capital
ratios at or above the ratios required for well-capitalized banking
institutions. See "Capitalization," "Branch Acquisition," "Unaudited Pro Forma
Combined Financial Information" and "Regulation and Supervision--Regulatory
Capital Requirements." The Company intends to use the balance of the proceeds,
if any, for general corporate purposes. The Company's intended use of proceeds
is summarized as follows:
<TABLE>
<S> <C>
Gross proceeds............................... $17,000,000
Underwriter's discount....................... 1,190,000
Expenses of Offering......................... 400,000
-----------
Net proceeds............................... 15,410,000
-----------
General corporate purposes................... 15,410,000
-----------
Total...................................... $15,410,000
-----------
-----------
</TABLE>
The above table assumes no exercise of the Underwriter's over-allotment
option. If the Underwriter exercises the over-allotment option, net proceeds
will increase by approximately $2,371,000. This amount will be used for general
corporate purposes.
The Offering will be completed before completion of the Branch Acquisition.
If the Branch Acquisition is completed, no assurance can be given that, as a
result of asset growth, future loan losses or other losses, the Company will be
able to maintain its capital ratios at required levels or realize acceptable
levels of return. No assurance can be given that the Branch Acquisition will be
completed or that it will be completed on the terms now anticipated by the
Company. If the Branch Acquisition is not completed, the Company reserves the
right to use the proceeds that otherwise would have been applied to the Branch
Acquisition for other purposes, including general corporate purposes or for
other acquisitions or expansion opportunities. At present management has not
identified any other potential acquisitions or expansion opportunities. See
"Risk Factors--Branch Acquisition" and "--Dividends." If the Branch Acquisition
is not completed, no assurance can be given that alternative strategies to
deploy the additional capital raised in the Offering will be successful.
16
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock has been quoted on the Nasdaq National Market under the
symbol CCOW since January 18, 1996. Before that date it was traded through the
"Electronic Bulletin Board." The following table sets forth for the Common Stock
the high and low bid prices as reported on the Nasdaq National Market since
January 18, 1996 and before that as reported by the principal stock brokerage
firms handling transactions in the Common Stock or otherwise known to
management. The quotations shown represent inter-dealer prices, without retail
mark-up, mark-down or commissions. All amounts are adjusted to reflect a 15%
stock dividend paid in June 1995, a 5% stock dividend in August 1996 and a
three-for-two stock split in May 1997.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1995
First Quarter.............................................................. $ 9.00 $ 8.00
Second Quarter............................................................. 9.33 8.33
Third Quarter.............................................................. 8.83 8.00
Fourth Quarter............................................................. 8.17 8.00
1996
First Quarter.............................................................. 10.00 8.33
Second Quarter............................................................. 10.00 8.67
Third Quarter.............................................................. 9.83 8.42
Fourth Quarter............................................................. 10.83 9.17
1997
First Quarter.............................................................. 14.00 10.33
Second Quarter............................................................. 14.50 12.25
Third Quarter (through July 11, 1997)...................................... 13.00 12.00
</TABLE>
On July 11, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $12.25 per share. As of March 31, 1997, there were
approximately 1,200 holders of record of the Common Stock.
DIVIDEND POLICY
The Company paid a $.03 per share cash dividend in April 1996. The Company
has no formal dividend policy, and dividends are issued solely in the discretion
of the Company's Board of Directors subject to compliance with tregulatory
requirements. In order to pay any cash dividends, the Company must receive
payments of dividends or management fees from County Bank or Town & Country.
There are certain limitations on the payment of cash dividends by banks and
thrift and loan companies. In March 1997, in response to regulatory concerns
about the Bank's level of nonperforming assets, the Board of Directors of County
Bank adopted a resolution not to pay cash dividends without the prior written
consent of the Department and the FDIC. See "Regulation and
Supervision--Limitations on Dividends." No assurance can be given that any
dividends will be declared or, if declared, what the amount of dividends will be
or whether such dividends, once declared, will continue.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997 as if the 3-for-2 stock split had occurred prior to March 31, 1997, and
on a pro forma as adjusted basis to reflect (i) the sale of 1,387,755 shares of
Common Stock offered hereby and (ii) the completion of the Branch Acquisition,
after deducting estimated underwriting discounts and commissions and offering
expenses payable by the Company, and the application of the estimated net
proceeds therefrom.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-------------------------
PRO FORMA
AS ADJUSTED
ACTUAL (1)
--------- --------------
<S> <C> <C>
(IN THOUSANDS)
Shareholders' equity:
Preferred Stock, 10,000,000 shares authorized, no shares issued or
outstanding actual and pro forma as adjusted..................... $ -- $ --
Common Stock, 30,000,000 shares authorized, 2,606,478 shares issued
and outstanding actual; 3,994,233 shares issued and outstanding
pro forma as adjusted (1)........................................ 15,592 31,002
Retained earnings.................................................. 6,239 6,239
Investment securities unrealized loss.............................. (162) (162)
--------- -------
Total stockholders' equity......................................... $ 21,669 $ 37,079
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) Excludes 175,603 shares of Common Stock that may be issued pursuant to
exercise of stock options outstanding as of June 20, 1997 at exercise prices
ranging from $5.40 to $12.50 per share. Excludes shares that would be issued
upon exercise of the Underwriter's over-allotment option.
18
<PAGE>
The following tables illustrate the actual and pro forma regulatory capital
and leverage ratios of the Company and County Bank as of March 31, 1997, after
giving effect to the Offering and the Branch Acquisition, assuming (i)
approximately $15.4 million in net proceeds is raised in the Offering; and (ii)
the Company assumes $78.9 million in deposits and pays $1.2 million for Branch
premises and equipment and a premium of $5.7 million in connection with the
Branch Acquisition; and (iii) the Company contributes $14 million as capital to
County Bank. See "Unaudited Pro Forma Combined Financial Information" and the
assumptions set forth therein.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
------------------------------------------------------
TIER 1 RISK-BASED TOTAL RISK-BASED
LEVERAGE RATIO CAPITAL RATIO CAPITAL RATIO
-------------- ------------------- -----------------
<S> <C> <C> <C>
CAPITAL CORP
As reported................................................... 7.19% 9.04% 10.27%
Pro forma for Offering........................................ 12.18 15.94 17.16
Pro forma for Offering and Branch Acquisition................. 7.98 12.37 13.51
Minimum regulatory requirement for a well-capitalized
institution (1)............................................. -- 6.00 10.00
Minimum regulatory requirement (2)............................ 4.00-5.00 4.00 8.00
COUNTY BANK
As reported................................................... 7.07% 8.92% 10.17%
Pro forma for Offering........................................ 9.88 13.18 14.43
Pro forma for Offering and Branch Acquisition................. 7.55 13.10 14.34
Minimum regulatory requirement for a well-capitalized
institution (1)............................................. 5.00 6.00 10.00
Minimum regulatory requirement (2)............................ 4.00-5.00 4.00 8.00
Minimum requirement under resolution of Board of Directors
(3)......................................................... 6.50 -- --
</TABLE>
- ------------------------
(1) Minimum capital ratios for well-capitalized bank holding companies and banks
established by FRB and FDIC regulations. See "Regulation and
Supervision--Regulatory Capital Requirements."
(2) Minimum capital ratios for bank holding companies and banks under FRB and
FDIC regulations.
(3) See "Recent Developments" and "Regulation and Supervision--County Bank." At
June 30, 1997, the Bank's total equity to total assets ratio was 6.15% and
was below the 6.50% commitment. The Bank has discussed this situation with
its regulators, which have agreed to forbear from taking any action against
the Bank as a result of its failure to meet the capital ratio commitment.
The regulators have not waived or given forbearance on this commitment for
the Bank at September 30, 1997. No assurances can be given that any such
waivers or forbearance will be given in the future should the Bank fail to
meet its commitments in the future.
Based on preliminary information, the Company expects its leverage, Tier 1
risk-based and total risk-based capital ratios as of June 30, 1997, to be 6.85%,
8.44% and 9.45%, respectively, and the Bank's Tier 1 risk-based and total
risk-based capital ratios as of June 30, 1997, to be 6.32%, 7.70% and 8.69%,
respectively.
19
<PAGE>
BRANCH ACQUISITION
County Bank has entered into a P&A Agreement with Bank of America dated June
25, 1997, pursuant to which Bank of America will sell and County Bank will
acquire three Branches located in Livingston, Dos Palos and Mariposa,
California. Subject to satisfaction of specified conditions, including receipt
of regulatory approvals, the parties expect to complete the transaction in the
fourth quarter of 1997.
County Bank has entered into the P&A Agreement in order to expand its
service area throughout the Central Valley of California. County Bank views this
geographic area as a natural extension of its existing service area in Merced,
Stanislaus and Tuolumne counties. County Bank believes that this extension
represents an opportunity for County Bank to provide a level of service to the
areas served by the Branches that the major banks in California generally do
not.
Under the P&A Agreement, Bank of America will sell and assign to County Bank
all of its interest in the Branch premises and furniture, fixtures and equipment
of the Branches, and County Bank will assume the deposit liabilities of each
Branch, excluding approximately $1.4 million in deposits that are designated as
"Head Office Accounts" or that secure loans or credit cards.
County Bank will pay to Bank of America the value of furniture, fixtures and
equipment based upon a schedule provided by Bank of America and a premium of
7.28% of the deposit liabilities being assumed. In addition, County Bank will
pay the fair market value of the Branch premises as determined by an appraiser
selected by County Bank from a list of appraisers provided by Bank of America.
At present, based on deposits of $78,879,000 at the Branches as of March 31,
1997 (net of deposits not to be transferred), County Bank expects the premium to
be approximately $5,742,000. Bank of America will pay to County Bank cash equal
to the amount of the assumed deposit liabilities as of the closing date, the
amount of accrued compensation, vacation and sick pay and other benefits owed to
employees of Bank of America who become employees of County Bank upon completion
of the Branch Acquisition and other pro-rated accrued liabilities of the
operations assumed by County Bank. The following table shows information with
respect to the Branches as of March 31, 1997:
<TABLE>
<CAPTION>
ESTIMATE OF
AMOUNT OF PURCHASE PRICE
AMOUNT OF TRANSFERABLE PURCHASE PURCHASE PRICE OF PREMISES
BRANCH DEPOSITS DEPOSITS PREMIUM OF EQUIPMENT (1)
- ------------------------------------- ------------- ------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Livingston........................... $ 23,990,000 $ 23,136,000
Dos Palos............................ 25,328,000 25,279,000
Mariposa............................. 30,930,000 30,464,000
------------- -------------
Total:........................... $ 80,248,000 $ 78,879,000 $ 5,742,000 $ 142,000 $ 1,058,000
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) Each of the Branches to be acquired is owned in fee by Bank of America.
Therefore, the fair market value to be paid by County Bank to Bank of
America must be determined by individual appraisals. As of the date of this
Prospectus, the appraisals of the premises have not been commenced, and it
is not possible to predict the fair market values that will be determined in
such appraisals. The appraisal methodology will be based upon an "as is"
condition of the property reflecting the highest and best use in the
condition observed by the appraiser during inspection. The estimate of the
purchase price of the premises set forth above is based on management's
internal estimate and is not supported by an appraisal. The Company believes
that the aggregate purchase prices for the owned real estate will not exceed
$1,100,000. However, no assurance can be given that the purchase price for
the Branch premises will not be substantially greater.
County Bank will not acquire any loans or other earning assets in the Branch
Acquisition. County Bank expects to invest the cash received on account of the
assumed deposits initially in short-term and medium-term adjustable and
fixed-rate investment securities, primarily government securities. As soon as
practicable consistent with its underwriting standards, County Bank will seek to
use such funds to increase
20
<PAGE>
its lending activities. At present, County Bank believes that approximately 75%
of the cash received on account of the assumed deposits will become invested in
loans within five years after completion of the Branch Acquisition. The
Company's ability to invest these funds in loans is dependent on many factors,
including general market conditions, competition for loans, interest rates
generally, the strength of the local economy and the ability of the Company to
attract and retain qualified loan officers. If the Bank cannot effectively
deploy these extra funds within a reasonable period of time in its primary
service area, it may elect to make loans outside of such area. If, for any of
these reasons, the Company is unable to invest in loans prudently and in
accordance with its plans, its return on equity and return on assets may
decrease.
Under the P&A Agreement, County Bank will offer employment to 30 current
employees (17 full-time equivalents) of Bank of America assigned to the Branches
at their current salary levels, comparable responsibilities and officer titles.
In the event that any such employee is terminated from employment by County Bank
within 12 months of the closing date, County Bank will be obligated to pay
severance equal to the amount that would be due under Bank of America's
severance policies. Bank of America will be responsible for any severance
obligations to its employees who choose not to accept employment with County
Bank as of the completion date. No assurance can be given that County Bank will
be able to employ and retain the number of current Bank of America employees (or
new employees from other sources) to provide the necessary administrative and
personnel support to the Branches. If staffing for the Branches is inadequate,
operations and customer service could be disrupted, and the Company might lose
part or all of the potential benefits of the Branch Acquisition.
Management of the Company believes that it will be able to employ and retain
the necessary personnel and to integrate the Branches into the Company's
existing operations. However, the Company's success in implementing the Branch
Acquisition could be adversely affected by unexpected employee departures,
systems problems or failures, or the failure to provide expected levels of
customer service. These events could impair the ability of the Company to
provide the necessary administrative and personnel support to the Branches to
compete effectively for business and thereby cause a decrease in deposits and a
loss of customers. They could also impair the ability of the Company to
integrate the Branches into its existing operations without undue disruption to
operations and customer service. Any of these possibilities may cause the
Company to lose part or all of the intended benefit of the Branch Acquisition.
The Branch Acquisition raises numerous other possible risks for the Company and
for investors. See "Risk Factors."
Completion of the Branch Acquisition is subject to certain conditions,
including the accuracy of each party's representations and warranties in the
Agreement, the receipt by County Bank of required regulatory approvals, the
absence of litigation contesting the sale of the Branches and the absence of any
material adverse change in the operations and deposits of the Branches. In the
event that County Bank fails to complete the purchase of one or more Branches,
it will be obligated to pay to Bank of America a break-up fee in the amount of
$75,000 per Branch for each Branch that is not acquired. Bank of America may
terminate the P&A Agreement and will become entitled to a break-up fee if the
Offering is not completed by November 14, 1997. Completion of the Branch
Acquisition is not conditioned on the level of deposits at any time after the
date of the P&A Agreement. No assurance can be given that the level of assumed
deposits will not decrease from or increase above the levels indicated above by
the time the Branch Acquisition is completed. In the event that the average
level of deposits over the 20 days preceding the closing is 20% or 30% lower
than the level as of the date of the P&A Agreement, then the amount of the
purchase premium (expressed as a percentage of assumed deposits) will decline to
6.28% or 5.28%, respectively.
21
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following tables represent the unaudited pro forma accounting impacts of
the Branch Acquisition and the Offering on the Company's historical balance
sheet at March 31, 1997 and the Company's historical income statements for the
three months ended March 31, 1997 and the year ended December 31, 1996. Pro
forma accounting impacts on the Company's historical income statements for the
three months ended March 31, 1997 are based on the assumptions that the Branch
Acquisition and the Offering had been completed on January 1, 1997. Pro forma
accounting impacts on the historical balance sheet as of December 31, 1996 and
income statement for the year ended December 31, 1996 are based on the
assumption that the Branch Acquisition and the Offering had been completed on
January 1, 1996. The unaudited pro forma financial information assumes
approximately $15.4 million in net proceeds is raised in the Offering and the
Company assumes $78.9 million in deposits and pays a $5.7 million deposit
premium and $1.2 million for the branch premises, furniture, fixtures and
equipment in connection with the Branch Acquisition. Included in the pro forma
income statements are non-recurring charges that are related to the Branch
Acquisition. These non-recurring charges are expensed in the first three months
of the pro forma income statements. As a result, the impact to the pro forma
income statement for the three months ended March 31, 1997 is not indicative of
on-going subsequent pro forma quarterly impacts. Cash received as a result of
the Branch Acquisition and the Offering is expected to be redeployed in loans
and adjustable and fixed-rate securities as soon as practicable following the
consummation of the Branch Acquisition and the Offering. The Branch Acquisition
is expected to be accounted for based on the purchase method of accounting. This
method requires that the purchase price for the Branches be allocated to the
acquired assets and liabilities on the basis of their estimated fair values as
of the date of acquisition. Therefore, on the effective date of the Branch
Acquisition, the Company will establish a new accounting and reporting basis for
the acquired assets and liabilities which will be reflected in future
consolidated financial statements of the Company.
These unaudited pro forma combined financial statements are based on the
assumptions set forth in the footnotes thereto, which are an integral part
thereof. The unaudited pro forma combined financial statements should also be
read in conjunction with the historical consolidated financial statements and
the related notes thereto of Capital Corp incorporated by reference or included
in this Prospectus. The unaudited pro forma statements of income are not
necessarily indicative of operating results that would have been achieved had
the Branch Acquisition been consummated as of the beginning of the dates
indicated above and should not be construed as representative of future
operations. No assurance can be given that the pro forma financial statements or
the assumptions on which they are based are accurate or will be realized.
22
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
AT MARCH 31, 1997
----------------------------------------------
BRANCH PRO
COMPANY ACQUISITION OFFERING FORMA
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
ASSETS
Cash and noninterest-bearing deposits........................ $ 17,967 $ 71,937(1) $ 15,410(1) $ 105,314
Time deposits with other banks............................... 1,288 1,288
Available-for-sale securities................................ 46,046 46,046
Held-to-maturity securities.................................. 11,456 11,456
Loans, net................................................... 185,381 185,381
Interest receivable.......................................... 1,985 1,985
Premises and equipment, net.................................. 8,095 1,200(2) 9,295
Intangibles.................................................. 2,364 5,742(3) 8,106
Other assets................................................. 11,302 11,302
---------- ----------- --------- ----------
Total Assets............................................... $ 285,884 $ 78,879 $ 15,410 $ 380,173
---------- ----------- --------- ----------
---------- ----------- --------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits..................................................... $ 247,446 $ 78,879(4) $ 326,325
Fed funds purchased and repurchase agreements................ 5,870 5,870
Borrowings................................................... 6,518 6,518
Other liabilities............................................ 4,381 4,381
Shareholders' equity:
Common stock............................................... 15,592 15,410(5) 31,002
Retained earnings.......................................... 6,239 6,239
Investment securities unrealized loss...................... (162) (162)
---------- ----------- --------- ----------
Total shareholders' equity................................. 21,669 -- 15,410 37,079
---------- ----------- --------- ----------
Total liabilities and shareholders' equity................. $ 285,884 $ 78,879 $ 15,410 $ 380,173
---------- ----------- --------- ----------
---------- ----------- --------- ----------
</TABLE>
- ------------------------
(1) Represents net cash proceeds received as a result of the Branch Acquisition
and Offering.
(2) Acquired branch premises and equipment are estimated to be the sum of
approximately $1,058,000 in premises and $142,000 in equipment. See "Branch
Acquisition."
(3) Represents a 7.28% premium on historical transferable deposits.
(4) Represents historical transferable deposits at March 31, 1997.
(5) Represents net proceeds of a $17,000,000 common stock offering less a 7.00%
underwriting discount and $400,000 in fixed expenses.
23
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1997
--------------------------------------------------
BRANCH
COMPANY ACQUISITION OFFERING PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Total interest income.......................................... $ 5,601 $ 1,088(1) $ 233(1) $ 6,922
Total interest expense......................................... 2,072 533(2) 2,605
----------- ----------- ----- -----------
Net interest income............................................ 3,529 555 233 4,317
Provision for loan losses...................................... 240 -- 240
----------- ----------- ----- -----------
Net interest income after provision............................ 3,289 555 233 4,077
Total other income............................................. 734 176(3) 910
Other expenses
Salaries and related benefits................................ 1,544 175(4) 1,719
Premises and occupancy....................................... 279 151(5) 430
Intangible amortization...................................... 24 205(6) 229
Other........................................................ 1,393 329(7) 1,722
----------- ----------- ----- -----------
Total other expenses......................................... 3,240 860 -- 4,100
----------- ----------- ----- -----------
Net income before taxes........................................ 783 (129) 233 887
Provision for income taxes..................................... 270 (52)(8) 93(8) 311
----------- ----------- ----- -----------
Net income..................................................... $ 513 $ (77) $ 140 $ 576
----------- ----------- ----- -----------
----------- ----------- ----- -----------
</TABLE>
- ------------------------
(1) Assumes cash received as a result of the Branch Acquisition and Offering is
invested in adjustable and fixed-rate securities earning interest at an
annual rate of 6.05%, which represents the historical average yield on the
Company's taxable investment securities for the three months ended March 31,
1997.
(2) Represents historical expense multiplied by the ratio of historical Branch
deposits at March 31, 1997 to deposits at December 31, 1996.
(3) Represents 75% of historical fee income for the Branches.
(4) Represents historical expense plus three months of salaries for additional
corporate staff for the branch support functions and lending functions.
Additional corporate and lending staff are estimated to cost $130,000 and
$100,000, respectively, annually.
(5) Represents historical expense plus three months of amortization on $400,000
of additional back office equipment amortized over five years and $225,000
of Branch refurbishment costs amortized over seven years.
(6) Represents three months of amortization of the purchase premium on Branch
deposits amortized over seven years.
(7) Represents historical expense plus $250,000 in one-time conversion costs and
$120,000 in annual general expenses to support the Branches.
(8) Effective tax rate is estimated to be 40.00%.
24
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
BRANCH
COMPANY ACQUISITION OFFERING PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Total interest income.......................................... $ 19,351 $ 4,799(1) $ 1,066(2) $ 25,396
Total interest expense......................................... 6,865 1,971(3) 8,836
----------- ----------- ----------- -----------
Net interest income............................................ 12,486 3,007 1,066 16,559
Provision for loan losses...................................... 1,513 72(4) 1,585
----------- ----------- ----------- -----------
Net interest income after provision............................ 10,973 2,935 1,066 14,974
Total other income............................................. 2,935 691(5) 3,626
Other expenses
Salaries and related benefits................................ 5,283 732(6) 6,015
Premises and occupancy....................................... 1,857 621(7) 2,478
Intangible amortization...................................... 69 820(8) 889
Other........................................................ 3,527 576(9) 4,103
----------- ----------- -----------
Total other expenses......................................... 10,736 2,749 -- 13,485
----------- ----------- ----------- -----------
Net income before taxes........................................ 3,172 878 1,066 5,116
Provision for income taxes..................................... 1,163 351(10) 427(10) 1,941
----------- ----------- ----------- -----------
Net income..................................................... $ 2,009 $ 527 $ 640 $ 3,175
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) Assumes cash received as a result of the Branch Acquisition is invested in
adjustable and fixed-rate securities and Company-originated loans. The
Company estimates that loans would be originated equally over months 4
through 12 of the year such that by the end of the year 10% of the net cash
proceeds from the Branch Acquisition would be invested in loans yielding
10.31%, which represents the historical average yield on the Company's loans
for the year ended December 31, 1996. Interest income is estimated to be the
sum of the income on the loans and income on the securities earning interest
at an average rate of 6.92%, which represents the historical average yield
on the Company's taxable investment securities for the year ended December
31, 1996.
(2) Assumes cash received as a result of the Offering is invested in adjustable
and fixed-rate securities earning interest at an average rate of 6.92%,
which represents the historical average yield on the Company's taxable
investment securities for the year ended December 31, 1996.
(3) Represents historical expense multiplied by the ratio of historical Branch
deposits at March 31, 1997 to deposits at December 31, 1996.
(4) Represents a loan loss provision equal to 1% of projected loan originations
for the year.
(5) Represents 75% of historical Branch fee income.
(6) Represents historical expense plus one year of salaries for additional
corporate staff for the branch management and lending functions. Additional
branch management and lending staff are estimated to cost $130,000 and
$100,000, respectively, annually.
(7) Represents historical expense plus one year of amortization on $400,000 of
additional back office equipment amortized over five years and $225,000 of
Branch refurbishment costs amortized over seven years.
(8) Represents one year of amortization of the purchase premium on Branch
deposits amortized over seven years.
(9) Represents historical expense plus $250,000 in one-time conversion costs
and $120,000 in annual general expenses to support the Branches.
(10) Effective tax rate is estimated to be 40.00%.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH IN THE SECTION ENTITLED "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
its subsidiaries' financial condition, operating results, asset and liability
management, liquidity and capital resources. The following discussion should be
read in conjunction with the Consolidated Financial Statements of the Company
and the Notes thereto.
RECENT DEVELOPMENTS
At March 31, 1997, the Company's allowance for loan losses was $2,674,000,
of which $1,725,000 was specifically allocable to a particular real estate
development loan with a balance of $3,458,000. In the second quarter of 1997,
the project funded by the loan become involved in litigation among other
parties, and development was suspended for an undetermined period. Without the
imminent prospect for completion of the project, the Company made the judgment
that its collateral position, subordinate in large part to bonds used to finance
the project, should conservatively not be accorded any value and accordingly
charged off the entire balance of the loan. The Company will nonetheless
vigorously pursue efforts to realize a potential recovery on the loan.
In response to this action and as a result of adoption of a new loan loss
reserve policy discussed below, the Company made provisions to the allowance for
loan losses of $3,236,000 in the second quarter of 1997. At June 30, 1997, the
allowance for loan losses totaled $2,268,000 or 1.16% of total loans. The
write-off substantially reduced the Company's nonperforming assets. At June 30,
1997, nonperforming assets totaled $2,793,000 or .95% of total assets,
nonperforming loans totaled $2,377,000 or 1.22% of total loans and the allowance
for loan losses totaled 95.41% of nonperforming loans.
The decision to increase the reserve above previous levels resulted in part
from the adoption by the Company of a new loan loss reserve policy, which the
Company first implemented in the second quarter. Under its new methodology, the
Company is grading its loans and analyzing the migration of loans from grade to
grade over time to determine appropriate levels of the allowance. See "Business
of Capital Corp of the West--Allowance and Provisions for Loan Losses." No
assurance can be given that the new methodology will result in an allowance for
loan losses that is adequate to cover all losses that occur in the loan
portfolio from time to time.
In the second quarter, the Company also recognized a gain of approximately
$511,000 on asset sales in its real estate subsidiary that in part offset the
negative impact on earnings of the loan loss provision. In 1995 the Company had
written off the entire balance of its real estate investments. See "Business of
Capital Corp of the West--Real Estate Development Activities."
After giving effect to the provision for loan losses and the gain on asset
sales, the Company expects to report a loss for the three months ended June 30,
1997, of approximately $940,000 and a loss for the six months ended June 30,
1997 of approximately $430,000.
FINANCIAL CONDITION
Total assets at March 31, 1997 were $285,884,000, an increase of $19,895,000
or 7% compared with total assets of $265,989,000 at December 31, 1996, and an
increase of $71,372,000 or 33% compared with total assets of $214,512,000 at
March 31, 1996. Total loans were $$188,055,000 at March 31, 1997, an increase of
$4,808,000 or 2.6% compared with total loans of $183,247,000 at December 31,
1996, and an increase of $49,712,000 or 35.9% compared with total loans of
$138,343,000 at March 31, 1996.
26
<PAGE>
The allowance for loan losses was $2,674,000 at March 31, 1997, representing
a decrease of 4.2% of the allowance at December 31, 1996 but an increase of
43.7% of the allowance at March 31, 1996. The allowance at March 31, 1997
represented 1.4% of total loans, compared with 1.5% of total loans at December
31, 1996. Nonperforming loans at March 31, 1997 increased $1,098,000 from
December 31, 1996 to March 31, 1997, moving from 3.04% of total loans to 3.54%
of total loans. In addition, during this same period, the allowance for loan
losses as a percentage of nonperforming loans decreased from 50.14% to 40.11%.
Deposits were $247,446,000 at March 31, 1997, an increase of $9,101,000 or
4% compared with deposits of $238,345,000 at December 31, 1996, and an increase
of $52,947,000 or 27% compared with deposits of $194,499,000 at March 31, 1996.
Total shareholders' equity grew to $21,669,000 at March 31, 1997, a 3%
increase from $20,974,000 at December 31, 1996, and a 42% increase from
$15,243,000 at March 31, 1996. The growth of the Company from March 31, 1996 to
March 31, 1997 was primarily the result of the Company's acquisition of Town &
Country in June of 1996 and the opening of three branch offices of County Bank
within that period.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31
1996
OVERVIEW. For the three months ended March 31, 1997, consolidated net
income was $513,000 compared with $501,000 for the three months ended March 31,
1996, an increase of 2%. Earnings per share were $.20 and $.24, respectively,
after adjustments for a 5% stock dividend in August 1996 and a three-for-two
split in May 1997. The annualized return on average assets was .76% for the
first three months of 1997 compared with .99% for the same three months in 1996.
The Company's annualized return on average equity was 9.58% and 11.05% for the
three months ended March 31, 1997 and 1996, respectively. The decreases in
earnings per share, return on average assets and return on average equity were
attributable to the increased number of shares outstanding and increased assets
after the acquisition of Town & Country in June 1996 without a proportionate
increase in earnings and to the expenses related to the opening of three
branches since March 31, 1996.
NET INTEREST INCOME. The Company's primary source of income is the
difference between interest income and fees derived from earning assets and
interest paid on liabilities. The difference between the two is net interest
income. Net interest income for the three months ended March 31, 1997 totaled
$3,529,000 compared with $2,738,000 for the same period in 1996, an increase of
$791,000 or 29%.
Total interest and fees on earning assets were $5,601,000 for the first
quarter of 1997, an increase of $1,351,000 or 32% from $4,250,000 for the same
three months in 1996. The level of interest income is affected by changes in
volume of and rates earned on interest-earning assets. Interest-earning assets
consist primarily of loans, investment securities and federal funds sold. The
increase in interest income in the first quarter was primarily the result of an
increase in the volume of interest-earning assets. Average interest-earning
assets for the first three months of 1997 were $240,196,000 compared with
$183,353,000 for the first three months of 1996, an increase of $56,843,000 or
31%.
Interest expense is a function of the volume of and the rates paid on
interest-bearing liabilities. Interest-bearing liabilities consist primarily of
certain deposits and borrowed funds. Total interest expense was $2,072,000 for
the three months ended March 31, 1997, compared with $1,512,000 for the three
months ended March 31, 1996, an increase of $560,000 or 37%. This increase was
primarily the result of an increase in the volume of interest-bearing
liabilities. Average interest-bearing liabilities were $211,161,000 for the
first three months of 1997 compared with $186,349,000 for the same three months
in 1996, an increase of $52,399,000 or 33%.
The Company's net interest margin, the ratio of net interest income to
average interest-earning assets, was 5.96% for the three months ended March 31,
1997 compared with 5.46% for the same period in 1996.
27
<PAGE>
Net interest margin provides a measurement of the Company's ability to employ
funds profitably during the period being measured. The Company's increase in net
interest margin was primarily attributable to a change in the mix of
interest-earning assets. Loans as a percentage of interest-earning assets
increased to 76.8% for the three months ended March 31, 1997 from 72.6% for the
same period in 1996, offset in part by a decrease in total interest-earning
assets as a percentage of total assets to 88.7% from 90.2%.
AVERAGE BALANCES AND RATES EARNED AND PAID
The following table presents condensed average balance sheet information for
the Company, together with interest rates earned and paid on the various sources
and uses of its funds for each of the periods indicated. Nonaccruing loans are
included in the calculation of the average balances of loans, but the nonaccrued
interest on such loans is excluded.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------------------------------------------------
MARCH 31, 1997 MARCH 31,1996
----------------------------------- ------------------------------------
INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID
---------- ---------- ----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold............................. $ 3,589 $ 45 5.09% $ 4,299 $ 56 5.28%
Taxable investment securities: (1)............. 47,994 810 6.85 41,458 716 7.00
Nontaxable investment securities............... 4,195 59 5.70 4,412 59 5.41
Loans, gross: (2).............................. 184,418 4,687 10.31 133,175 3,419 10.41
---------- ---------- ----- ---------- ----------- -----
Total Earning Assets........................... 240,196 $ 5,601 9.46 183,353 $ 4,250 9.40
---------- -----------
Allowance for loan losses...................... (2,977) (1,743)
Cash and due from banks........................ 10,806 9,811
Premises and equipment......................... 7,334 4,268
Interest receivable and other assets........... 15,516 7,642
---------- ----------
Total Assets................................... $ 270,875 $ 203,331
---------- ----------
Liabilities and Shareholders' Equity
Interest-bearing demand deposits............... $ 33,368 $ 78 0.95 $ 27,928 $ 64 0.91
Savings deposits............................... 112,564 1,122 4.04 99,965 1,036 4.20
Time deposits.................................. 59,415 799 5.45 30,009 400 5.41
Other borrowed funds........................... 5,814 73 5.09 860 12 5.65
---------- ---------- ----- ---------- ----------- -----
Total interest-bearing liabilities............. 211,161 $ 2,072 3.98 158,762 $ 1,512 3.86
---------- -----------
Noninterest-bearing demand deposits............ 32,871 28,507
Accrued interest, taxes and other liabilities.. 5,432 599
Total liabilities.............................. 249,464 187,868
Shareholders' equity........................... 21,411 15,463
---------- ----------
Total Liabilities and Shareholders' Equity..... $ 270,875 $ 203,331
---------- ----------
Net interest income............................ $ 3,529 $ 2,738
---------- -----------
Net interest margin (3)........................ 5.96% 5.46%
----- -----
</TABLE>
- ------------------------
(1) Interest on municipal securities is not computed on a tax-equivalent basis.
(2) Amounts of interest earned includes loan fees of $233,000 and $222,000 for
the periods included.
(3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
28
<PAGE>
NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE
The following table sets forth, for the periods indicated, a summary of the
changes in average asset and liability balances and interest earned and interest
paid resulting from changes in average asset and liability balances (volume) and
changes in average interest rates and the total net change in interest income
and expenses. The changes in interest due to both rate and volume have been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amount of the change in each.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
OVER
THREE MONTHS ENDED
MARCH 31, 1996
---------------------------------
INCREASE (DECREASE)
DUE TO CHANGE IN
---------------------------------
AVERAGE AVERAGE
VOLUME RATE TOTAL
--------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST AND FEE INCOME:
Federal funds sold.............................................................. ($9) ($2 ) ($11)
Taxable investment securities................................................... 110 (16 ) 94
Nontaxable investment securities(1)............................................. (3) 3 --
Loans, gross.................................................................... 1,302 (34 ) 1,268
--------- --- ---------
Total......................................................................... 1,400 (49 ) 1,351
INCREASE (DECREASE) IN INTEREST EXPENSE:
Interest-bearing demand deposits................................................ 13 1 14
Savings deposits................................................................ 123 (37 ) 86
Time deposits................................................................... 395 4 399
Other borrowed funds............................................................ 62 (1 ) 61
--------- --- ---------
Total......................................................................... 593 (33 ) 560
--------- --- ---------
--------- --- ---------
Total change in net interest income............................................. $ 807 ($ 16 ) $ 791
--------- --- ---------
--------- --- ---------
</TABLE>
- ------------------------
(1) Interest on nontaxable securities is not computed on a tax-equivalent basis.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the first
quarter of 1997 increased 50% from the first quarter of 1996, to $240,000 from
$160,000.
NONINTEREST INCOME. Noninterest income increased by $163,000 or 29% to
$734,000 for the three months ended March 31, 1997 compared with $571,000 in the
same period in 1996. Service charges on deposit accounts increased by $56,000 or
20%, income from the sale of real estate held for sale or development decreased
by $1,000 and other income increased by $108,000 or 38%. The primary reasons for
the increase in other income are increases from loan servicing income and retail
investment sales.
NONINTEREST EXPENSE. Noninterest expenses increased by $887,000 or 38% for
the three months ended March 31, 1997 compared with $571,000 for the same period
in 1996. The primary components of noninterest expenses were salaries and
employee benefits, occupancy expenses, furniture and equipment
29
<PAGE>
expenses, and other operating expenses. The following table summarizes
noninterest expenses for the three-month periods ended March 31, 1997 and 1996.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Salaries and employee benefits............................................. $ 1,544 $ 1,186
Furniture and equipment.................................................... 287 232
Occupancy expense.......................................................... 279 157
Marketing.................................................................. 159 90
Professional fees.......................................................... 141 141
Supplies................................................................... 103 55
Regulatory assessments..................................................... 20 10
Other...................................................................... 707 482
--------- ---------
Total.................................................................... $ 3,240 $ 2,353
--------- ---------
--------- ---------
</TABLE>
For the three months ended March 31, 1997 compared with the three months
ended March 31, 1996, salaries and related benefits increased by $358,000 or
30%, equipment expenses increased $55,000 or 24%, occupancy expenses increased
$122,000 or 78%, marketing expenses increased by $69,000 or 77% and other
expenses increased by $225,000 or 47%. The expense increases were primarily the
result of expansion including expenses associated with acquisition and operation
of Town & Country (acquired in June 1996) and the opening of three branch
offices in the last three quarters of 1996. The increases in noninterest expense
resulted in an increase in the efficiency ratio (noninterest expense divided by
the sum of net interest income and noninterest income excluding securities gains
and losses) to 76% from 71% for the three months ended March 31, 1996.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes was
$270,000 for the three months ended March 31, 1997 compared with $295,000 for
the same three months in 1996. Effective tax rates were 34% and 37% for the
first quarters of 1997 and 1996, respectively. The provision and the effective
tax rate were reduced due to the purchase of limited partnership investments in
low-income affordable housing projects providing the investor with affordable
housing income tax credits. The Company had investments in these partnerships of
$2,700,000 as of March 31, 1997 and $1,700,000 as of March 31, 1996.
NET INCOME. The increase in earnings in the first quarter of 1997 compared
with the first quarter of 1996 resulted primarily from asset growth, an increase
in the Company's net interest income of $791,000 or 29% to $3,529,000 from
$2,738,000 and an increase in fee income of $163,000 or 29% to $734,000 from
$571,000, offset by an increase in noninterest expenses of $887,000 or 38% to
$3,240,000 from $2,353,000, a decrease in interest-earning assets as a
percentage of total assets to 88.7% from 90.2%, and an increase of $80,000 or
50% to $240,000 from $160,000 in provisions for loan losses.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
OVERVIEW. Net income for 1996 was $2,009,000 compared with $335,000 in 1995
and $1,736,000 in 1994. Earnings per share were $0.85 in 1996 compared with
$0.16 in 1995 and $0.83 in 1994. The return on average assets was .88% in 1996
compared with .18% in 1995 and 1.05% in 1994. The Company's return on average
equity for the same periods was 11.05%, 2.16% and 12.81%, respectively. Earnings
in 1995 reflect a $2,881,000 write-off of the Bank's investment in real estate
held by its real estate subsidiary Merced Area Investment & Development, Inc.
("MAID"). The write-off resulted in a $1,757,000 reduction in after-tax earnings
for 1995.
30
<PAGE>
NET INTEREST INCOME. Total interest and fee income on earning assets
increased to $19,351,000 from $15,873,000 or 22% in 1996 compared with 1995. Net
interest income increased to $15,873,000 from $12,807,000, or 24%, in 1995 from
1994. Average interest-earning assets in 1996 were $203,880,000 compared with
$166,826,000 in 1995, an increase of $36,220,000 or 22%. The 1996 increase in
interest income was primarily the result of growth in interest-earning assets.
The 1995 increase in interest income was attributable almost equally to growth
in these assets and to increases in yields on these assets.
Total average interest-bearing liabilities in 1996 were $176,333,000
compared with $143,131,000 in 1995, an increase of $33,202,000 or 23%. Total
interest expense increased $1,148,000 or 20% in 1996 compared with 1995 and
increased $1,867,000 or 48% in 1995 compared with 1994. The 1996 increase in
interest expense was the result of growth in interest-bearing liabilities. The
1995 increase was attributable primarily to increases in the rates paid on these
liabilities and, to a lesser extent, to growth in these liabilities.
The Company's net interest margin was 6.12% for 1996, compared with 6.09%
for 1995 and 6.03% for 1994. The modest improvement in net interest margin was
due to an increase in loan volume as a percentage of earning assets, which was
partially offset by the increase in nonperforming loans.
AVERAGE BALANCES AND RATES EARNED AND PAID
The following table presents, for the periods indicated, condensed average
balance sheet information for the Company, together with interest rates earned
and paid on the various sources and uses of its funds. The table is arranged to
group the elements of interest-earning assets and interest-bearing liabilities,
these
31
<PAGE>
items being the major sources of income and expense. Nonaccruing loans are
included in the calculation of average loan balances, but the nonaccrued
interest thereon is excluded.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995
---------------------------- --------------------------
INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID
-------- -------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold......................... $ 3,920 $ 207 5.28% $ 6,253 $ 358 5.73%
Taxable investment securities:............. 38,331 2,596 6.77 34,095 2,219 6.51
Nontaxable investment securities(1)........ 4,531 246 5.43 5,858 327 5.58
Loans, gross:(2)........................... 157,098 16,302 10.38 120,620 12,969 10.75
-------- -------- ------- -------- ------- -------
Total Earning Assets................... 203,880 $19,351 9.49 166,826 $15,873 9.51
-------- -------
Allowance for loan losses.................. (1,913) (1,616)
Cash and due from banks.................... 10,436 8,832
Premises and equipment..................... 4,775 3,783
Interest receivable and other assets....... 10,946 8,056
-------- --------
Total Assets........................... $228,124 $185,881
-------- --------
Liabilities and shareholders' equity
Interest-bearing demand deposits........... $ 29,376 $ 268 .91 $ 26,192 $ 239 .91
Savings deposits........................... 104,438 4,350 4.16 91,509 4,213 4.65
Time deposits.............................. 40,994 2,167 5.29 25,431 1,254 4.93
Other borrowed funds....................... 1,020 80 7.84 141 11 7.80
-------- -------- ------- -------- ------- -------
Total interest-bearing liabilities......... 176,328 $ 6,865 3.89 143,273 $5,717 3.99
-------- -------
Noninterest-bearing demand deposits........ 30,549 26,478
Accrued interest, taxes and other
liabilities.............................. 3,067 641
--------
Total liabilities.......................... 209,944 170,392
Shareholders' equity....................... 18,180 15,485
-------- --------
Total liabilities and shareholders'
equity................................... $228,124 $185,881
-------- --------
Net interest income........................ $12,486 $10,156
-------- -------
Net interest margin(3)..................... 6.12% 6.09%
------- -------
<CAPTION>
1994
--------------------------
INTEREST RATES
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID
-------- ------- -------
<S> <C> <C> <C>
Assets
Federal funds sold......................... $ 6,330 $ 261 4.12%
Taxable investment securities:............. 26,966 1,479 5.48
Nontaxable investment securities(1)........ 4,579 272 5.94
Loans, gross:(2)........................... 110,690 10,795 9.75
-------- ------- -------
Total Earning Assets................... 148,565 $12,807 8.62
-------
Allowance for loan losses.................. (1,690)
Cash and due from banks.................... 8,750
Premises and equipment..................... 2,578
Interest receivable and other assets....... 7,628
--------
Total Assets........................... $165,831
--------
Liabilities and shareholders' equity
Interest-bearing demand deposits........... $ 25,126 $ 237 .94
Savings deposits........................... 66,516 2,298 3.45
Time deposits.............................. 34,420 1,312 3.81
Other borrowed funds....................... 48 3 6.25
-------- ------- -------
Total interest-bearing liabilities......... 126,110 $3,850 3.05
-------
Noninterest-bearing demand deposits........ 25,326
Accrued interest, taxes and other
liabilities.............................. 842
Total liabilities.......................... 152,278
Shareholders' equity....................... 13,553
--------
Total liabilities and shareholders'
equity................................... $165,831
--------
Net interest income........................ $8,957
-------
Net interest margin(3)..................... 6.03%
-------
</TABLE>
- ------------------------------
(1) Interest on municipal securities is not computed on a tax-equivalent basis.
(2) Amounts of interest earned includes loan fees of $1,106,000, $501,000 and
$812,000 for the periods included.
(3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
32
<PAGE>
NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE
The following table sets forth, for the periods indicated, a summary of the
changes in average asset and liability balances and interest earned and interest
paid resulting from changes in average asset and liability balances (volume) and
changes in average interest rates. The changes in interest due to both rate and
volume have been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amount of the change in each. Nonaccruing
loans are included in the table for computational purposes, but the nonaccrued
interest thereon is excluded.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
OVER YEAR ENDED DECEMBER 31, OVER YEAR ENDED DECEMBER 31,
1995 1994
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
------------------------------- -------------------------------
<CAPTION>
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Increase (decrease) in interest and fee income:
Taxable investment securities.................... $ 276 $ 101 $ 377 $ 434 $ 306 $ 740
Nontaxable investment securities(1).............. (74) (7) (81) 70 (15) 55
Federal funds sold............................... (125) (26) (151) (3) 100 97
Loans, gross..................................... 3,767 (434) 3,333 1,015 1,159 2,174
--------- --------- --------- --------- --------- ---------
Total........................................ 3,844 (366) 3,478 1,516 1,550 3,066
Increase (decrease) in interest expense:
Interest-bearing demand deposits................. $ 29 $ -- $ 29 $ 9 $ (7) $ 2
Savings deposits................................. 427 (290) 137 1,016 899 1,915
Time deposits.................................... 817 96 913 (90) 32 (58)
Other borrowed funds............................. 69 -- 69 7 1 8
--------- --------- --------- --------- --------- ---------
Total........................................ 1,342 (194) 1,148 942 925 1,867
--------- --------- --------- --------- --------- ---------
Total change in net interest income.............. $ 2,502 ($ 172) $ 2,330 $ 574 $ 625 $ 1,199
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Interest on nontaxable securities is not computed on a tax-equivalent basis.
PROVISIONS FOR LOAN LOSSES. The provision for loan losses increased
substantially to $1,513,000 in 1996 from $228,000 in 1995 and $0 in 1994.
NONINTEREST INCOME. Noninterest income in 1996 increased to $2,935,000 from
a loss of $1,224,000, an increase of $4,159,000. Noninterest income in 1995
reflected a $2,881,000 write-off of real estate held by MAID. In 1996, service
charges increased $354,000 or 38%, other income increased by $504,000 or 78% and
gains on the sale of real estate increased by $420,000 or 474%. Increases in
service charge income were due to Company's growth as well as increased service
charges implemented in 1996. Other income increased primarily due to increased
revenues on retail investment products, loan servicing income, gains on the sale
of Small Business Administration loans and gains on the sale of securities.
In 1995, service charge income increased by $20,000 or 2%, income from the
sale of real estate held for sale or development increased by $74,000 and other
income increased by $237,000 or 57%. Other income increases in 1995 were due to
the addition of commission fees earned on investment product sales and increases
in loan servicing fee income.
In 1996, the Company recognized $508,000 in gains on the sale of 40 improved
lots and four single family homes in two real estate projects. In 1995, the
Company recognized gains of $88,000 in gains on the sale of eight single family
homes and 56 improved lots in three projects. In 1994 the Company recognized
gains of $14,000 on the sale of nine single-family homes and two improved lots
in three projects.
33
<PAGE>
NONINTEREST EXPENSE. Noninterest expense in 1996 was $10,736,000, an
increase of $2,590,000 or 32% compared with 1995. Noninterest expense in 1995
was $8,146,000, an increase of $1,223,000 or 18% compared with noninterest
expense of $6,923,000 in 1994.
The primary components of noninterest expenses were salaries and employee
benefits, occupancy expenses, furniture and equipment expenses, and other
operating expenses. The following table summarizes noninterest expenses for the
last three years.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits........................................... $ 5,283 $ 4,161 $ 3,540
Furniture and equipment.................................................. 1,022 789 534
Occupancy expense........................................................ 835 612 587
Professional fees........................................................ 755 404 299
Marketing................................................................ 370 212 250
Supplies................................................................. 292 234 124
Regulatory assessments................................................... 48 183 394
Other.................................................................... 2,131 1,551 1,195
--------- --------- ---------
Total................................................................ $ 10,736 $ 8,146 $ 6,923
--------- --------- ---------
--------- --------- ---------
</TABLE>
The salary increase in 1996 of $1,122,000 was primarily due to two factors.
First, the purchase of Town & County added $473,000 to total salaries. Second,
in 1996 the Bank underwent a reengineering project under which Bank operations
were streamlined and voluntary separation packages were offered to all eligible
employees. A total of 23 employees accepted the package, and total separation
expenses of $286,000 were added to 1996 total salaries. The remaining increase
was primarily due to the two new branches established in late 1995 and early
1996.
Other increases related to overall growth in expenses attributable to new
branch openings in late 1995 through 1996, as well as the acquisition of Town &
Country. The salary and related benefits increase in 1995 was primarily due to
an increase in full-time equivalents due in part to the opening of a new branch
and two new loan production offices in 1995. Average full-time equivalents were
115 in 1995 compared with 103 in 1994, a 11.7% increase. Normal merit increases
and related benefit expenses also contributed to the overall increase.
The 1996 and 1995 increases in occupancy expense were primarily due to the
purchase of Town & Country and its four branch offices in June 1996 and the
opening of four new branches of County Bank between November 1995 and December
1996.
Professional fees include legal, consulting, audit and accounting fees. The
1996 increase in professional fees was due in part to consulting fees incurred
in conjunction with the reengineering project undertaken by the Company in 1996.
The increases in 1995 were primarily due to increases in legal fees related to
corporate matters such as the conversion to a bank holding company structure.
Other increase in expenses from 1994 to 1995 and from 1995 to 1996 were
attributable primarily to overall growth of the Company.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes was
$1,163,000 in 1996, $223,000 in 1995 and $1,103,000 in 1994. The effective
income tax rate was 36.7% in 1996 compared with 39.9% in 1995 and 38.8% in 1994.
In part the effective tax rate of the Company was reduced in 1996 due to the tax
credits earned by the purchase of housing tax credits in late 1995 and 1996.
Total housing tax credits for 1996 were approximately $67,000. The change in the
effective tax rate for the three years was also affected by the effective tax
benefit derived from interest income on loans and securities exempt from
34
<PAGE>
federal taxation. The tax benefit from such income as a percentage of income
before taxes was 2.7% in 1996, 17.7% in 1995 and 3.0% in 1994.
NET INCOME. Net income in 1996 represented a 500% increase in earnings
compared with 1995, following a 81% decrease in 1995 compared with 1994 results.
The increase in earnings in 1996 compared with 1995 was primarily due to the
real estate write-off in 1995. Excluding the effect of the write-off, earnings
in 1996 were down approximately $83,000. The areas in which the Company showed
earnings improvement in 1996 compared with 1995 included a net interest income
increase of $2,330,000 or 23%, and an increase in noninterest income, exclusive
of the 1995 real estate write-off and any gains or income on real estate held
for sale or development in 1996 and 1995, of $1,278,000 or 77%. These increases
were more than offset by an increase of $1,285,000 or 564% in provisions for
loan losses to $1,513,000 from $228,000 and an increase of $2,591,000 or 32% in
noninterest expenses to $10,736,000 in 1996 from $8,146,000 in 1995.
Net income in 1995 was most profoundly affected by the $2,881,000 real
estate-write off in that year. Net interest income in 1995 was $10,156,000
compared with $8,957,000 in 1994. Noninterest income, exclusive of the real
estate provisions, increased by $54,000. These increases were partially offset
by an increase of $1,223,000 or 18% in noninterest expense, to $8,146,000 in
1995 from $6,923,000 in 1994, and loan loss provisions of $228,000 in 1995
compared with zero in 1994. The decrease in return on average assets and average
equity in 1995, exclusive of the real estate write-off, was generally
attributable to increases in noninterest expenses and loan loss provisions,
which were offset in part by a moderate increases in net interest income and
noninterest income.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is an integral part of managing a banking
institution's primary source of income, net interest income. The Company manages
the balance between rate-sensitive assets and rate-sensitive liabilities being
repriced in any given period with the objective of stabilizing net interest
income during periods of fluctuating interest rates. The Company considers its
rate-sensitive assets to be those which either contain a provision to adjust the
interest rate periodically or mature within one year. These assets include
certain loans and investment securities and federal funds sold. Rate-sensitive
liabilities are those which allow for periodic interest rate changes within one
year and include maturing time certificates, certain savings deposits and
interest-bearing demand deposits. The difference between the aggregate amount of
assets and liabilities that reprice within at various time frames is called the
"gap." Generally, if repricing assets exceed repricing liabilities in a time
period the Company would be deemed to be asset-sensitive. If repricing
liabilities exceed repricing assets in a time period the Company would be deemed
to be liability-sensitive. Generally, the Company seeks to maintain a balanced
position whereby there is no significant asset or liability sensitivity within a
one-year period to ensure net interest margin stability in times of volatile
interest rates. This is accomplished through maintaining a significant level of
loans, investment securities and deposits available for repricing within one
year.
35
<PAGE>
The following tables set forth the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities as of March 31, 1997
and December 31, 1996, using the interest rate sensitivity gap ratio. For
purposes of the following table, an asset or liability is considered
rate-sensitive within a specified period when it can be repriced or matures
within its contractual terms.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
------------------------------------------------------------------------
AFTER 3 AFTER 1
BUT YEAR BUT
WITHIN WITHIN WITHIN AFTER NON-INTEREST
3 MONTHS 12 MONTHS 5 YEARS 5 YEARS BEARING TOTAL
----------- ----------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold
Time deposits at other
banks................. $ 991 $ 297 $ -- $ -- $ -- $ 1,288
Investment securities... 7,671 7,029 6,875 35,927 -- 57,502
Loans................... 115,133 22,185 40,941 9,796 -- 188,055
Other interest-bearing
assets................ -- 3,172 -- -- -- 3,172
----------- ----------- ----------- --------- ----------- ---------
Total earning
assets.............. 123,795 32,683 47,816 45,723 -- 250,017
Noninterest-earning
assets and allowances
for
loan losses........... -- -- -- -- 35,867 35,867
----------- ----------- ----------- --------- ----------- ---------
Total assets.......... $ 123,795 $ 32,683 $ 47,816 $ 45,723 $ 35,867 $ 285,884
LIABILITIES AND
SHAREHOLDERS' EQUITY
Savings, money market
and NOW deposits...... $ 146,905 $ -- $ -- $ -- $ 35,179 $ 182,084
Time deposits........... 14,591 34,691 15,880 200 -- 65,362
Other interest-bearing
liabilities........... 4,523 2,430 5,330 105 -- 12,388
Other liabilities and
shareholders'
equity................ -- -- -- -- 26,050 26,050
----------- ----------- ----------- --------- ----------- ---------
Total liabilities and
shareholders'
equity.............. 166,019 37,121 21,210 305 61,229 $ 285,884
----------- ----------- ----------- --------- ----------- ---------
Incremental gap......... (42,224) (4,438) 26,606 45,418 ($ 25,362)
----------- ----------- ----------- --------- ----------- ---------
Cumulative gap.......... $ (42,224) $ (46,662) $ (20,056) $ 25,362
Cumulative gap as a % of
earning assets........ (16.9)% (18.7)% (8.0)% 10.1%
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------------------------------------------
AFTER 3 AFTER 1
BUT YEAR BUT
WITHIN WITHIN WITHIN AFTER NON-INTEREST
3 MONTHS 12 MONTHS 5 YEARS 5 YEARS BEARING TOTAL
----------- ----------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold...... $ 3,735 $ -- $ -- $ -- $ -- $ 3,735
Time deposits in other
banks................. 1,800 308 993 -- -- 3,101
Investment securities... 315 3,976 8,279 30,808 -- 43,378
Loans................... 115,848 20,857 36,856 9,686 -- 183,247
Other interest-bearing
assets................ 880 3,134 -- -- -- 4,014
Total earning
assets.............. 122,778 28,275 45,135 40,494 -- 237,475
Noninterest-earning
assets and allowances
for
loan losses........... -- -- -- -- 28,514 28,514
----------- ----------- ----------- --------- ----------- ---------
Total assets.......... $ 122,578 $ 28,275 $ 46,128 $ 40,494 $ 28,514 $ 265,989
----------- ----------- ----------- --------- ----------- ---------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Savings, money market
and NOW deposits...... $ 145,588 $ -- $ -- $ -- $ 39,157 $ 184,745
Time deposits........... 12,180 29,877 11,543 -- -- 53,600
Other interest-bearing
liabilities........... -- 791 105 3,000 3,896
Other liabilities and
shareholders'
equity................ -- -- -- -- 23,748 23,748
----------- ----------- ----------- --------- ----------- ---------
Total liabilities and
shareholders'
equity.............. 157,768 30,668 11,543 105 65,905 $ 265,989
----------- ----------- ----------- --------- ----------- ---------
Incremental gap......... (35,190) (2,393) 34,585 40,389 $ (37,391)
----------- ----------- ----------- --------- ----------- ---------
Cumulative gap.......... $ (35,190) $ (37,583) $ (2,998) $ 37,391
Cumulative gap as a % of
earning assets........ (14.8)% (15.8)% (12.6)% 15.7%
</TABLE>
The Company was liability-sensitive with a negative cumulative one-year gap
of $46,662,000 or 18.7% of interest-earnings assets at March 31, 1997 and
$37,583,000 or 15.8% of earning assets at December 31, 1996. In general, based
upon the Company's mix of deposits, loans and investments, increases in interest
rates would be expected to result in a decrease in the Company's net interest
margin.
The interest rate gaps reported in the tables arise when assets are funded
with liabilities having different repricing intervals. Since these gaps are
actively managed and change daily as adjustments are made in interest rate views
and market outlook, positions at the end of any period may not be reflective of
the Company's interest rate sensitivity in subsequent periods. Active management
dictates that longer-term economic views are balanced against prospects for
short-term interest rate changes in all repricing intervals. For purposes of the
analysis above, repricing of fixed-rate instruments is based upon the
contractual maturity of the applicable instruments. Actual payment patterns may
differ from contractual payment patterns. The change in net interest income may
not always follow the general expectations of an asset-sensitive or
liability-sensitive balance sheet during periods of changing interest rates,
because interest rates earned or paid may change by differing increments and at
different time intervals for each type of
37
<PAGE>
interest-sensitive asset and liability. As a result of these factors, at any
given time, the Company may be more sensitive or less sensitive to changes in
interest rates than indicated in the above tables. Greater sensitivity would
have a more adverse effect on net interest margin if market interest rates were
to increase, and a more favorable effect if rates were to decrease.
An additional measure of interest rate sensitivity that the Company monitors
through a detailed model is its expected change in earnings. This model's
estimate of interest rate sensitivity takes into account the differing time
intervals and differing rate change increments of each type of
interest-sensitive asset and liability. It then measures the projected impact of
changes in market interest rates on the Company's return on equity. Based upon
the March 31, 1997 mix of interest-sensitive assets and liabilities, given an
immediate and sustained increase in the federal funds rate of 1%, this model
estimates the Company's cumulative return on equity over the next year would
decrease by less than 1%. No assurance can be given that the actual return on
equity would not decrease by more than 1% in response to a 1% increase in
federal funds rate, or that actual return on equity would not decrease
substantially if market interest rates increased by more than 1%.
LIQUIDITY AND CAPITAL RESOURCES
To maintain adequate liquidity requires that sufficient resources be
available at all times to meet cash flow requirements of the Company. The need
for liquidity in a banking institution arises principally to provide for deposit
withdrawals, the credit needs of its customers and to take advantage of
investment opportunities as they arise. A company may achieve desired liquidity
from both assets and liabilities. The Company considers cash and deposits held
in other banks, federal funds sold, other short term investments, maturing loans
and investments, payments of principal and interest on loans and investments and
potential loan sales as sources of asset liquidity. Deposit growth and access to
credit lines established with correspondent banks and market sources of funds
are considered by the Company as sources of liability liquidity.
The Company reviews its liquidity position on a regular basis based upon its
current position and expected trends of loans and deposits. These assets include
cash and deposits in other banks, available-for-sale securities and federal
funds sold. The Company's liquid assets totaled $65,301,000, $63,196,000 and
$64,269,000 on March 31, 1997, December 31, 1996, and December 31, 1995,
respectively, and constituted 22.8%, 23.8% and 30.7%, respectively, of total
assets on those dates. Liquidity is also affected by the collateral requirements
of its public deposits and certain borrowings. Total pledged securities were
$14,797,000 at March 31, 1997 compared with $16,678,000 at December 31, 1996 and
$18,157,000 at December 31, 1995.
Although the Company's primary sources of liquidity include liquid assets
and a stable deposit base, the Company maintains lines of credit with the
Federal Reserve Bank of San Francisco, Federal Home Loan Bank of San Francisco
and Pacific Coast Bankers' Bank aggregating $12,600,000, of which $6,105,000 was
outstanding as of March 31, 1997 and $105,000 was outstanding as of December 31,
1996. Lines of credit were $5,270,000 with $106,000 outstanding at December 31,
1995. Management believes that the Company maintains adequate amounts of liquid
assets to meet its liquidity needs. The Company's liquidity might be
insufficient if deposit withdrawals were to exceed anticipated levels. Deposit
withdrawals can increase if a company experiences financial difficulties or
receives adverse publicity for other reasons, or if its pricing, products or
services are not competitive with those offered by other institutions.
Capital serves as a source of funds and helps protect depositors against
potential losses. The primary source of capital for the Company has been
internally generated capital through retained earnings. The Company's
shareholders' equity increased by $695,000 or 3% since December 31, 1996. This
increase was primarily the result of net income of $513,000 for the three months
ended March 31, 1997, $99,000 from the exercise of stock options and $172,000
from the purchase of stock pursuant to Company benefit plans. These increases
were offset to a limited extent by an increase of $93,000 in unrealized loss on
investment
38
<PAGE>
securities (net of tax effect). The Company's shareholders' equity increased
$5,881,000 in 1996, $1,011,000 in 1995, and $1,449,000 in 1994. The increase in
1996 was the result of net income for the year of $2,009,000, $3,969,000 from
issuance of common stock in the acquisition of Town & Country, $208,000 in
payments upon the exercise of stock options and $162,000 in payments for the
issuance of shares pursuant to employee benefit plans. The increases were
partially offset by a net reduction in the net unrealized value in the
available-for-sale investment portfolio of $381,000 and cash payments of $86,000
paid in lieu of fractional shares on stock dividends and for cash dividends. The
1995 increase was the result of a $667,000 increase in the unrealized gain in
the available-for-sale investment portfolio, net income of $335,000 and $15,000
received upon the exercise of stock options.
Federal regulations establish guidelines for calculating risk-adjusted
capital ratios. These guidelines establish a systematic approach of assigning
risk weights to bank assets and off-balance sheet items making capital
requirements more sensitive to differences in risk profiles among banking
organizations. Under these regulations, banks and bank holding companies are
required to maintain a risk-based capital ratio of 8.0%; that is, "Tier 1" plus
"Tier 2" capital must equal at least 8% of risk-weighted assets plus off-balance
sheet items, and Tier 1 capital (primarily shareholders' equity) must constitute
at least 50% of qualifying capital. Tier 1 capital consists primarily of
shareholders' equity excluding good will, and Tier 2 capital includes
subordinated debt and, subject to a limit of 1.25% of risk-weighted assets, the
allowance for loan losses. It is the Company's intention to maintain risk-based
capital ratios at levels characterized as "well capitalized" for banking
organizations: Tier 1 risk-based capital of 6% or above and total risk-based
capital at 10% or above. As of March 31, 1997 and December 31, 1996 the Company
had Tier 1 risk-based capital ratios of 9.04% and 8.95%, respectively, and total
risk-based capital ratios of 10.27% and 10.20%, respectively. Based on
preliminary information, the Company expects its Tier 1 risk-based and total
risk-based capital ratios as of June 30, 1997, to be 8.44% and 9.45%,
respectively.
In addition, regulators have adopted a minimum leverage capital ratio
standard. This standard is designed to ensure that all financial institutions,
irrespective of their risk profile, maintain minimum levels of core capital,
which by definition excludes the allowance for loan losses. These minimum
standards for top-rated institutions may be as low as 3%; however, regulatory
agencies have stated that most institutions should maintain ratios at least 1 to
2 percentage points above the 3% minimum. It is the Company's intention to
maintain the leverage ratio for County Bank above the 3% minimum for "well
capitalized" banks. As of March 31, 1997 and December 31, 1996, the Company's
leverage capital ratio equaled 7.19% and 7.31%, respectively. The decrease was
due primarily to growth in the Company's assets. Based on preliminary
information, the Company expects its leverage ratio as of June 30, 1997 to be
6.85%.
For a presentation of the actual and pro forma capitalization of the Company
and County Bank, see "Capitalization."
As indicated, capital levels for the Company remain above established
regulatory capital requirements. Failure to meet minimum capital requirements
can trigger mandatory and possibly additional discretionary actions by the
regulators that, if undertaken, could have a material effect on the Company's
financial statements and operations. See "Regulation and Supervision."
In addition, in March 1997, in response to regulatory concerns about the
Bank's level of nonperforming assets, the Bank's Board of Directors adopted a
resolution to maintain a ratio of shareholder's equity to total assets of 6.75%
upon reducing its loans classified as "Substandard" or "Doubtful" as of December
2, 1996, from $11,800,000 to no more than $8,555,000 by June 30, 1997, and to
maintain a ratio of at least 6.50% upon reducing such loans to $7,800,000 by
December 31, 1997. At March 31, 1997, the Bank's assets classified as
"Substandard" or "Doubtful" were $10,080,000.
At June 30, 1997, loans that were classified "Substandard" and "Doubtful" as
of December 2, 1996 were reduced to $4.2 million, below both the $8.6 million
target level for June 30, 1997 and the $7.8 million target level for December
31, 1997. Accordingly, the Bank's commitment is to maintain a total equity to
total assets ratio of no less than 6.50%. However, in the second quarter of
1997, the Company incurred
39
<PAGE>
losses primarily as a result of making provisions of $3,236,000 to the allowance
for loan losses, which reduced the Bank's ratio of total equity to total assets
at June 30, 1997 to 6.15%, which was below the 6.50% commitment. See "Recent
Developments." The Bank has discussed this situation with its regulators, which
have agreed to forbear from taking any action against the Bank as a result of
its failure to meet the capital ratio commitment. The regulators have not waived
or given forbearance on this commitment for the Bank at September 30, 1997. No
assurances can be given that any such waiver or forbearances will be given in
the future should the Ban fail to meet its commitments in the future.
IMPACT OF INFLATION
The financial statements and related financial information presented in this
Prospectus have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance that the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or same magnitude as the price of goods and services.
40
<PAGE>
BUSINESS OF CAPITAL CORP OF THE WEST
THE FOLLOWING BUSINESS SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS.
GENERAL
Capital Corp was incorporated in 1995 under the California General
Corporation Law for the principal purpose of becoming the holding company for
County Bank, which is its primary asset, and to engage in activities permitted
for a bank holding company. It is registered as a bank holding company under the
BHC Act. It shares corporate headquarters with County Bank at 1160 West Olive
Avenue, Merced, California 95348. Its telephone number is (209) 725-2269. The
activities of Capital Corp are subject to the regulatory supervision of the FRB.
Capital Corp may engage, directly or through subsidiary corporations, only in
those activities closely related to banking which are specifically permitted
under the BHC Act. See "Regulation and Supervision--Bank Holding Company Act."
Capital Corp conducts nearly all of its operations through two operating
subsidiary financial institutions, County Bank and Town & Country.
COUNTY BANK
County Bank was organized and began operations in 1977 as County Bank of
Merced, a California state banking corporation. In November 1992, the Bank
changed its legal name to County Bank. The Bank's deposits are insured by the
FDIC up to applicable limits. It is not a member of the Federal Reserve System.
The Bank engages in the general commercial banking business primarily in
Merced, Stanislaus and Tuolumne counties from its main banking office in Merced,
California, and its eight other full-service branch offices located in Merced,
Atwater, Los Banos, Hilmar, Sonora, Modesto and Turlock. Although approved to be
a full service branch banking office, the administrative headquarters facility
is currently used solely as corporate headquarters.
The Bank conducts a general commercial banking business including the
solicitation of demand, savings and time deposits and commercial, real estate,
personal, home improvement, home mortgage, automobile, credit card and other
installment and term loans. The Bank offers travelers' checks, safe deposit
boxes, banking-by-mail, drive-up facilities, 24-hour automated teller machines,
and other customary banking services to its customers. The Bank also offers
investment products, such as mutual funds, annuities, stocks and bonds, through
Aegon USA Securities, Inc. Investment products are not FDIC-insured. Management
believes that there is no significant demand for trust services in the Bank's
service area, and the Bank does not operate a trust department nor does it offer
these services through a correspondent banking relationship to its customers.
Most of the Bank's business originates from individuals, businesses and
professional firms located in and around its service area.
TOWN & COUNTRY
Town & Country is an industrial loan company, also known as a thrift and
loan company, originally organized under California law in 1957. Its
headquarters and main banking office are in Turlock, California, and it has
branches in Modesto, Visalia and Fresno. Town & Country conducts a general
consumer lending and deposit-taking business; it specializes in direct loans to
the public and the purchase of financing contracts principally from automobile
dealerships and furniture stores. At March 31, 1997, it had assets of $31
million, loans of $22 million and deposits of $25 million.
41
<PAGE>
Thrift and loan companies are subject to examination, regulation and control
by the FDIC and the Department. Its deposits (technically known as investment
certificates or certificates of deposit rather than deposits) are insured by the
FDIC up to applicable limits. Under California law, Town & Country may issue
investment certificates and certificates of deposit in an aggregate amount up to
17 times its capital and surplus. It is also subject to FDIC capital adequacy
guidelines.
PREMISES
The Company's headquarters is currently located at 1160 West Olive Street,
Merced, California. The Company is constructing a new headquarters building in
downtown Merced at the corner of M and Main Streets. This facility will house
the corporate headquarters, the Merced main office of County Bank, central
administrative support and certain loan departments. The Company expects
construction to be complete in the third quarter of 1997. The following table
sets forth information about the Company's banking offices, including the
Branches to be acquired if the Branch Acquisition is completed.
<TABLE>
<CAPTION>
IN OPERATION
LOCATION TYPE OF OFFICE OWNED/LEASED SINCE
- ----------------------------------------- ------------------ ------------- ----------------
<S> <C> <C> <C>
COUNTY BANK
490 West Olive, Merced................... Main branch Owned 1977
606 West 19th Street, Merced (1)......... Branch Leased 1991
1160 West Olive Street, Merced (1)....... Administrative Leased 1986
office
1170 West Olive, Merced (1).............. Real estate loan Leased 1992
department/
administrative
offices
Atwater.................................. Branch Owned 1981
Los Banos................................ Branch Leased 1989
Hilmar................................... Branch Owned 1993
Turlock.................................. Branch Owned 1995
Sonora................................... Branch Leased 1996
3508 McHenry, Modesto.................... Branch Leased 1996
1003 12th Street, Modesto................ Branch Leased 1996
Dos Palos (2)............................ Branch Owned 1997
Livingston (2)........................... Branch Owned 1997
Mariposa (2)............................. Branch Owned 1997
TOWN & COUNTRY
Turlock.................................. Main office Leased 1980
Modesto.................................. Branch Leased 1989
Visalia.................................. Branch Leased 1993
Fresno................................... Branch Leased 1996
</TABLE>
- ------------------------
(1) To be relocated into the new headquarters in downtown Merced in late 1997.
(2) To be acquired as part of the Branch Acquisition.
Aggregate annual rentals for the Company and its subsidiaries for leased
premises were $391,000 for the year ended December 31, 1996. Aggregate annual
rental commitments for leased premises for 1997 are $451,000.
42
<PAGE>
INVESTMENT PORTFOLIO
The following table sets forth the fair value of securities available for
sale and the book and market values of securities held for maturity at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
AT MARCH 31, 1997 1996 1995 1994
-------------------- -------------------- -------------------- --------------------
BOOK MARKET BOOK MARKET BOOK MARKET BOOK MARKET
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and U.S.
Government agency........... $ 5,599 $ 17,711 $ 22,521 $ 20,593
State and political
subdivisions................ 4,294 4,271 4,297
Mortgage-backed securities.... 34,669 20,751 17,932
Other securities.............. 1,524 645 552 487
--------- --------- --------- ---------
Total......................... $ 46,086 $ 43,378 $ 45,302 $ 21,080
--------- --------- --------- ---------
HELD TO MATURITY
U.S. Treasury and U.S.
Government agency........... $ 11,456 $ 11,058 -- -- $ 8,175 $ 7,989
State and political
subdivisions................ -- -- -- -- 6,571 6,567
--------- --------- --------- --------- --------- ---------
Total......................... $ 11,456 $ 11,058 -- -- $ 14,746 $ 14,556
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
The following table sets forth the maturities of the Company's investment
securities at March 31, 1997 and the weighted average yields of such securities
calculated on the basis of the cost and effective yields based on the scheduled
maturity of each security. Maturities of mortgage-backed securities are
stipulated in their respective contracts. However, actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call prepayment penalties. Yields on
municipal securities have not been calculated on a tax-equivalent basis.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
---------------------------------------------------------------------------------------------------------
AFTER ONE BUT WITHIN AFTER FIVE BUT WITHIN
WITHIN ONE YEAR FIVE YEARS 10 YEARS AFTER 10 YEARS TOTAL
---------------------- ---------------------- ---------------------- ---------------------- ---------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
--------- ----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and U.S.
Government agency.... $ -- -- $ 4,299 7.01% $ 978 7.55% $ 322 7.75% $ 5,599
State and political
subdivisions......... 1,163 7.51% 2,309 4.54 822 4.87 -- -- 4,294
Mortgage-backed
securities........... 5,096 6.94 309 7.74 300 8.10 28,964 7.35 34,669
Equity securities...... -- -- -- -- 1,524
--------- --------- --------- --------- ---------
Total.................. $ 6,259 $ 6,917 $ 2,100 $ 29,286 $ 46,086
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
HELD TO MATURITY
U.S. Treasury and U.S.
Government agency.... -- -- -- -- $ 7,054 6.94% $ 4,402 7.41% $ 11,456
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
In the above table, mortgage-backed securities are shown repricing at the
time of maturity rather than in accordance with their principal amortization
schedules. The Company does not own securities of a single issuer whose
aggregate book value is in excess of 10% of its total equity.
43
<PAGE>
LENDING ACTIVITIES
GENERAL. County Bank originates, purchases and sells loans, or purchases
and sells participating interests in loans. See "Lending Procedures and Loan
Approval Process" for a description of applicable regulations which limit
lending in relation to shareholders' equity. County Bank originates, purchases
and participates in loans for its own portfolio and for sale in the secondary
market. Lending activities include the origination and purchase of commercial
loans (including Small Business Administration loans and accounts receivable
loans), agricultural loans, real estate construction loans, real estate mortgage
loans and consumer loans.
COMMERCIAL LOANS
GENERAL. County Bank provides intermediate and short-term commercial loans
that are either unsecured, partially secured or fully secured. The majority of
these loans are in Merced, Stanislaus and Tuolumne counties. Loan maturities are
normally 12 months with a complete re-analysis required prior to considering any
extension. Depending on the creditworthiness of the business, certain types of
open-ended loans to $100,000 and non-open-ended reviewable products are also
available. These loans are made to any size business from a sole proprietorship
to a corporation. In general, it is the intent of County Bank to take collateral
whenever possible regardless of the loan purpose. Collateral may include liens
on inventory, accounts receivable, fixtures and office furniture and equipment
and, in some cases, leasehold improvements. As a matter of policy, the Bank
requires all principals of a business to be co-obligors on all loan instruments
and all significant stockholders of corporations to execute a specific debt
guaranty. All borrowers must demonstrate the ability to service and repay not
only County Bank debt but all outstanding business debt, exclusive of
collateral, on the basis of historical earnings and/or reliable projections.
SBA LOANS. County Bank's SBA Loan Department originates and funds loans
qualifying for guarantees issued by the United States Small Business
Administration (the "SBA"), an independent agency of the Federal government. The
SBA guarantees on such loans currently range from 75% to 90% of the principal
and accrued interest. Under certain circumstances, the guarantee of principal
and interest may be less than 75%, as the maximum guarantee in most loans
originated by County Bank is $750,000, and the guaranteed percentage is less
than 75% for loans over $1.0 million. SBA loans are generally made to small and
medium-size businesses. County Bank typically requires that SBA loans be secured
by first or second deeds of trust on real property, and occasionally County Bank
also obtains additional collateral such as personal property or other real
property. SBA loans have terms ranging from seven to 25 years depending on the
use of the proceeds. County Bank generally limits the amount available to any
one borrower under this program to $1.0 million. To qualify for an SBA loan, a
borrower must demonstrate the capacity to service and repay the loan exclusive
of the collateral on the basis of historical earnings and/or reliable
projections. Those portions of the loans that remain with the Bank and those
that have not yet been sold are included in the loan category "Commercial" in
the loan portfolio table.
ACCOUNTS RECEIVABLE LOANS. County Bank provides accounts receivable
financing for small and medium-size businesses within its service area. To
facilitate this type of financing, County Bank contracts with Business
Manager/Private Business, Inc., which provides the computer program that
provides receivable accounting and reconcilement and by which County Bank
manages and supervises this financing facility.
Once the creditworthiness, integrity and financial capacity of the business
have been determined, County Bank then qualifies the eligibility of the specific
business's accounts receivable. Typically, eligible accounts receivable are
those receivables that are paid current to 60 days. County Bank advances 90% of
the eligible receivables directly to the business, retaining 10% in a reserve
account assigned to the specific business customer in order to cover any future
unanticipated credit losses. Receivables that were eligible at inception but
which have become delinquent beyond 60 days are also charged back to the
business customer through the reserve account.
44
<PAGE>
While the business customer retains full ownership of all accounts
receivable, County Bank provides direct billing and collection services.
Payments are generally received directly by County Bank and applied to the
outstanding balance of the accounts receivable line of credit. Each business
customer using an accounts receivable line of credit is reviewed annually for
ongoing financial capacity and viability, performance and accounts receivable
quality. The accounts receivable line of credit financing facility relies
heavily on the quality of the business customer's accounts receivable, which
limits the financial risks associated with traditional short-term business
financing. These loans are included in the loan category "Commercial" in the
loan portfolio table.
At March 31, 1997, the total of all commercial loans was $31,783,000 or
16.9% of total loans.
AGRICULTURAL LOANS. County Bank is located in the heart of the San Joaquin
Valley of Central California, a large and diverse provider of agricultural
products. Accordingly, County Bank provides agricultural loans for (i) short
term crop production and/or equipment financing, (ii) short and intermediate
term financing of dairy operations and (iii) intermediate and long-term
agricultural real estate financing. The preponderance of agricultural real
estate loans are originated, underwritten and packaged by the Bank and either
sold to the secondary market through the Prudential Insurance Company of America
or the Farmers Home Administration or direct-funded by investors. Generally,
loans are made to owner-operator agricultural borrowers whose principal place of
business is located within 75 miles of any of County Bank's branch offices.
County Bank strives to provide agricultural financing to those borrowers who
exhibit the highest level of credit quality. In doing so, County Bank evaluates
agricultural borrowers based primarily on their historical profitability, level
of experience in their particular agricultural industry, overall financial
capacity and the availability of secondary collateral in order to withstand
associated economic and natural variations common to this industry. County Bank
generally requires anticipated cash flow to cover debt service on agricultural
loans by a minimum ratio of 1.20 to 1. Because agricultural loans present a
higher level of risk associated with events caused by nature, County Bank
routinely makes on-site visits and inspections in order to monitor and identify
such risks. No assurance can be given that these procedures will protect the
Bank from the inherent risks of agricultural lending. See "Risk Factors--General
Lending Risks" and "--Asset Quality" and "Business of Capital Corp of the
West--External Factors Affecting Asset Quality."
At March 31, 1997, the total of all agricultural loans was $39,111,000 or
20.8% of total loans.
REAL ESTATE CONSTRUCTION LOANS. County Bank finances the construction of
residential, commercial and industrial properties. In order to limit risks
inherent in its construction loan portfolio, County Bank has restricted such
lending to owner-builder construction loans. No assurance can be given
pertaining to future conditions relating to the local economy nor its effect on
the collateral values of such loans. See "Risk Factors--General Lending Risks"
and "--Asset Quality."
New construction loans typically have maturities of one year or less, have a
floating rate of interest based on County Bank's base lending rate and are made
primarily to owner/builder users with a minimum cash equity of 20% of project
cost. County Bank's construction loans are generally secured by first mortgages
on the underlying real estate and have loan-to-value ratios that generally are
intended not to exceed 70%. All such loans provide for recourse against the
borrower or a guarantor in the event of a default. The loan agreements generally
require County Bank to advance funds for fees. The amount of the loan generally
provides borrowers with sufficient funds to pay the interest on the loan during
the anticipated construction period since interest is considered part of the
total cost of the property. County Bank does not typically commit to make the
permanent loan on the property. County Bank does not joint venture or take an
equity interest in connection with its construction lending.
Construction loans involve additional risks attributable to the fact that
loan funds are advanced upon the security of a project under construction, and
the project is of uncertain value prior to its completion.
45
<PAGE>
Because of the uncertainties inherent in estimating construction costs, the
market value of the completed project (which is often beyond the control of the
borrower), and the effects of governmental regulation on real property, it can
be difficult to accurately evaluate the total funds required to complete a
project and the related loan-to-value ratio. As a result of these uncertainties,
construction lending often involves the disbursement of substantial funds with
repayment dependent, in part, on the success of the ultimate project rather than
the ability of the borrower or guarantor to repay principal and interest. If
County Bank is forced to foreclose on a project prior to or at completion due to
a default, there can be no assurance that County Bank will be able to recover
all of the unpaid balance of, and accrued interest on, the loan as well as the
related foreclosure and holding costs. In addition, County Bank may be required
to fund additional amounts to complete a project and may have to hold the
property for an indeterminable period of time. County Bank has underwriting
procedures designed to identify what it believes to be acceptable levels of risk
in construction lending. No assurance can be given that these procedures will
prevent losses arising from the risks described above.
At March 31, 1997, real estate construction loans totaled $14,796,000 or
7.9% of total loans.
REAL ESTATE MORTGAGE LOANS
COMMERCIAL MORTGAGE LOANS. County Bank provides intermediate and long-term
commercial real estate loans. Collateral includes first deeds of trust on real
property. Typically, real estate collateral is owner-occupied and the value is
supported by formal appraisals in accordance with applicable regulations. The
majority of the properties securing these loans are located in Merced,
Stanislaus and Tuolumne counties.
County Bank also provides commercial real estate loans principally secured
by owner-occupied/rental commercial and industrial buildings. Generally, these
types of loans are made for a period of up to five to seven years, with a
loan-to-value ratio of 70% or less, using an adjustable rate indexed to County
Bank's base lending rate or, to a lesser extent, the prime rate (as appearing in
the West Coast edition of the WALL STREET JOURNAL). Fixed rate loans are also
offered, but rate adjustments are typically required in intervals of one to five
years. Amortization schedules for commercial loans generally do not exceed 20
years.
Payments on loans secured by such properties are often dependent on
successful operation or management of the properties. Repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. County Bank seeks to minimize these risks in a variety of
ways, including limiting the size of such loans and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan. When possible, County Bank also
obtains loan guaranties from financially capable parties. Substantially all of
the properties securing County Bank's real estate loans are inspected by County
Bank's lending personnel before the loan is made.
County Bank requires title insurance insuring the status of its lien on all
of the real estate secured loans when a first trust deed on the real estate is
taken as collateral. County Bank also requires that fire and extended coverage
casualty insurance (and, if the property is in a flood zone, flood insurance) is
maintained in an amount at least equal to the outstanding loan balance, subject
to applicable law that in some circumstances may limit the required amount of
hazard insurance to the cost to replace the insured improvements. County Bank's
lending policies generally limit the loan-to-value ratio on mortgage loans
secured by owner-occupied properties to 70% of the lesser of the appraised value
or the purchase price. No assurance can be given that these procedures will
protect the Bank against losses on loans secured by real property. See "Risk
Factors--General Lending Risks" and "Business of Capital Corp of the West--
External Factors Affecting Asset Quality."
RESIDENTIAL MORTGAGE LOANS. County Bank currently packages but does not
fund both fixed-rate mortgage loans and adjustable-rate mortgage loans ("ARMs")
secured by one-to-four family properties with amortization schedules of 15 to 30
years and maturities of up to five years. The loan fees charged,
46
<PAGE>
interest rates and other provisions of County Bank's ARMs and fixed rate loans
are determined by the direct lender, in most cases either G.N. Mortgage Company
or North American Mortgage Company, and the Bank receives fee income for
packaging the loans.
At March 31, 1997, the total of all mortgage real estate loans, excluding
construction real estate loans, was $59,869,000 or 31.8% of total loans.
CONSUMER LOANS. Consumer loans are extended for a variety of purposes,
including secured and unsecured personal loans, the purchase of automobiles,
home improvement, equity lines, overdraft protection loans, unsecured lines of
credit and credit cards. Consumer loan underwriting standards include an
examination of the applicant's credit history and payment record on other debts
and an evaluation of their ability to meet existing obligations and payments on
the proposed loan. Although creditworthiness of the applicant is of primary
importance, the underwriting process also includes a comparison of the value of
the security, if any, to the proposed loan amount.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Such loans may also give rise to claims and defenses
by a consumer loan borrower against an assignee of such loans such as County
Bank, and a borrower may be able to assert against such assignee claims and
defenses that it has against the seller of the underlying collateral. See "Risk
Factors-- General Lending Risks."
Loans made by Town & Country are primarily consumer loans. It specializes in
direct consumer loans and the purchase of financing contracts principally from
automobile dealerships and furniture stores. Generally, loans are secured by
various forms of collateral. The collateral consists primarily of automobiles
and flooring inventory. A small portion of the Company's loans are not supported
by specific collateral but rather by the general financial strength of the
borrower. In addition, the contracts are purchased from the dealers with
recourse to the dealer, and dealer reserves are established for each borrower.
Consumer loans at Town & Country as of March 31, 1997 were $19,725,000.
As of March 31, 1997, the total of all consumer loans held by the Company
was $42,496,000 or 22.6% of total loans.
LENDING PROCEDURES AND THE LOAN APPROVAL PROCESS
Loan applications may be approved by the Board of Directors' Loan Committee
(the "DLC") or County Bank's Credit Policy Committee (the "CPC"), which is
comprised of Bank's management and lending officers, or by individual lending
officers to the extent of their loan authority. Individual lending authority is
granted to the Chief Executive Officer, the Chief Operating Officer, the Chief
Credit Officer, branch and department managers and other key lending officers.
Loans for which direct and indirect borrower liability would exceed an
individual's lending authority are referred to the CPC or, for those in excess
of CPC's approval limits, to the DLC.
As of March 31, 1997, County Bank's authorized legal lending limits were
$3.0 million for unsecured loans plus an additional $1.9 million for certain
secured loans. Legal lending limits are calculated in conformance with
California law, which prohibits a bank from lending to any one individual or
entity or its related interests an aggregate amount which exceeds 15% of primary
capital plus the allowance for loan
47
<PAGE>
losses on an unsecured basis (plus an additional 10% on a secured basis). County
Bank's primary capital plus allowance for loan losses at March 31, 1997 totaled
$24.5 million. County Bank's largest borrower as of March 31, 1997 had an
aggregate loan liability totaling $3.4 million in secured loans and $400,000 in
outstanding letters of credit.
The highest individual lending authority in County Bank is the combined
administrative lending authority for unsecured and secured lending of $750,000,
which requires the approval and signatures of any two of the Chief Executive
Officer, the Chief Operating Officer, the Chief Credit Officer or the Credit
Administrator. The second highest lending authority is $500,000 for each of the
Chief Executive Officer, the Chief Operating Officer, the the Chief Credit
Officer or Credit Administrator, each acting singly. All other individual
lending authority is substantially less, with the next largest authority for
secured loans being $250,000.
Lending limits are authorized for the Chief Executive Officer, the Chief
Operating Officer and the Chief Credit Officer by the DLC through authority
delegated by the Board of Directors of County Bank. The Chief Credit Officer is
responsible for evaluating the authority limits for individual credit officers
and, with the concurrence of the DLC, recommends lending limits for all other
officers to the Board of Directors for approval.
The review of each loan application includes the applicant's credit history,
income level and cash flow analysis, financial condition and the value of any
collateral to secure the loan (which, in the case of real estate loans over a
certain amount, utilizes a review of an appraisal report prepared by an
independent bank approved appraiser).
With respect to any approved commercial, agricultural or real estate loan,
County Bank generally issues a written commitment to the applicant, setting
forth the terms under which the loan will be extended.
The Company seeks to mitigate the risks inherent in its loan portfolio by
adhering to certain underwriting practices. These practices include analysis of
prior credit histories, financial statements, tax returns and cash flow
projections of its potential borrowers, valuation of collateral based on reports
of independent appraisers and audits of accounts receivable or inventory pledged
as security.
LOAN PORTFOLIO
The following table shows the composition of the Company's loan portfolio at
the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------ ---------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ---------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial...................................... $ 31,783 $ 27,857 $ 20,374 $ 15,229 $ 16,896 $ 24,094
Agricultural.................................... 39,111 43,929 45,187 40,598 38,029 32,997
Real estate--construction....................... 14,796 13,923 12,006 11,726 9,143 7,131
Real estate--mortgage........................... 59,869 57,098 42,128 34,743 32,984 21,338
Consumer........................................ 42,496 40,440 14,039 11,304 10,072 11,775
------------ ---------- ---------- ---------- ---------- ---------
Total....................................... $ 188,055 $ 183,247 $ 133,736 $ 113,600 $ 107,124 $ 97,335
------------ ---------- ---------- ---------- ---------- ---------
------------ ---------- ---------- ---------- ---------- ---------
</TABLE>
48
<PAGE>
The following tables show the maturity distribution of the loan portfolio at
March 31, 1997, and December 31, 1996, and the loan portfolio's sensitivity to
changes in interest rates.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
------------------------------------------------------
AFTER 1 BUT
WITHIN 5 AFTER 5
WITHIN 1 YEAR YEARS YEARS TOTAL
------------- ------------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and agricultural
Loans with floating interest rates..................... $ 42,617 $ 14,847 $ 5,305 $ 62,769
Loans with fixed interest rates........................ 412 6,687 1,030 8,129
------------- ------------- ------------ ----------
Subtotal............................................. 43,029 21,534 6,335 70,898
------------- ------------- ------------ ----------
Real estate--construction
Loans with floating interest rates..................... 7,650 5,898 -- 13,548
Loans with fixed interest rates........................ 335 -- 913 1,248
------------- ------------- ------------ ----------
Subtotal............................................. 7,985 5,898 913 14,796
------------- ------------- ------------ ----------
Real estate--mortgage.................................... 5,784 40,777 13,307 59,868
Consumer................................................. 5,251 32,206 5,036 42,493
------------- ------------- ------------ ----------
Total................................................ $ 62,049 $ 100,415 $ 25,591 $ 188,055
------------- ------------- ------------ ----------
------------- ------------- ------------ ----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------------------------
AFTER 1 BUT
WITHIN 5 AFTER 5
WITHIN 1 YEAR YEARS YEARS TOTAL
------------- ------------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and agricultural
Loans with floating interest rates..................... $ 39,515 $ 24,150 $ 4,337 $ 64,002
Loans with fixed interest rates........................ 630 6,116 1,038 7,784
------------- ------------- ------------ ----------
Subtotal............................................. 40,145 30,266 5,375 71,786
------------- ------------- ------------ ----------
Real estate-construction
Loans with floating interest rates..................... 5,419 4,528 2,542 12,489
Loans with fixed interest rates........................ 674 32 728 1,434
------------- ------------- ------------ ----------
Subtotal............................................. 6,093 4,560 3,270 13,923
------------- ------------- ------------ ----------
Real estate-mortgage..................................... 4,384 39,845 12,809 57,098
Consumer................................................. 3,909 33,192 3,339 40,440
------------- ------------- ------------ ----------
Total................................................ $ 54,531 $ 103,863 $ 24,793 $ 183,247
------------- ------------- ------------ ----------
------------- ------------- ------------ ----------
</TABLE>
OFF-BALANCE SHEET COMMITMENTS
The following table shows the distribution of the Company's undisbursed loan
commitments at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------ --------------------
1997 1996 1995
------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate-construction...................................................... $ 6,720 $ 6,305 $ 4,232
Standby letters of credit..................................................... 2,267 3,213 2,465
Other......................................................................... 41,391 36,677 21,624
------------ --------- ---------
Total..................................................................... $ 50,378 $ 46,195 $ 28,321
------------ --------- ---------
------------ --------- ---------
</TABLE>
49
<PAGE>
OTHER INTEREST-EARNING ASSETS
The following table relates to other interest-earning assets not disclosed
previously for the dates indicated. This item consists of a salary continuation
plan for the Company's executive management and deferred retirement benefits for
participating board members. The plan is informally linked with universal life
insurance policies for the salary continuation plan. Income from these policies
is reflected in noninterest income.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------- -----------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash surrender value of life insurance.................. $ 3,172 $ 3,134 $ 1,290 $ 288 -- --
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans, loans 90 days or more past
due, restructured loans and other real estate owned. The following table
summarizes the Company's nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------- -----------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans.................................... $ 5,101 $ 4,968 $ 4,626 $ 653 $ 1,019 $ 1,064
Accruing loans past due 90 days or more............. 1,565 600 224 46 64 145
Other real estate owned............................. 1,466 1,466 47 -- -- 676
------ --------- --------- --------- --------- ---------
Total........................................... $ 8,132 $ 7,034 $ 4,897 $ 699 $ 1,083 $ 1,885
------ --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- ---------
</TABLE>
Nonperforming loans are those which the borrower fails to perform in
accordance with the original terms of the obligation and include loans on
nonaccrual status, loans past due 90 days or more and restructured loans. The
Company generally places loans on nonaccrual status and accrued but unpaid
interest is reversed against the current year's income when interest or
principal payments become 90 days or more past due unless the outstanding
principal and interest is adequately secured and, in the opinion of management,
is deemed in the process of collection. Interest income on nonaccrual loans is
recorded on a cash basis. Payments may be treated as interest income or return
of principal depending upon management's opinion of the ultimate risk of loss on
the individual loan. Cash payments are treated as interest income where
management believes the remaining principal balance is fully collectible.
Additional loans not 90 days past due may also be placed on nonaccrual status if
management reasonably believes the borrower will not be able to comply with the
contractual loan repayment terms and collection of principal or interest is in
question.
A "restructured loan" is a loan on which interest accrues at a below market
rate or upon which certain principal has been forgiven so as to aid the borrower
in the final repayment of the loan, with any interest previously accrued, but
not yet collected, being reversed against current income. Interest is reported
on a cash basis until the borrower's ability to service the restructured loan in
accordance with its terms is established. The Company had no restructured loans
as of the dates indicated in the above table.
Interest income on loans on nonaccrual status during the three months ended
March 31, 1997, and the year ended December 31, 1996, that would have been
recognized if the loans had been current in accordance with their original terms
was approximately $127,000 and $497,000, respectively. In 1995, 1994, 1993 and
1992, the amounts of such interest income were not material.
The Company had nonperforming assets at March 31, 1997 of $8,132,000
compared with $7,034,000 at December 31, 1996, $4,897,000 at December 31, 1995
and $699,000 at December 31, 1994. The increase to
50
<PAGE>
$1,565,000 in accruing loans 90 days past due at March 31, 1997, compared with
$600,000 at December 31, 1996 was a result in part of a delay in the renewal of
$1,145,000 in agricultural loans by March 31, 1997. By April 30, 1997, the
renewal process was complete and accruing loans 90 days past due were reduced by
approximately $900,000. Nonperforming loans that were secured by first deeds of
trust on real property were $3,598,000 at March 31, 1997, $3,626,000 at December
31, 1996, $3,286,000 at December 31, 1995 and $422,000 at December 31, 1994.
Other forms of collateral such as inventory and equipment secured the remaining
nonperforming loans as of each date. No assurance can be given that the
collateral securing nonperforming loans will be sufficient to prevent losses on
such loans.
The increase in nonperforming assets at December 31, 1996 from the level at
December 31, 1995 was attributable primarily to a commercial real estate loan, a
purchased portfolio of lease receivables, and two agricultural real estate
properties acquired through foreclosure.
In late 1995, a commercial real estate development loan was placed on
nonaccrual status. At March 31, 1997, the balance of this loan was $3,458,000 or
52% of nonperforming loans at such date. This loan is secured by a second lien
(subject to the first lien of project-related municipal development bonds and
taxes and assessments) on 10 improved commercial lots and one commercial
building and by a second lien on two fully occupied commercial buildings in
Sonora, California, and is guaranteed by the principals of the borrowing entity.
The owner is developing the property as an office park. The Company had
specifically allocated $1,725,000 of its allowance for loan losses as of March
31, 1997 to this loan. See "-- Allowance and Provisions for Loan Losses." In the
second quarter of 1997, the project funded by the loan become involved in
litigation among other parties, and development was suspended for an
undetermined period. Without the imminent prospect for completion of the
project, the Company made the judgment that its collateral position, subordinate
in large part to bonds used to finance the project, should conservatively not be
accorded any value and accordingly charged off the entire balance of the loan.
The company will nonetheless vigorously pursue efforts to realize a potential
recovery on the loan.
As a result of the charge-off and other developments regarding nonperforming
loans, the Company had nonperforming loans at June 30, 1997 of $2,377,000,
representing a 64% decrease from March 31, 1997. At June 30, 1997, nonperforming
assets represented .95% of total assets, and nonperforming loans represented
1.22% of total loans.
County Bank purchased a portfolio of lease receivables in 1994. The company
that packages and sells these leases to financial institutions filed a Chapter
11 reorganization in April 1996 and its chief financial officer has been charged
by the Commission with participating in securities fraud. More than 360 banks
nationwide had acquired similar lease receivable contracts. The Bank had
$1,281,000 of these leases on nonaccrual status as of December 31, 1996. On
February 12, 1997, County Bank signed a settlement agreement in regards to this
portfolio of leases that established a projected recovery rate at 78.5% or
approximately $1,006,000. On March 31, 1997, the Bank charged off $275,000
against its allowance for loan losses and the remaining balance of $1,006,000
remains on nonaccrual. The projected recovery may not be achieved and is subject
to uncertainties, including the risk that the delinquency rate in the portfolio
might increase, that information that has been provided to the Company by third
parties about the likelihood of repayment may prove to be incorrect, that
additional fraudulent leases may be discovered in the portfolio or that
administrative expenses of the bankruptcy with priority over the Company may
exceed estimates on which the recovery projections are based. Any of these
uncertainties could reduce, in part or entirely, the amount that the Company
recovers on this portfolio.
At March 31, 1997, the Company had $1,466,000 in two agricultural properties
acquired through foreclosure in late 1996. Such properties are carried at the
lower of their estimated market value, as evidenced by independent appraisals,
or the recorded investment in the related loan, less estimated selling expenses.
At foreclosure, if the fair value of the real estate is less than the Company's
recorded investment in the related loan, a charge is made to the allowance for
loan losses. On April 30, 1997, the Company sold one of the two properties and
reduced the balance of real estate acquired through foreclosure to $416,000.
51
<PAGE>
The remaining property is expected to be sold during 1997. No assurance can be
given that the Company will sell such property in 1997 or at any time or the
amount for which such property might be sold.
In addition to property acquired through foreclosure, the Company has
investments in residential real estate lots in various stages of development in
Merced County through MAID. MAID held two separate properties for sale or
development at March 31, 1997. These investments were completely written off in
1995, although County Bank still retains title to these properties. In the
second quarter of 1997, two parcels were sold for a pre-tax gain of $511,000.
See "--Real Estate Development Activities."
The Bank closely monitors its loans classified "Substandard" or "Doubtful"
by the regulatory agencies. In March 1997, in response to a 1996 regulatory
examination, the Bank committed to reduce loans in the amount of $11,848,000
classified "Substandard" and "Doubtful" at December 2, 1996 to no more than
$8,550,000 by June 30, 1997 and to no more than $7,800,000 by December 31, 1997.
Such loans totaled $10,362,000 at March 31, 1997 and $11,185,000 at December 31,
1996. At June 30, 1997, such loans totaled $4,209,000.
Management defines impaired loans, regardless of past due status on loans,
as those on which principal and interest are not expected to be collected under
the original contractual loan repayment terms. An impaired loan is charged off
at the time management believes the collection process has been exhausted. At
March 31, 1997 and December 31, 1996, impaired loans were measured based on the
present value of future cash flows discounted at the loan's effective rate, the
loan's observable market price or the fair value of collateral if the loan is
collateral-dependent. Impaired loans at March 31, 1997 were $5,101,000 (all of
which were also nonaccrual loans), on account of which the Company had made
provisions to the allowance for loan losses of $1,756,000, including $1,725,000
on account of the commercial real estate development loan described above.
Except for loans that are disclosed above, there were no assets as of March
31, 1997, where known information about possible credit problems of borrower
causes management to have serious doubts as to the ability of the borrower to
comply with the present loan repayment terms and which may become nonperforming
assets. Given the magnitude of the Company's loan portfolio, however, it is
always possible that current credit problems may exist that may not have been
discovered by management. See "--Allowance and Provisions for Loan Losses" and
"--External Factors Affecting Asset Quality."
52
<PAGE>
ALLOWANCE AND PROVISIONS FOR LOAN LOSSES
The following table sets forth an analysis of the allowance for loan losses
and provisions for loan losses for the periods indicated.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period................ $ 2,792 $ 1,701 $ 1,701 $ 1,621 $ 1,747 $ 1,616 $ 1,699
Due to acquisition............................ -- -- 148 -- -- -- --
Provision for possible loan losses............ 240 160 1,513 228 -- 254 162
Loans charged off
Commercial and agricultural................. 341 7 518 160 206 217 250
Real estate--construction..................... -- -- -- -- -- -- --
Real estate--mortgage......................... -- -- -- -- -- -- --
Consumer...................................... 77 140 63 42 83 109
--------- --------- --------- --------- --------- --------- ---------
Total charge-offs......................... 418 13 658 223 248 300 359
Recoveries
Commercial and agricultural................. 56 9 27 66 99 145 87
Real estate--construction................... -- -- -- -- 8 -- --
Real estate--mortgage....................... -- -- -- -- -- -- --
Consumer.................................... 4 3 61 9 15 32 27
--------- --------- --------- --------- --------- --------- ---------
Total recoveries.......................... 60 12 88 75 122 177 114
--------- --------- --------- --------- --------- --------- ---------
Net charge-offs............................... 358 1 570 148 126 123 245
Balance at end of period...................... $ 2,674 $ 1,860 $ 2,792 $ 1,701 $ 1,621 $ 1,747 $ 1,616
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Average loans outstanding, gross.............. $ 184,418 $ 133,765 $ 157,098 $ 120,620 $ 110,690 $ 102,236 $ 91,458
Total loans at end of period, gross........... $ 188,055 $ 140,658 $ 183,247 $ 133,736 $ 113,600 $ 107,124 $ 97,335
Net charge-offs/average loans outstanding..... 0.19% --% 0.36% 0.12% 0.12% 0.12% 0.27%
Allowance at end of period/loans outstanding.. 1.42 1.32 1.52 1.27 1.43 1.63 1.66
Allowance/nonperforming loans................. 40.11 33.57 50.14 34.74 231.90 161.30 85.73
</TABLE>
The Company maintains an allowance for loan losses at a level considered by
management to be adequate to cover the inherent risks of loss associated with
its loan portfolio under prevailing and anticipated economic conditions. In
determining the adequacy of the allowance for loan losses, management takes into
consideration growth trends in the portfolio, examination of financial
institution supervisory authorities, prior loan loss experience for the Company,
concentrations of credit risk, delinquency trends, general economic conditions,
the interest rate environment and internal and external credit reviews. In
addition, the risks management considers vary depending on the nature of the
loan. The normal risks considered by management with respect to agricultural
loans include the fluctuating value of the collateral, changes in weather
conditions and the availability adequate water resources in the Company's local
market area. The normal risks considered by management with respect to real
estate construction loans include fluctuation in real estate values, the demand
for improved commercial and industrial properties and housing, the availability
of permanent financing in the Company's market area and borrowers' ability to
obtain permanent financing. The normal risks considered by management with
respect to real estate mortgage loans include fluctuations in the value of real
estate. Additionally, the Company relies on data obtained through independent
appraisal for significant properties to determine loss exposure on nonperforming
loans.
The balance in the allowance is affected by the amounts provided from
operations, amounts charged off and recoveries of loans previously charged off.
The Company recorded provisions for loan losses in the first three months of
1997 of $240,000 compared with $160,000 in the same period of 1996. The increase
was due to the overall growth of the loan portfolio as well as an increased
provision to reflect problem loans discussed previously. The Company made
provisions to the allowance of $1,513,000 in the year ended
53
<PAGE>
December 31, 1996 compared with $228,000 in 1995 and none in 1994. The increase
in loan loss provisions in 1996 was primarily due to increased reserves
established for a large commercial real estate loan, reserves required for a
portfolio of lease receivables purchased in 1994 and, to a lesser extent,
reserves to support the general loan growth of the Company.
The Company's charge-offs, net of recoveries, were $358,000 for the three
month period ended March 31, 1997 compared with $1,000 for the same three months
in 1996. The increase in charge-offs was primarily due to the charge-off of
$275,000 taken on the portfolio of lease receivables. The Company's charge-offs,
net of recoveries, were $570,000 in the year ended December 31, 1996 compared
with $148,000 in 1995 and $126,000 in 1994. The increase in net charge-offs for
the year ended December 31, 1996 was primarily due to the loss recognized on the
foreclosure of a real estate secured agricultural loan, the foreclosed real
estate was sold in the second quarter of 1997.
As of March 31, 1997, the allowance for loan losses was $2,674,000 or 1.4%
of total gross loans outstanding, compared with $2,792,000 or 1.5% of total
gross loans outstanding as of December 31, 1996 and $1,701,000 or 1.3% of total
gross loans outstanding as of December 31, 1995.
From 1992 to 1995, loan losses were relatively low and stable. In 1995 and
1996, the Company experienced loan problems and made provisions at levels not
previously experienced. In response to regulatory concerns over the Bank's level
of nonperforming assets, in March 1997, the Board of Directors of County Bank
adopted resolutions under which the Bank committed, among other things, to
maintain an adequate allowance for loan losses, to conduct a review prior to and
at each quarter of the adequacy of the allowance and to document the basis for
changes in the allowance.
As a result, the Company concluded that its historical method of determining
the appropriate levels for its allowance and provisions for loan losses should
be revised. The Company therefore adopted a new methodology of determining the
appropriate level of its allowance for loan losses. This method, sometimes known
as a migration analysis, applies relevant risk factors to the entire loan
portfolio, including nonperforming loans. The methodology is based, in part, on
the Bank's loan grading and classification system. The Bank grades its loans
through internal reviews and periodically subjects loans to external reviews
which then are assessed by the Bank's audit committee. Credit reviews are
performed on a monthly basis and the quality grading process occurs on a
quarterly basis. The "migration" of loans from grade to grade is then tracked to
help predict future losses and thus more accurately set allowance levels. Risk
factors applied to the performing loan portfolio are based on the Company's past
loss history considering the current portfolio's characteristics, current
economic conditions and other relevant factors. General reserves are applied to
various categories of loans at percentages ranging up to 1.5% based on the
Bank's assessment of credit risks for each category. Risk factors are applied to
the carrying value of each classified loan: (i) loans internally graded "Watch"
or "Special Mention" carry a risk factor from 1.0% to 2.0%; (ii) "Substandard"
loans carry a risk factor from 3% to 40% depending on collateral securing the
loan, if any; (iii) "Doubtful" loans carry a 50% risk factor; and (iv) "Loss"
loans are charged off 100%. In addition, a portion of the allowance is specially
allocated to identified problem credits. The analysis also includes reference to
factors such as the delinquency status of the loan portfolio, inherent risk by
type of loans, industry statistical data, recommendations made by the Company's
regulatory authorities and outside loan reviewers, and current economic
environment. Important components of the overall credit rating process are the
asset quality rating process and the internal loan review process.
At March 31, 1997, the Company's allowance for loan losses was $2,674,000,
of which $1,725,000 was specifically allocable to a particular real estate
development loan with a balance of $3,458,000. In the second quarter of 1997,
the project funded by the loan become involved in litigation among other
parties, and development was suspended for an undetermined period. Without the
imminent prospect for completion of the project, the Company made the judgment
that its collateral position, subordinate in large part to bonds used in finance
the project, should conservatively not be accorded any value and accordingly
charged off the entire balance of the loan. The Company will nonetheless
vigorously pursue efforts to realize a potential recovery on the loan.
54
<PAGE>
In response to this action and as a result of adoption of a new loan loss
reserve policy discussed previously, the Company made provisions to the
allowance for loan losses of $3,236,000 in the second quarter of 1997. At June
30, 1997, the allowance for loan losses totaled $2,268,000 or 1.16% of total
loans. The write-off substantially reduced the Company's nonperforming assets.
At June 30, 1997, nonperforming assets totaled $2,793,000 or .95% of total
assets, nonperforming loans totaled $2,377,000 or 1.22% of total loans and the
allowance for loan losses totaled 95.41% of nonperforming loans.
The allowance is based on estimates and ultimate future losses may vary from
current estimates. It is always possible that future economic or other factors
may adversely affect the Company's borrowers, and thereby cause loan losses to
exceed the current allowance. In addition, there can be no assurance that future
economic or other factors will not adversely affect the Company's borrowers, or
that the Company's asset quality may deteriorate through rapid growth, failure
to enforce underwriting standards, failure to maintain appropriate underwriting
standards, failure to maintain an adequate number of qualified loan personnel,
failure to identify and monitor potential problem loans or for other reasons,
and thereby cause loan losses to exceed the current allowance. See "Risk
Factors--General Lending Risks."
The following table summarizes a breakdown of the allowance for loan losses
by loan category and the allocation in each category as a percentage of total
loans in each category at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
MARCH 31,
1997 1996 1995 1994
------------------------ ------------------------ ------------------------ ------------------------
AMOUNT AMOUNT AMOUNT AMOUNT
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
LOANS IN LOANS IN LOANS IN LOANS IN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
agricultural....... $ 513 .72% $ 840 1.17% $ 944 1.44% $ 898 1.61%
Real estate-
construction....... 1,766 11.94 1,421 10.21 708 5.90 218 1.86
Real
estate-mortgage.... 158 .26 219 .38 -- -- 376 1.08
Consumer............. 237 .56 312 .77 49 .35 129 1.14
----------- ----------- ----------- -----------
Total.............. $ 2,674 $ 2,792 $ 1,701 $ 1,621
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
1993 1992
------------------------ ------------------------
AMOUNT AMOUNT
TO TOTAL TO TOTAL
LOANS IN LOANS IN
AMOUNT CATEGORY AMOUNT CATEGORY
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial and
agricultural....... $ 974 1.77% $ 835 1.46%
Real estate-
construction....... 317 3.47 305 4.28
Real
estate-mortgage.... 296 .90 275 1.29
Consumer............. 160 1.59 201 1.71
----------- -----------
Total.............. $ 1,747 $ 1,616
----------- -----------
----------- -----------
</TABLE>
The allocation of the allowance to loan categories is an estimate by
management of the relative risk characteristics of loans in those categories. No
assurance can be given that losses in one or more loan categories will not
exceed the portion of the allowance allocated to that category or even exceed
the entire allowance. See "Risk Factors--General Lending Risks."
EXTERNAL FACTORS AFFECTING ASSET QUALITY
As a result of the Company's loan portfolio mix, the future quality of its
assets could be affected by adverse economic trends in its region or in the
agricultural community. These trends are beyond the control of the Company.
California is an earthquake-prone region. Accordingly, a major earthquake
could result in material loss to the Company. At times the Company's service
area has experienced other natural disasters such as floods and droughts. The
Company's properties and substantially all of the real and personal property
securing loans in the Company's portfolio are located in California. The Company
faces the risk that many of its borrowers face uninsured property damage,
interruption of their businesses or loss of their jobs from earthquakes, floods
or droughts. As a result these borrowers may be unable to repay their loans in
accordance with their terms and the collateral for such loans may decline
significantly in value. The Company's service areas is a largely agricultural
region and therefore is highly dependent on a reliable supply of water for
irrigation purposes. The area obtains nearly all of its water from the run-off
of melting snow in the mountains of the Sierra Nevada to the east. Although such
sources have usually been available
55
<PAGE>
in the past, water supply can be adversely affected by light snowfall over one
or more winters or by any diversion of water from its present natural courses.
Any such natural disaster could impair the ability of many of the Company's
borrowers to meet their obligations to the Company. See "Risk Factors--Asset
Quality."
Parts of California experienced significant floods in January 1997. The
Company has completed an analysis of its collateral as a result of the recent
floods. Current estimates indicate that there were no material adverse effects
to the collateral position of the Company as a result of these events. No
assurance can be given that future flooding will not have an adverse impact on
the Company and its borrowers and depositors.
DEPOSITS
Deposits are the Company's primary source of funds. At March 31, 1997, the
Company had a deposit mix of 47% in savings deposits, 25% in time deposits and
14% in interest-bearing checking accounts and 14% in noninterest-bearing demand
accounts. Noninterest-bearing demand deposits enhance the Company's net interest
income by lowering its costs of funds.
The Company obtains deposits primarily from the communities it serves. No
material portion of its deposits has been obtained from or is dependent on any
one person or industry. The Company's business is not seasonal in nature. The
Company accepts deposits in excess of $100,000 from customers. These deposits
are priced to remain competitive. At March 31, 1997, the Company had no brokered
deposits.
The following table sets forth the average balances and the average rates
paid for the major categories of deposits for the dates indicated:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED ------------------------------------------------------------
MARCH 31, 1997 1996 1995 1994
----------------------- ----------------------- ----------------------- ----------
AMOUNT % AMOUNT % AMOUNT % AMOUNT
---------- ----------- ---------- ----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand............ $ 32,871 -- $ 30,549 -- $ 26,478 -- $ 25,326
Interest-bearing demand............... 33,368 0.94% 29,376 0.91% 26,192 0.91% 25,126
Savings............................... 112,564 3.99 104,938 4.15 91,509 4.60 66,517
Time deposits under $100,000.......... 50,809 5.27 34,408 5.26 19,073 4.84 27,259
Time deposits $100,000 and over....... 8,607 5.47 6,586 5.43 6,358 5.17 7,160
---------- --- ---------- --- ---------- --- ----------
Total deposits...................... $ 238,219 3.89 $ 205,857 3.87 $ 169,610 3.98 $ 151,388
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
<CAPTION>
%
-----------
<S> <C>
Noninterest-bearing demand............ --
Interest-bearing demand............... 0.94%
Savings............................... 3.45
Time deposits under $100,000.......... 3.82
Time deposits $100,000 and over....... 3.78
---
Total deposits...................... 3.05
---
---
</TABLE>
MATURITIES OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
Maturities of time certificates of deposits of $100,000 or more outstanding
at March 31, 1997 and December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
AT MARCH 31, 1997 AT DECEMBER 31, 1996
----------------- ---------------------
<S> <C> <C>
(IN THOUSANDS)
Three months or less................................. $ 1,915 $ 2,230
Over three to six months............................. 5,821 2,150
Over six to twelve months............................ 4,350 175
Over twelve months................................... 5,378 2,055
------- ------
Total.............................................. $ 17,464 $ 6,610
------- ------
------- ------
</TABLE>
The increase in time deposits from December 31, 1996 to March 31, 1997 was
attributable to a deposit promotion held in the recently opened Modesto branch
offices.
56
<PAGE>
REAL ESTATE DEVELOPMENT ACTIVITIES
California law allows state-chartered banks to engage in real estate
development activities. The Bank established MAID in 1987 pursuant to this
authorization. After changes in federal law effectively required that these
activities be divested as prudently as possible but in any event before 1997,
MAID reduced its activities and embarked on a plan to liquidate its real estate
holdings. In 1995 the uncertainty about the effect of the investment in MAID on
the results of future operations caused management to write off its remaining
investment of $2,881,000 in real property development.
At March 31, 1997, MAID held two real estate projects including improved and
unimproved land in various stages of development. MAID continues to develop
these projects, and any amounts realized upon sale or other disposition of these
assets above their current carrying value of zero will result in noninterest
income at the time of such sale or disposition. In the second quarter of 1997, a
number of parcels were sold resulting in noninterest income of approximately
$511,000. Although the Company expects that sale or disposition of its remaining
assets will result in some positive contribution to noninterest income at some
time in the future, no assurance can be given as to whether or when such sales
or dispositions will be completed or that the amounts, if any, that the Company
will ultimately realize on such assets or whether such amounts will exceed the
future expenses required to hold and complete development of the projects. The
amounts, if any, realized on future disposition of these properties will depend
on conditions in the local real estate market and the demand, if any, for new
development. The Company's regulatory deadline for completing its divestiture of
these assets is December 31, 2000.
COMPETITION
The Bank's primary market area consists of Merced, Stanislaus and Tuolumne
counties and nearby communities of adjacent counties. In California generally,
and in the Company's service area specifically, major banks and local regional
banks dominate the commercial banking industry. By virtue of their larger
capital bases, such institutions have substantially greater lending limits than
those of the Company, as well as more locations, more products and services,
greater economies of scale and greater ability to make investments in technology
for the delivery of financial services.
An independent bank's principal competitors for deposits and loans are other
banks (particularly major banks), savings and loan associations, credit unions,
thrift and loans, mortgage brokerage companies and insurance companies. Other
institutions, such as mutual funds, brokerage houses, credit card companies and
even retail establishments have offered new investment vehicles, such as
money-market funds, that also compete with banks. The direction of federal
legislation in recent years favors competition between different types of
financial institutions and encourages new entrants into the financial services
market, and it is anticipated that this trend will continue.
To compete with larger financial institutions in its service area, County
Bank relies upon specialized services, responsive handling of customer needs,
local promotional activity, and personal contacts by its officers, directors and
staff, compared with large multi-branch banks that compete primarily on interest
rates and location of branches. For customers whose loan demands exceed the
Bank's lending limits, County Bank seeks to arrange funding for such loans on a
participation basis with its correspondent banks or other independent commercial
banks. County Bank also assists customers requiring services not offered by the
Bank to obtain such services from its correspondent banks. The increase in
capital from the Offering will increase County Bank's lending limit and permit
it to compete with larger institutions for larger loans. No assurance can be
given that County Bank will be able to compete successfully for such loans. Even
if County Bank is successful in making such larger loans, larger and stronger
borrowers may be more creditworthy and therefore may be able to negotiate for
lower interest rates on their loans, which in turn may reduce the net interest
margin in County Bank's portfolio.
No assurance can be given that, because of customer loyalty, available
products and services or other reasons, customers in County Bank's branches will
not withdraw their business and establish a banking
57
<PAGE>
relationship with other competitors. In addition, no assurance can be given that
customers of the Branches will not seek to re-establish relationships with Bank
of America. Moreover, while the P&A Agreement prohibits the establishment of
full-service Branches by Bank of America within 10 miles of the Branches for 12
months, it does not prohibit Bank of America from opening in-store branches in
these areas. No assurance can be given that Bank of America will not compete
with the Branches by opening in-store branches or by opening full-service
branches at distances greater than 10 miles from a Branch. See "Business of
Capital Corp of the West--Competition." See "Branch Acquisition" and "Risk
Factors-- Branch Acquisition."
EMPLOYEES
As of March 31, 1997, the Company employed a total of 140 full-time
equivalent employees, including four executive officers for the Company and the
Bank. None of the Company's employees is presently represented by a union or
covered by a collective bargaining agreement. The Company believes its employee
relations are excellent. The Company expects to offer employment to
approximately 30 current Bank of America employees (17 full-time equivalents) if
the Branch Acquisition is completed. See "Branch Acquisition." Bank of America
employees are not represented by a union or covered by a collective bargaining
agreement.
LITIGATION
From time to time, the Company is involved in litigation as an incident to
its business. In the opinion of management, no pending or threatened litigation
is likely to have a material adverse effect on the Company's financial condition
or results of operations.
58
<PAGE>
MANAGEMENT
The following table provides information with respect to members of the
Board of Directors of Capital Corp. For information on stock ownership of the
directors, see "--Security Ownership of Certain Beneficial Owners and
Management."
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME/CLASS AGE DIRECTOR SINCE TERM EXPIRES DURING PAST FIVE YEARS
- --------------------------- --- ---------------- --------------- -------------------------------------------------
<S> <C> <C> <C> <C>
Lloyd H. Ahlem 67 1995 2000 Psychologist
Dorothy L. Bizzini 62 1992 2000 Owner, Bizzini Real Estate
Jerry E. Callister 53 1991(1) 2000 Partner, Callister & Hendricks, Inc., a law firm,
and Chairman and Secretary of Pacific Color
Nurseries, a wholesale nursery
Jack F. Cauwels 63 1977 1998 Vice President of Inter-West since 1996; through
1996, President, Insurance Center of Merced
John D. Fawcett 48 1995 1998 President, Fawcett Farms, Inc.
Thomas T. Hawker 54 1991 1998 President and Chief Executive Officer, Capital
Corp and County Bank
Robert E. Holl 53 1977 1999 Owner, Bob Holl Sheet Metal, an air conditioning
contractor
Bertyl W. Johnson 65 1977 1999 Tree crop farmer and nut processor
Tapan Munroe 61 1996 1999 Chief Economist, Pacific Gas & Electric Company
James W. Tolladay 65 1991 1999 President, Tolladay, Fremming & Parson, a civil
engineering consulting firm
Thomas Van Groningen 65 1997(2) 1998 President, TGV Associates, a consulting practice
primarily serving community colleges; retired
Chancellor of Los Rios Community College District
</TABLE>
- ------------------------
(1) Previously served on Board of Directors from 1977 to 1985.
(2) Appointed as of June 30, 1997.
No family relationships exist among the directors of the Bank.
No director or person nominated or chosen by the Board of Directors to
become a director of the Bank is a director of any other company with a class of
securities registered pursuant to Section 12 of the Securities and Exchange Act
of 1934, as amended.
59
<PAGE>
EXECUTIVE OFFICERS OF CAPITAL CORP AND THE BANK
Set forth below is certain information with respect to each of the executive
officers of Capital Corp and the Bank.
<TABLE>
<CAPTION>
EXECUTIVE
NAME AGE POSITIONS AND OFFICES OFFICER SINCE
- --------------------- --- -------------------------------------------------- ---------------
<S> <C> <C> <C>
Thomas T. Hawker 54 President, Chief Executive Officer and Director of 1991
Capital Corp and County Bank
Carol L. Wix 60 Executive Vice President and Chief Operating 1992
Officer of County Bank
Janey E. Boyce 36 Senior Vice President and Chief Financial Officer 1992
of Capital Corp and County Bank
Michael D. Wells 41 Senior Vice President and Chief Credit Officer of 1996
County Bank
</TABLE>
A brief summary of the background and business experience of the executive
officers is set forth below.
THOMAS T. HAWKER became the Bank's President and Chief Executive Officer in
1991 and President and Chief Executive Officer of Capital Corp in 1995. He
served as President and Chief Executive Officer of Concord Commercial Bank from
1986 to 1991. Prior to that he served in various banking positions for over 19
years.
CAROL L. WIX became the Bank's Executive Vice President in 1994 and Chief
Operating Officer in 1996. Prior to that she served as Senior Vice President and
Credit Administrator to the Bank since 1992. Prior to that she served as
Regional Vice President and Manager of First National Bank of Central California
and as the Executive Vice President and Senior Loan Officer of Pajaro Valley
Bank, which merged with First National in 1991, from 1982 to 1992. Prior to that
she served in various banking positions for over five years with Wells Fargo
Bank.
JANEY E. BOYCE became the Bank's Senior Vice President in 1996 and Chief
Financial Officer in 1992 and Capital Corp's Chief Financial Officer in 1995.
Prior to that she served as the Bank's controller for the previous six years.
She has worked for the Bank since 1984.
MICHAEL D. WELLS became County Bank's Senior Vice President and Chief Credit
Officer in August 1996. He served as the Bank's Vice President, Credit
Administration, since October 1994. Prior to that he served as Senior Vice
President of Country National Bank and in various banking positions for over 20
years.
60
<PAGE>
BENEFICIAL OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table shows the number and percentage of shares each
beneficially owned as of June 20, 1997 by directors and by the only other
shareholder of Capital Corp with 5% or more of the outstanding shares of Common
Stock.
<TABLE>
<CAPTION>
BENEFICIALLY OWNED (1)
------------------------
AMOUNT PERCENTAGE
--------- -------------
<S> <C> <C>
Lloyd H. Ahlem (2)....................................... 10,681 *
Dorothy L. Bizzini (3)................................... 27,003 1.0%
Jerry E. Callister (4)................................... 18,775 *
Jack F. Cauwels (5)...................................... 33,007 1.3%
John D. Fawcett (6)...................................... 7,225 *
Thomas T. Hawker (7)..................................... 64,392 2.4%
Robert E. Holl (8)....................................... 59,982 2.3%
Bertyl W. Johnson (9).................................... 50,943 2.3%
Tapan Munroe (10)........................................ 4,305 *
James W. Tolladay (11)................................... 19,921 *
All directors and executive officers of Capital Corp as a
group (14 in number)................................... 372,887 13.4%
</TABLE>
- ------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options or warrants currently exercisable, or exercisable within 60 days
of June 20, 1997, are deemed outstanding for computing the percentage of the
person holding such options or warrants but are not deemed outstanding for
computing the percentage of any other person. As of June 20, 1997, the
Company had a total of 2,606,478 shares of Common Stock issued and
outstanding and options exercisable for 174,003 shares within 60 days.
(2) Includes 6,606 shares held in Living Trust with wife and options exercisable
for 4,075 shares within 60 days of June 20, 1997.
(3) Includes 6,660 shares held jointly with spouse in the Atwater/Merced
Veterinary Clinic Pension Fund, 13,470 shares held by the Bizzini Family
Trust and options exercisable for 6,873 shares within 60 days of June 20,
1997.
(4) Includes 4,342 shares held by the Callister Family Trust, of which Mr.
Callister is trustee and options exercisable for 14,433 shares within 60
days of June 20, 1997.
(5) Includes 17,178 shares held by the Cauwels Family Trust, of which Mr.
Cauwels is co-trustee, 1,396 shares held by Inter-West Corporate Profit
Sharing Plan and options exercisable for 14,433 shares within 60 days of
June 20, 1997.
(6) Includes 1,575 shares held as joint tenancy with wife, 1,575 shares held by
Fawcett Farms, Inc., and options exercisable for 4,075 shares within 60 days
of June 20, 1997.
(7) Includes 11,101 shares held individually, 1,575 shares held by spouse, 1,039
shares held by daughter, 3,252 shares held through an ESOP; and options
exercisable for 47,425 shares within 60 days of June 20, 1997.
(8) Includes 47,484 shares held as joint tenancy with spouse and options
exercisable for 12,498 shares within 60 days of June 20, 1997.
(9) Includes 7,330 shares held individually; 35,751 shares held at joint tenancy
with spouse; 2,332 shares held individually by spouse; and options
exercisable for 12,127 shares within 60 days of June 20, 1997.
61
<PAGE>
(10) Includes 1,392 shares held individually in an IRA; 550 shares held by
spouse as trustee; and options exercisable for 2,363 shares within 60 days
of June 20, 1997.
(11) Includes 2,998 shares held in an IRA; 2,490 shares held in joint tenancy
with spouse; and options exercisable for 14,433 shares within 60 days of
June 20, 1997.
Capital Corp of the West ESOP owns 165,263 shares or 6.3% of the outstanding
shares of Common Stock. Its address is P. O. Box 552, Merced, California 95341.
No other individuals known to the Board of Directors of Capital Corp owned of
record or beneficially 5% or more of the outstanding shares of Common Stock.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Board of Directors of Capital Corp has established, under Sections
401(a) and 501(a) of the Internal Revenue Code of 1986, a qualified Employee
Stock Ownership Plan ("ESOP") effective December 31, 1984. The purpose of the
ESOP is to provide all eligible employees with an additional incentive to
maximize their job performance by providing them with an opportunity to acquire
or increase their proprietary interest in Capital Corp and to provide
supplemental income upon retirement. The ESOP is designed primarily to invest
Capital Corp's contributions in shares of Capital Corp's Common Stock. All
assets of the ESOP are held in trust for the exclusive benefit of participants
and are administered by a committee appointed by the directors of Capital Corp.
However, each participant has the right to direct the trustees as to the manner
in which those shares of Capital Corp's stock which are credited to the account
of each participant are to be exercised with respect to a corporate matter or
the Bylaws of Capital Corp. The company has made and in the future intends to
make periodic contributions to the ESOP in amounts determined by the Board of
Directors. It is anticipated that as contributions are made by Capital Corp,
shares of Capital Corp's Common Stock will be acquired from time to time through
open market purchases and privately negotiated transactions. Any effect on the
market quotations of, or on the market in general for, Capital Corp's common
stock which could result from the fact that the ESOP may make acquisitions of
Capital Corp's shares in the future is not possible to determine in advance.
TRANSACTIONS WITH MANAGEMENT
Some of Capital Corp's directors and executive officers, as well as their
immediate family, associates and companies in which they have a financial
interest, are customers of, and have had banking transactions with, Capital
Corp's subsidiary County Bank in the ordinary course of the Bank's business, and
the Bank expects to have such ordinary banking transactions with these persons
or entities in the future. In the opinion of the Bank's management, the Bank
made all loans and commitments to lend included in such transactions in
compliance with applicable laws and on substantially the same terms, including
interest rates and collateral, as those prevailing for comparable transactions
with other persons or entities of similar credit worthiness, and these loans do
not involve more than a normal risk of collectibility or present other
unfavorable features.
There are no other existing or proposed material transactions between
Capital Corp and any of its directors, executive officers, nominees for election
as a director, or the immediate family or associates of any of the foregoing
persons except as follows:
Jack F. Cauwels, a director of Capital Corp, was president of Insurance
Center of Merced which was sold to Inter-West in February 1996. At that time he
became a vice-president of Inter-West. Inter-West sold the Company insurance
products during 1996 and expects to provide additional insurance products to the
Company during 1997. The aggregate amount of insurance premiums paid by the
Company to the Insurance Center of Merced and Inter-West during 1996 was
$169,000.
In accordance with its policies, Capital Corp obtains competitive bids for
the kinds of products and services referred to above from independent parties
before selecting a vendor of such products and services.
62
<PAGE>
REGULATION AND SUPERVISION
REGULATORY ENVIRONMENT
The banking and financial services industry is a heavily regulated one.
Statutes, regulations and policies affecting the industry are frequently under
review by Congress and state legislatures, and by the federal and state agencies
charged with supervisory and examination authority over banking institutions.
Changes in the banking and financial services industry can be expected to occur
in the future. Some of the changes may create opportunities for Capital Corp and
the Bank to compete in financial markets with less regulation. However, these
changes also may create new competitors in geographic and product markets which
have historically been limited by law to bank institutions, such as the Bank.
Changes in the statutes, regulation, or policies that impact Capital Corp and
the Bank cannot necessarily be predicted and may have a material effect on their
business and earnings.
The operations of bank holding companies and their subsidiaries are affected
by the credit and monetary policies of the FRB. An important function of the FRB
is to regulate the national supply of bank credit. Among the instruments of
monetary policy used by the FRB to implement its objectives are open market
operations in U.S. government securities, changes in the discount rate on bank
borrowings and changes in reserve requirements on bank deposits. These
instruments of monetary policy are used in varying combinations to influence the
overall level of bank loans, investments and deposits, the interest rates
charged on loans and paid for deposits, the price of the dollar in foreign
exchange markets, and the level of inflation. The credit and monetary policies
of the FRB will continue to have a significant effect on the Bank and on Capital
Corp.
Set forth below is a summary of significant statutes, regulations and
policies that apply to the operation of banking institutions. This summary is
qualified in its entirety by reference to the full text of such statutes,
regulations and policies.
BANK HOLDING COMPANY ACT
As a bank holding company, Capital Corp is subject to regulation under the
BHC Act, and is registered as such with, and subject to examination by, the FRB.
Pursuant to the BHC Act, Capital Corp is subject to limitations on the kinds of
businesses in which it can engage directly or through subsidiaries. It may of
course manage or control banks. Generally, however, it is prohibited, with
certain exceptions, from acquiring direct or indirect ownership or control of
more than five (5) percent of any class of voting shares of an entity engaged in
nonbanking activities, unless the FRB finds such activities to be "so closely
related to banking" as to be deemed "a proper incident thereto" within the
meaning of the BHC Act. Removal of many of the activity limitations is currently
under review by Congress, but whether any legislation liberalizing permitted
bank holding company activities will be enacted is not known.
At present Capital Corp operates Town & Country, an industrial loan company,
and Capital West Group, which engages in the business of providing investment
and financial advice. Capital Corp has no present intention to engage in any
other such permitted activities. However, it might at some time determine to
engage in additional activities if it were in the best interests of the Company.
Bank acquisitions by bank holding companies are also regulated. A bank
holding company may not acquire more than five (5) percent of the voting shares
of any domestic bank without the prior approval of the FRB.
The BHC Act subjects bank holding companies to minimum capital requirements.
See "--Regulatory Capital Requirements." Regulations and policies of the FRB
also require a bank holding company to serve as a source of financial and
managerial strength to its subsidiary banks. It is the FRB's policy that a bank
holding company should stand ready to use available resources to provide
adequate capital funds to a subsidiary bank during periods of financial stress
or adversity and should maintain the financial flexibility and capital-raising
capacity to obtain additional resources for assisting a subsidiary bank. Under
certain
63
<PAGE>
conditions, the FRB may conclude that certain actions of a bank holding company,
such as a payment of a cash dividend, would constitute an unsafe and unsound
banking practice.
COUNTY BANK
County Bank is a California state-licensed bank. The Bank is a member of the
FDIC and thus is subject to the rules and regulations of the FDIC pertaining to
deposit insurance, including deposit insurance assessments. The Bank also is
subject to regulation and supervision by the Department. Applicable federal and
state regulations address many aspects of the Bank's business and activities,
including investments, loans, borrowings, transactions with affiliates,
branching, reporting and other areas. County Bank may acquire other banks or
branches of other banks with approval of the FDIC and the Department. County
Bank is subject to examination by both the FDIC and the Department.
In response to regulatory concerns over the Bank's level of nonperforming
assets, in March 1997 the Board of Directors of County Bank adopted resolutions
under which the Bank committed to the following: (i) not to appoint a new
director or executive officer without prior written approval of the Department
and the FDIC; (ii) to reduce loans classified "Substandard" and "Doubtful" as of
December 2, 1996 from $11.8 million to $8.6 million by June 30, 1997 and to
maintain a ratio of shareholder's equity to total assets of 6.75% (or 6.50%
pursuant to the next clause); (iii) to reduce such "Substandard" and "Doubtful"
loans to $7.8 million by December 31, 1997, and thereafter to maintain a ratio
of shareholder's equity to total assets of 6.50%; (iv) to maintain an adequate
allowance for loan losses, to conduct a review prior to and at each quarter of
the adequacy of the allowance and to document the basis for changes in the
allowance; (v) not to pay cash dividends without the prior written consent of
the Department and the FDIC; and (vi) to furnish the Department and the FDIC
with a quarterly progress report on compliance with the resolutions. Failure to
comply with these commitments could result in the imposition of regulatory
restrictions or prohibitions on the Bank or its management and could adversely
affect its prospects for regulatory approval of the Branch Acquisition. See
"Regulation and Supervision--County Bank" and "-- Regulatory Capital
Requirements."
At June 30, 1997, loans that were classified "Substandard" and "Doubtful" at
December 2, 1996 were reduced to $4.2 million, below both the $8.6 million
target level for June 30, 1997 and the $7.8 million target level for December
31, 1997. Accordingly, the Bank's commitment is to maintain a total equity to
total assets ratio of no less than 6.50%. However, in the second quarter of
1997, the Company incurred losses primarily as a result of making provisions of
$3,236,000 to the allowance for loan losses, which reduced the Bank's ratio of
total equity to total assets at June 30, 1997 to 6.15%, which was below the
6.50% commitment. See "Recent Developments." The Bank has discussed this
situation with its regulators, which have agreed to forbear from taking any
action against the Bank as a result of its failure to meet the capital ratio
commitment. The regulators have not waived or given forbearance on this
commitment for the Bank at September 30, 1997. No assurances can be given that
any such waivers or forbearances will be given in the future should the Bank
fail to meet its commitments in the future.
TOWN & COUNTRY
Town & Country is a California industrial loan company, commonly known as a
thrift and loan, chartered under California's Industrial Loan Law (alternatively
known as the "Thrift and Loan Law"). Effective July 1, 1997, regulation of Town
& Country was transferred from California's Department of Corporations to the
Department. As an industrial loan company, Town & Country issues investment or
thrift certificates, which are deposit-like obligations insured by the FDIC.
California law requires diversification of the loan portfolio in certain
respects, including limits on loans to one borrower and its affiliates, the
aggregate amount of loans secured in whole or in part by real estate or by the
stock of one corporation and the aggregate amount of loans with terms in excess
of seven years. Thrift and loan companies are generally limited to investments
which are legal investments for California commercial banks. A thrift is not
permitted to declare dividends on its capital stock unless it has at least
$750,000 of unimpaired capital
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plus additional capital of $50,000 for each branch office maintained. It is also
subject to capital and leverage requirements. See "Business of Capital Corp of
the West--Town & Country."
DIVIDENDS
A California corporation such as Capital Corp may make a distribution to its
shareholders if the corporation's retained earnings equal at least the amount of
the proposed distribution. In the event sufficient retained earnings are not
available for the proposed distribution, such a corporation may nevertheless
make a distribution to its shareholders if, after giving effect to the
distribution, the corporation's assets equal at least 125% of its liabilities
and certain other conditions are met. Since the 125% ratio translates into a
minimum capital ratio of 20%, most bank holding companies, including Capital
Corp based on its current capital ratios, are unable to meet this last test.
The primary source of funds for payment of dividends by Capital Corp to its
shareholders is the receipt of dividends and management fees from County Bank
and, to a lesser extent, Town & Country. Capital Corp's ability to receive
dividends from County Bank is limited by applicable state and federal law. A
California state-licensed bank may not make a cash distribution to its
shareholders in excess of the lesser of the following: (i) the bank's retained
earnings, or (ii) the bank's net income for its last three fiscal years, less
the amount of any distributions made by the bank to its shareholders during such
period. However, with the approval of the Commissioner of Financial Institutions
(the "Commissioner"), a bank may pay dividends in an amount not to exceed the
greater of (i) a bank's retained earnings, (ii) its net income for its last
fiscal year, or (iii) its net income for the current fiscal year.
The FDIC and the Commissioner have authority to prohibit a bank from
engaging in practices which are considered to be unsafe and unsound. Depending
on the financial condition of the Bank and upon other factors, the FDIC or the
Commissioner could determine that payment of dividends or other payments by the
Bank might constitute an unsafe or unsound practice. Finally, any dividend that
would cause a bank or a thrift and loan to fall below required capital levels
could also be prohibited. See "--Regulatory Capital Requirements." The Bank has
committed to its regulators for an indefinite period that it will not pay cash
dividends without the written consent of the regulators.
REGULATORY CAPITAL REQUIREMENTS
Each of the Company, the Bank and Town & Country is required to maintain a
minimum risk-based capital ratio of 8% (at least 4% in the form of Tier 1
capital) of risk-weighted assets and off-balance sheet items. "Tier 1" capital
consists of common equity, non-cumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries and excludes
goodwill. "Tier 2" capital consists of cumulative perpetual preferred stock,
limited-life preferred stock, mandatory convertible securities, subordinated
debt and (subject to a limit of 1.25% of risk-weighted assets) general loan loss
reserves. In calculating the relevant ratio, a bank's assets and off-balance
sheet commitments are risk-weighted: thus, for example, loans are included at
100% of their book value while assets considered less risky are included at a
percentage of their book value (20%, for example, for interbank obligations, and
0% for vault cash and U.S. Government and Government Agency securities).
Each of the Company, the Bank and Town & Country is also subject to leverage
ratio guidelines. The leverage ratio guidelines require maintenance of a minimum
ratio of 3% Tier 1 capital to total assets for the most highly rated
organizations. Institutions that are less highly rated, anticipating significant
growth or subject to other significant risks will be required to maintain
capital levels ranging from 1% to 2% above the 3% minimum.
Recent federal regulation established five tiers of capital measurement
ranging from "well capitalized" to "critically undercapitalized." Federal bank
regulatory authorities are required to take prompt corrective action with
respect to inadequately capitalized banks. If a bank does not meet the minimum
capital requirements set by its regulators, the regulators are compelled to take
certain actions, which may
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include a prohibition on payment of dividends to a parent holding company and
requiring adoption of an acceptable plan to restore capital to an acceptable
level. Failure to comply will result in further sanctions, which may include
orders to raise capital, merge with another institution, restrict transactions
with affiliates, limit asset growth or reduce asset size, divest certain
investments and /or elect new directors. It is Capital Corp's intention to
maintain risk-based capital ratios for itself and for the Bank and Town &
Country at above the minimum for the "well capitalized" level (6% Tier 1
risk-based; 10% total risk-based) and to maintain the leverage capital ratio for
County Bank above the 5% minimum for "well-capitalized" banks. However, in the
second quarter of 1997, the Company incurred losses primarily as a result of
making provisions of $3,236,000 to the allowance for loan losses, and these
losses had an adverse effect on the Company's capital ratios. See "Prospectus
Summary--Recent Developments." Based on preliminary information, the Company
expects its leverage, Tier 1 risk-based and total risk-based capital ratios as
of June 30, 1997, to be 6.85%, 8.44% and 9.45%, respectively, and the Bank's
leverage, Tier 1 risk-based and total risk-based capital ratios as of June 30,
1997, to be 6.32%, 7.70% and 8.69%, respectively. At June 30, 1997, the
Company's and the Bank's Tier 1 risk-based ratios and the Bank's leverage ratio
were in the "well-capitalized" level; however their total risk-based ratios were
below the "well-capitalized" level, but above the minimum requirements. The
Company anticipates that the net proceeds of the Offering will assist it and the
Bank in achieving capital ratios in the "well capitalized" level. See "Use of
Proceeds" and "Capitalization." No assurance can be given that the Company or
the Bank will be able to maintain capital ratios in the "well capitalized" level
in the future. In addition, the Bank has committed for an indefinite period to
maintain its ratio of total equity to total assets at 6.50%. See "--County
Bank." However, in the second quarter of 1997, the Company incurred losses
primarily as a result of making provisions of $3,236,000 to the allowance for
loan losses, which reduced the Bank's ratio of total equity to total assets at
June 30, 1997 to 6.15%, which was below the 6.50% commitment. See "Recent
Developments." The Bank has discussed this situation with its regulators, which
have agreed to forbear from taking any action against the Bank as a result of
its failure to meet the capital ratio commitment. The regulators have not waived
or given forbearance on this commitment for the Bank at September 30, 1997. No
assurance can be given that any such waivers or forbearances will be given in
the future should the Bank fail to meet its commitments in the future.
CROSS-INSTITUTION ASSESSMENTS
Any insured depository institution owned by Capital Corp can be assessed for
losses incurred by the FDIC in connection with assistance provided to, or the
failure of, any other depository institution owned by Capital Corp.
INSURANCE PREMIUMS AND ASSESSMENTS
The FDIC has authority to impose a special assessment on members of the Bank
Insurance Fund (the "BIF") to insure that there will be sufficient assessment
income for repayment of BIF obligations and for any other purpose which it deems
necessary. The FDIC is authorized to set semi-annual assessment rates for BIF
members at levels sufficient to increase the BIF's reserve ratio to a designated
level of 1.25% of insured deposits. The BIF achieved this level in mid-1995.
Congress is considering various proposals to merge the BIF with the Savings
Association Insurance Fund ("SAIF") or otherwise to require banks to contribute
to the insurance funds for savings associations. Adoption of any of these
proposals might increase the cost of deposit insurance for all banks, including
the Bank.
The FDIC has developed a risk-based assessment system, under which the
assessment rate for an insured depository institution will vary according to the
level of risk incurred in its activities. An institution's risk category is
based upon whether the institution is well capitalized, adequately capitalized
or less than adequately capitalized. Each insured depository institution is also
to be assigned to one of the following "supervisory subgroups." Subgroup A, B or
C. Subgroup A institutions are financially sound
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institutions with few minor weaknesses; Subgroup B institutions are institutions
that demonstrate weaknesses which, if not corrected, could result in significant
deterioration; and Subgroup C institutions are institutions for which there is a
substantial probability that the FDIC will suffer a loss in connection with the
institution unless effective action is taken to correct the areas of weakness.
The FDIC assigns each member institution an annual FDIC assessment rate which,
as of the date of this Prospectus, varies between 0.0% per annum with a $2,000
minimum (for well capitalized Subgroup A institutions) and 0.27% per annum (for
undercapitalized Subgroup C institutions). Insured institutions are not
permitted to disclose their risk assessment classification.
Under recent legislation, the cost of carrying bonds issued by the Financing
Corporation ("FICO") to cover losses of failed savings associations will be
allocated between BIF-insured institutions and SAIF-insured institutions, with
BIF-insured institutions paying twenty (20) percent of the amount paid by SAIF-
insured institutions. The FDIC recently estimated that to cover these costs BIF
institutions will pay an assessment of approximately $.0128 annually per $100
insured deposits, and SAIF institutions will pay approximately $.0644 annually
per $100 of insured deposits. Starting in the year 2000, BIF and SAIF
institutions will share the FICO bond costs equally, with an estimated
assessment of $.0243 annually per $100 of insured deposits.
This legislation will increase County Bank's premiums, as it will be
required to share in the cost of carrying the FICO bonds. The increase will be
slight until the year 2000, at which time it will increase.
AUDIT REQUIREMENTS
All depository institutions are required to have an annual, full-scope
on-site examination. Those depository institutions with assets greater than $500
million are required to have annual independent audits and to prepare all
financial statements in accordance with generally accepted accounting
principles. Each institution is required to have an independent audit committee
comprised entirely of outside directors.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each bank to identify the
communities served by the bank's offices and to identify the types of credit the
bank is prepared to extend within such communities. It also requires the bank's
regulators to assess the bank's performance in meeting the credit needs of its
community and to take such assessment into consideration in reviewing
application for mergers, acquisitions and other transactions, such as the Branch
Acquisition. An unsatisfactory rating may be the basis for denying such an
application. The Bank was rated "satisfactory" in its most recent CRA
examination in August 1995.
POTENTIAL ENFORCEMENT ACTIONS
Banks and their institution-affiliated parties may be subject to potential
enforcement actions by the bank regulatory agencies for unsafe or unsound
practices in conducting their businesses, or for violations of any law, rule or
regulation or provision, any consent order with any agency, any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver,
cease-and-desist orders and written agreements, the termination of insurance of
deposits, the imposition of civil money penalties and removal and prohibition
orders against institution-affiliated parties.
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INTERSTATE BANKING
RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994
INTERSTATE BANKING AND BRANCHING. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Riegle-Neal Act") was signed by President
Clinton in September 1994. Generally, provisions of this Act authorize
interstate banking and interstate branching, subject to certain state options.
- Interstate acquisition of banks by holding companies was permitted in all
states on and after September 29, 1995. However, states may continue to
prohibit acquisition of banks that have been in existence less than five
years and interstate chartering of new banks.
- Interstate mergers of banks were permitted as of June 1, 1997, unless a
state adopted legislation before June 1, 1997 to "opt out" of interstate
merger authority. Individual states were permitted to enact legislation to
permit interstate mergers earlier than that date.
- Interstate acquisition of branches is permitted to a bank only if the law
of the state where the branch is located expressly permits interstate
acquisition of a branch without acquiring the entire bank.
- Interstate DE NOVO branching is permitted to a bank only if a state adopts
legislation to "opt in" to interstate DE NOVO branching authority.
LIMITATIONS ON CONCENTRATIONS. An interstate banking application may not be
approved if the applicant and its depository institution affiliates would
control more than 10% of insured deposits nationwide or more than 30% of insured
deposits in the state in which the bank to be acquired in located. These limits
do not apply to mergers solely between affiliates. States may waive the 30% cap
on a nondiscriminatory basis. Nondiscriminatory state caps on deposit market
share of a depository institution and its affiliates are not affected.
AGENCY AUTHORITY. A bank subsidiary of a bank holding company is authorized
to receive deposits, renew time deposits, close loans, service loans and receive
payments on loans as an agent for a depository institution affiliate without
being deemed a branch of the affiliate. A bank is not permitted to engage, as
agent for an affiliate, in any activity as agent that it could conduct as a
principal, or to have an affiliate, as its agent, conduct any activity that it
could not conduct directly, under federal or state law.
HOST STATE REGULATION. Out-of-state banks seeking to acquire or establish a
branch are required to comply with any nondiscriminatory filing requirements of
the host state where the branch is located. The host state may set notification
and reporting requirements for a branch of an out-of-state bank. A branch of an
out-of-state bank is subject to all of the laws of the host state regarding
intrastate branching, consumer protection, fair lending and community
reinvestment. A branch of a out-of-state bank is not permitted to conduct any
activities at the branch that are not permissible for a bank chartered by the
host state.
MEETING LOCAL CREDIT NEEDS. CRA evaluations are required for each state in
which an interstate bank has a branch. Interstate banks are prohibited from
using out-of-state branches "primarily for the purpose of deposit production."
Federal banking agencies have adopted regulations to ensure that interstate
branches are being operated with a view to the needs of the host communities.
CALIFORNIA LAW. In October 1995, California enacted state legislation in
accordance with authority under the Riegle-Neal Act. This new state law permits
banks headquartered outside California to acquire or merge with California banks
that have been in existence for at least five years, and thereby establish one
or more California branch offices. An out-of-state bank may not enter California
by acquiring one or more branches of a California bank or other operations
constituting less than the whole bank. The law authorizes waiver of the 30%
limit on state-wide market share for deposits as permitted by the Riegle-Neal
Act. This law also authorizes California state-licensed banks to conduct certain
banking activities (including receipt of deposits and loan payments and
conducting loan closings) on an agency basis on behalf of out-of-state banks and
to have out-of-state banks conduct similar agency activities on their behalf.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Capital Corp consists of 30,000,000 shares
of common stock, no par value, and 10,000,000 shares of preferred stock, no par
value. As of June 20, 1997, there were 2,606,478 shares of Capital Corp common
stock outstanding and no shares of preferred stock outstanding.
COMMON STOCK
Holders of Capital Corp Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of shareholders. Holders of
Common Stock are entitled to receive ratably such dividends as may be legally
declared by Capital Corp's Board of Directors. There are legal and regulatory
restrictions on the ability of Capital Corp to declare and pay dividends. See
"Dividends" and "Regulation and Supervision--Limitations on Dividends." In the
event of a liquidation, holders of Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities. Holders of Common Stock have
no preemptive, subscription or conversion rights. Shares of Common Stock are not
subject to further call or assessment, and there are no redemption or sinking
fund provisions with respect to the Common Stock.
PREFERRED STOCK
The Board of Directors of Capital Corp is authorized to fix the preferences,
limitations, relative rights, qualifications and restrictions of the preferred
stock and may establish series of preferred stock and determine the variations
between series, without any further vote or action by the Company's
shareholders. If and when any preferred stock is issued, the holders of
preferred stock may have a preference over holders of Common Stock for the
payment of dividends, for distributions upon liquidation of the Company, in
respect of voting rights and in the redemption of the Common Stock. The issuance
of preferred stock could adversely affect the rights of holders of the Common
Stock and could have the effect of delaying, deferring or preventing a change in
control of the Company.
CERTAIN ANTI-TAKEOVER MATTERS
The articles of incorporation and bylaws of the Company include certain
provisions that may make it more difficult for a third party to acquire control
of the Company. These provisions include the following: (i) the elimination of
cumulative voting; (ii) classification of the Board of Directors into three
equal classes serving staggered three-year terms; and (iii) a requirement that
shareholder action may be taken only at annual or special meetings of
shareholders and not by shareholder written consent. Under California law, a
"listed corporation" may, with shareholder approval, eliminate cumulative voting
and adopt a classified or staggered board of directors. Since its shares became
traded on the Nasdaq National Market, Capital Corp qualifies as a listed
corporation and is eligible to adopt and maintain such provisions. The board of
directors and the shareholders approved such provisions in 1996.
The elimination of cumulative voting permits a majority of the shares voting
to elect or remove every director; and precludes a minority of the shares voting
at a meeting from electing or preventing the removal of any director. The
elimination of cumulative voting could therefore prevent minority shareholders
(even those with substantial holdings but less than a majority) from obtaining
representation on the Board of Directors. The elimination of cumulative voting
may tend to make achieving a change in control of Capital Corp more difficult by
preventing substantial minority shareholders from electing directors.
With a classified or staggered Board of Directors, only three or four
directors, rather than the entire board of 11 directors, are elected each year.
As a result, it will generally take at least two annual meetings of shareholders
to elect a majority of the Board. A classified or staggered board may therefore
discourage persons from attempting to acquire control of Capital Corp without
the consent of the Board of Directors because its provisions would operate to
delay such person's ability to obtain control of the Board of Directors. In
addition, a classified or staggered board would similarly delay shareholders who
do not approve of policies of the Board in their attempt to replace a majority
of the directors, unless they
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obtained the requisite vote to remove the entire Board. For the same reasons, it
may also deter certain mergers, tender offers or other takeover attempts which
some or a majority of holders of Capital Corp's voting stock may deem to be in
their best interests.
The Company has amended its articles of incorporation to prohibit its
shareholders from taking action by written consent without a meeting and
requiring that any shareholder action be taken at a shareholder meeting. Action
by written consent may, in some circumstances, permit the shareholders to take
action opposed by the Board of Directors more rapidly than would be possible if
a meeting were required. The provision prohibiting shareholder action without a
meeting may deter certain mergers, tender offers or other takeover attempts
which some or a majority of holders of Capital Corp's voting stock may deem to
be in their best interests.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Common Stock is Harris Trust Co.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
dated as of the date hereof (the "Underwriting Agreement"), the Underwriter
named below (the "Underwriter") has agreed to purchase the aggregate number of
shares of Common Stock set forth opposite its name:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Sutro & Co. Incorporated...................................................
-----------------
Total:................................................................. 1,387,755
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriter's obligations is such that
the Underwriter is committed to purchase all shares of Common Stock offered
hereby if any of such shares are purchased.
The Underwriter proposes to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriter may allow, and such dealers may reallow,
a concession not in excess of $ per share to certain other dealers.
After the public offering of the shares, the offering price and other selling
terms may be changed by the Underwriter.
The Company has granted to the Underwriter an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to an aggregate
of 208,163 additional shares of Common Stock at the public offering price, less
the underwriting discount set forth on the cover page of this Prospectus. To the
extent that the Underwriter exercises such option, each of the Underwriter will
have a firm commitment to purchase such additional shares in approximately the
same proportion that the number of shares of Common Stock to be purchased by it
shown in the above table bears to the total number of shares of Common Stock
offered hereby. The Company will be obligated, pursuant to the option, to sell
such shares to the Underwriter to the extent the option is exercised. The
Underwriter may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriter and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriter reserves the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriter may be required to make in respect thereof.
The Company, its executive officers, directors and certain other
stockholders of the Company have agreed that they will not, without the prior
written consent of Sutro & Co. Incorporated offer, sell or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common Stock
owned by them during the 180-day period following the effective date of the
Offering, except that the Company may issue shares upon the exercise of options
granted prior to the date hereof and may grant additional options under its
stock option plans.
In general, the rules of the Commission will prohibit the Underwriter from
making a market in the Company's Common Stock during the restricted period
immediately preceding the pricing of the Common Stock offered hereby. The
Commission has, however, adopted exemptions from these rules that permit passive
market making under certain conditions. These rules permit an Underwriter to
continue to make a market subject to the conditions, among others, that its bid
not exceed the highest bid by a market maker not connected with the Offering and
that its net purchases on any one trading day not exceed prescribed
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limits. Pursuant to these exemptions, the Underwriter, certain selling group
members (if any) or their respective affiliates intend to engage in passive
market making in the Common Stock during the restricted period.
In connection with the Offering, the Underwriter and other persons
participating in the Offering may engage in transactions that stabilize,
maintain or otherwise affect the price of the Common Stock. Specifically, the
Underwriter may over-allot in connection with the Offering, creating a short
position in the Common Stock for its own account. To cover over-allotments or to
stabilize the price of the Common Stock, the Underwriter may bid for, and
purchase, shares of the Common Stock in the open market. The Underwriter may
also impose a penalty bid whereby the Underwriter may reclaim selling
concessions allowed to an underwriter or dealer for distributing the Common
Stock in the Offering, if the Underwriter repurchases previously distributed
Common Stock in transactions to cover their short position, in stabilization
transactions or otherwise. Finally, the Underwriter may bid for, and purchase,
shares of the Common Stock in market making transactions. These activities may
stabilize or maintain the market price of the Common Stock above market levels
that may otherwise prevail. The Underwriter is not required to engage in these
activities and may end any of these activities at any time.
The Underwriter do not intend to confirm sales to accounts over which they
exercise discretionary authority.
EXPERTS
The consolidated financial statements of Capital Corp as of December 31,
1996 and 1995 and for each of the three years ended December 31, 1996 included
in this Prospectus have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, included herein, and upon the authority of said firm as
experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to Capital Corp shares of Common Stock
offered hereby will be passed upon for Capital Corp by McCutchen, Doyle, Brown &
Enersen, LLP, San Francisco, California. Certain legal matters will be passed
upon for the Underwriter by Morrison & Foerster LLP, Los Angeles, California.
AVAILABLE INFORMATION
Capital Corp is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith has, since December 19, 1995, filed reports and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by Capital Corp with the Commission can
be inspected without charge and copied at prescribed rates at the Public
Reference Room of the Commission, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at the public reference facilities of the Chicago Regional
Office, Northwestern Atrium Center, 500 W. Madison Street, Suite 1400, Chicago,
Illinois 60661, and New York Regional Office, 7 World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material also can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W. Washington
D.C. 20549 at prescribed rates. Before such date, County Bank, as Capital Corp's
predecessor, was subject to the same requirements and filed reports and other
information with the FDIC. Such reports and information can be inspected at, and
copies obtained from, the Registration and Disclosure Section of the FDIC, 1776
F Street N.W., Room 643, Washington, D.C. 20429 at prescribed rates. These
documents may also be inspected at the Federal Reserve Bank of San Francisco,
101 Market Street, San Francisco, California.
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Capital Corp has filed with the Commission a Registration Statement on Form
S-2 (together with all amendments and exhibits, the "Registration Statement")
under the Securities Act of 1933 relating to the shares of Capital Corp common
stock to be offered hereby. This Prospectus also constitutes the Prospectus of
Capital Corp filed as part of the Registration Statement and does not contain
all the information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
such Registration Statement, exhibits and schedules. The Registration Statement
and the exhibits and schedules thereto may be inspected without charge and
copied at prescribed rates at the Public Reference Room of the Commission, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the public
reference facilities of the Chicago Regional Office, Northwestern Atrium Center,
500 W. Madison Street, Suite 1400, Chicago, Illinois 60661, and New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material also can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W. Washington D.C. 20549 at prescribed
rates.
In addition, the Commission has a web site on the World Wide Web at
http://www.sec.gov, containing registration statements, reports, proxy and
information statements and other information that registrants, such as the
Company, file electronically with the Commission.
The Common Stock is traded on the Nasdaq National Market, and the Company's
reports, proxy or information statements and other information may be inspected
at the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
INFORMATION INCORPORATED BY REFERENCE
The following documents previously filed or to be filed with the Commission
pursuant to the Exchange Act are hereby incorporated by reference in this
Prospectus:
(a) Capital Corp's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, including its Annual Report to Shareholders (the "Capital
Corp 10-K");
(b) Capital Corp's Quarterly Report on Form 10-Q for the period ended
March 31, 1997 (the "Capital Corp 10-Q");
(c) Capital Corp's Current Report on Form 8-K filed with the Commission
on July 10, 1997; and
(d) All other reports of the Company filed pursuant to Section 13(a) or
15(d) of the Exchange Act since December 31, 1996 to the date of this
Prospectus and prior to the termination of the Offering of the Common Stock
hereunder.
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein, or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein,
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
Copies of the above documents are available without charge upon request from
Karen Venditti, Corporate Secretary, Capital Corp of the West, 1160 West Olive
Avenue, Suite A, Merced, California 95348, telephone 209-725-2269.
73
<PAGE>
CAPITAL CORP OF THE WEST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants..................................................................
Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994....................
Consolidated Balance Sheets at December 31, 1996 and 1995.................................................
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994......
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994................
Notes to Consolidated Financial Statements................................................................
Consolidated Statements of Income for the Three Months Ended March 31, 1997 and 1996 (Unaudited)..........
Consolidated Balance Sheets at March 31, 1997 and 1996 (Unaudited)........................................
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 (Unaudited)......
Notes to Consolidated Financial Statements (Unaudited)....................................................
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Capital Corp of the West:
We have audited the accompanying consolidated balance sheets of Capital Corp
of the West and subsidiaries (the Company) as of December 31, 1996 and 1995 and
the related consolidated statements of income, cash flows, and shareholders'
equity for each of the years in the three year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Capital Corp
of the West and subsidiaries as of December 31, 1996 and 1995 and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for impaired loans in 1995 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards (SFAS) No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A
LOAN, as amended by Statement No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF
A LOAN--INCOME RECOGNITION AND DISCLOSURES.
/S/ KPMG PEAT MARWICK LLP
Sacramento, California
January 31, 1997
F-2
<PAGE>
CAPITAL CORP OF THE WEST
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans............................................... $16,302,000 $12,969,000 $10,795,000
Interest on deposits with other financial institutions................... 127,000 -- --
Interest on investment securities held to maturity:
Taxable.................................................................. 60,000 34,000 413,000
Non-taxable.............................................................. -- -- 272,000
Interest on investment securities available for sale:
Taxable.................................................................. 2,409,000 2,185,000 1,066,000
Non-taxable.............................................................. 246,000 327,000 --
Interest on federal funds sold........................................... 207,000 358,000 261,000
---------- ---------- ----------
Total interest income...................................................... 19,351,000 15,873,000 12,807,000
---------- ---------- ----------
Interest expense:
Deposits:
Negotiable orders of withdrawal........................................ 268,000 239,000 237,000
Savings................................................................ 4,350,000 4,213,000 2,298,000
Time, under $100,000................................................... 1,808,000 950,000 1,040,000
Time, $100,000 and over................................................ 359.000 304,000 272,000
---------- ---------- ----------
Total interest on deposits................................................. 6,785,000 5,706,000 3,847,000
---------- ---------- ----------
Other...................................................................... 80,000 11,000 3,000
---------- ---------- ----------
Total interest expense................................................... 6,865,000 5,717,000 3,850,000
---------- ---------- ----------
Net interest income........................................................ 12,486,000 10,156,000 8,957,000
---------- ---------- ----------
Provision for loan losses.................................................. 1,513,000 228,000 --
---------- ---------- ----------
Net interest income after provision for loan losses........................ 10,973,000 9,928,000 8,957,000
---------- ---------- ----------
Other income (loss):
Service charges on deposit accounts...................................... 1,274,000 920,000 900,000
Income from real estate held for sale or development..................... 508,000 88,000 14,000
Provision for loss on real estate held for sale or development............. -- (2,881,000) (798,000)
Gain on sale of premises and equipment..................................... -- -- 277,000
Other...................................................................... 1,153,000 649,000 412,000
---------- ---------- ----------
Total other income (loss).................................................. 2,935,000 (1,224,000) 805,000
---------- ---------- ----------
Other expenses:
Salaries and related benefits............................................ 5,283,000 4,161,000 3,540,000
Premises and occupancy................................................... 835,000 612,000 587,000
Equipment................................................................ 1,022,000 789,000 534,000
Bank assessments......................................................... 48,000 183,000 394,000
Professional fees........................................................ 755,000 404,000 299,000
Supplies................................................................. 292,000 234,000 124,000
Marketing................................................................ 370,000 212,000 250,000
Other.................................................................... 2,131,000 1,551,000 1,195,000
---------- ---------- ----------
Total other expenses....................................................... 10,736,000 8,146,000 6,923,000
---------- ---------- ----------
Income before income taxes................................................. 3,172,000 558,000 2,839,000
Provision for income taxes................................................. 1,163,000 223,000 1,103,000
---------- ---------- ----------
Net income................................................................. $2,009,000 $ 335,000 $1,736,000
---------- ---------- ----------
Net income per share....................................................... $ 1.27 $ .24 $ 1.24
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-3
<PAGE>
CAPITAL CORP OF THE WEST
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Assets
Cash and noninterest-bearing deposits in other banks............................. $ 12,982,000 $ 18,967,000
Federal funds sold............................................................... 3,735,000 --
Time deposits at other financial institutions.................................... 3,101,000 --
Investment securities available for sale at fair value........................... 43,378,000 45,302,000
Mortgage loans held for sale..................................................... 880,000 501,000
Loans, net....................................................................... 180,455,000 132,035,000
Interest receivable.............................................................. 1,879,000 1,860,000
Premises and equipment, net...................................................... 6,266,000 4,138,000
Other assets..................................................................... 13,313,000 6,230,000
-------------- --------------
Total assets..................................................................... $ 265,989,000 $ 209,033,000
-------------- --------------
-------------- --------------
Liabilities
Deposits:
Noninterest-bearing demand..................................................... $ 39,157,000 $ 39,726,000
Negotiable orders of withdrawal................................................ 34,303,000 29,019,000
Savings........................................................................ 111,285,000 95,537,000
Time, under $100,000........................................................... 46,990,000 21,917,000
Time, $100,000 and over........................................................ 6,610,000 6,402,000
-------------- --------------
Total deposits............................................................... 238,345,000 192,601,000
-------------- --------------
Accrued interest, taxes and other liabilities.................................... 6,670,000 1,339,000
-------------- --------------
Total liabilities................................................................ 245,015,000 193,940,000
-------------- --------------
Shareholders' equity
Preferred stock, no par value; 10,000,000 shares authorized; none outstanding.... -- --
Common stock, no par value; 20,000,000 shares authorized; 1,734,474 and 1,334,956
shares issued and outstanding.................................................. 15,321,000 9,870,000
Retained earnings................................................................ 5,722,000 4,911,000
Investment securities unrealized (losses) gains, net............................. (69,000) 312,000
-------------- --------------
Total shareholders' equity....................................................... 20,974,000 15,093,000
-------------- --------------
Total liabilities and shareholders' equity....................................... $ 265,989,000 $ 209,033,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-4
<PAGE>
CAPITAL CORP OF THE WEST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------------------------------------------
UNREALIZED
SECURITIES
NUMBER RETAINED GAINS
OF SHARES AMOUNT EARNINGS (LOSSES), NET TOTAL
---------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balances--December 31, 1993........... 1,002,360 $ 5,477,000 $ 7,156,000 $ -- $ 12,633,000
---------- ------------- ------------- --------------- -------------
---------- ------------- ------------- --------------- -------------
15% stock dividend, including payment
for fractional shares............... 149,966 1,875,000 (1,880,000) -- (5,000)
Exercise of stock options............. 7,560 73,000 -- -- 73,000
Investment securities unrealized
losses, net of tax effect of
$227,000............................ -- -- -- (355,000) (355,000)
Net income............................ -- -- 1,736,000 -- 1,736,000
---------- ------------- ------------- --------------- -------------
Balances--December 31, 1994........... 1,159,886 7,425,000 7,012,000 (355,000) 14,082,000
---------- ------------- ------------- --------------- -------------
---------- ------------- ------------- --------------- -------------
15% stock dividend, including payment
for fractional shares............... 173,570 2,430,000 (2,436,000) -- (6,000)
Exercise of stock options............. 1,500 15,000 -- -- 15,000
Net change in fair value of investment
securities, net of tax effect of
$427,000............................ -- -- -- 667,000 667,000
Net income............................ -- -- 335,000 -- 335,000
---------- ------------- ------------- --------------- -------------
Balances--December 31, 1995........... 1,334,956 9,870,000 4,911,000 312,000 15,093,000
---------- ------------- ------------- --------------- -------------
---------- ------------- ------------- --------------- -------------
5% stock dividend and $.05 per share
cash dividend, including payment for
fractional shares................... 82,384 1,112,000 (1,198,000) -- (86,000)
Exercise of stock options............. 20,739 208,000 -- -- 208,000
Issuance of shares pursuant to 401K &
ESOP plans.......................... 11,817 162,000 -- -- 162,000
Acquisition of Town & Country Finance
& Thrift............................ 284,578 3,969,000 -- -- 3,969,000
Change in fair value of investment
securities, net of tax effect of
($247,000).......................... -- -- -- (381,000) (381,000)
Net Income............................ -- -- 2,009,000 -- 2,009,000
---------- ------------- ------------- --------------- -------------
Balances--December 31, 1996........... 1,734,474 $ 15,321,000 $ 5,722,000 $ (69,000) $ 20,974,000
---------- ------------- ------------- --------------- -------------
---------- ------------- ------------- --------------- -------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-5
<PAGE>
CAPITAL CORP OF THE WEST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Operating activities:
Net income....................................................... $ 2,009,000 $ 335,000 $ 1,736,000
Adjustments to reconcile net income to net cash (used) provided
by operating activities:
Provision for loan losses........................................ 1,513,000 228,000 --
Depreciation, amortization and accretion, net.................... 1,023,000 860,000 707,000
Provision for deferred income taxes.............................. (327,000) (1,191,000) (235,000)
Gain on sale of premises and equipment........................... -- -- (277,000)
Gain on sale of real estate held for sale........................ (348,000) -- --
Net increase in interest receivable and other assets............. (5,044,000) (3,164,000) (1,015,000)
Net decrease (increase) in mortgage loans held for sale.......... (376,000) 2,241,000 (1,583,000)
Net increase in deferred loan fees............................... 54,000 31,000 63,000
Net increase (decrease) in accrued interest payable and other
liabilities.................................................... 1,330,000 499,000 (82,000)
Provision for loss on real estate held for sale or development... -- 2,881,000 798,000
Net cash (used) provided by operating activities................. (166,000) 2,720,000 112,000
Investing activities:
Investment security purchases.................................... (26,993,000) (26,622,000) (23,494,000)
Proceeds from maturities of investment securities................ 17,599,000 15,022,000 9,578,000
Proceeds from sales of investment securities..................... 14,590,000 3,012,000 --
Proceeds from sales of commercial and real estate loans.......... 3,230,000 1,037,000 1,691,000
Net increase in loans............................................ (35,017,000) (21,379,000) (8,345,000)
Purchases of premises and equipment.............................. (2,768,000) (1,719,000) (1,501,000)
Proceeds from sales of premises and equipment.................... 9,000 71,000 739,000
Construction of real estate held for sale or development......... (417,000) (622,000) (916,000)
Proceeds from sale of real estate held for sale or development... 765,000 1,547,000 1,346,000
Purchase of subsidiary........................................... (183,000) -- --
-------------- -------------- --------------
Net cash used by investing activities............................ (29,185,000) (29,653,000) (20,902,000)
-------------- -------------- --------------
Financing activities:
Net increase in demand, NOW and savings deposits................. 13,812,000 26,004,000 30,351,000
Net increase (decrease) in certificates of deposit............... 9,109,000 3,397,000 (8,882,000)
Net increase in other borrowings................................. 3,896,000 -- 107,000
Issued shares for benefit plan purchases......................... 162,000 -- --
Exercise of stock options........................................ 208,000 15,000 73,000
Fractional shares from stock dividends........................... (86,000) (6,000) (5,000)
-------------- -------------- --------------
Net cash provided by financing activities........................ 27,101,000 29,410,000 21,644,000
-------------- -------------- --------------
Net(decrease) increase in cash and cash equivalents.............. (2,250,000) 2,477,000 854,000
-------------- -------------- --------------
Cash and cash equivalents at beginning of year................... 18,967,000 16,490,000 15,636,000
-------------- -------------- --------------
Cash and cash equivalents at end of year......................... $ 16,717,000 $ 18,967,000 16,490,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-6
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of Capital Corp of the West (the
"Company") include its subsidiaries, County Bank (the "Bank"), Town & Country
Finance and Thrift (the "Thrift") and Capital West Group. Effective June 28,
1996, the Company consummated the purchase of the Thrift. The transaction
resulted in 284,578 shares of stock being issued and $1,493,000 being disbursed
to the shareholders of the Thrift. The total purchase price was $5,823,000. The
Thrift is licensed by the California Department of Corporations as an industrial
loan company, also known as a thrift and loan company. The purchase was
accounted for under the purchase method of accounting. All of the Thrift's
operations since June 28, 1996 have been included in these consolidated
financial statements.
A summary of the net assets acquired is set forth in the following table:
<TABLE>
<CAPTION>
<S> <C>
Assets Acquired:
Cash & cash equivalents.......................................................................... $ 1,310,000
Time deposits at other financial institutions.................................................... 6,554,000
Loans, net....................................................................................... 18,203,000
Interest receivable.............................................................................. 60,000
Premises and equipment........................................................................... 212,000
Other assets..................................................................................... 114,000
-------------
Total assets acquired.......................................................................... $ 26,453,000
-------------
-------------
Liabilities Assumed:
Deposits......................................................................................... $ 22,823,000
Other liabilities................................................................................ 105,000
-------------
Total liabilities assumed...................................................................... 22,928,000
-------------
-------------
Net Assets Acquired.......................................................................... $ 3,525,000
-------------
-------------
</TABLE>
The total purchase price was allocated to the tangible and identifiable
intangible assets and liabilities of the Thrift based on their respective fair
values and the remainder was allocated to goodwill. The following adjustments
were made to allocate the purchase price of the Thrift: equity of the Thrift
$3,525,000; fair value adjustments to loans ($185,000); core deposit intangible
$460,000; and goodwill $2,023,000. The fair value adjustments are amortized
against (accreted to) net income as follows: fair value adjustment to loans: 3
years; core deposit intangible: 10 years; goodwill: 18 years. The amortization
of goodwill will be evaluated periodically in accordance with Statement of
Financial Accounting Standards No.121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
In April of 1996, the Company formed a new subsidiary that engages in
financial institution advisory services, Capital West Group. The Bank has two
wholly owned subsidiaries, Merced Area Investment and Development, Inc. ("MAID")
and another inactive subsidiary. All references herein to the Company include
the Bank, the Thrift, Capital West Group and the Bank's subsidiaries unless the
context otherwise requires. All significant intercompany accounts and
transactions have been eliminated in preparing these consolidated financial
statements.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles and prevailing practices in the banking
industry. In preparing the consolidated financial
F-7
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION:
(CONTINUED)
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and revenue and expense for the period. Actual results could differ from
those estimates applied in the preparation of the consolidated financial
statements.
CASH AND CASH EQUIVALENTS: The Company maintains deposit balances with
various banks which are necessary for check collection and account activity
charges. Cash in excess of immediate requirements is invested in federal funds
sold or other short term investments. Generally, federal funds are sold for
periods from one to thirty days. Cash, noninterest-bearing deposits in other
banks and federal funds sold are considered to be cash and cash equivalents for
the purposes of the consolidated statements of cash flows. At December 31, 1996,
the Company's average cash reserve balances as required by the Federal Reserve
Bank were approximately $2,190,000. The Company maintained sufficient balances
of vault cash to satisfy its reserve requirements.
INVESTMENT SECURITIES: Investment securities at December 3 1, 1996 and 1995
consist of U.S. Treasury and U.S. Government agency obligations, municipal
securities and mortgage-backed securities. At the time of purchase of a
security, the Company designates the security as held-to-maturity or as
available-for-sale, based on its investment objectives, operational needs and
intent. The Company does not purchase securities with the intent of actively
trading them. Held-to-maturity securities are recorded at amortized cost,
adjusted for amortization or accretion of premiums or discounts.
Available-for-sale securities are recorded at fair value with unrealized holding
gains and losses, net of the related tax effect, and are reported as a separate
component of stockholders' equity until realized.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary, results in a charge to
earnings and the corresponding establishment of a new cost basis for the
security. No such declines have occurred.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using a method which approximates the
effective interest method. Dividend and interest income are recognized when
earned. Realized gains and losses for securities classified as available-
for-sale and held-to-maturity are included in earnings and are derived using the
specific identification method for deter-mining the cost of securities sold.
MORTGAGE LOANS HELD FOR SALE: Real estate mortgage loans held for sale are
carried at the lower of cost or market at the balance sheet date or the date on
which investors have committed to purchase such loans.
LOANS: Loans are carried at the principal amount outstanding, net of
deferred origination fees, less an allowance for loan losses. During 1995, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 114, Accounting by Creditors for the Impairment of a Loan as amended by
Statement No. 118, Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures (SFAS 114). Under SFAS 114, an impaired loan is
measured based upon the present value of future cash flows discounted at the
loan's effective rate, the loan's observable market price, or the fair value of
collateral if the loan is collateral dependent. Interest on impaired loans is
recognized on a cash basis. SFAS 114 does not apply to large groups of small
balance homogenous loans that are collec-tively evaluated for impairment.
F-8
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION:
(CONTINUED)
The recognition of interest income on a loan is discontinued, and previously
accrued interest is reversed, when interest or principal payments become 90 days
past due, unless the outstanding principal and interest is adequately secured
and, in the opinion of management, remains collectible. Interest is subsequently
recognized only as received until the loan is returned to accrual status.
Nonrefundable fees and related direct costs associated with the origination or
purchase of loans are deferred and are amortized into interest income over the
loan term using a method which approximates the interest method.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses represents
management's recognition of the risks assumed when extending credit and its
evaluation of the quality of the loan portfolio. The allowance is maintained at
the level considered to be adequate for potential loan losses based on
management's assessment of various factors affecting the loan portfolio, which
include a review of problem loans, business conditions and an overall evaluation
of the quality of the portfolio. The allowance is increased by provisions for
loan losses charged to operations and reduced by loans charged to the allowance,
net of recoveries. The allowance for loan losses is a subjective estimation and
may be adjusted in the future depending on economic conditions. Also regulatory
examiners may require the Company to recognize additions to the allowance based
upon their judgments about information available to them at the time of an
examination.
LOAN SERVICING INCOME: The Company services both the sold and retained
portions of United States Small Business Administration (SBA) loans and a
portfolio of mortgage loans. Servicing income is realized through the retention
of an ongoing rate differential between the rate paid by the borrower to the
Company and the rate paid by the Company to the investor in the loan.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost and
depreciated on the straight-line method over the estimated useful lives of the
assets as follows:
Buildings - 35 years Leasehold improvements - term of lease Furniture and
equipment - 3 to 15 years
REAL ESTATE HELD FOR SALE OR DEVELOPMENT: Real estate held for sale or
development is recorded at the lower of cost or net realizable value.
Revenue recognition on the disposition of real estate is dependent upon the
transaction meeting certain criteria relating to the nature of the property sold
and the terms of the sale. Under certain circumstances, revenue recognition may
be deferred until these criteria are met.
OTHER REAL ESTATE: In accordance with the provisions of the Statement of
Financial Account Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, other real estate acquired
through foreclosure is carried at the lower of cost or fair value less estimated
costs to sell at the date of foreclosure. Fair value of other real estate is
determined based on an appraisal of the property. Credit losses arising from the
acquisition of such properties are charged against the allowance for possible
loan losses. Any subsequent costs or losses are charged against income when
incurred.
INVESTMENT TAX CREDITS: The Company has investments in limited partnerships
in low income affordable housing which provides the investor affordable housing
income tax credits. As an investor in these partnerships, the Company receives
tax benefits in the form of tax deductions from partnership operating losses and
income tax credits. These income tax credits are earned over a 10-year period as
a result of the
F-9
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION:
(CONTINUED)
investment meeting certain criteria and are subject to recapture over a 15-year
period. The expected benefit resulting from the affordable housing income tax
credits is recognized in the period in which the tax benefit is recognized in
the Company's consolidated tax returns. These investments are accounted for
using the cost method. These investments are evaluated at each reporting period
for impairment. The Bank had investments in these partnerships of $2,700,000 and
$1,701,000 as of December 31, 1996 and 1995 respectively.
DEFERRED COMPENSATION: The Company has purchased single premium universal
life insurance policies in conjunction with implementation of salary
continuation plans for certain members of management and the Board of Directors.
The Company is the owner and beneficiary of these plans. The cash surrender
value of the insurance policies is recorded in other assets in accordance with
Financial Accounting Standards Board Technical Bulletin No. 85-4, Accounting For
Purchases of Life Insurance. Income from the policy is recorded in other income
and the load, mortality and surrender charges have been recorded in other
expenses. The accrued liability is recorded to reflect the present value of the
expected retirement benefits. The balance of these life insurance policies was
$3,134,000 and $1,290,000 as of December 31, 1996 and 1995 respectively.
INCOME TAXES: The Company files a consolidated federal income tax return
and a combined state franchise tax return. The provision for income taxes
includes federal income and state franchise taxes. Income tax expense is
allocated to each entity of the Company based upon the analyses of the tax
consequences of each company on a stand alone basis.
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
STOCK OPTION PLAN: Prior to January 1, 1996, the Company accounted for its
stock option plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option grants made
in 1995 and future years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
PER SHARE INFORMATION: Per share information is based on the weighted
average number of shares of common stock outstanding during the periods
presented after giving retroactive effect to stock dividends.
F-10
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 2: INVESTMENT SECURITIES
The carrying value and estimated fair value for each category of investment
securities at December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
1996 AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Available-for-Sale: U.S. Treasury & U.S. government
agencies & corporations................................. $ 38,653,000 $ 190,000 $ 381,000 $ 38,462,000
-------------- ---------- ---------- -------------
State & political subdivisions............................ 4,196,000 100,000 25,000 4,271,000
Total debt securities................................... 42,849,000 290,000 406,000 42,733,000
Equity securities......................................... 645,000 -- -- 645,000
-------------- ---------- ---------- -------------
Total Investment Securities............................. $ 43,494,000 $ 290,000 $ 406,000 $ 43,378,000
-------------- ---------- ---------- -------------
-------------- ---------- ---------- -------------
1995
Available-for-Sale: U.S. Treasury & U.S. government
agencies & corporations................................. $ 40,055,000 $ 437,000 $ 39,000 $ 40,453,000
-------------- ---------- ---------- -------------
States & political subdivisions........................... 4,183,000 133,000 19,000 4,297,000
Total debt securities................................... 44,238,000 570,000 58,000 44,750,000
Equity securities......................................... 552,000 -- -- 552,000
-------------- ---------- ---------- -------------
Total Investment Securities............................. $ 44,790,000 $ 570,000 $ 58,000 $ 45,302,000
-------------- ---------- ---------- -------------
-------------- ---------- ---------- -------------
</TABLE>
The change in the net unrealized holding gain on available for sale
securities during 1996 was $628,000. At December 31, 1996 and 1995, investment
securities with carrying values of approximately $16,678,000 and $18,157,000,
respectively, were pledged as collateral for deposits of public funds and
government deposits and for the Bank's use of the Federal Reserve Bank's
discount window and Federal Home Loan Bank line of credit. The Bank is a member
of the Federal Home Loan Bank and has purchased $645,000 and $552,000 of Federal
Home Loan Bank stock as of December 31, 1996 and 1995 respectively.
For the years ended December 31, 1996 and 1995, the proceeds from the sale
of securities were $14,590,000 and $3,012,000, respectively. There were no
securities sold in 1994. The Bank recognized net gains or losses on the sale of
investment securities of approximately $11,000 in gains in 1996 and $3,000 in
losses in 1995, respectively.
F-11
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 2. INVESTMENT SECURITIES (CONTINUED)
The carrying and estimated fair values of debt securities at December 31,
1996 by contractual maturity, are shown on the following table. Actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment notice.
<TABLE>
<CAPTION>
ESTIMATED
1996 AMORTIZED COST FAIR VALUE
- -------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Available-for-Sale Debt Securities:
Due in one year or less..................................... $ 981,000 $ 996,000
Due after one year through five years....................... 8,894,000 8,922,000
Due after five years through ten years...................... 7,849,000 7,774,000
Due after ten years......................................... 4,400,000 4,290,000
Mortgage-backed securities.................................. 20,725,000 20,751,000
-------------- -------------
Total Debt securities..................................... $ 42,849,000 $ 42,733,000
-------------- -------------
-------------- -------------
</TABLE>
NOTE 3: LOANS
Loans outstanding at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Commercial, financial and agricultural....................... $ 71,786,000 $ 65,563,000
Real Estate:
Mortgage................................................... 57,098,000 42,128,000
Construction............................................... 13,923,000 12,006,000
Consumer Loans............................................. 40,440,000 14,039,000
-------------- --------------
183,247,000 133,736,000
Less allowance for loan losses........................... 2,792,000 1,701,000
-------------- --------------
$ 180,455,000 $ 132,035,000
-------------- --------------
-------------- --------------
</TABLE>
These loans are net of deferred loan fees of $765,000 in 1996 and $708,000
in 1995. The amount of nonaccrual loans at December 31, 1996 is $4,968,000
($4,626,000 at December 31, 1995). Impaired loans are loans for which it is
probable that the Company will not be able to collect all amounts due. As of
December 31, 1996, the Company had outstanding balances of $7,020,000 in
impaired loans which had specific allowances for possible loss of $1,827,000.
The average outstanding balance of impaired loans for the year ended December
31, 1996 was approximately $6,248,000. Of these impaired loans, $5,090,000 are
loans that have been restructured. This compares with $4,326,000 in impaired
loans which had specific allowances for possible loss of $605,000 and an average
outstanding balance for the year ending December 31, 1995 of $2,165,000.
Foregone interest on nonaccrual loans was approximately $497,000 and $25,000 for
the years ending December 31, 1996 and 1995 respectively.
F-12
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 3: LOANS (CONTINUED)
Following is a summary of changes in the allowance for loan losses during
the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance--beginning of year.......................... $ 1,701,000 $ 1,621,000 $ 1,747,000
Due to acquisition of Thrift........................ 148,000 -- --
Losses charged to the allowance..................... (658,000) (223,000) (248,000)
Recoveries of amounts charged off................... 88,000 75,000 122,000
Provision charged to operations..................... 1,513,000 228,000 --
------------ ------------ ------------
Balance--end of year................................ $ 2,792,000 $ 1,701,000 $ 1,621,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
In the ordinary course of business, the Company has made loans to certain
directors and officers and their related businesses. In management's opinion,
these loans were granted on substantially the same terms, including interest
rates and collateral, as those prevailing on comparable transactions with
unrelated parties, and do not involve more than the normal risk of
collectibility. These loans are summarized below:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance--beginning of year.......................................... $ 675,000 $ 497,000
Loan advances and renewals.......................................... 511,000 633,000
Loans matured or collected.......................................... (613,000) (455,000)
----------- -----------
Balance--end of year................................................ $ 573,000 $ 675,000
----------- -----------
----------- -----------
</TABLE>
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Land............................................................. $ 1,139,000 $ 955,000
Buildings........................................................ 2,979,000 1,744,000
Leasehold improvements........................................... 887,000 725,000
Furniture and equipment.......................................... 6,363,000 4,505,000
------------- ------------
11,368,000 7,929,000
Less accumulated depreciation and amortization................... 5,102,000 3,791,000
------------- ------------
$ 6,266,000 $ 4,138,000
------------- ------------
------------- ------------
</TABLE>
Included in the totals on the previous page for December 31, 1996 is
construction in progress for the new branch and administrative facilities in
downtown Merced and the branch under construction in Turlock totaling
$1,428,000.
NOTE 5: REAL ESTATE OPERATIONS
As of December 31, 1996, MAID held two real estate projects, including
improved and unimproved land. Based on the general state of the local real
estate climate, the Bank reduced its carrying value of its
F-13
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 5: REAL ESTATE OPERATIONS (CONTINUED)
remaining projects to zero as of December 31, 1995. Total real estate write
downs were $2,881,000 in 1995 and $798,000 in 1994.
Summarized below is condensed financial information of MAID:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
CONDENSED BALANCE SHEETS 1996 1995
- ------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
Assets:
Cash on deposit with the Bank.................................... $ 481,000 $ 1,359,000
Notes receivable and other....................................... 103,000 --
---------- -------------
$ 584,000 $ 1,359,000
Liabilities and Shareholder's equity:
Accounts payable and other....................................... $ 298,000 $ 296,000
Shareholder's equity............................................. 286,000 1,063,000
---------- -------------
$ 584,000 $ 1,359,000
---------- -------------
---------- -------------
<CAPTION>
DECEMBER 31,
-------------------------
CONDENSED STATEMENT OF OPERATIONS 1996 1995
- ------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
Revenues........................................................... $ 812,000 $ 1,643,000
Expenses........................................................... 287,000 4,437,000
---------- -------------
505,000 (2,794,000)
Other, net......................................................... (81,000) (94,000)
Income (loss) before income taxes.................................. $ 424,000 $ (2,888,000)
---------- -------------
---------- -------------
</TABLE>
NOTE 6. INCOME TAXES
The provision for income taxes for the years ended December 31 is comprised
of the following:
<TABLE>
<CAPTION>
1996 FEDERAL STATE TOTAL
- ---------------------------------------------------- ------------ ----------- -------------
<S> <C> <C> <C>
Current............................................. $ 1,049,000 $ 441,000 $ 1,490,000
Deferred............................................ (283,000) (44,000) (327,000)
------------ ----------- -------------
$ 766,000 $ 397,000 $ 1,163,000
<CAPTION>
1995
- ----------------------------------------------------
<S> <C> <C> <C>
Current............................................. $ 1,020,000 $ 394,000 $ 1,414,000
Deferred............................................ (860,000) (331,000) (1,191,000)
------------ ----------- -------------
$ 160,000 $ 63,000 $ 223,000
<CAPTION>
1994
- ----------------------------------------------------
<S> <C> <C> <C>
Current............................................. $ 972,000 $ 366,000 $ 1,338,000
Deferred............................................ (204,000) (31,000) (235,000)
------------ ----------- -------------
$ 768,000 $ 335,000 $ 1,103,000
------------ ----------- -------------
------------ ----------- -------------
</TABLE>
F-14
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 6. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
State franchise tax............................................. $ 162,000 $ 115,000
Real estate subsidiary.......................................... 1,822,000 2,176,000
Allowance for loan losses....................................... 804,000 535,000
Investment securities unrealized losses......................... 47,000 --
Nonaccrual interest............................................. 335,000 --
Other........................................................... 134,000 183,000
------------ ------------
Total gross deferred tax assets................................... 3,301,000 3,009,000
Less valuation allowance.......................................... (170,000) (170,000)
------------ ------------
Deferred tax assets............................................... $ 3,134,000 $ 2,839,000
------------ ------------
------------ ------------
Deferred tax liabilities:
Fixed assets.................................................... $ 127,000 $ 58,000
State franchise taxes........................................... 61,000 187,000
Deferred loan fees.............................................. -- 65,000
Investment securities unrealized gain........................... -- 200,000
Other........................................................... 79,000 36,000
------------ ------------
Total gross deferred tax liabilities.............................. 267,000 546,000
------------ ------------
Net deferred tax assets........................................... $ 2,867,000 $ 2,293,000
------------ ------------
------------ ------------
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes
that the valuation allowance is sufficient to cover that portion that will not
be fully realized.
A reconciliation of the provision for income taxes to the statutory federal
income tax rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate.................................... 34.0% 34.0% 34.0%
State franchise tax, net of federal income tax benefit............... 8.3 7.5 7.7
Tax-exempt interest income, net...................................... (2.7) (17.7) (3.0)
Housing tax credits.................................................. (.7) -- --
Other................................................................ (2.2) 3.5 .1
Increase in valuation allowance for deferred tax assets.............. -- 12.6 --
--- --------- ---------
Effective income tax rate............................................ 36.7% 39.9% 38.8%
--- --------- ---------
--- --------- ---------
</TABLE>
F-15
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 7: LINES OF CREDIT
At December 31, 1996, the Company has available lines of credit with
correspondent banks and the Federal Reserve Bank aggregating approximately
$7,623,000 of which $105,000 were outstanding.
NOTE 8. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company'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 judgements 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).
First, a bank must meet a minimum Tier I (as defined in the regulations)
capital ratio ranging from 3% to 5% based upon the bank's CAMEL (capital
adequacy, asset quality, management, earnings and liquidity) rating.
Second, a bank must meet minimum total risk-based capital to risk-weighted
assets ratio of 8%. Risk-based capital and asset guidelines vary from Tier I
capital guidelines by redefining the components of capital, categorizing assets
into different risk classes, and including certain off-balance sheet items in
the calculation of the capital ratio. The effect of the risk-based capital
guidelines is that banks with high exposure will be required to raise additional
capital while institutions with low risk exposure could, with the concurrence of
regulatory authorities, be permitted to operate with lower capital ratios. In
addition, a bank must meet minimum Tier I capital to average assets ratio of 4%.
Management believes, as of December 31, 1996, that the Company and the Bank
meet all capital adequacy requirements to which they are subject. As of December
31, 1996, the most recent notification, the Federal Deposit Insurance
Corporation (FDIC) categorized the Bank as meeting the ratio test for a well
capitalized bank under the regulatory framework for prompt corrective action. To
be categorized as adequately capitalized, the Bank must meet the minimum ratios
as set forth below. There are no conditions or events since that notification
that management believes have changed the institution's classification.
F-16
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 8. REGULATORY MATTERS (CONTINUED)
The Company's and Bank's actual capital amounts and ratios as of December
31, 1996 are as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
CORRECTIVE
FOR CAPITAL ADEQUACY PURPOSES: ACTION
PROVISIONS:
------------------------------ -------------
ACTUAL AMOUNT RATIO AMOUNT
-------------------------- (LESS THAN (LESS THAN (LESS THAN
CONSOLIDATED: AMOUNT RATIO OR EQUAL TO) OR EQUAL TO) OR EQUAL TO)
- ------------------------------------------ ------------- ----- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
As of December 31, 1996
Total capital (to risk weighted assets)... $ 23,670,000 11.2% $ 16,914,000 8.0% $ 21,142,000
Tier I capital (to risk weighted assets).. 21,043,000 9.6 $ 8,407,000 4.0 $ 12,686,000
Tier I capital (to average assets)........ 21,043,000 8.2 $ 10,293,000 4.0 $ 12,868,000
--
------------- --- ------------- -------------
The Bank:
As of December 31, 1996
Total capital (to risk weighted assets)... 19,007,000 10.2 $ 14,965,000 8.0 $ 18,707,000
Tier I capital (to risk weighted assets).. 16,667,000 8.9 $ 7,483,000 4.0 $ 11,224,000
Tier I capital (to average assets)........ $ 16,667,000 7.3% $ 9,150,000 4.0% $ 11,438,000
--
--
------------- --- ------------- -------------
------------- --- ------------- -------------
<CAPTION>
RATIO
(LESS THAN
CONSOLIDATED: OR EQUAL TO)
- ------------------------------------------ ---------------
<S> <C>
As of December 31, 1996
Total capital (to risk weighted assets)... 10.0%
Tier I capital (to risk weighted assets).. 6.0
Tier I capital (to average assets)........ 5.0
---
The Bank:
As of December 31, 1996
Total capital (to risk weighted assets)... 10.0
Tier I capital (to risk weighted assets).. 6.0
Tier I capital (to average assets)........ 5.0%
---
---
</TABLE>
NOTE 9. COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT
RISK
At December 31, 1996, the Company has operating lease rental commitments for
remaining terms of one to ten years. The Company has options to renew one of its
leases for a period of 15 years. The minimum future commitments under
noncancellable lease agreements having terms in excess of one year at December
31, 1996 aggregates approximately $2,469,000 as follows:
1997: $451,000 1998: $427,000 1999: $385,000 2000: $323,000 2001:
$171,000
Thereafter: $712,000 = $2,469,000
Rent expense was approximately $391,000, $272,000, and $248,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. Effective July 15,
1995 the Company entered into an agreement to relocate its existing
administrative office and an existing branch in downtown Merced to a new
facility in downtown Merced. Construction began in the summer of 1996 and is
expected to be complete in late summer of 1997. The estimated construction cost
of the new 29,000 square foot facility including a parking structure is
estimated at approximately $4.7 million. In conjunction with the construction of
the facility, the Merced Redevelopment Agency has provided the Bank with an
interest-free loan in the amount of $3.0 million. The loan matures on August 31,
1997. It is anticipated that upon completion of the facility, a permanent
mortgage loan will be obtained from an unaffiliated lender.
In addition, the Company has a loan with an unaffiliated lender with an
outstanding balance of $791,000 as of December 31, 1996. The loan matures in
July of 1998. The loan was related to the cash portion of the purchase of the
Thrift.
At December 31, 1996 the aggregate maturities for time deposits in excess of
one year are as follows:
1997: $10,263,000 1998: $863,000 1999: $417,000 2000: --- 2001: ---- =
$11,543,000
In the ordinary course of business, the Company enters into various types of
transactions which involve financial instruments with off-balance sheet risk.
These instruments include commitments to
F-17
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 9. COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT
RISK (CONTINUED)
extend credit and standby letters of credit and are not reflected in the
accompanying balance sheet. These transactions may involve, to varying degrees,
credit and interest risk in excess of the amount, if any, recognized in the
balance sheet.
The Company's off-balance sheet credit risk exposure is the contractual
amount of commitments to extend credit and standby letters of credit. The
Company applies the same credit standards to these contracts as it uses in its
lending process. Additionally, commitments to extend credit and standby letters
of credit bear similar credit risk characteristics as outstanding loans (see
note 10).
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Financial instruments whose contractual amount represents risk:
Commitments to extend credit................................... $ 46,159,000 $ 28,321,000
Standby letters of credit...................................... 3,231,000 2,465,000
------------- -------------
------------- -------------
</TABLE>
Commitments to extend credit are agreements to lend to customers. These
commitments have specified interest rates and generally have fixed expiration
dates but may be terminated by the Company if certain conditions of the contract
are violated. Although currently subject to drawdown, many of these commitments
are expected to expire or terminate without funding. Therefore, the total
commitment amounts do not necessarily represent future cash requirements.
Collateral held relating to these commitments varies, but may include
securities, equipment, inventory and real estate.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of the customer to a third party.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. Collateral held
for standby letters of credit is based on an individual evaluation of each
customer's credit worthiness, but may include cash, equipment, inventory and
securities.
NOTE 10. CONCENTRATIONS OF CREDIT RISK
The Bank's business activity is with customers located primarily within
Merced and Stanislaus and Tuolomne counties. The Bank specializes in real
estate, real estate construction, commercial and dairy lending. Although the
Bank has a diversified loan portfolio, a significant portion of its customers'
ability to repay loans is dependent upon economic factors affecting residential
real estate, construction, dairy, agribusiness and consumer goods retailing.
Generally, loans are secured by various forms of collateral. The Bank's loan
policy requires sufficient collateral be secured as necessary to meet the Bank's
relative risk criteria for each borrower. The Bank's collateral consists
primarily of real estate, dairy cattle, accounts receivable, inventory,
equipment and marketable securities. A small portion of the Bank's loans are not
supported by specific collateral but rather by the general financial strength of
the borrower.
The Thrift's business activity is with customers located primarily within
Stanislaus, Fresno and Tulare counties. The Thrift specializes in direct
consumer loans and the purchase of financing contracts principally from
automobile dealerships and furniture stores. Generally, loans are secured by
various forms of collateral. The Thrift's collateral consists primarily of
automobiles and flooring inventory. A small portion of the Thrift's loans are
not supported by specific collateral but rather by the general financial
strength of
F-18
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 10. CONCENTRATIONS OF CREDIT RISK (CONTINUED)
the borrower. In addition the contracts are purchased from the dealers with
recourse to the dealer and dealer reserves are established for each borrower.
Although the slowdown in the real estate market has been a factor in the
local economy for the last several years and has played a role in reducing
economic growth in California, it is management's opinion that the underlying
strength and diversity of the Central Valley's economy should mitigate a severe
deterioration in the borrowers' ability to repay their obligations to the
Company.
NOTE 11. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory employee stock ownership plan ("ESOP") and
an employee savings plan covering substantially all employees. During 1996,
1995, and 1994, the Company contributed approximately $114,000, $100,000, and
$101,000, respectively, to the ESOP and $38,000, $27,000, and $30,000,
respectively, to the employee savings plan.
Under provisions of the ESOP, the Company can make discretionary
contributions to be allocated based on eligible individual annual compensation,
as approved by the Board of Directors. Contributions to the ESOP are recognized
as compensation expense. For the years December 31, 1996, 1995, and 1994, the
ESOP owned 106,247, 95,263, and 86,899 shares, respectively. ESOP shares are
included in the weighted average number of shares outstanding for earnings per
share computations.
The employee savings plan allowed participating employees to contribute up
to $9,500 in 1996. The Company will match 25% of the employees' elective
contribution, as defined, not to exceed 6% of eligible annual compensation.
NOTE 12. STOCK OPTION PLAN
During 1992, shareholders approved the adoption of an incentive stock option
plan for bank management and a nonstatutory stock option plan for directors. The
maximum number of shares issuable under the plans was 126,000. Options are
available for grant under the plans at prices that approximate fair market value
at the date of grant. Options granted under both plans become exercisable 25% at
the time of grant and 25% each year thereafter and expire 10 years from the date
of grant. In 1995, shareholders
F-19
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 12. STOCK OPTION PLAN (CONTINUED)
approved an amendment to the stock option plans increasing the number of
authorized but unissued shares available for future grant of the Company's
common stock.
<TABLE>
<CAPTION>
SHARES
AVAILABLE FOR OPTIONS EXERCISE
GRANT OUTSTANDING PRICE PER SHARE
--------------- ----------- ---------------
<S> <C> <C> <C>
Balance, December 31, 1994.................... 21,122 130,708 $ 8.10-$14.13
Additional shares added to plan............... 148,170
Options granted............................... (29,000) 29,000 $ 12.25-$13.50
Options exercised............................. -- (1,500) $ 9.90
Stock dividend declared....................... 24,494 20,506 --
------- ----------- ---------------
Balance, December 31, 1995.................... 163,886 179,614 $ 8.10-$13.86
Options granted............................... (29,500) 29,500 $ 12.63-$14.00
Options exercised............................. -- (20,739) $ 9.90-$12.25
Stock dividend declared....................... 6,844 9,294 --
------- ----------- ---------------
Balance, December 31, 1996.................... 141,230 197,669 $ 8.10-$14.00
------- ----------- ---------------
------- ----------- ---------------
</TABLE>
At December 31, 1996, options for 156,310 shares were exercisable at prices
varying from $8.10 to $14.00 per share. The exercise price per share has been
adjusted for stock dividends in periods in which the exercise price exceeded the
then current fair market value.
The per share weighted-average fair value of stock options granted during
1996 and 1995 was $8.59 and $5.24 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
1995-1996--an expected dividend yield of 0%; a risk-free interest rate of 5.48%
and 6.31% respectively; and an expected life of 7 years.
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock options in
the accompanying consolidated financial statements. 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 pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995 1996 1995
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net income As
reported............ $ 2,009,000 $ 335,000 Pro forma...... $ 1,857,000 $ 250,000
Net income per share
As reported......... $ 1.27 $ .24 Pro forma...... $ 1.17 $ .19
------------ ---------- ------------ ----------
------------ ---------- ------------ ----------
</TABLE>
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of ten years and compensation cost for options granted prior to January
1, 1995 is not considered.
F-20
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 13: SUPPLEMENTARY CASH FLOW INFORMATION
For the years ended December 31, 1996, 1995 and 1994, the Company paid
interest of $6,244,000, $5,678,000, and $3,906,000 and income taxes of
$1,126,000, $1,471,000, and $1,242,000, respectively.
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Financial Assets:
Cash and cash equivalents: For these assets, the carrying amount is a
reasonable estimate for fair value.
Investments: Fair values for investment securities available-for-sale are
the amounts reported on the consolidated balance sheets and investment
securities held-to-maturity are based on quoted market prices where available.
If quoted market prices were not available, fair values were based upon quoted
market prices of comparable instruments.
Net loans: The fair value of loans is estimated by utilizing discounted
future cash flow calculations using the interest rates currently being offered
for similar loans to borrowers with similar credit risks and for the remaining
or estimated maturities considering pre-payments. The carrying value of loans
are net of the allowance for possible loan losses and unearned loan fees.
Loans held for sale: The fair value of loans held for sale is the carrying
value as the loans are under commitments to be sold at carrying value.
Financial Liabilities:
Deposits: The fair values disclosed for deposits generally paid upon demand
(i.e., noninterest-bearing and interest-bearing demand, savings and money market
accounts) are considered equal to their respective carrying amounts as reported
on the consolidated balance sheets. The fair value of fixed rate certificates of
deposit is estimated using the rates currently offered for deposits of similar
remaining maturities.
Borrowings: For these instruments, the fair value is estimated using rates
currently available for similar loans with similar credit risk and for the
remaining maturities.
Commitments to extend credit and standby letters of credit: The fair value
of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present credit-worthiness of the counter parties. For fixed rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligation with the counter parties at
the reporting date.
Fair values for financial instruments are management's estimates of the
values at which the instruments could be exchanged in a transaction between
willing parties. These estimates are subjective and may vary significantly from
amounts that would be realized in actual transactions. In addition, other
significant assets are not considered financial assets including, any mortgage
banking operations, deferred tax assets,
F-21
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
and premises and equipment. Further, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
the fair value estimates and have not been considered in any of these estimates.
<TABLE>
<CAPTION>
1996 CARRYING AMOUNT FAIR VALUE
- ----------------------------------------------------------- ---------------- --------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents.................................. $ 16,717,000 $ 16,717,000
Investment securities:
Available-for-sale......................................... 43,378,000 43,378,000
Net loans.................................................. 180,455,000 180,259,000
Mortgage loans held for sale............................... 880,000 880,000
---------------- --------------
Financial Liabilities:
Deposits:
Noninterest-bearing demand................................. 39,157,000 39,157,000
Interest-bearing demand.................................... 34,303,000 34,303,000
Savings and money market................................... 111,285,000 111,285,000
Time deposits.............................................. 53,600,000 53,753,000
Borrowings................................................. $ 3,896,000 $ 3,575,000
---------------- --------------
CONTRACT AMOUNT
--------------------------------
Off-balance sheet:
Commitments................................................ $ 46,159,000 $ 4,615,900
Standby letters of credit.................................. 3,231,000 32,300
---------------- --------------
---------------- --------------
1995 CARRYING AMOUNT FAIR VALUE
- ----------------------------------------------------------- ---------------- --------------
Financial assets:
Cash and cash equivalents.................................. $ 18,967,000 $ 18,967,000
Investment securities:
Available-for-sale......................................... 45,302,000 45,302,000
Net loans.................................................. 132,035,000 131,708,000
Mortgage loans held for sale............................... 501,000 501,000
---------------- --------------
Financial Liabilities:
Deposits:
Noninterest-bearing demand................................. 39,726,000 39,726,000
Interest-bearing demand.................................... 29,019,000 29,019,000
Savings and money market................................... 95,537,000 95,537,000
Time deposits.............................................. 28,319,000 28,559,000
Borrowings................................................. $ 106,000 $ 106,000
---------------- --------------
</TABLE>
F-22
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<S> <C> <C>
CONTRACT AMOUNT
--------------------------------
Off-balance sheet:
Commitments................................................ $ 28,321,000 $ 2,832,100
Standby letters of credit.................................. 2,465,000 24,600
---------------- --------------
---------------- --------------
</TABLE>
NOTE 15: DERIVATIVE FINANCIAL INSTRUMENTS
As of December 31, 1996 and 1995 the Company had no off-balance sheet
derivative financial instruments. The Company held one step-up bond, considered
a structured note, with a fair market value of $497,000 as of December 31, 1995
which matured during 1996. The Company held no derivative instruments as of
December 31, 1996.
NOTE 16: PARENT COMPANY ONLY FINANCIAL INFORMATION
This information should be read in conjunction with the other notes to the
consolidated financial statements. The parent company was formed November 1,
1995. During the year ended December 31, 1996, the Bank paid the Company
$100,000 in cash dividends and the Thrift paid the Company $825,000 in cash
dividends. The following is the condensed balance sheet of the Company as of
December 31, 1996 and the condensed statement of income and cash flows for the
year ended December 31, 1996:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS (IN THOUSANDS) 1996 1995
- ------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
Cash deposited in subsidiary bank....................................... $ 159 $ 51
Investment in subsidiary, County Bank................................... 16,574 14,968
Investment in subsidiary, Town & Country................................ 5,061 --
Investment in subsidiary, Capital West Group............................ 81 --
Other assets............................................................ 98 107
--------- ---------
Total Assets............................................................ $ 21,973 $ 15,126
--------- ---------
--------- ---------
Accrued expenses and other liabilities.................................. $ 999 $ 33
Stockholders' equity.................................................... 20,974 15,093
--------- ---------
Total liabilities and stockholders' equity.............................. $ 21,973 $ 15,126
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME (IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Equity in undistributed income of subsidiary................................. $ 2,094 $ 335
Expenses..................................................................... 85 --
Net income................................................................... $ 2,009 $ 335
--------- ---------
--------- ---------
</TABLE>
F-23
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
NOTE 16: PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Net cash used by operating activities........................................ $ (712) $ (74)
Net cash (used)/provided by investing activities............................. (233) 125
Net cash provided by financing activities.................................... 1,053 --
Net increase in cash......................................................... 108 51
Cash at the beginning of the year............................................ 51 --
Cash at the end of the year.................................................. $ 159 $ 51
--------- ---------
--------- ---------
</TABLE>
NOTE 17: PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
Management of the Company does not expect that adoption of SFAS No. 125 will
have a material impact on the Company's financial position, results of
operations, or liquidity.
F-24
<PAGE>
CAPITAL CORP OF THE WEST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
3/31/97 3/31/96
------------------- -------------------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C>
Interest Income
Interest and fees on loans........................................... $ 4,687 $ 3,419
Interest on investment securities
Taxable............................................................ 810 716
Non-taxable........................................................ 59 59
Interest on federal funds sold......................................... 45 56
------ ------
Total Interest Income................................................ 5,601 4,250
Interest Expense
Deposits
Negotiable orders of withdrawal.................................... 78 64
Savings............................................................ 1,122 1,036
Time, under $100,000............................................... 693 306
Time, $100,000 and over............................................ 106 94
Other................................................................ 73 12
------ ------
Total Interest Expense............................................. 2,072 1,512
Net Interest Income.................................................... 3,529 2,738
Provision for loan losses.............................................. 240 160
------ ------
Net Interest income after provision for loan losses.................... 3,289 2,578
Other Income
Service charges on deposit accounts.................................. 337 281
Income from real estate held for sale or development................. 7 8
Other................................................................ 390 282
------ ------
Total Other Income................................................. 734 571
Other Expenses
Salaries and related benefits........................................ 1,544 1,186
Premises and occupancy............................................... 279 157
Equipment............................................................ 287 232
Professional fees.................................................... 141 141
Marketing............................................................ 159 90
Other................................................................ 830 547
------ ------
Total Other Expenses............................................... 3,240 2,353
Income before income taxes........................................... 783 796
Provision for income taxes........................................... 270 295
------ ------
Net Income........................................................... 513 501
------ ------
------ ------
Net Income Per Share................................................. $ 0.20 $ 0.24
------ ------
------ ------
</TABLE>
See accompanying notes.
F-25
<PAGE>
CAPITAL CORP OF THE WEST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
3/31/97 12/31/96 3/31/96
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Assets
Cash and noninterest-bearing deposits in other banks......................... $ 17,967 $ 12,982 $ 18,783
Federal funds sold........................................................... -- 3,735 --
Time deposits at other financial institutions................................ 1,288 3,101 --
Investment securities:
Available-for-sale securities, at fair value............................... 46,046 43,378 44,199
Held-to-maturity securities at amortized cost, market value of $11,058,000
at March 31, 199 ........................................................ 11,456 -- --
Mortgage loans held for sale................................................. -- 880 2,315
Loans, net of allowance for loan losses of $2,674,000 at March 31, 1997,
$2,792,000 at December 31, 1996 and $1,860,000 at March 31, 1996........... 185,381 180,455 136,483
Interest receivable.......................................................... 1,985 1,879 1,830
Premises and equipment, net.................................................. 8,095 6,266 4,333
Other assets................................................................. 13,666 13,313 6,568
---------- ---------- ----------
Total assets............................................................... $ 285,884 $ 265,989 $ 214,512
---------- ---------- ----------
---------- ---------- ----------
Liabilities
Deposits:
Noninterest-bearing demand................................................. $ 35,179 $ 39,157 $ 34,979
Negotiable orders of withdrawal............................................ 35,002 34,303 27,388
Savings.................................................................... 111,903 111,285 101,220
Time, under $100,000....................................................... 51,082 46,990 23,959
Time, $100,000 and over.................................................... 14,280 6,610 6,943
---------- ---------- ----------
Total Deposits........................................................... 247,446 238,345 194,499
Federal funds purchased and securities sold
under agreements to repurchase............................................. 5,870 -- 3,000
Short-term borrowings........................................................ 1,083 110 --
Long-term borrowings......................................................... 5,435 1,535 106
Accrued interest, taxes and other liabilities................................ 4,381 5,025 1,664
---------- ---------- ----------
Total liabilities.......................................................... 264,215 245,015 199,269
Shareholders' Equity
Preferred stock, no par value; 15,000,000 shares authorized; none
outstanding................................................................ -- -- --
Common stock, no par value; 30,000,000 shares authorized; 2,606,478 issued
and outstanding at March 31, 1997; 2,581,822 issued and outstanding at
December 31, 1996 and 2,003,747 issued and outstanding at March 31, 1996... 15,592 15,321 9,880
Retained earnings............................................................ 6,239 5,722 5,413
Investment securities unrealized losses, net................................. (162) (69) (50)
---------- ---------- ----------
Total Shareholders' Equity................................................... 21,669 20,974 15,243
---------- ---------- ----------
Total Liabilities and Shareholders' Equity................................... $ 285,884 $ 265,989 $ 214,512
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-26
<PAGE>
CAPITAL CORP OF THE WEST
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
3 MONTHS ENDED 3 MONTHS ENDED
3/31/97 3/31/96
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net income....................................................................... $ 513 $ 501
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses...................................................... 240 160
Depreciation, amortization and accretion, net.................................. 281 367
Provision (benefit) for deferred income taxes.................................. (65) --
Gain on sale of premises and equipment......................................... -- (80)
Net (increase) decrease in interest receivable and other assets.................. (415) 161
Net decrease (increase) in mortgage loans held for sale.......................... 880 (1,814)
Net increase in deferred loan fees............................................... 67 61
Net increase in accrued interest payable and other liabilities................... 1,606 3,431
-------------- --------------
Net cash provided by operating activities........................................ 3,907 2,787
Investing activities:
Investment security purchases.................................................. (17,788) (7,699)
Proceeds from maturities of investment securities.............................. 2,899 5,040
Proceeds from sales of investment securities................................... 2,519 3,202
Proceeds from sales of commercial and real estate loans........................ 205 591
Net increase in loans.......................................................... (5,428) (5,185)
Purchases of premises and equipment............................................ (2,051) (369)
Construction of real estate held for sale or development....................... (72) (369)
-------------- --------------
Net cash (used) by investing activities.......................................... (19,716) (4,789)
Financing activities:
Net decrease in demand, NOW and savings deposits............................... (2,661) (695)
Net increase in certificates of deposit........................................ 11,762 2,593
Net increase in other borrowings............................................... 8,493 --
Issued shares for benefit plan purchases....................................... 176 --
Exercise of stock options...................................................... 99 11
-------------- --------------
Net cash provided by financing activities........................................ 17,869 1,909
Net increase (decrease) in cash and cash equivalents............................. 1,250 (93)
Cash and cash equivalents at beginning of year................................... 16,717 18,967
-------------- --------------
Cash and cash equivalents at end of quarter...................................... $ 17,967 $ 18,874
-------------- --------------
-------------- --------------
Supplemental Disclosure of noncash investing and financing activities:
Investment securities unrealized losses........................................ (152) 362
</TABLE>
See accompanying notes.
F-27
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, DECEMBER 31, 1996 AND MARCH 31, 1996
(UNAUDITED)
GENERAL-COMPANY Capital Corp of the West (the "Company" or "Capital Corp")
is a bank holding company incorporated under the laws of the State of California
on April 26, 1995. On November 1, 1995, the Company became registered as a bank
holding company, and is the holder of all of the capital stock of Country Bank
(the "Bank") and all of the capital stock of Town and Country Finance and Thrift
(the "Thrift"). During 1996 the Company formed Capital West Group, a new
subsidiary that engages in the financial institution advisory business. The
Company's primary asset is the Bank and the Bank is the Company's primary source
of income. The Company's securities consist of 30,000,000 shares of Common Stock
, no par value and 10,000,000 shares of Preferred Stock. As of March 31, 1997
there were 2,606,478 common shares outstanding, held of record by approximately
1,175 shareholders. There were no preferred shares outstanding at March 31,
1997. The Bank has two wholly owned subsidiaries, Merced Area Investment &
Development, Inc. ("MAID") and County Asset Advisors ("CAA"). CAA is currently
inactive. All references herein to the "Company" include the Bank, and the
Bank's subsidiaries, Capital West Group and the Thrift, unless the context
otherwise requires.
GENERAL-BANK The Bank was organized on August 1, 1977, as County Bank of
Merced, a California state banking corporation. The Bank commenced operations on
December 22, 1977. In November 1992, the Bank changed its legal name to County
Bank. The Bank's securities consist of one class of Common Stock, no par value
and is wholly owned by the Company. The Bank's deposits are insured under the
Federal Deposit Insurance Act, by the Federal Deposit Insurance Corporation
("FDIC") up to applicable limits stated therein. Like most state-chartered banks
of its size in California, it is not a member of the Federal Reserve System.
GENERAL-THRIFT The Company acquired the Thrift on June 28, 1996 for a
combination of cash and stock with an aggregate value of approximately $5.8
million. The Thrift is an industrial loan company with four offices. It
specializes in direct loans to the public and the purchase of financing
contracts principally from automobile dealerships and furniture stores. It was
originally incorporated in 1957. Its deposits (technically known as investment
certificate or certificates of deposit rather than deposits) are insured by the
FDIC up to applicable limits.
BANK'S INDUSTRY & MARKET AREA The Bank engages in general commercial
banking business primarily in Merced, Tuolomne and Stanislaus Counties. The Bank
has nine branch offices: two in Merced with the branch located in north Merced
currently designated as the head office, and offices in Atwater, Turlock,
Hilmar, Sonora, Los Banos, and two offices in Modesto opened in late 1996. The
Company's administrative headquarters are located in three separate suites in
the same office complex. The administrative facilities also provides
accommodations for the activities of Merced Area Investment and Development
("MAID"), the Bank's wholly owned real estate development subsidiary and Capital
West Group. Although approved to be a full service branch banking office, the
administrative headquarters facility is presently used solely as the Company's
corporate headquarters. Effective July 15, 1995 the Company entered into an
agreement to relocate its existing administrative office and an existing branch
in downtown Merced to a new facility in downtown Merced. Construction began in
the summer of 1996 and is expected to be complete in late summer of 1997. The
estimated construction cost of the new 29,000 square foot facility including a
parking structure is estimated at approximately $4.7 million. In conjunction
with the construction of the facility, the Merced Redevelopment Agency has
provided the Company with an interest-free loan in the amount of $3.0 million.
The loan matures on July 8, 1997. It is anticipated that upon completion of the
facility, a permanent mortgage loan will be obtained from an unaffiliated
lender. The Thrift engages in general consumer lending business primarily in
Stanislaus, Fresno and Tulare Counties from its main office in Turlock; and
branch offices located in Modesto, Visalia, and Fresno.
F-28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE AN REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFERING BEING MADE HEREBY AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ITS MANAGEMENT OR THE UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THEN THE SHARES TO WHICH IT RELATES, OR AN OFFER OF SUCH SHARES
TO A PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 2
Risk Factors.............................................................. 11
Use of Proceeds........................................................... 16
Price Range of Common Stock............................................... 17
Dividend Policy........................................................... 17
Capitalization............................................................ 18
Branch Acquisition........................................................ 20
Unaudited Pro Forma Combined Financial Information........................ 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 26
Business of Capital Corp of the West...................................... 41
Management................................................................ 59
Regulation and Supervision................................................ 63
Description of Capital Stock.............................................. 69
Underwriting.............................................................. 70
Experts................................................................... 72
Legal Matters............................................................. 72
Available Information..................................................... 72
Information Incorporated by Reference..................................... 73
Index to Financial Statements............................................. F-1
</TABLE>
SHARES
CAPITAL CORP OF THE WEST
COMMON STOCK
---------------------
PROSPECTUS
---------------------
SUTRO & CO.
INCORPORATED
JULY , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts are estimates except for
the SEC registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 5,940
NASD filing fee................................................... 2,455
Nasdaq National Market listing fee................................ *
Registrar and transfer agent fees................................. 5,000
Printing and distribution......................................... 75,000
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... 33,000
Miscellaneous..................................................... 32,000
---------
Total............................................................. $ 400,000
---------
---------
</TABLE>
- ------------------------
* To be provided by amendment.
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 317 of the California General Corporation Law permits
indemnification of directors, officers and employees of corporations under
certain conditions and subject to certain limitations. Article VI of the
Articles of Incorporation of the Registrant contains provisions limiting the
monetary liability of directors for breaches of the duty of care. Article VII of
the Articles of Incorporation of the Registrant contains provisions for the
indemnification of directors, officers and employees to the fullest extent
permitted, and in excess of that authorized, under Section 317. In addition, the
registrant maintains officers' and directors' liability insurance for an annual
aggregate maximum of $2,000,000.
The Registrant's Articles of Incorporation authorize the Registrant, by
bylaw, agreement or otherwise, to provide for indemnification of its agents,
including directors and officers, in excess of that expressly permitted by
Section 317 of the California Corporations Code. California law provides that
rights to indemnification and advancement of expenses need not be limited to
those expressly provided by statute. As a result, under the Registrants'
Articles of Incorporation, the Registrant would be permitted to indemnify its
directors, executive officers, employees and agents, within the limits
established by law and public policy, pursuant to an express contract, bylaw or
charter provision, stockholder vote, or otherwise.
The Registrant's Bylaws provide that a director and officer of the company
who was or is made a party to, or is involved in, any action, suit or proceeding
by reason of the fact that he or she is or was a director or officer of the
Registrant (or was serving at the request of the Registrant as a director,
officer or employee of another entity) shall be indemnified and held harmless by
the Registrant, to the fullest extent authorized by California law, against all
expenses and liabilities actually and reasonably incurred by such person in
connection with any investigation, lawsuit or other proceeding. They also
provide that a director or officer is entitled to have the Registrant pay his or
her expenses incurred in defending such a claim in advance of final disposition
of the claim, subject to receipt of an underwriting to repay such expenses if it
is ultimately determined that the director or officer is not entitled to be
indemnified. The Registrant's Bylaws also provide for permissive, rather than
mandatory, indemnification by the Registrant of employees and agents (other than
directors and officers) in similar circumstances, but without any provision for
paying expenses of defending a claim in advance of final disposition of the
claim.
II-1
<PAGE>
The Registrant's Bylaws provide that all rights to indemnification shall be
enforceable as contract rights. Repeal or modification of the Registrant's Bylaw
provision would only be effective on a prospective basis and would not affect
rights to indemnification and advancement of expenses in effect at the time of
any such repeal or modification. Indemnification under any contract or agreement
entered into between the Registrant and its directors and executive officers
would likewise not be affected by the repeal or modification of the Registrant's
Articles of Incorporation.
Some of the Registrant's officers and directors have entered into
indemnification agreements with the Registrant. The indemnification agreements
provide for partial indemnification of costs and expenses in the event the
indemnified party is not entitled to full indemnification under the terms of the
indemnification agreements. Section 317 does not address this issue. It does,
however, provide that to the extent an indemnified party is successful on the
merits, he is entitled to indemnification. The indemnification agreements
incorporate future change in the laws that increase the protection to the
indemnitee. Such changes apply to the Registrant without further shareholder
approval and may further impair shareholders' rights or subject the Registrant's
assets to the risk of loss in the event of large indemnification claims. An
indemnification agreement may not be amended without the consent of the person
who is protected by it.
The Underwriting Agreement, to be filed as Exhibit 1.1 hereto, will contain
certain provisions relating to indemnification.
See also the undertakings set out in response to Item 17 herein.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION OF EXHIBITS
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.................................................................. (1)
2.1 Branch Purchase and Assumption Agreement dated June 25, 1997, between County Bank and Bank of
America.......................................................................................
5.1 Form of opinion of McCutchen, Doyle, Brown & Enersen, LLP.......................................
10.1 Lease Agreement for Downtown Merced Branch (filed as exhibit 10.1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.2 Lease Agreement for Administrative Offices (filed as exhibit 10.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.3 Lease Agreement for Los Banos Branch (filed as exhibit 10.3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.4 Architectural Agreement for Administrative Office (filed as exhibit 10.4 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by
reference).
10.5 Lease Agreement for Sonora Branch (filed as exhibit 10.5 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.6 1992 Stock Option Plan (filed as exhibit 10.6 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by reference).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION OF EXHIBITS
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
10.7 Agreement and Plan of Acquisition dated as of March 22, 1996, between the Company and Town &
Country Finance and Thrift Company (filed as exhibit 2.1 to the Company's Registration
Statement on Form S-4 filed on April 3, 1996 (Registration No. 333-03174) and incorporated
herein by reference).
10.8 Employment Agreement between Thomas T. Hawker and County Bank (filed as exhibit 10 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated
herein by reference).
11 Statement re computation of earnings per share, included in Note 1 of the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996 and incorporated herein by reference.
13.1 The Company's Annual Report on Form 10-K for the year ended December 31, 1996, incorporated
herein by reference.
13.2 The Company's 1996 Annual Report to Shareholders, included in its Annual Report on Form 10-K for
the year ended December 31, 1996, and incorporated herein by reference.
13.3 The Company's Quarterly Report to Shareholders on Form 10-Q for the period ended March 31, 1997,
and incorporated herein by reference.
21 List of significant subsidiaries of the Company.................................................
23.1 Consent of KPMG Peat Marwick LLP................................................................
23.2 Consent of McCutchen, Doyle, Brown & Enersen, LLP (included in their opinion filed as Exhibit
5.1).
24.1 Power of Attorney (follows signature page)
</TABLE>
- ------------------------
(1) To be provided by amendment
(b) Financial Statement Schedules.
Not applicable.
ITEM 17. UNDERTAKINGS.
1. The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
2. The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
II-3
<PAGE>
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
3. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to its Articles and Bylaws, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person of the
Registrant in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Merced, State of California, on July 11, 1997.
CAPITAL CORP OF THE WEST
(Registrant)
By /s/ THOMAS T. HAWKER
-----------------------------------------
Thomas T. Hawker
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
DATE SIGNATURE TITLE
- --------------- ------------------------------------------------------ ----------------------------------------
<S> <C> <C>
/s/ THOMAS T. HAWKER President and Chief Executive Officer
July 11, 1997 ------------------------------------------- and Director (Principal Executive
Thomas T. Hawker Officer)
/s/ JANEY E. BOYCE Senior Vice President and Chief
July 11, 1997 ------------------------------------------- Financial Officer (Principal Financial
Janey E. Boyce and Accounting Officer)
/s/ LLOYD H. AHLEM
July 11, 1997 ------------------------------------------- Director
Lloyd H. Ahlem
/s/ DOROTHY L. BIZZINI
July 11, 1997 ------------------------------------------- Director
Dorothy L. Bizzini
/s/ JERRY E. CALLISTER
July 11, 1997 ------------------------------------------- Director
Jerry E. Callister
/s/ JACK F. CAUWELS
July 11, 1997 ------------------------------------------- Director
Jack F. Cauwels
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
DATE SIGNATURE TITLE
- --------------- ------------------------------------------------------ ----------------------------------------
<S> <C> <C>
/s/ JOHN FAWCETT
July 11, 1997 ------------------------------------------- Director
John Fawcett
/s/ ROBERT E. HOLL
July 11, 1997 ------------------------------------------- Director
Robert E. Holl
/s/ BERTYL W. JOHNSON
July 11, 1997 ------------------------------------------- Director
Bertyl W. Johnson
/s/ TAPAN MUNROE
July 11, 1997 ------------------------------------------- Director
Tapan Munroe
/s/ JAMES W. TOLLADAY
July 11, 1997 ------------------------------------------- Director
James W. Tolladay
-------------------------------------------
June , 1997 Thomas Van Groningen Director
</TABLE>
II-6
<PAGE>
POWER OF ATTORNEY
Know all men by these presents that the undersigned does hereby make,
constitute and appoint Thomas T. Hawker or Janey E. Boyce as the true and lawful
attorney-in-fact of the undersigned, with full power of substitution and
revocation, for and in the name, place and stead of the undersigned, to execute
and deliver the Registration Statement on Form S-2, and any and all amendments
thereto, including without limitation pre-effective and post-effective
amendments thereto; such Form S-2 and each such amendment to be in such form and
to contain such terms and provisions as said attorney or substitute shall deem
necessary or desirable; giving and granting unto said attorney, or to such
person as in any case may be appointed pursuant to the power of substitution
herein given, full power and authority to do and perform any and every act and
thing whatsoever requisite, necessary or, in the opinion of said attorney or
substitute, able to be done in such matter as the undersigned might or could do
if personally present, hereby ratifying and confirming all that said attorney or
such substitute shall lawfully do or cause to be done by virtue hereof.
In witness whereof, the undersigned has duly executed this Power of
Attorney.
<TABLE>
<S> <C>
Dated: June 17, 1997 /s/ LLOYD H. AHLEM
--------------------------------------------
Lloyd H. Ahlem
Dated: June 20, 1997 /s/ DOROTHY L. BIZZINI
--------------------------------------------
Dorothy L. Bizzini
Dated: June 18, 1997 /s/ JERRY E. CALLISTER
--------------------------------------------
Jerry E. Callister
Dated: June 17, 1997 /s/ JACK F. CAUWELS
--------------------------------------------
Jack F. Cauwels
Dated: June 17, 1997 /s/ JOHN FAWCETT
--------------------------------------------
John Fawcett
Dated: June 17, 1997 /s/ ROBERT E. HOLL
--------------------------------------------
Robert E. Holl
Dated: June 17, 1997 /s/ BERTY W. JOHNSON
--------------------------------------------
Berty W. Johnson
Dated: June 17, 1997 /s/ TAPAN MUNROE
--------------------------------------------
Tapan Munroe
Dated: June 17, 1997 /s/ JAMES W. TOLLADAY
--------------------------------------------
James W. Tolladay
Dated: June , 1997 --------------------------------------------
Thomas Van Groningen
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION OF EXHIBITS
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.................................................................. (1)
2.1 Branch Purchase and Assumption Agreement dated June 25, 1997, between County Bank and Bank of
America.......................................................................................
5.1 Form of opinion of McCutchen, Doyle, Brown & Enersen, LLP.......................................
10.1 Lease Agreement for Downtown Merced Branch (filed as exhibit 10.1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.2 Lease Agreement for Administrative Offices (filed as exhibit 10.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.3 Lease Agreement for Los Banos Branch (filed as exhibit 10.3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.4 Architectural Agreement for Administrative Office (filed as exhibit 10.4 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by
reference).
10.5 Lease Agreement for Sonora Branch (filed as exhibit 10.5 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.6 1992 Stock Option Plan (filed as exhibit 10.6 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by reference).
10.7 Agreement and Plan of Acquisition dated as of March 22, 1996, between the Company and Town &
Country Finance and Thrift Company (filed as exhibit 2.1 to the Company's Registration
Statement on Form S-4 filed on April 3, 1996 (Registration No. 333-03174) and incorporated
herein by reference).
10.8 Employment Agreement between Thomas T. Hawker and County Bank (filed as exhibit 10 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated
herein by reference).
11 Statement re computation of earnings per share, included in Note 1 of the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996 and incorporated herein by reference.
13.1 The Company's Annual Report on Form 10-K for the year ended December 31, 1996, incorporated
herein by reference.
13.2 The Company's 1996 Annual Report to Shareholders, included in its Annual Report on Form 10-K for
the year ended December 31, 1996, and incorporated herein by reference.
13.3 The Company's Quarterly Report to Shareholders on Form 10-Q for the period ended March 31, 1997,
and incorporated herein by reference.
21 List of significant subsidiaries of the Company.................................................
23.1 Consent of KPMG Peat Marwick LLP................................................................
23.2 Consent of McCutchen, Doyle, Brown & Enersen, LLP (included in their opinion filed as Exhibit
5.1).
24.1 Power of Attorney (follows signature page)
</TABLE>
- ------------------------
(1) To be provided by amendment
<PAGE>
----------------------------------------
BRANCH PURCHASE AND ASSUMPTION AGREEMENT
dated as of
June 25, 1997
between
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
and
COUNTY BANK
----------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE 1 Definitions. . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2 Purchase and Sale. . . . . . . . . . . . . . . . . . . 6
2.1 Purchase and Sale. . . . . . . . . . . . . . . . . . . 6
2.2 Closing. . . . . . . . . . . . . . . . . . . . . . . . 7
2.3 Transitional Matters . . . . . . . . . . . . . . . . . 10
2.4 Employee Considerations. . . . . . . . . . . . . . . . 13
ARTICLE 3 Price and Adjustments. . . . . . . . . . . . . . . . . 16
3.1 Price. . . . . . . . . . . . . . . . . . . . . . . . . 16
3.2 Adjustments. . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE 4 Additional Covenants . . . . . . . . . . . . . . . . . 20
4.1 Seller's Covenants . . . . . . . . . . . . . . . . . . 20
4.2 Buyer's Covenants. . . . . . . . . . . . . . . . . . . 24
4.3 Consents . . . . . . . . . . . . . . . . . . . . . . . 25
4.4 Environmental Matters. . . . . . . . . . . . . . . . . 25
4.5 Valuation of the Assets. . . . . . . . . . . . . . . . 33
4.6 Clearing Items . . . . . . . . . . . . . . . . . . . . 33
4.7 IRA Deposits and Keogh Accounts. . . . . . . . . . . . 34
4.8 Interest Reporting and Withholding . . . . . . . . . . 34
4.9 Eminent Domain or Taking . . . . . . . . . . . . . . . 34
4.10 Damage or Destruction. . . . . . . . . . . . . . . . . 35
ARTICLE 5 Representations and Warranties . . . . . . . . . . . . 36
5.1 Seller's Representations and Warranties. . . . . . . . 36
5.2 Buyer's Representations and Warranties . . . . . . . . 38
ARTICLE 6 Understandings . . . . . . . . . . . . . . . . . . . . 40
6.1 Depositors' Rights . . . . . . . . . . . . . . . . . . 40
6.2 Unclaimed Property . . . . . . . . . . . . . . . . . . 40
6.3 Head Office Accounts . . . . . . . . . . . . . . . . . 40
6.4 Limitation of Warranties . . . . . . . . . . . . . . . 41
ARTICLE 7 Conditions to the Closing. . . . . . . . . . . . . . . 41
7.1 Seller's Conditions. . . . . . . . . . . . . . . . . . 41
7.2 Buyer's Conditions . . . . . . . . . . . . . . . . . . 42
ARTICLE 8 Termination. . . . . . . . . . . . . . . . . . . . . . 44
8.1 Events of Termination. . . . . . . . . . . . . . . . . 44
8.2 Liability for Termination. . . . . . . . . . . . . . . 44
ARTICLE 9 Survival, Indemnification. . . . . . . . . . . . . . . 45
9.1 Survival . . . . . . . . . . . . . . . . . . . . . . . 45
9.2 Seller's Indemnity . . . . . . . . . . . . . . . . . . 45
9.3 Buyer's Indemnity . . . . . . . . . . . . . . . . . . 46
9.4 Arbitration of Disputes. . . . . . . . . . . . . . . . 46
9.5 Limit on Indemnities . . . . . . . . . . . . . . . . . 47
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<PAGE>
ARTICLE 10 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . 48
10.1 Obligations of the Buyer and the Seller. . . . . . . . 48
10.2 Access to Information. . . . . . . . . . . . . . . . . 48
10.3 Allocation of Consideration. . . . . . . . . . . . . . 49
ARTICLE 11 Miscellaneous. . . . . . . . . . . . . . . . . . . . . 49
11.1 Public Notice. . . . . . . . . . . . . . . . . . . . . 49
11.2 Assignment . . . . . . . . . . . . . . . . . . . . . . 49
11.3 Notices. . . . . . . . . . . . . . . . . . . . . . . . 49
11.4 Time . . . . . . . . . . . . . . . . . . . . . . . . . 50
11.5 Expenses . . . . . . . . . . . . . . . . . . . . . . . 50
11.6 Communications . . . . . . . . . . . . . . . . . . . . 50
11.7 Entire Agreement . . . . . . . . . . . . . . . . . . . 50
11.8 Amendment. . . . . . . . . . . . . . . . . . . . . . . 51
11.9 Governing Law, Severability. . . . . . . . . . . . . . 51
11.10 Waiver . . . . . . . . . . . . . . . . . . . . . . . . 51
11.11 Confidentiality. . . . . . . . . . . . . . . . . . . . 51
11.12 Third Party Rights . . . . . . . . . . . . . . . . . . 52
11.13 Headings . . . . . . . . . . . . . . . . . . . . . . . 52
11.14 Counterparts . . . . . . . . . . . . . . . . . . . . . 53
SCHEDULES
---------
A List of Branches
1.1(a) Branch Real Estate
1.1(b) Furniture, Fixtures and Equipment
1.1(c) Other Liabilities
1.1(d) Deposit Summary
2.2(b)(i)(A) Form of Grant Deed
2.2(b)(i)(B) Form of Bill of Sale
2.2(b)(i)(C) Form of Assignment and Assumption
2.2(d) Contracts
2.2(e) Leases
3.1 Leasehold Improvements
4.4(c) Phase I Environmental Site
Assessments and Asbestos Surveys
5.1(e) Litigation
5.1(h) Employees
5.2(j) Real Estate Disclosures
6.3 Head Office Accounts
-ii-
<PAGE>
BRANCH PURCHASE AND ASSUMPTION AGREEMENT
THIS BRANCH PURCHASE AND ASSUMPTION AGREEMENT ("Agreement") is made as of
June 25, 1997, by and between BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, a national banking association established under the laws of the
United States (the "Seller"), and COUNTY BANK, a California banking
corporation (the "Buyer").
WHEREAS, the Seller maintains the branch or branches listed on
Schedule A hereto (sometimes referred to herein collectively as the
"Branches" and individually as a "Branch");
WHEREAS, the Buyer wishes to purchase certain of the assets and assume
certain of the liabilities of the Branches and the Seller is willing to
sell and transfer the same upon the terms and subject to the conditions
hereinafter set forth; and
WHEREAS, the Buyer intends that retail and business banking services
will be offered in the geographic areas served by the Branches.
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants, agreements and conditions contained
herein, the Seller and the Buyer hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. For purposes of this Agreement:
"Account" means, as of any date, a deposit liability of the Seller which
(i) is not represented by a certificate of deposit having a fixed maturity
and (ii) is maintained at one of the Branches.
"Accrued Expenses" means the accrued and unpaid expenses appearing as a
liability on the Financial Statements pursuant to Section 3.2(c).
"Accrued Interest" on any Deposits at any date means interest which is
accrued on such Deposits to and including such date and not yet posted to
such deposit accounts.
"Affiliate" of a person means any person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such person.
"Agreement" means this Branch Purchase and Assumption
-1-
<PAGE>
Agreement, including all schedules, exhibits and addenda, as modified,
amended or extended from time to time.
"Allocation" shall have the meaning set forth in Section 10.3.
"Assets" means the Branch Real Estate, the Furniture, Fixtures and
Equipment, Improvements, Leasehold Improvements, Cash on Hand, safe deposit
boxes located at the Branches (exclusive of the contents thereof), Prepaid
Expenses, Overdrafts and all books, records, files and documentation relating to
the foregoing.
"Assumed Contracts" shall have the meaning set forth in Section 2.2(d).
"Assumed Deposits" means all Deposits existing on the Closing Date in one
or more of the Branches, together with all Accrued Interest thereon as of the
Closing Date; PROVIDED, HOWEVER, that Assumed Deposits shall not include any
of the following, which shall be retained by Seller: (i) Deposits which
secure loans, (ii) Deposits not assumed pursuant to Sections 3.2(f), 3.2(g),
or 6.3, (iii) Deposits which secure Visa card accounts, and (iv) other
Deposits, if any, which the Buyer has advised the Seller, at least thirty
(30) Business Days prior to the Closing Date, it cannot legally accept.
"Branch Real Estate" means all real property owned by the Seller on which
any of the Branches is located and which is identified in the preliminary
title reports included in Schedule 1.1(a).
"Break-up Fee" means an amount to be paid by Buyer to Seller pursuant to
Section 5.2(i) hereof calculated by multiplying $75,000 times the number of
Branches listed on Schedule A hereto which are not acquired due to the
failure of Buyer to raise sufficient capital.
"Business Day" means a day on which the Seller is open for business in
California and which is not a Saturday or Sunday.
"Cash on Hand" means, as of any date, all petty cash, vault cash, teller
cash, automated teller machine cash and prepaid postage maintained at the
Branches.
"Closing" and "Closing Date" refer to the closing of the sale, purchase,
transfer and assumption provided for herein to be held at the time and date
provided for in Section 2.2(a) hereof.
"Closing Financial Statement" means the estimated balance sheet of the
Branches prepared by the Seller as of the close of business at the Branches on
the Closing Date and on which are recorded as of such date, in accordance with
the Seller's normal practices and procedures, the Assets and the Liabilities
(except
-2-
<PAGE>
that such normal practices and procedures shall be modified as necessary to
implement prorations required by, or other provisions of, this Agreement).
"Continuation Coverage" shall have the meaning set forth in Section
2.4(g).
"Deposits" means, as of any date, all deposit liabilities of the Seller
that are Accounts or certificates of deposit maintained at the Branches,
including, without limitation, Time Deposits, and including all uncollected
items included in depositors' balances, as of such date.
"Direct Deposit Cut-off Date" shall have the meaning set forth in Section
4.1(g).
"Employee" means any employee employed on the Closing Date at one of the
Branches by Seller or its subsidiaries or Affiliates, including without
limitation, those employees on medical leave, family leave, military leave or
personal leave under Seller's policies.
"Federal Funds Rate" on any day means the per annum rate of interest
(rounded upward to the nearest 1/100 of 1%) which is the weighted average of
the rates on overnight federal funds transactions arranged on such day or, if
such day is not a banking day, the previous banking day, by federal funds
brokers computed and released by the Federal Reserve Bank of New York (or any
successor) in substantially the same manner as such Federal Reserve Bank
currently computes and releases the weighted average it refers to as the
"Federal Funds Effective Rate" at the date of this Agreement.
"Final Financial Statement" means the balance sheet of the Branches
prepared by the Seller as of the close of business at the Branches on the
Closing Date, and delivered by the Seller to the Buyer pursuant to Section
3.2(a)(ii). The Final Financial Statement is to be prepared in accordance
with the Seller's normal practices and procedures (except that such normal
practices and procedures shall be modified as necessary to implement
prorations required by, or other provisions of, this Agreement) and in a
manner consistent with the Closing Financial Statement.
"Financial Statements" shall mean collectively the Closing Financial
Statement, the Pre-Final Financial Statement and the Final Financial
Statement.
"Furniture, Fixtures and Equipment" means all furniture, fixtures and
equipment that are listed on Schedule 1.1(b) under the caption "Sold to
Buyer." Buyer acknowledges that there shall be excluded from this definition
any and all other items, including those listed on Schedule 1.1(b) under the
caption "Retained by Seller (Items Excluded from Sale)."
-3-
<PAGE>
"Improvements" means all improvements to the Branch Real Estate
purchased, installed or constructed by or on behalf of, and owned by, the
Seller and used in connection with the operation or maintenance of the
Branches, including, without limitation, buildings, structures, parking
facilities and drive-up teller facilities.
"Individual Retirement Account" or "IRA" means an account created by
trust for the exclusive benefit of an individual or his or her beneficiaries
in accordance with the provisions of Section 408 of the IRC.
"Initial Base Amount" shall have the meaning set forth in Section 3.1.
"IRA Deposits" shall have the meaning set forth in Section 3.2(f).
"IRC" means the Internal Revenue Code of 1986, as amended.
"Keogh Accounts" shall have the meaning set forth in Section 3.2(g).
"Lease" means any lease or sublease of a lease by which Seller has rights
to occupy and use Leased Real Estate or Leasehold Improvements or both.
"Leased Real Estate" means all real property on which any of the Branches
is located, which is occupied and used by the Seller pursuant to a lease.
"Leasehold Improvements" means all improvements on or constituting a
portion of Leased Real Estate, purchased, installed or constructed by or on
behalf of, and owned by, Seller and used in connection with the operation or
maintenance of the Branches, including, without limitation, buildings,
structures, parking facilities and drive-up teller facilities.
"Liabilities" means (i) the Assumed Deposits, (ii) the Assumed Contracts,
if any, (iii) the Seller's obligations to provide services from and after the
Closing Date in connection with the Assets and the Assumed Deposits,
including obligations with respect to safe deposit boxes, (iv) the Leases, if
any, and (v) such other liabilities of the Seller with respect to the
operations of the Branches as may be described on Schedule 1.1(c) (the "Other
Liabilities"); excluding, however, any Leases or Assumed Contracts as to
which any consents required to transfer the same to the Buyer at Closing
cannot be obtained; and no other duty, obligation or liability whatsoever
(including, without limitation, any and all penalties, fines, compensatory or
punitive damages of any kind whatsoever) of the Seller, its Affiliates or any
other person or with respect to the Assets or Liabilities.
-4-
<PAGE>
"Magnetic Tapes" shall mean the computer data storage tapes (which may be
in reel-to-reel or cartridge form) prepared by Seller which contain the
information to be used for an automated conversion of the Assumed Deposits.
"Market Value" shall mean, with respect to any Branch Real Estate and any
Improvements with respect thereto, the appraised market value thereof on an
"as is" basis, reflecting the highest and best use thereof in the condition
observed by the appraiser upon inspection and as such property physically and
legally exists without hypothetical conditions, assumptions or
qualifications. Market Value is the most probable price which a property
should bring in a competitive and open market under all conditions requisite
to a fair sale, the Buyer and the Seller each acting prudently and
knowledgeably, and assuming the price is not affected by undue stimulus.
Implicit in this definition is the consummation of a sale as of a specified
date and the passing of title from the Seller to the Buyer under conditions
whereby: (i) the Buyer and the Seller are typically motivated; (ii) both
parties are well informed or well advised, and acting in what they consider
their own best interests; (iii) a reasonable time is allowed for exposure in
the open market; (iv) payment is made in cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and (v) the price represents the
normal consideration for the property sold, unaffected by special or creative
financing or sales concessions granted by anyone associated with the sale.
The appraisal shall be set forth in a report of appraisal by an independent
appraiser to be selected by the Buyer from a list of no more than five (5)
appraisers to be provided by the Seller. The cost of such appraisal shall be
borne equally by the Buyer and the Seller.
"Overdrafts" means only overdrafts in Transaction Accounts (other than
overdrafts extended pursuant to a formal line of credit or similar
arrangement) maintained at the Branches.
"Pre-Final Financial Statement" means the balance sheet of the Branches
prepared by the Seller as of the close of business at the Branches on the
Closing Date, and delivered by the Seller to the Buyer pursuant to Section
3.2(a)(i). The Pre-Final Financial Statement is to be prepared in accordance
with the Seller's normal practices and procedures (except that such normal
practices and procedures shall be modified as necessary to implement
prorations required by, or other provisions of, this Agreement) and in a
manner consistent with the Closing Financial Statement, and shall, to the
extent practicable, reflect actual Deposits and Cash on Hand as of the
Closing Date, and any third-party invoices (such as from communication
vendors) available by the time the Seller prepares the Pre-Final Financial
Statement.
"Prepaid Expenses" means the prepaid expenses appearing as an asset on
the Financial Statements pursuant to Section 3.2(c).
"Purchase Premium" means, as of the Closing Date, the sum of
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the following: (i) 7.28% times the average over the twenty (20) Business Days
preceding the Closing of the Assumed Deposits located in the Mariposa Branch;
plus (ii) 7.28% times the average over the twenty (20) Business Days
preceding the Closing of the Assumed Deposits located in the Dos Palos
Branch; plus (iii) 7.28% times the average over the twenty (20) Business Days
preceding the Closing of the Assumed Deposits located in the Livingston
Branch; PROVIDED, HOWEVER, in the event that (x) the Assumed Deposits for any
Branch on the Closing Date are equal to or greater than 70% and less than 80%
of the aggregate Deposits for such Branch as reflected in the Deposit summary
figures set forth on Schedule 1.1(d), then the percentage multiplier to be
used in calculating the Purchase Premium attributable to such Branch shall be
reduced by 100 basis points, or (y) the Assumed Deposits for any Branch on
the Closing Date are less than 70% of the aggregate Deposits for such Branch
as reflected in the Deposit summary figures set forth on Schedule 1.1(d),
then the percentage multiplier to be used in calculating the Purchase Premium
attributable to such Branch shall be reduced by 200 basis points.
"Returned Items" shall have the meaning set forth in Section 3.2(h).
"Seller's Knowledge" or other similar phrases shall mean the actual
knowledge, without having conducted any independent inquiry or investigation,
of the regional manager of the Seller responsible for a Branch (but only as
to information as to such Branch) and Brian A. Dunne, Vice President of the
Seller.
"Settlement Date" means the sixtieth (60th) calendar day following the
Closing Date.
"Time Deposit" means a certificate of deposit which is not transferable
or negotiable, and earns interest at a fixed rate for a specific term.
"Transaction Account" means any Account in respect of which deposits
therein are withdrawable in practice upon demand or upon which third party
drafts may be drawn by the depositor, including checking accounts, Alpha
accounts, NOW accounts and money market deposit accounts.
"Validation Run" shall have the meaning set forth in Section 2.2(b)(i)(F).
ARTICLE 2
PURCHASE AND SALE
2.1 PURCHASE AND SALE. Upon the terms and subject to the conditions of
this Agreement, the Seller agrees to sell and transfer and the Buyer agrees
to purchase and assume the Assets and the Liabilities at the Closing as
provided in Section 2.2.
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2.2 CLOSING.
(a) CLOSING DATE AND PLACE. The closing of the transactions provided
for herein will be held at the offices of the Seller, 315 Montgomery Street,
Suite 1300, San Francisco, California 94104; PROVIDED, THAT transfer of the
Branch Real Estate shall be effected through a real estate escrow to be
opened with Chicago Title Company, 388 Market Street, San Francisco,
California 94111. The closing shall be held on a Thursday that is mutually
agreeable to the Buyer and the Seller as soon as practicable following the
receipt of all government and other approvals and consents necessary for the
consummation of the transactions contemplated hereby (including the
expiration of any statutory waiting periods) and the satisfaction (or waiver)
of all other conditions to closing provided for herein. Notwithstanding the
foregoing, the Seller may, for any proper business reason, adjourn the date
and time of the Closing, upon written notice to the Buyer; PROVIDED, HOWEVER,
that the Seller shall use all reasonable efforts to reschedule the Closing to
take place at a time agreeable to the Buyer, which agreement shall not be
unreasonably withheld; PROVIDED FURTHER, HOWEVER, that the parties shall
agree in any event upon a date for the Closing which shall be on or prior to
March 31, 1998, or such other date as the Seller and the Buyer shall agree
upon in writing.
(b) CONVEYANCES; PAYMENT.
(i) The following shall be delivered by the parties at the
Closing, subject to Sections 2.2(d), 2.2(e), 3.2(b), 4.3 and the final
paragraph of Section 7.2:
(A) The Seller shall deliver to the Buyer one or more grant
deeds for the Branch Real Estate, if any, in the form attached
hereto as Schedule 2.2(b)(i)(A) and shall cooperate with the
Buyer in assisting the Buyer to obtain (at the Buyer's expense)
one or more CLTA policies of title insurance with respect to the
Branch Real Estate (or portions thereof) if the Buyer determines
to obtain such insurance;
(B) The Seller shall deliver to the Buyer one or more bills
of sale in the form attached hereto as Schedule 2.2(b)(i)(B) for
the Leasehold Improvements, if any, and the Furniture, Fixtures
and Equipment;
(C) The Seller shall deliver to the Buyer one or more
assignments in the form attached hereto as Schedule 2.2(b)(i)(C)
for the Leases, if any, and the Assumed Contracts, if any;
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(D) The Seller shall make the payment to the Buyer required
by Section 3.1 in immediately available funds (such payment to be
made no later than 11:00 a.m.(Pacific Time));
(E) The Seller shall use its reasonable efforts to have
available for pick-up at 1455 Market Street, San Francisco,
California, by the Buyer by approximately 6:00 a.m. on the
morning following the Closing Date (I) hard copy (printed) lists
of Assumed Deposits maintained at each Branch, which lists shall
identify each Assumed Deposit by type of Account, with
appropriate information regarding the depositor and the terms of
the Account and (II) Magnetic Tapes. The Buyer shall have the
responsibility of making and paying for the appropriate courier
arrangements to pick up from the Seller the items referred to in
(I) and (II) above and to deliver the items referred to in (I) to
the appropriate Branches and the items referred to in (II) to the
Buyer's system vendor;
(F) The Seller shall prepare, separately for each Branch, a
readable set of the Magnetic Tapes and printed reports referred
to in Section 2.2(b)(i)(E) to be used for a validation (practice)
run ("Validation Run") on a mutually agreed-upon date thirty (30)
to sixty (60) calendar days prior to the Closing Date, at no cost
to the Buyer, PROVIDED THAT, depending on the number and
locations of the Branches, the parties may agree to conduct more
than one Validation Run. If the Buyer thereafter requests any
additional Magnetic Tapes (whether or not Buyer also concurrently
requests printed reports) for Validation Run purposes, the Seller
will provide the Magnetic Tapes (and printed reports if requested
by Buyer) at a cost to Buyer of $2,000 for each set of Magnetic
Tapes (whether or not accompanied by printed reports);
(G) The Seller shall deliver to the Buyer copies of written
consents to the assignment of any Assumed Contracts or Leases
requiring such consent; and
(H) The Buyer shall pay to the Seller the amount of the
interest which would accrue at the Federal Funds Rate in effect
on the Closing Date on the cash payment by the Seller pursuant to
Section 2.2(b)(i)(D).
(c) CLOSING COSTS; PRORATION. The Seller and the Buyer
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shall each pay one-half of any documentary, stamp, deed, sales, use or other
transfer taxes, recording fees and escrow fees relating to the sale of the
Assets and assumption of the Liabilities, including but not limited to the
assignment of the Leases. On the Closing Date, (i) all real and personal
property taxes and current installments of special assessments levied or
assessed with respect to the Branch Real Estate, the Improvements, the
Leasehold Improvements and the Furniture, Fixtures and Equipment shall be
prorated between the Seller and the Buyer on a daily basis as of the Closing
Date based upon the fiscal year of the appropriate taxing authority, and (ii)
utilities and any other normal maintenance and operating expenses relating to
the Branch Real Estate, the Leases, the Improvements, the Leasehold
Improvements and the Furniture, Fixtures and Equipment shall be prorated
between the Seller and the Buyer as of the Closing Date on a daily basis.
(d) CONTRACTS. At the Closing, the Seller shall assign to the Buyer all
of the Seller's right, title and interest in those equipment leases and
service and maintenance contracts, if any, relating to the operations of one
or more of the Branches which are set forth in Schedule 2.2(d) and which the
Buyer indicates in writing to the Seller not later than thirty (30) Business
Days prior to Closing the Buyer wishes to assume (collectively, the "Assumed
Contracts"). The Seller shall not be required to provide Buyer with any
information regarding, or to set forth in Schedule 2.2(d), equipment leases
or service and maintenance contracts which it believes are not legally
assignable and the Seller shall have no liability to the Buyer as the result
of its inability to accomplish assignments thereof. After the date of this
Agreement, the Seller shall not enter into, except with the prior written
consent of the Buyer, any service, maintenance or other contracts, or any
equipment lease, relating to the operations of the Branches for which the
Buyer shall have any responsibility after the Closing.
(e) LEASES. At the Closing, the Seller shall assign to the Buyer all of
the Seller's right, title and interest in the Leases, if any, set forth in
Schedule 2.2(e); PROVIDED, HOWEVER, that if the Seller notifies the Buyer not
later than thirty (30) Business Days prior to the Closing Date that one or
more such Leases are legally nonassignable without the consent of one or more
third parties, and that such consents have not been obtained, then (i) the
Seller shall not be required to assign such Lease or Leases at Closing, (ii)
Seller shall have no liability to the Buyer as the result of its inability to
accomplish such assignment and (iii) either (A) the Seller at its sole
discretion may elect to exercise its right under the final paragraph of
Section 7.2 to exclude the affected Branch from the Closing, and the parties
shall continue to be obligated to carry out the provisions of this Agreement
as to the remaining Branch or Branches or (B) if the Lease permits the Seller
to sublease the premises and the related Leasehold Improvements to the Buyer,
the Seller in its sole discretion may elect to sublease such
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premises and Leasehold Improvements to Buyer for the maximum term permitted
under the Lease, on substantially the same terms and conditions as the terms
and conditions of the Lease, in which case the consideration payable under
Article 3 shall be adjusted to reflect the Leasehold Improvements which will
not be transferred to the Buyer and the parties shall continue to be
obligated to carry out the provisions of this Agreement as to the remaining
Branch or Branches.
2.3 TRANSITIONAL MATTERS.
(a) CONDUCT OF BUSINESS PRIOR TO THE CLOSING. From the date hereof
until the Closing, except as expressly permitted by this Agreement or
otherwise consented to or approved by the Buyer in writing (such consent or
approval not to be unreasonably withheld):
(i) The Seller shall not permit the Branches to incur any
material liabilities or material obligations (whether directly or by
way of guaranty, endorsement, surety contract or otherwise) including
without limitation any obligation for borrowed money or evidenced by
any note, bond, debenture or similar instrument, except for deposit
liabilities incurred in the ordinary course of business pursuant to
the Seller's customary rate schedules, and except for other
liabilities and obligations incurred in the ordinary course of
business;
(ii) The Seller shall not sell, transfer, mortgage, encumber or
otherwise dispose of any of the Assets except for the disposition of
Assets (other than the Branch Real Estate, Improvements or Leasehold
Improvements) in the ordinary course of business;
(iii) Except as provided in Article 6, the Seller will not cause
the transfer from one or more of the Branches to the Seller's other
operations (except to another Branch) of any deposits of the type
included in the Liabilities; PROVIDED, HOWEVER, that the Seller may
transfer deposits to the Seller's other branches or offices upon
request of the depositors and may transfer to its other branches or
offices other deposits which are not to be transferred to Buyer
pursuant to this Agreement; PROVIDED, FURTHER, that, except in
connection with a general solicitation or general advertising not
targeted specifically at the depositors of the Assumed Deposits,
Seller will not solicit or encourage depositors to transfer deposits
to Seller's other branch offices;
(iv) The Seller shall not make any capital commitments with
respect to the Branch Real Estate, the Improvements and the Leasehold
Improvements except
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aggregate capital commitments made in the ordinary course of business
not exceeding $25,000 for each Branch;
(v) The Seller shall not grant any increase in the rate of
compensation or in the benefits payable or to become payable to any
current officer or employee of the Branches, or to any current agent
or consultant thereof, over the levels in effect as of the date
hereof, other than any regularly scheduled increases, including
bonuses, contemplated under contracts, policies or programs existing
on the date hereof or under any benefit program generally applicable
to the Seller's employees; provided that the Seller shall retain the
right to hire additional branch employees at comparable rates of
compensation as necessary for the operation of the Branches;
(vi) The Seller will maintain the Branch Real Estate,
Improvements, Leasehold Improvements and Furniture, Fixtures and
Equipment substantially in accordance with its normal practices, and
keep such property in its present condition, ordinary wear and tear
excepted;
(vii) The Seller shall operate the Branches and the businesses
thereof in accordance with its normal practices and will use
reasonable efforts to preserve for the benefit of the Buyer after the
Closing its business, goodwill and relationships with customers and
suppliers; and
(viii) The Seller shall provide the Buyer reasonable access
during normal business hours to and the opportunity to review and
inspect the Branch Real Estate, Improvements, Leased Real Estate,
Leasehold Improvements, Furniture, Fixtures and Equipment of the
Branches, and the books, records, files, documentation and accounts of
the Branches; shall furnish to the Buyer such reports and compilations
pertaining thereto as the Buyer shall reasonably request from time to
time; and shall furnish to the Buyer all such other information
pertaining to the Assets and the Liabilities and the business of the
Branches as the Buyer may reasonably request. In addition, the Seller
shall provide the Buyer reasonable access to the Branches during the
thirty (30) calendar day period immediately preceding the Closing Date
for the purpose of installing teller terminals and other equipment,
PROVIDED THAT (A) Seller shall not be required to provide such access
to any Branch until after all consents, approvals and authorizations
referred to in Sections 7.1(c) and 7.2(c) hereof have been obtained
with respect to all Branches and (B) Buyer shall give
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Seller at least twenty-four (24) hours advance notice that it wishes to
have such access. The Buyer agrees to cause the installation of such
teller terminals and other equipment to be effected in a manner intended
to minimize disruption to the operations of the Branches.
(b) BUYER'S ACCESS TO BRANCH PREMISES. The Buyer will indemnify, defend,
and hold Seller harmless for, from and against any and all claims, damages,
costs, liabilities and losses (including mechanics' liens) arising out of any
entry by Buyer or its agents, designees or representatives on the Branch Real
Estate or Leased Real Estate for purposes of the review, inspection and
installation provided for in Section 2.3(a)(viii) or for any other purpose
(other than for the purposes set forth in Section 4.4(d), which shall be
governed by the provisions of that Section). Without limiting the scope of the
foregoing, Buyer also will restore the Branch Real Estate, Improvements, Leased
Real Estate, Leasehold Improvements, Furniture, Fixtures and Equipment, books,
records, files, and documentation of the Branches at its sole cost and expense
if one or more of the transactions contemplated by this Agreement do not close.
Until restoration is complete, Buyer will take all steps necessary to ensure
that any conditions at the Branches created by any testing, review, inspection,
installation or other actions performed by or for Buyer will not unreasonably
interfere with the normal operation of the Branches or create any dangerous,
unhealthy, unsightly or noisy conditions at the Branches. Buyer shall comply
with any requirements or restrictions contained in the Leases regarding any
actions it takes at the Leased Real Estate, including, without limitation, any
requirements of notice to the landlord. The provisions of this Section 2.3(b)
shall survive the Closing or any earlier termination of this Agreement.
(c) DATA PROCESSING CONVERSION. The conversion of the data processing
with respect to the Branches and the Assets and the Liabilities to be
transferred hereunder will commence on the Closing Date and continue during the
night on the Closing Date and the following morning. The Seller shall use its
reasonable efforts to make available the required hard copy (printed) reports
(and Magnetic Tapes, if applicable) in connection therewith for pick up at 1455
Market Street, San Francisco, California, from the Seller by 6:00 a.m. on such
morning, subject to any production problems that are beyond the Seller's
reasonable control. The arrangements for pickup, delivery and payment for
courier services shall be as provided in Section 2.2(b)(i)(E). In connection
with the conversion of the data processing, the Seller and the Buyer shall each
cooperate with the other and shall each pay their own costs and expenses
associated with the conversion of the data processing and shall bear equally the
duties and responsibilities relating to the conversion. Seller will not migrate
(transfer) existing PINs used for ATM cards to the Buyer.
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2.4 EMPLOYEE CONSIDERATIONS.
(a) Buyer shall offer employment as of the Closing Date to all Employees.
Following the Closing Date, such Employees will be "at will" employees of Buyer
under the same conditions as Buyer's other employees. All Employees shall be
offered employment at base wages and salaries no less favorable than the wages
and salaries currently being paid by Seller to such Employees. To the extent
consistent with Buyer's existing structure for comparable positions and
comparable officer titles and its current policies regarding officer titles,
Employees shall be offered positions with responsibilities and officer titles
comparable to those they currently have with Seller and, unless agreed upon by
any such Employee, within a reasonable geographic proximity to such Employee's
work location before the Closing Date.
(b) All Employees who accept employment with Buyer as of the Closing Date
shall be eligible to participate in the employee benefit plans and other fringe
benefits of Buyer on the same basis as such plans and benefits are offered to
employees of Buyer with comparable positions with Buyer, except as provided in
the penultimate sentence of Section 2.4(e). Buyer shall credit such Employees
for their length of service with Seller or its Affiliates for all purposes under
each employee benefit plan and fringe benefit to be provided by Buyer to such
Employees, to the same extent such service was recognized under a similar plan
of Seller, based on information provided by Seller. However, such service need
not be counted for purposes of calculating accrued benefits under a pension
benefit plan, except that in determining the rate of prospective benefit
accrual, service shall be counted where such rate increases with service. For
purposes of this Section 2.4, "employee benefit plans and other fringe benefits"
includes, without limitation, pension and profit sharing plans, retirement and
post retirement welfare benefits, health insurance benefits (medical, dental and
vision), disability, life and accident insurance, sickness benefits, vacation,
employee loans and banking privileges.
(c) If Buyer offers a salary continuation or similar program for employees
unable to work for medical reasons, the Employees who accept employment with
Buyer shall be credited under any program of Buyer with at least the number of
sickness benefit days accrued under Seller's program at the Closing Date.
(d) Seller agrees to remain responsible for the payment of all benefits
accrued during the period of employment by the Seller under the terms of the
Seller's retirement plans with respect to any Employee. Buyer shall not at any
time assume any liability for the benefits of any active or any terminated,
vested or retired participants in the Seller's retirement plans.
(e) Seller shall be responsible for payments for accrued vacation not
taken by an Employee prior to the Closing Date and
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for timely payment as required by law of all wages, salaries, bonuses, if
any, and other compensation with respect to service completed on or prior to
the Closing Date. Seller shall offer Employees who accept employment with
Buyer the option to receive cash or to transfer to Buyer their accrued
vacation days or fractions thereof earned but unused while employed by
Seller. In the event any Employee elects to receive cash upon employment by
Buyer, Seller shall make a cash payment to such Employee in accordance with
applicable law. In the event any such Employee elects to have his or her
accrued vacation transferred upon employment by Buyer, Buyer shall give such
Employee credit after the Closing Date for the same number of vacation days
or fractions thereof he or she has accrued with Seller as of the Closing
Date. For purposes of this Section, personal choice days or fractions
thereof will be treated as vacation days. In the event Employees elect to
have their accrued vacation carried over to Buyer, Seller shall pay to Buyer,
not later than the date of the Final Financial Statement, an amount equal to
the net cash value of each such Employee's accrued vacation before payroll
deductions. In the calendar year in which the Closing Date occurs, Employees
shall be eligible to earn at least the prorated annual vacation amount
Employees were eligible to earn under Seller's vacation policy. In
subsequent calendar years, Employees will be eligible to earn vacation
according to the schedule specified in Buyer's policy and subject to the
maximum accruals permitted under Buyer's policies.
(f) Seller shall retain the responsibility for payment of all medical,
dental, vision, health and disability claims incurred by any Employee prior to
the Closing Date, and Buyer shall not assume any liability with respect to such
claims. On or after the Closing Date, all medical, dental, vision, health and
disability claims incurred by Employees in Buyer's employ shall be determined
under Buyer's benefit plans. Buyer agrees that Employees and their eligible
dependents will receive credit for their periods of coverage under Seller's
health or disability plans towards satisfying any preexisting condition clause
in any of Buyer's health or disability plans, provided such Employee or eligible
dependent is enrolled in Seller's plans on the Closing Date. Buyer also agrees
that Employees and their eligible dependents shall receive credit under Buyer's
health care plans for any deductibles paid by such Employee and enrolled
dependents for the current plan year under a health care plan maintained by
Seller.
(g) Seller shall be responsible for providing any Employee whose
"qualifying event," within the meaning of Section 4980B(f) of the IRC, occurs on
or prior to the Closing Date (and such Employee's "qualified beneficiaries"
within the meaning of Section 4980B(f) of the IRC) with the continuation of
group health coverage required by Section 4980B(f) of the IRC ("Continuation
Coverage") under the terms of the health plan maintained by Seller. Buyer shall
be responsible for Continuation Coverage to any Employee in Buyer's employ (and
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each Employee's qualified beneficiaries) whose qualifying event occurs after
the Closing Date to the extent required by law.
(h) Seller agrees that it shall retain, consistent with its normal
employment practices, all liability and obligation, if any (including, without
limitation, the liability and obligation for all wages, salary, vacation pay and
unemployment, medical, dental, vision, health and disability benefits) for those
former employees of the Branches who retired or terminated employment prior to
the Closing Date or who otherwise do not become employees of Buyer.
(i) Effective as of the Closing Date, Buyer shall assume liability for
severance pay and similar obligations payable to any Employee who accepts
employment with Buyer and who is terminated by Buyer on or after the Closing
Date. Such payment shall be made pursuant to Buyer's normal severance policy
and Buyer shall compute severance pay by giving Employees full credit for all
years of service that would have been recognized under Seller's severance
policy. In addition, for an Employee whose job with Buyer is eliminated within
twelve (12) months of the Closing Date, Buyer agrees to pay to such Employee the
difference, if any, between the amount of severance pay received by the Employee
under Buyer's severance policy and the amount such Employee would have received
upon his or her separation from the Seller under Seller's severance policy in
effect on the Closing Date.
(j) For Employees who accept employment with Buyer and who as of the
Closing Date are absent from work due to sickness or short-term disability,
Seller shall have no further liability or obligation for short-term disability
benefits, sick pay or salary continuation to the extent attributable to periods
after the Closing Date (or any medical, dental, vision and health claims
incurred after the Closing Date). Such Employees shall be eligible for such
benefits as are provided by Buyer under its policies and this Agreement.
(k) The Buyer shall make the offers of employment as soon as possible
after all the consents, approvals and authorizations referred to in Sections
7.1(c) and 7.2(c) hereof have been obtained (and in no event more than ten (10)
Business Days after the last of such consents, approvals and authorizations has
been obtained). Such offers shall be made in person to each Employee at a
meeting at which representatives of Buyer and Seller are present. The
information provided to each Employee at such meeting shall include a discussion
of Buyer's employee benefit plans and policies, together with a written summary
thereof. Buyer shall be responsible for advising Employees of the details of
any offers and terms of employment, and answering any questions relating
thereto, but Seller shall be allowed to review and approve, prior to its
distribution, (i) any communication with Employees prior to the Closing Date,
and (ii) any communication with such Employees after the Closing Date
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which describes or refers to Seller's employee benefit plans and policies.
Buyer shall not at any time have access to Employee personnel files of Seller.
(l) Prior to the Closing Date, the Buyer may train the Seller's
Employees who have accepted Buyer's offers of employment, at a time mutually
agreed upon by Buyer and Seller, and the Buyer will reimburse the Seller for
such Employees' salaries for the time they are engaged in such training and
for all of their expenses incurred in connection with such training for which
they are reimbursed by Seller.
ARTICLE 3
PRICE AND ADJUSTMENTS
3.1 PRICE. The Seller agrees that in the event the Initial Base Amount
(as hereinafter defined) is less than the sum of (i) the amount of the
Assumed Deposits and (ii) the amount of the Accrued Expenses, the Seller
shall transfer to the Buyer cash in the amount equal to the deficit. The
Buyer agrees that in the event the Initial Base Amount is greater than the
sum of (i) the amount of the Assumed Deposits and (ii) the amount of the
Accrued Expenses, the Buyer shall transfer to the Seller cash in an amount
equal to such excess. Calculations and payments pursuant to this Section 3.1
shall be as of the date and time of the Closing Financial Statement. The
"Initial Base Amount" shall be equal to the sum of (i) the amount of Cash on
Hand, (ii) the Market Value of the Branch Real Estate and the Improvements,
(iii) the amount of $0 for the Leasehold Improvements (which amount is
allocated among the Branches, if any, as listed on Schedule 3.1), (iv) the
amount of $141,953.52 for the Furniture, Fixtures and Equipment (which amount
is allocated as listed on Schedule 1.1(b)), (v) the amount of Prepaid
Expenses at the Branches, (vi) the amount of the Overdrafts, (vii) the amount
of any fees, charges or accrued interest receivable on such Overdrafts,
(viii) the amount of the Purchase Premium, and (ix) the Seller's pro rata
portion of IRA Deposit and Keogh Account trustee fees accrued on such
accounts held in the Branches through the Closing Date, less the amount of
the safe deposit key deposits referred to in Section 3.2(e).
3.2 ADJUSTMENTS. Subject to the provisions of Section 4.4 and Article 9,
the assignments, transfers, acceptances and assumptions of the Assets and the
Liabilities and the payment of the amounts due in respect thereof in accordance
with Sections 2.2 and 3.1 shall be final and without recourse and not subject to
any claim for reimbursement, repayment, rescission or avoidance; PROVIDED,
HOWEVER, that:
(a) The following adjustments shall be made:
(i) As soon as practicable after the Closing Date, but in no event
later than ten (10) calendar days
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thereafter, the Seller shall deliver the Pre-Final Financial Statement to
the Buyer. After delivery of the Pre-Final Financial Statement, the
Seller shall pay the Buyer or the Buyer shall pay the Seller, as
appropriate, by wire transfer no later than the next Business Day after
delivery of the Pre-Final Financial Statement, the difference between the
amount paid at the Closing and the amount calculated on the Pre-Final
Financial Statement, plus interest accrued from the Closing Date at the
Federal Funds Rate in effect on the Closing Date.
(ii) As soon as practicable after the Closing Date, but in no event
later than sixty (60) calendar days thereafter, the Seller shall deliver
the Final Financial Statement to the Buyer. Subject to the Seller's and
Buyer's rights of indemnification pursuant to Section 4.4 and Article 9,
the Final Financial Statement shall become final and binding on the Buyer
and the Seller ten (10) calendar days after its delivery to the Buyer,
unless the Buyer gives written notice to the Seller of its disagreement
with respect to any item included in such Final Financial Statement. The
Seller and the Buyer shall use their respective reasonable efforts to
resolve the disagreement during the ten (10) calendar day period following
receipt by the Seller of the notice. If the disagreement is not resolved
during such ten (10) calendar day period, the parties shall follow the
procedures set forth in Section 9.4 to resolve such dispute and such Final
Financial Statement shall be modified by any such resolution, whereupon the
Final Financial Statement shall become final and binding. When the Final
Financial Statement becomes final and binding, and after giving effect to
any payment made based on the Pre-Final Financial Statement, the Seller
shall pay the Buyer or the Buyer shall pay the Seller, as appropriate, the
difference between the amount paid at the Closing and the amount calculated
on the Final Financial Statement, plus interest accrued from the Closing
Date at the Federal Funds Rate in effect on the Closing Date.
(b) If any non-material Asset (materiality to be determined by Seller in
good faith) shall not have been assigned to the Buyer at the Closing, then the
Seller shall use its reasonable efforts to assign such Asset to the Buyer as
soon as possible after the Closing Date but in any event no later than on the
Settlement Date. In the event the Seller for any reason is unable to assign any
such Asset to the Buyer prior to or on the Settlement Date, then the Seller
shall no longer have any obligation to assign such Asset to the Buyer and the
Seller shall refund to the Buyer the value of such Asset as reflected on the
Closing Financial Statement together with interest from the Closing Date through
the date of such refund at a rate equal to the Federal Funds Rate in effect on
the Closing Date;
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(c) All operating expenses and fees accrued or prepaid prior to the
Closing Date, including, without limitation, wages, salaries, rents, Bank
Insurance Fund ("BIF") premiums, utility payments, personal property taxes,
non-delinquent real property taxes and assessments relating to the Assets and
the Liabilities transferred at the Closing, but excluding fees for use of safe
deposit boxes, shall be prorated between the parties. With respect to the BIF
premiums, the proration shall be on the basis of the amount of the Assumed
Deposits. To the extent that the Seller has paid expenses that are expenses
allocable to the Buyer pursuant to this Section 3.2(c), such expenses shall
appear as an asset on the Financial Statements. To the extent that expenses
have been accrued and not paid by the Seller prior to the Closing Date, they
shall appear as a liability on the Financial Statements;
(d) As soon as practicable after the Closing Date, the Seller will provide
to the Buyer a report of customer data for the Branches showing the names,
addresses, tax identification numbers (where available from the Seller's
records) and deposit balances of each and all of the customers of the Branches
as of such date; the customer data shall include the signature cards for all
Assumed Deposits and a list of Accounts and certificates of deposit subject as
of the Closing Date to annual Taxpayer Identification Number solicitation by
Seller in the normal course of its business;
(e) At the Closing Date, the Seller shall pay to the Buyer the amount of
cash deposits held by the Seller at the Closing Date received for keys issued in
connection with safe deposit box rentals at the Branches that are transferred to
the Buyer hereunder;
(f) With respect to Deposits which are Individual Retirement Accounts
("IRA Deposits") created by a trust for the exclusive benefit of an
individual or his or her beneficiaries in accordance with the provisions of
Section 408 of the IRC, the Seller will use reasonable efforts and will
cooperate with the Buyer, both before and after the Closing, in taking
whatever actions are reasonably necessary to accomplish either the
appointment of the Buyer as successor custodian or the delegation to the
Buyer (or an affiliate of the Buyer) of the Seller's authority and
responsibility as custodian of all such IRA Deposits except self-directed IRA
Deposits (and, for those customers with self-directed IRA Deposits, any other
IRA Deposits), including but not limited to, sending to the depositors
thereof appropriate notices, cooperating with the Buyer (or such affiliate)
in soliciting consents from such depositors, and filing any appropriate
applications with applicable regulatory authorities. If any such delegation
is made to the Buyer (or such affiliate), the Buyer (or such affiliate) will
perform all of the duties so delegated and comply with the terms of the
Seller's agreement with the depositor of the IRA Deposits affected thereby;
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(g) With respect to Deposits which are BankAmerica Basic Retirement Plan
Accounts ("Keogh Accounts") created by a trust for the benefit of employees
(some or all of whom are owner-employees) and that comply with the provisions of
Section 401 of the IRC, the Seller will use reasonable efforts and cooperate
with the Buyer to invite depositors thereof to direct a transfer of each such
depositor's Keogh Account and the related Deposit to the Buyer (or an affiliate
of the Buyer), as trustee thereof, and to adopt the Buyer's (or such
affiliate's) form of Keogh Master Plan as a successor to that of the Seller.
The Buyer (or such affiliate) will assume no Deposits which are Keogh Accounts
unless the Buyer (or such affiliate) has received the documents necessary for
such assumption or transfer at or before the Closing. With respect to any
depositors who do not transfer such accounts to the Buyer's (or such
affiliate's) form of Keogh Master Plan, the Seller will use reasonable efforts
in order to enable the Buyer (or such affiliate) to retain such Keogh Accounts
at the Branches at which such accounts were maintained;
(h) Any items that were credited for deposit to or cashed against an
Assumed Deposit prior to the Closing and are returned unpaid on or within sixty
(60) calendar days after the Closing Date ("Returned Items") will be handled as
set forth herein. If the Seller's bank account is charged for the Returned
Item, the Seller shall forward such Returned Item to the Buyer. If upon the
Buyer's receipt of such Returned Item there are sufficient funds in the Assumed
Deposit to which such Returned Item was credited or any other Assumed Deposit
transferred at the Closing standing in the name of the party liable for such
Returned Item, the Buyer will debit any or all of such Assumed Deposits an
amount equal in the aggregate to the Returned Item, and shall repay that amount
to the Seller. If there are not sufficient funds in the Assumed Deposit because
of the Buyer's failure to honor holds placed on such Assumed Deposit, the Buyer
shall repay the amount of the Returned Item to the Seller. If there are not
sufficient funds in the Assumed Deposit for any other reason, the Buyer shall
repay the balance of the Assumed Deposit to the Seller and create an overdraft
for the unrecovered portion of the Returned Item. Any items that were credited
for deposit to or cashed against an Assumed Deposit at a Branch prior to the
Closing Date and are returned unpaid more than sixty (60) calendar days after
the Closing Date will be the responsibility of the Buyer, except that for a
period of eighteen (18) months after the Closing Date checks drawn on the United
States Treasury, checks issued by state governments and municipalities and
checks returned for endorsement irregularities will be the responsibility of the
Seller; and
(i) As soon as practicable, but in any event no later than fifteen (15)
calendar days after the Closing Date, the Buyer shall mail to each depositor in
respect of a Transaction Account (included in the Assumed Deposits) a letter
approved in writing by the Seller (which approval will be delivered as soon as
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practicable and will not be unreasonably withheld) requesting that such
depositor promptly cease writing the Seller's drafts against such Transaction
Account. At such time as the Buyer mails each such notice to each depositor,
the Buyer shall also forward to each such depositor new drafts which such
depositor may draw upon the Buyer for the purpose of effecting transactions
with respect to such Transaction Accounts.
The parties hereto shall use reasonable efforts to develop procedures
which cause the Seller's form of drafts against Transaction Accounts which
are received after the Closing Date to be cleared through the Buyer's then
current clearing procedures.
During the one hundred eighty (180) calendar day period from the Closing
Date, if it is not possible to clear Transaction Account drafts through the
Buyer's then current clearing procedures after the Closing Date, the Seller
shall forward to the Buyer no later than the next Business Day after receipt
thereof all such Transaction Account drafts drawn against Transaction
Accounts domiciled at one of the Branches and transferred on the Closing
Date. The Seller shall have no obligation to pay such Transaction Account
drafts. Upon the expiration of such one hundred eighty (180) calendar day
period, the Seller shall cease forwarding drafts against Transaction Accounts
transferred on the Closing Date and shall instead return them to the
originators marked "Account Closed." The Buyer will compensate the Seller
for processing of drafts as described in this Section according to the
compensation arrangement set forth in Section 4.6.
(j) The Seller will pay the Buyer for such portion of any overdraft on
an Assumed Deposit (including interest at the Federal Funds Rate in effect on
the Closing Date) created by Returned Items received by the Seller and passed
on to the Buyer during the sixty (60) calendar days that follow the Closing
Date, which is not recovered by the Buyer within sixty (60) calendar days
after the Closing Date.
ARTICLE 4
ADDITIONAL COVENANTS
4.1 SELLER'S COVENANTS. The Seller (and, to the extent specifically
indicated below, the Buyer) agrees:
(a) To use reasonable efforts to sign and deliver to the Buyer such
additional agreements and other documents, and to do such other acts and things,
as may be required to complete the transactions contemplated by this Agreement;
(b) To reasonably cooperate with the Buyer in obtaining all governmental
and regulatory consents, approvals, licenses, waivers and the like required to
be fulfilled or obtained for
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the completion of the transactions contemplated by this Agreement;
(c) To deliver to the Buyer those books, records, accounts and other
documents relating solely to the Assets and the Liabilities as soon as
practicable after the Closing and to store the other books, records and accounts
of the Branches relating to the Seller's former operation of the Branches in
accordance with Seller's normal records retention policy;
(d) Until Closing or the earlier termination of this Agreement, to cause
the business of the Branches to be conducted in accordance with Section 2.3
above;
(e) To remove all signage from the Branches at the expense of the Seller
on or before the Closing Date, it being understood that the Buyer shall be
responsible for installation of its signage at its expense;
(f) As soon as practicable after the receipt of all regulatory approvals
required by Sections 7.1(c) and 7.2(c) with respect to all Branches, and no
later than thirty (30) calendar days prior to the Closing Date (unless
earlier required by law, regulation or regulatory policy), each of the Seller
and the Buyer shall provide, or join in providing where appropriate, all
notices, separately as to each Branch, to holders of Deposits and other
persons that the Seller or the Buyer, as the case may be, is required to give
by any regulatory authority having jurisdiction or under applicable law or
the terms of any other agreement between the Seller and any customer in
connection with the transactions contemplated hereby. A party proposing to
send or publish any notice or communication pursuant to any provision of this
Section 4.1(f) or Section 4.2(f) shall furnish to the other party a copy of
the proposed form of such notice or communication as soon as practicable in
advance of the proposed date of the first mailing, posting, or other
dissemination thereof to customers, and shall not unreasonably refuse to
amend such notice to incorporate any changes that the other such party
proposes as necessary to comply with applicable statutes, rules, regulations
or requirements of any regulatory authority having jurisdiction. All costs
and expenses of any notice or communication sent or published by the Buyer or
the Seller shall be the responsibility of the party sending such notice or
communication. All out-of-pocket costs and expenses of any joint notice or
communication which Buyer or Seller pays to a third-party vendor shall be
shared equally by the Seller and the Buyer. Each party shall bear the costs
and expenses of its own employees or agents engaged in any joint notice or
communication;
(g) The Seller will use reasonable efforts to transfer to the Buyer on the
Closing Date all of those automated clearing house and fed wire direct deposit
arrangements which are tied by agreement or other standing arrangement to
Assumed Deposits.
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For a period of one hundred eighty (180) calendar days after the Closing
Date, in the case of automated clearing house direct deposits to Assumed
Deposits, and thirty (30) calendar days after the Closing Date, in the case
of fed wire direct deposits to Assumed Deposits (each, a "Direct Deposit
Cut-off Date"), the Seller will, no later than the next Business Day
following the date of receipt thereof, remit and transfer to the Buyer all
direct deposits intended for Accounts which are Assumed Deposits. After the
applicable Direct Deposit Cut-off Date, the Seller may discontinue accepting
and forwarding automated clearing house and fed wire entries and funds and
return such direct deposits to the originators. The Seller shall not be
liable for any account overdrafts that may thereby be created or for any
other matter. The Buyer and the Seller shall agree on a reasonable period of
time prior to the Closing during which the Seller will no longer be obligated
to accept new direct deposit arrangements. At the time of each Direct
Deposit Cut-off Date, the Buyer will provide automated clearing house
originators with account numbers and conversion tapes relating to Assumed
Deposits; and
(h) As soon as practicable after the receipt of all regulatory approvals
required by Sections 7.1(c) and 7.2(c) with respect to all Branches (except for
statutory waiting periods), and after the notice provided in Section 4.1(f)
above, the Buyer will send appropriate notice, separately as to each Branch, to
all holders of Deposits which are to be assumed by the Buyer at the Closing the
terms of which provide for direct debit of such accounts by third parties,
instructing such customers concerning transfer of customer direct debit
authorizations from the Seller to the Buyer. The Seller shall cooperate in
soliciting the transfer of such authorizations. Such notice shall be in a form
agreed to by the parties. For a period of one hundred eighty (180) calendar days
following the Closing Date, the Seller will, on the Business Day following the
date of receipt thereof, forward to the Buyer all direct debits on Accounts
which are Assumed Deposits transferred on the Closing Date and will give the
Buyer a daily accounting of such debits to its clearing account. Thereafter,
the Seller may discontinue forwarding such entries and return them to the
originators. The Buyer and the Seller shall agree on a reasonable period of
time prior to the Closing during which the Seller will no longer be obligated to
accept new direct debit arrangements. At the time of the Closing Date, the
Buyer will provide automated clearing house originators of such direct debits
with account numbers and conversion tapes.
(i) In addition to the requirements and procedures set forth in Sections
4.1(g) and 4.1(h), the Buyer shall, commencing on the first Business Day
following the Closing Date, deliver to the originators of the direct deposits of
Assumed Deposits and the originators of direct debits of Assumed Deposits
specified in such sections, notices of change instructing such originators to
change the routing transit number for such deposits and
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debits from the Seller's routing transit number to the Buyer's routing
transit number.
(j) The Seller agrees that for a period of twelve (12) months following
the Closing Date, it will not establish a "Full-Service Branch" (as defined
in the immediately following sentence) within ten (10) miles of a Branch
which is included in the Closing (the "Protected Area"). "Full-Service
Branch" shall mean a branch which includes tellers and which transacts all
business related to deposits and loans. Seller shall not be deemed to have
established a Full-Service Branch for purposes of this Section 4.1(j) solely
because Seller or any successor in interest does one or more of the
following: (i) it exercises any rights or performs any obligations it has or
may have to establish banking facilities pursuant to any existing or future
agreements with a third party or parties for the installation, location and
operation of banking facilities in or in connection with retail stores or
supermarkets owned or operated, or both, by such third party or parties, (ii)
it acquires one or more banking facilities within the Protected Area as a
result of a merger, consolidation, purchase or sale of all or substantially
all of the assets of a party, or other reorganization to which Seller or
BankAmerica Corporation ("Parent") is a party, (iii) it maintains one or more
ATM facilities or conducts courier operations within the Protected Area, (iv)
it takes any action to satisfy any obligations or commitments Seller or
Parent may have arising out of the approval by the Federal Reserve Board of
the merger of Security Pacific Corporation ("Security Pacific") into Parent
on April 22, 1992, including without limitation any commitment to maintain or
enhance all existing levels of services provided at the time of the merger by
Seller or Security Pacific branches in all service areas (for example, where
branches are sold, service levels will be maintained through placing branches
in grocery stores, mobile vans, increasing access to automated teller
machines and increasing multilingual services), or (v) it continues to
maintain within the Protected Area after the Closing Date one or more
branches which it maintained therein on the Closing Date.
(k) For a period of twelve (12) months following the Closing Date (or
such shorter period as Employees may continue to be employed by the Buyer
following the Closing Date), neither the Seller nor any Affiliate shall solicit
the employment (including the solicitation of any transfer of employment) of any
Employees; PROVIDED, HOWEVER, that nothing herein shall prevent the Seller or
its Affiliates from advertising generally any employment opportunities, or from
hiring any Employees who seek employment without inducement from the Seller.
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4.2 BUYER'S COVENANTS. The Buyer agrees:
(a) To use reasonable efforts to sign and deliver to the Seller such
additional agreements and other documents, and to do such other acts and things,
as may be required to complete the transactions contemplated by this Agreement;
(b) To use its best efforts to fulfill all governmental, regulatory and
other requirements (including, without limitation, obtaining the approval of all
California and federal bank or other financial institution regulatory agencies
and any other governmental entity having jurisdiction over the Buyer's
acquisition of the Branches or the Buyer) required to be fulfilled by the Buyer
for the completion of the transactions contemplated by this Agreement, and to
take the initial drafting responsibility therefor. The Seller shall have the
right to review and comment upon all applications to, and filings with,
governmental and regulatory agencies and entities made for the above purpose,
prior to their filing; PROVIDED THAT, the Seller shall have no responsibility
for any such application or filing. Without limiting the generality of the
foregoing, Buyer agrees to file all required regulatory applications within
thirty (30) calendar days after the date of this Agreement;
(c) To pay, honor, discharge and perform all liabilities and obligations
in respect of the Assets and the Liabilities and any other liabilities of the
Branches arising, accruing or subsisting after the Closing which the Buyer is
obligated to assume pursuant to this Agreement, subject to applicable
indemnification rights of the Buyer;
(d) Not to use, keep or claim any registered or unregistered trademark,
service mark or other identification commonly associated with the Seller, or any
sign, display or similar material of the Seller or any banking or other forms,
stationery, passbooks, checks, traveler's checks, cashier's checks, manager's
checks or similar banking material of the Seller or bearing the Seller's name or
other similar marks or identification (except to the extent necessary to conduct
business operations, and then only if the Seller's name, marks or identification
are obliterated from such material, and such material is clearly identified as
that of the Buyer), or any proprietary material of the Seller including, without
limitation, operating manuals, training manuals and public relations,
explanatory or advertising materials; and
(e) As of the Closing Date, to become the "holder," as that term is
defined in the California Unclaimed Property Law (Code of Civil Procedure
Section 1500, et seq.), of all Assumed Deposits and safe deposit boxes which
the Buyer assumes under this Agreement. The Buyer will be responsible for the
escheat of any property for which it becomes the holder and which becomes
abandoned during the calendar year in which the Closing occurs.
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(f) As soon as practicable after the receipt of all regulatory approvals
required by Sections 7.1(c) and 7.2(c) with respect to all Branches, and no
later than thirty (30) calendar days prior to the Closing Date (unless earlier
required by law, regulation or regulatory policy), the Buyer shall, subject to
Section 11.1 hereof, (i) send a notice to all holders of safe deposit boxes at
each Branch and (ii) notify the holders of Deposits to be transferred on the
Closing Date that, subject to Closing, the Buyer will be assuming liability for
such Deposits, and following or concurrently with such notices the Buyer may
communicate with and deliver information, brochures, bulletins and other
communications to holders of Deposits and safe deposit boxes concerning the
transactions contemplated by this Agreement and concerning the business and
operations of the Buyer.
(g) Continue to operate each of the Branches at its current location for a
period of at least ninety (90) calendar days after the Closing Date (unless
Buyer has provided Seller written confirmation from Buyer's appropriate banking
regulatory agency that any earlier change in location by Buyer would be exempt
from the notice and other requirements of 12 U.S.C. Sec. 1831r-1).
(h) To obtain approval of this Agreement and the transactions contemplated
hereby by the requisite vote or consent of the holders of outstanding securities
of the Buyer if such approval is required by applicable law, contract, the
Buyer's Articles of Incorporation or Bylaws, or otherwise.
4.3 CONSENTS. The Seller shall use its reasonable efforts to obtain any
nongovernmental consents required for the transfer or assignment of the Assets
and Liabilities to Buyer pursuant to this Agreement, including (a) Leases, if
any, and (b) Assumed Contracts, if any; PROVIDED, HOWEVER, that (a) the Seller
shall not be required to pay any additional compensation or fee to any person or
entity to obtain any such consent, (b) the Buyer agrees that it shall provide
reasonable assistance to the Seller to obtain such consents, and (c) Seller
shall be entitled to rely on the provisions of Section 2.2(e) and the final
paragraph of Section 7.2 hereof if it does not obtain one or more such consents.
4.4 ENVIRONMENTAL MATTERS.
(a) SCOPE. The provisions of this Section 4.4 shall exclusively govern
the rights and obligations of the Seller and Buyer with regard to Hazardous
Substances.
(b) DEFINITIONS. For purposes of this Section 4.4, the following terms
have the following meanings:
(i) "Environmental Assessments" means environmental audits,
investigations, reviews or testing of the Branch Real Estate, Improvements,
Leased Real Estate or Leasehold
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Improvements (sometimes referred to collectively in this Section 4.4 as the
"Subject Assets") performed by Buyer or any third party or consultant engaged
by Buyer to conduct such study.
(ii) "Environmental Due Diligence Period" means the forty-five (45)
Business Day period starting on the date of this Agreement during which Buyer
must complete its due diligence as described in Section 4.4(d).
(iii)"Environmental Law" means any law, statute, ordinance or
regulation pertaining to health, industrial hygiene or the environment in effect
as of the date of this Agreement, including but not limited to Title 42 of the
United States Code, Section 6901 ET SEQ. (commonly known as "RCRA") or Section
9601 ET SEQ. (commonly known as "CERCLA" or "Superfund").
(iv) "Hazardous Substance" means any substance, material or waste that
is or becomes designated or regulated as "toxic," "hazardous," "pollutant," or
"contaminant" or a similar designation or regulation under any federal, state or
local law (whether under common law, statute, regulation or otherwise) or
judicial or administrative interpretation of such, including without limitation,
petroleum or natural gas.
(c) SELLER'S ENVIRONMENTAL REPRESENTATIONS AND WARRANTIES. Seller has
delivered to the Buyer copies of a Phase I Environmental Site Assessment ("Phase
I") and an Asbestos Survey ("Asbestos Survey") regarding each Branch; PROVIDED
THAT Seller has not delivered an Asbestos Survey regarding any Branch where
construction of all Improvements and Leasehold Improvements was completed after
December 31, 1980. The dates of such Phase I's and Asbestos Surveys and the
names of the persons by whom they were prepared are listed on Schedule 4.4(c).
The cost of such Phase I's and Asbestos Surveys shall be borne by the Seller.
As of the date of this Agreement, to the Seller's Knowledge and except as
disclosed in the Phase I's and Asbestos Surveys:
(i) during the time the Seller has owned the Branch Real Estate or
leased the Leased Real Estate, no Hazardous Substances are now or have
been used or stored on or within any portion of the
Subject Assets except those Hazardous Substances which are or have
been used or stored in the normal course of use and operation of the
Subject Assets in compliance with all applicable Environmental Laws;
(ii) during the time the Seller has owned the Branch Real Estate or
leased the Leased Real Estate, there are and have been no federal,
state, or local enforcement, clean-up, removal, remedial or other
governmental or regulatory actions instituted or completed pursuant to
Environmental Laws or pertaining to Hazardous Substances and affecting
the Subject Assets;
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(iii) no claims have been made by any third party against Seller
relating to any Hazardous Substances on or within the Subject Assets;
and
(iv) Seller has obtained and is in compliance with all permits,
licenses and other authorizations required with respect to the
operation of its prior business at the Branch Real Estate and Leased
Real Estate under all applicable Environmental Laws.
(d) ENVIRONMENTAL DUE DILIGENCE.
(i) BUYER'S COVENANTS. The Buyer acknowledges and agrees that:
(A) Seller is furnishing copies of the Phase I's and Asbestos
Surveys to Buyer for informational purposes only and without
representation or warranty as to the accuracy or completeness of
the contents of such materials except as otherwise provided in
this Section 4.4;
(B) Buyer will not rely on the Phase I's or Asbestos Surveys and
will conduct its own due diligence on the matters contained in
the documents; and
(C) Buyer is not purchasing the Branch Real Estate, Improvements
and Leasehold Improvements and accepting assignment of the Leases
in reliance upon any representations or warranties of any kind
whatsoever made by the Seller (or any representatives, agents or
employees of the Seller) except those made or contained in this
Agreement.
(ii) BUYER'S ENVIRONMENTAL DUE DILIGENCE. During the Environmental Due
Diligence Period, Buyer shall have the right to conduct Environmental
Assessments of the Subject Assets, and Buyer and Buyer's
representatives, agents and designees will have the right, at
reasonable times and upon reasonable notice to Seller (which notice
must describe the scope of the planned testing and investigations) to
enter upon the Branch Real Estate and Leased Real Estate provided:
(A) Any Environmental Assessment performed by or on behalf of
Buyer shall be conducted pursuant to standard quality
control/quality assurance procedures.
(B) The persons or entities performing such tests shall be
properly licensed and qualified and will have obtained all
appropriate permits
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for performing such tests.
(C) Prior to any entry involving physical testing, drilling or
other physical disturbance, Buyer will obtain, maintain and
provide Seller, or shall cause any consultant, contractor or
other person entering Branch premises to obtain, maintain and
provide Seller, with proof of comprehensive general liability
insurance in the amount of at least $1,000,000 combined, single
limit coverage, naming Seller as an additional insured and with
coverages reasonably satisfactory to Seller.
(D) Buyer shall give Seller at least five (5) Business Days'
prior notice of any physical testing or drilling.
(E) Buyer shall schedule any tests outside normal business hours
whenever feasible unless otherwise approved by Seller.
(F) Seller shall have the right of approval (which shall not be
unreasonably withheld or delayed) of any proposed physical
testing or drilling.
(G) Seller shall have the right to have a representative of
Seller accompany Buyer and Buyer's representatives, agents or
designees while they are on the Branch Real Estate or Leased Real
Estate.
(H) Any entry by Buyer, its representatives, agents or designee
shall not unreasonably interfere with Seller's or any tenant's
use of the Subject Assets.
(I) Buyer shall indemnify, defend, and hold Seller harmless for,
from and against any and all claims, damages, costs, liabilities
and losses (including mechanics' liens) arising out of any entry
by Buyer or its agents, designees or representatives. Without
limiting the scope of the foregoing, Buyer also at its sole
expense shall repair, replace or otherwise correct any damages
caused by Buyer or its agents, designees or representatives to
the Subject Assets if the transactions contemplated by this
Agreement do not close. Until this correction is complete, Buyer
will take all steps necessary to ensure that any conditions
created by Buyer's entry will not interfere with the normal
operation of the Branches or create any dangerous, unhealthy,
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unsightly or noisy conditions at the Branches. This indemnity
provision shall survive the Closing or any earlier termination of
this Agreement.
(J) Any groundwater, soil, or other samples taken from the
Subject Assets shall be properly disposed of by Buyer at Buyer's
sole cost and in accordance with all applicable laws.
(K) Any Environmental Assessment conducted by Buyer shall be at
the Buyer's sole expense and Buyer shall provide to Seller a copy
of all results generated by any Environmental Assessment,
including without limitation, any reports or other summaries.
(L) Seller has provided to Buyer copies of the Leases and Buyer
shall comply with any requirements or restrictions contained in
the Leases regarding testing and investigations to be performed
at the Leased Real Estate, including, without limitation, any
requirements of notice to the landlord.
(iii) NOTICE OF OBJECTIONS. During the Environmental Due
Diligence Period, Buyer may notify Seller in writing of any objections
relating to any aspects of the Subject Assets relating to one or more
Branches (the "Affected Branches") pertaining to physical condition,
presence of any Hazardous Substances, compliance with all applicable
Environmental Laws, any matters disclosed in the Phase I's or Asbestos
Surveys, any matters disclosed by Seller or about which Seller
provided representations or warranties in this Section 4.4, or any
matters disclosed in any Environmental Assessments.
(A) In the event that Buyer fails to so notify Seller of any
such objections, Buyer shall be deemed to have approved such
items.
(B) In the event, however, that Buyer notifies Seller in writing
and within the Environmental Due Diligence Period of any such
objections, the parties will have a period of ten (10) Business
Days to agree upon a resolution of the objection(s). If the
parties cannot agree within such period of ten (10) Business
Days, then within five (5) Business Days after the expiration of
such period either party may initiate a proceeding to resolve
such objections pursuant to the procedures set forth in Section
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9.4 of this Agreement; PROVIDED, HOWEVER, that within such five
(5) Business Days the Seller in its sole discretion may, in a
case where Buyer has notified Seller of objections with respect
to Branch Real Estate or Improvements, elect to remove the Branch
Real Estate and Improvements relating to the Affected Branches
from the Assets to be sold and transferred to Buyer, in which
event (I) the consideration payable under Article 3 shall
automatically be adjusted accordingly and (II) commencing on the
Closing Date Buyer shall lease the Branch Real Estate and
Improvements relating to the Affected Branches from Seller for a
period of at least six (6) months, at a rental rate and on terms
to be agreed upon by Buyer and Seller, which rate and terms shall
be commercially reasonable and comparable to those for similar
properties in the vicinities of the Affected Branches, and
PROVIDED, FURTHER, that if Buyer and Seller do not agree upon the
rental rate or one or more such terms within an additional ten
(10) Business Days after expiration of the five (5) Business Days
referred to above, then the determination of such rate and/or
term(s) shall be immediately submitted to arbitration pursuant to
the procedures set forth in Section 9.4 of this Agreement. In a
case where Buyer has notified Seller of objections with respect
to Leased Real Estate or Leasehold Improvements, then if neither
party has initiated a proceeding to resolve such objections
pursuant to the procedures set forth in Section 9.4 of this
Agreement within the five (5) Business Days referred to in the
immediately preceding sentence, then the Seller in its sole
discretion may elect to exercise its right under the final
paragraph of Section 7.2 to exclude the Affected Branch from the
Closing.
(C) If this Agreement is not amended or otherwise modified
pursuant to the provisions of the foregoing Section
4.4(d)(iii)(B), Buyer shall be deemed to have waived its
objections and this Agreement will continue in full force and
effect.
(e) MUTUAL ENVIRONMENTAL INDEMNIFICATIONS.
(i) Subject to Subsection 4.4(e)(iv) and Article 9 below, if there
are any third party claims against Buyer that arise out of any
Hazardous Substances that became located in, on or under Branch Real
Estate during Seller's ownership of the Branch Real Estate, or in, on
or under Leased Real Estate during the term of Seller's Lease, Seller
will (to the extent the
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Seller is liable for such Hazardous Substances under any federal,
state or local law pertaining to or concerning Hazardous Substances)
indemnify, defend (by counsel reasonably acceptable to Buyer),
protect and hold Buyer harmless for, from and against any and all
claims, liabilities, penalties, forfeitures, losses or expenses
(including without limitation reasonable expenses of investigation
and attorney's fees and expenses in connection with any action, suit
or proceeding brought against the Buyer) arising therefrom (to the
extent that any such third party claims are attributable to the
portion of the Hazardous Substances which occurred or were in
existence at the Branch Real Estate or Leased Real Estate on or prior
to the Closing Date) in an amount which (together with any amount for
which Seller may become liable to provide indemnification pursuant to
Section 9.2 or otherwise), shall not exceed the amount of the Initial
Base Amount, and PROVIDED THAT notwithstanding any other provision
hereof, Seller shall not be liable under this Section 4.4(e)(i) for
any losses sustained by the Buyer unless and until the aggregate
amount of all losses with respect to a Branch sustained bythe Buyer
to be indemnified by the Seller under this Agreement (including any
amount for which Seller may become liable to provide indemnification
pursuant to Section 9.2 or otherwise), shall exceed $25,000, in which
event the Seller shall be liable only for such losses in excess of
$25,000 with respect to that Branch (it being the intention of the
parties that losses sustained by the Buyer with respect to one Branch
shall not be combined with losses sustained with respect to another
Branch to satisfy such minimum $25,000 amount).
(ii) Subject to Subsection 4.4(e)(iv) and Article 9 below, if there
are any third party claims against Seller that arise out of any
Hazardous Substances that became located in, on or under the Subject
Assets at any time after the Closing, Buyer will indemnify, defend (by
counsel reasonably acceptable to Seller), protect and hold Seller
harmless for, from and against any and all claims, liabilities,
penalties, forfeitures, losses or expenses (including without
limitation reasonable expenses of investigation and attorney's fees
and expenses in connection with any action, suit or proceeding brought
against the Seller) arising therefrom, PROVIDED THAT notwithstanding
any other provision hereof, Buyer shall not be liable under this
Section 4.4(e)(ii) for any losses sustained by the Seller unless and
until the aggregate amount of all losses with respect to a Branch
sustained by the Seller to be indemnified by the Buyer under this
Agreement (including any amount for which Buyer may
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become liable to provide indemnification pursuant to Section 9.3
or otherwise), shall exceed $25,000, in which event the Buyer shall
be liable only for such losses in excess of $25,000 with respect to
that Branch (it being the intention of the parties that losses
sustained by the Seller with respect to one Branch shall not be
combined with losses sustained with respect to another Branch to
satisfy such minimum $25,000 amount).
(iii) As used in this Subsection 4.4(e), "third party claims" are
defined as any claims or rights of recovery by any person or entity
(including governmental agencies):
(A) which result from injury, damage or loss to or of any person
or property;
(B) for cost recovery, removal or remedial action; or
(C) third party claims will also include any costs paid or
payable by either party for damage, loss, injury, investigation,
removal, remediation or other liability in response to any third
party claim or in anticipation of any enforcement or remedial
action undertaken or threatened by any governmental agency or
private party.
(iv) Nothing in this Section 4.4(e) is meant to diminish any party's
rights or obligations under any federal, state or local law pertaining
to or concerning Hazardous Substances; but Seller will not be liable
to Buyer under this Agreement, and Buyer hereby releases Seller from
any and all liability under any such law, for any third party claims
which are attributable to any environmental condition which:
(A) was described or referred to in the Phase I's, Asbestos
Surveys or any Environmental Assessments obtained or conducted by
Buyer;
(B) was reasonably discoverable by prudent investigation during
the Environmental Due Diligence Period; or
(C) was otherwise disclosed by Seller to Buyer or discovered by
Buyer at any time prior to the Closing.
(v) The above release includes claims of which Buyer is presently
unaware or which Buyer does not presently suspect to exist which, if
known by Buyer, would materially affect Buyer's release(s) to Seller.
Buyer
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expressly waives and relinquishes any and all rights which it may have
under the provisions of Section 1542 of the California Civil Code, to
the extent applicable, which Section reads as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR".
It is understood and agreed that the purchase price has been adjusted
by prior negotiations to reflect that all of the Subject Assets and
the Furniture Fixtures and Equipment are sold by Seller and purchased
by Buyer and Buyer is accepting assignment of the Leases subject to
the foregoing. It is not contemplated that the purchase price will be
increased if costs to Buyer associated with the Subject Assets, the
Furniture Fixtures and Equipment and the Leases prove to be less than
expected nor will the purchase price be reduced if the Buyer's plan
for the same leads to higher cost projections. The sole remedy of the
Buyer will be to exercise its rights under Section 4.4(d) prior to the
end of the Environmental Due Diligence Period.
Buyer's Initials /s/JB Seller's Initials /s/BAD
--------- ---------
4.5 VALUATION OF THE ASSETS. Buyer agrees that it is relying solely upon
its own judgment, after such investigation and inspection as it deems necessary
or appropriate, as to the quality, condition, fitness and value of the Assets
and the nature and amount of the Liabilities, and Seller hereby disclaims any
representations or warranties made by Seller as to their condition, value,
nature or amount except those made in Section 5.1 of this Agreement, and subject
to the provisions of Section 4.4 of this Agreement, which shall exclusively
govern the rights and obligations of the parties with regard to Hazardous
Substances.
4.6 CLEARING ITEMS. From the Closing Date and for one hundred eighty
(180) calendar days thereafter, items drawn on Transaction Accounts assumed by
the Buyer may continue to be presented to the Seller. The Seller will make
provisional settlement to the presenting institution and will present such items
to the Buyer within the Seller's midnight deadline. For the first ninety (90)
calendar days following the Closing Date, the Seller shall perform its
obligations under the first two sentences of this Section 4.6 at no cost to the
Buyer. For the remaining ninety (90) calendar day period, the Buyer shall pay
the Seller $0.50 for each item so processed. After one hundred eighty (180)
calendar days from the Closing Date, the Seller
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shall return to the sender any items presented. Upon timely presentation to
the Buyer, the Buyer will assume all responsibility for such items (except
for such items which have not been handled by the Seller in accordance with
applicable law or regulation, or with ordinary care), including but not
limited to determining whether to honor or dishonor such items and giving any
required notification for the return of large items.
4.7 IRA DEPOSITS AND KEOGH ACCOUNTS. The Seller will deliver to the
Buyer, on the Closing Date, copies of the Seller's documents for each IRA
Deposit and Keogh Account which is included in the Assumed Deposits. The Seller
will prepare and file all reports to government authorities required to be filed
for the period ending on the Closing Date and all prior periods. The Buyer will
be responsible for all such reporting for periods commencing on the day after
the Closing.
4.8 INTEREST REPORTING AND WITHHOLDING. Unless otherwise agreed to by the
parties, the Seller will report to applicable taxing authorities and holders of
Assumed Deposits transferred on the Closing Date, with respect to the period
from January 1 of the year in which the Closing occurs through and including the
Closing Date, all interest credited to, withheld from and any early withdrawal
penalties imposed upon the Assumed Deposits. The Buyer will report to the
applicable taxing authorities and holders of Assumed Deposits, with respect to
all periods from the day after the Closing Date, all such interest credited to,
withheld from and any early withdrawal penalties imposed upon such Assumed
Deposits. Any amounts required by any governmental agencies to be withheld from
any of the Assumed Deposits through the Closing Date will be withheld by the
Seller in accordance with applicable law or appropriate notice from any
governmental agency and will be remitted by the Seller to the appropriate agency
on or prior to the applicable due date. Any such withholding required to be
made subsequent to the Closing Date shall be withheld by the Buyer in accordance
with applicable law or the appropriate notice from any governmental agency and
will be remitted by the Buyer to the appropriate agency on or prior to the
applicable due date. Promptly after the Closing Date, but in no event later
than the date the Buyer is obligated to remit such amounts to the applicable
governmental agency, the Seller will pay to the Buyer that portion of any sums
theretofore withheld by the Seller from any Assumed Deposits transferred on the
Closing Date which are or may be required to be remitted by the Buyer pursuant
to the foregoing and shall directly remit to the applicable governmental agency
that portion of any such sums which are required to be remitted by the Seller.
4.9 EMINENT DOMAIN OR TAKING. If proceedings under a power of eminent
domain relating to a specific Branch or any part thereof (the "Affected Branch")
are commenced prior to the Closing Date, Seller will promptly inform Buyer in
writing.
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(a) If such proceedings involve the taking of all of or a material
interest in the Affected Branch, Buyer may elect to terminate this Agreement
with respect to such Affected Branch by notice in writing sent within ten (10)
calendar days of Seller's written notice to Buyer, in which case neither party
will have any further obligation to or rights against the other with respect to
the Affected Branch except any rights or obligations of either party which are
expressly stated to survive termination of this Agreement.
(b) If the proceedings do not involve the taking of all of or a material
interest in the Affected Branch, or if Buyer does not elect to terminate this
Agreement as to the Affected Branch, this transaction will be consummated as
described herein, and, subject to the Lease, if any, or other encumbrances, if
any, relating to the Affected Branch, any award or settlement payable with
respect to such proceeding will be paid or assigned to Buyer on the Closing
Date.
(c) If the Closing contemplated by this Agreement is not consummated for
any reason, Buyer will have no claim to any condemnation award or settlement
with respect to the Affected Branch.
4.10 DAMAGE OR DESTRUCTION. Except as provided in this Section 4.10, prior
to the Closing Date, as between Seller and Buyer the entire risk of loss or
damage by earthquake, flood, landslide, fire or other casualty is borne and
assumed by Seller. If, prior to the Closing Date, any part of the Improvements
or Leasehold Improvements at a specific Branch (the "Affected Improvements") is
damaged or destroyed by earthquake, flood, landslide, fire or other casualty,
Seller will promptly inform Buyer of such fact in writing and advise Buyer as to
the extent of the damage and whether it is, in Seller's reasonable opinion,
"MATERIAL."
(a) If the parties determine that such damage or destruction is
"MATERIAL", Buyer has the option to terminate this Agreement with respect to
such Branch (the "Affected Branch") upon written notice to the Seller given not
later than ten (10) calendar days after receipt of Seller's written notice to
Buyer advising of such damage or destruction.
(b) For purposes of this Section 4.10, "MATERIAL" shall mean any damage or
destruction to the Affected Improvements where the cost of repair or replacement
is estimated to be (i) in the case of damage or destruction to Improvements,
more than twenty-five (25) percent of the Market Value of the Branch Real Estate
and Improvements, or (ii) in the case of damage or destruction to Leasehold
Improvements, more than twenty-five (25) percent of the amount indicated in
Section 3.1 and Schedule 3.1 for the Leasehold Improvements at the Affected
Branch ("Leasehold Improvements Value"), and that in either case will take more
than sixty (60) calendar days to repair.
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(c) If this Agreement is so terminated, neither party will have any further
obligation to or rights against the other with respect to the Affected Branch
except any rights or obligations of either party which are expressly stated to
survive termination of this Agreement.
(d) Subject to the Lease, if any, or other encumbrances, if any, if the
Buyer does not elect to terminate this Agreement as to the Affected Branch, or
if the casualty is not material, Seller shall EITHER (i) reduce the Market Value
of the Branch Real Estate or the Leasehold Improvements Value at the Affected
Branch, as the case may be, by the value reasonably estimated by the parties to
repair or restore the damaged portion of the Affected Improvements, less any
sums expended by Seller to make emergency repairs to the Affected Improvements
OR (ii) repair or restore the damaged portion of the Affected Improvements, and
in either case this transaction will close pursuant to the terms of this
Agreement, and the Buyer will accept the Affected Branch as is, where is,
without recourse, with all faults and with no warranties other than as expressly
provided in Section 5.1 of this Agreement, and subject to the provisions of
Section 4.4 of this Agreement, which shall exclusively govern the rights and
obligations of the parties with regard to Hazardous Substances.
(e) If the damage is not material, Seller's notice to Buyer of the damage
or destruction will also set forth the reduced Market Value of the Branch Real
Estate or the reduced Leasehold Improvements Value at the Affected Branch, as
the case may be, and Seller's allocation of value to the damaged portion of the
Affected Improvements. If Buyer does not accept Seller's reduced valuation,
Buyer's sole remedy will be to submit the issue to arbitration pursuant to
Section 9.4 hereof.
(f) Whether or not the sale of the Affected Branch is consummated
hereunder, Buyer shall have no rights to insurance claims or proceeds in respect
of damage or destruction to the Affected Improvements occurring prior to the
Closing Date.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
5.1 SELLER'S REPRESENTATIONS AND WARRANTIES. The Seller represents and
warrants to the Buyer that, as of the date of this Agreement (or, as to any
information specified in a Schedule to have been compiled as of some earlier
date, as of such earlier date), and subject to Section 4.4 (a):
(a) The Seller is a national banking association, duly organized and in
good standing under the laws of the United States;
(b) The Seller has the requisite power and authority to execute, deliver
and perform this Agreement and to consummate
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the transactions contemplated hereby; all corporate action necessary to be
taken by or on the part of the Seller to execute, deliver and perform this
Agreement and to consummate the transactions contemplated hereby has been
duly and validly taken; and this Agreement has been duly executed and
delivered by, and constitutes the valid and binding agreement of the Seller,
enforceable in accordance with its terms except as limited by bankruptcy,
insolvency, reorganization, fraudulent transfer, moratorium and similar laws
affecting creditors generally and by the availability of equitable remedies;
(c) The execution, delivery and performance by the Seller of this
Agreement do not, and the consummation by the Seller of the transactions
contemplated hereby will not, violate or conflict with the articles of
association or bylaws of the Seller, or any law or regulation currently
applicable to the Seller, or any material agreement or instrument, or currently
applicable award, order, judgment or decree to which the Seller is a party or by
which it is bound, or require any filing by the Seller with, or authorization,
approval, consent or other action with respect to the Seller by, any
governmental or regulatory agency except such as have been made or obtained and
are in full force and effect;
(d) Schedule 2.2(d) sets forth a list of all material written contracts,
agreements and other obligations known to the Seller to which the Seller is a
signatory which relate to the operation of the Branches (other than those giving
rise to the Assets and the Liabilities), including without limitation equipment
leases and service and maintenance contracts, consulting contracts, agency
agreements and licensing agreements; PROVIDED, HOWEVER, THAT equipment leases
and service and maintenance contracts which the Seller does not believe are
assignable are not listed;
(e) Except as set forth in Schedule 5.1(e): (i) there is no litigation,
claim, action, suit or proceeding pending which, if adversely determined, would
adversely affect the use of the Assets or the Liabilities; and (ii) to the
Seller's knowledge, there is no litigation, claim, action, suit or proceeding
threatened by any organization, person, individual or governmental agency which,
if adversely determined, would, individually or in the aggregate, materially and
adversely affect the use of the Assets or the Liabilities;
(f) The Seller has not in any manner whatsoever paid or agreed to pay any
fee or commission to any agent, broker, finder or other person for or on account
of services rendered as a broker or finder in connection with this Agreement or
the transactions covered and contemplated hereby. All negotiations relating to
this Agreement have been conducted by the Seller directly and without the
intervention of any person in such manner as to give rise to any valid claim
against the Seller for any brokerage commission or like payment;
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(g) Schedule 2.2(e) contains an accurate and complete list of all Leases,
if any. True and correct copies of all Leases referred to in such Schedule have
been provided to Buyer;
(h) Schedule 5.1(h) lists for each Branch all employees thereof and states
for each such individual his or her position, dates of employment with the
Seller and present compensation;
(i) A certificate of occupancy or equivalent is in effect permitting the
occupancy of each Branch for its present use. The Seller holds all licenses
materially required in connection with the use or occupancy of each Branch;
(j) The Seller has not in any manner whatsoever paid or agreed to pay any
fee or commission to any agent, broker, finder or other person for or on account
of services rendered as a broker or finder in connection with this Agreement or
the transactions covered and contemplated hereby. All negotiations relating to
this Agreement have been conducted by the Seller directly and without the
intervention of any person in such manner as to give rise to any valid claim
against the Seller for any brokerage commission or like payment; and
(k) The Branch Real Estate and the Improvements have been owned, operated
and used in material compliance with all laws, regulations and ordinances
(excluding Environmental Laws, which are exclusively governed by Section 4.4
hereof); to the knowledge of the Seller, the Improvements were constructed in
material compliance with all applicable laws and regulations (excluding
Environmental Laws, which are exclusively governed by Section 4.4 hereof),
including zoning, land use and other requirements and all building permits; the
Seller has received no notice of, or is not otherwise aware of, any proposed
condemnation or eminent domain proceeding with respect to the Branch Real
Estate, or any portion thereof.
5.2 BUYER'S REPRESENTATIONS AND WARRANTIES. The Buyer represents and
warrants to the Seller that, as of the date of this Agreement, and subject to
Section 4.4(a):
(a) The Buyer is a banking corporation, duly established and in good
standing under the laws of the State of California;
(b) Subject to the satisfaction of any applicable governmental or
regulatory requirements referred to in Section 4.2(b) and to approval of this
Agreement and the transactions contemplated hereby by the requisite vote or
consent of the holders of outstanding securities of the Buyer if such approval
is required by applicable law, contract, the Buyer's Articles of Incorporation
or Bylaws, or otherwise, the Buyer has the requisite power and authority to
execute, deliver and perform this
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Agreement and to consummate the transactions contemplated hereby; all acts
and other proceedings required to be taken by or on the part of the Buyer to
execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby have been duly and validly taken; and this
Agreement has been duly executed and delivered by, and constitutes the valid
and binding agreement of, the Buyer, enforceable in accordance with its terms
except as limited by bankruptcy, insolvency, reorganization, fraudulent
transfer, moratorium and similar laws affecting creditors generally and by
the availability of equitable remedies;
(c) Subject to the satisfaction of any applicable governmental or
regulatory requirements referred to in Section 4.2(b), the execution, delivery
and performance by the Buyer of this Agreement do not, and the consummation by
the Buyer of the transactions contemplated hereby will not, violate or conflict
with the articles of incorporation or bylaws of the Buyer, or any law or
regulation currently applicable to the Buyer, or any material agreement or
instrument, or currently applicable order, judgment or decree to which the Buyer
is a party or by which it is bound or require any prior filing by the Buyer
with, or authorization, approval, consent or other action with respect to the
Buyer by, any governmental or regulatory agency except such as have been made or
obtained and are in full force and effect or will be made or obtained and in
full force and effect as of the Closing;
(d) There are no actions, suits or proceedings pending or, to the
knowledge of the Buyer, threatened against or affecting, the Buyer, which may
cause a material adverse change in the Buyer's business or financial condition;
(e) The Buyer has not paid or agreed to pay any fee or commission to any
agent, broker, finder or other person for or on account of services rendered as
a broker or finder in connection with this Agreement or the transactions covered
and contemplated hereby. All negotiations relating to this Agreement have been
conducted by the Buyer directly and without the intervention of any person in
such manner as to give rise to any valid claim against the Seller for any
brokerage commission or like payment;
(f) The Buyer has not received written notice from any federal or
California governmental or regulatory agency indicating that it would oppose or
not grant or issue its consent or approval, if required, with respect to the
transactions contemplated by this Agreement;
(g) The Buyer satisfies each and all of the standards and requirements
lawfully within the control of the Buyer of which it is aware (and, as of the
Closing Date, will satisfy each and all of the standards and requirements
lawfully within the control of the Buyer) imposed as a condition to obtaining or
necessary to comply with and in order to obtain any of the governmental or
regulatory approvals referred to in Section 4.2(b) of this Agreement;
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(h) At the time of the most recent regulatory evaluation of Buyer's
performance under the Community Reinvestment Act (the "CRA"), Buyer's record of
performance was deemed to be "outstanding" or "satisfactory", and no proceedings
are pending or to the knowledge of Buyer, threatened, that would result in a
change in such evaluation. Buyer has not received any adverse public comments
with respect to its compliance under the CRA since the date of its most recent
regulatory evaluation of its performance under the CRA;
(i) The Buyer has available sufficient cash or other liquid assets or
financing pursuant to binding agreements or commitments which may be used to
fund the transactions contemplated hereby and has provided to Seller a copy of
an engagement letter from Sutro & Co., a reputable investment banking firm, to
act as managing underwriter of a firm commitment underwritten equity capital
offering which will be completed before the Closing Date in a sufficient
principal amount with which to consummate such transactions; PROVIDED that if
the transactions contemplated hereby are not consummated due to Buyer's failure
to raise sufficient capital, then, promptly upon demand, Buyer shall pay to
Seller the Break-up Fee; and
(j) Buyer acknowledges and is aware of the disclosures made by Seller with
respect to the Branch Real Estate and set forth in Schedule 5.2(j) attached
hereto.
ARTICLE 6
UNDERSTANDINGS
Buyer and Seller understand and agree as follows:
6.1 DEPOSITORS' RIGHTS. The Buyer and the Seller understand and agree
that all transfers to the Buyer of Assumed Deposits are subject to the
individual depositors' continuing rights to withdraw, and the Seller makes no
representation or warranty to the Buyer concerning the continuing maintenance of
such deposits at the Branches.
6.2 UNCLAIMED PROPERTY. With respect to safe deposit boxes that have been
opened by the Seller and whose contents have been inventoried and are being held
by the Seller in safekeeping in preparation for escheat to the State of
California, the Seller shall remove any and all such contents from the Branches
prior to the Closing Date.
6.3 HEAD OFFICE ACCOUNTS. Schedule 6.3 sets forth certain Accounts at the
Branches which have been designated by the Seller as "Head Office Accounts."
The Buyer and the Seller understand and agree that the Seller may remove from
the Branches prior to the Closing Date any and all Head Office Accounts and
deposits of the types described in the proviso in Section 2.3(a)(iii) and any
Head Office Accounts and any such
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deposits so removed shall not be included in the Assumed Deposits.
6.4 LIMITATION OF WARRANTIES. Except as may be expressly represented or
warranted by Seller in Section 5.1 of this Agreement, and subject to the
provisions of Section 4.4 of this Agreement which shall exclusively govern the
rights and obligations of the parties with regard to Hazardous Substances,
Seller makes no representation or warranty whatsoever with regard to any Asset,
any Liability or the business or operation of any of the Branches, it being
expressly understood that such Assets and Liabilities are being transferred AS
IS, WHERE IS, WITHOUT RECOURSE, WITH ALL FAULTS AND WITH NO WARRANTIES OTHER
THAN AS EXPRESSLY PROVIDED IN SECTION 5.1 OF THIS AGREEMENT. Buyer agrees that
it is relying solely upon its own judgment, after such investigation and
inspection as it deems necessary or appropriate, as to the quality, condition,
fitness and value of the Assets and the nature and amount of the Liabilities,
and Seller hereby disclaims any representations or warranties made by Seller as
to their condition, value, nature or amount except those made in Section 5.1 of
this Agreement, subject to Section 4.4 of this Agreement. Notwithstanding any
other provision of this Agreement, Buyer and Seller understand and agree that
Seller is making, and shall make, no representations or warranties with respect
to title to the Branch Real Estate other than those, if any, contained in the
grant deed the form of which is attached hereto as Schedule 2.2(b)(i)(A).
ARTICLE 7
CONDITIONS TO THE CLOSING
7.1 SELLER'S CONDITIONS. The obligations of the Seller to consummate the
Closing shall be subject to the satisfaction at or prior to Closing of all of
the following conditions, any one or more of which may be waived, in whole or in
part, by the Seller:
(a) The Buyer shall have complied in all material respects with each of
its covenants and agreements contained herein to be performed at or prior to the
Closing Date, and each of the representations and warranties of the Buyer in
Section 5.2 hereof shall be true and correct in all material respects as if made
at and as of the Closing;
(b) The Buyer shall have delivered to the Seller a duly authorized and
signed officer's certificate, dated as of the Closing Date, certifying as to the
matters specified in Section 7.1(a), and further that (i) the methodology and
accounting procedures used by the Seller in preparing the Closing Financial
Statement have been reviewed and are acceptable to the Buyer, and (ii) the
Buyer, to and including the Closing Date, has performed such review of the
books, records, files, documentation and accounts of the Branches as it has
deemed appropriate;
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(c) All consents, approvals and authorizations required to be obtained
prior to the Closing from governmental and regulatory authorities in connection
with the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby to be consummated at the Closing shall have
been made or obtained, and shall remain in full force and effect, all waiting
periods applicable to the consummation of the transactions contemplated hereby
shall have expired or been terminated and all required regulatory filings shall
have been made; PROVIDED, HOWEVER, that no governmental or regulatory consent,
approval or authorization shall have imposed any condition or requirement that
the Seller in good faith determines to be materially burdensome upon the
business of the Seller or upon the consummation of the transactions contemplated
hereby;
(d) There shall not be in effect any nonappealable final order, decree or
judgment of any court or governmental body having competent jurisdiction that
would be violated by consummation of the transactions contemplated hereby, nor
any material pending or threatened action, proceeding or investigation, the
adverse determination of which would result in such order, decree or judgment;
provided, that in the case of such material pending or threatened action,
proceeding or investigation, neither party shall decline to proceed with the
Closing pending final resolution thereof without exercising its reasonable
efforts promptly to determine jointly with the other party the merit thereof and
the likelihood of an adverse determination in such proceeding; and
(e) This Agreement and the transactions contemplated hereby shall have
been approved by the requisite vote or consent of the holders of outstanding
securities of the Buyer if such approval is required by applicable law,
contract, the Buyer's Articles of Incorporation or Bylaws, or otherwise.
7.2 BUYER'S CONDITIONS. The obligations of the Buyer to consummate the
Closing shall be subject to the satisfaction at or prior to Closing of all of
the following conditions, any one or more of which may be waived, in whole or in
part, by the Buyer:
(a) The Seller shall have complied in all material respects with each of
its covenants and agreements herein to be performed at or prior to the Closing
Date and each of the representations and warranties of the Seller contained in
this Agreement and the Schedules shall be true and correct in all material
respects as if made at and as of Closing except to the extent of changes that
have occurred prior to Closing that are consistent with the provisions of
Section 2.3(a);
(b) The Seller shall have delivered to the Buyer a duly authorized and
signed officer's certificate, dated as of the Closing Date, certifying that
(i) the representations and
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warranties of the Seller contained in this Agreement and the Schedules are
true and correct as of the Closing Date, and (ii) the Seller has complied in
all material respects with each of its covenants and agreements herein to be
performed at or prior to the Closing Date;
(c) As to each of the Branches, there shall have been given, obtained or
satisfied in final form any notice, approval, permit or other requirement of law
or any competent governmental or regulatory authority that is necessary to
proceed with the Closing, including without limitation such approvals as may be
required of any California or federal bank or other financial institution
regulatory agency and any other entity or entities having jurisdiction over the
Branches, the Buyer or the Seller, and no such agency or entity shall, in
connection therewith, have imposed any condition or requirement that would
result in a material adverse effect on the business or prospects of the Branches
or the Buyer, or on the consummation of the transactions contemplated hereby;
and
(d) There shall not be in effect any nonappealable final order, decree or
judgment of any court or governmental body having competent jurisdiction that
would be violated by consummation of the transactions contemplated hereby, nor
any material pending or threatened action, proceeding or investigation, the
adverse determination of which would result in such order, decree or judgment;
provided, that in the case of such material pending or threatened action,
proceeding or investigation, neither party shall decline to proceed with the
Closing pending final resolution thereof without exercising its reasonable
efforts promptly to determine jointly with the other party the merit thereof and
the likelihood of an adverse determination in such proceeding.
Notwithstanding any other provision of this Agreement, in the event that,
at the Closing, there shall be a failure of any condition specified in this
Section 7.2 or elsewhere in this Agreement, including without limitation any
failure of condition specified in Section 2.2(d), 2.2(e), 4.3, 4.4, 4.9 or 4.10
to the obligations of the Buyer in respect of the acquisition of any specific
Branch or Branches, the Buyer nevertheless shall be obligated to consummate the
transactions contemplated by this Agreement upon the Closing Date, and the
Seller may, upon written notice to the Buyer, exclude from the Closing the
Branch or Branches in respect of which the failure of condition shall exist, in
which case, appropriate adjustment shall be made in the consideration payable
pursuant to Article 3, the Schedules hereto, the Financial Statements and the
other documents to be delivered pursuant hereto so as to duly reflect the
deletion of such Branch or Branches from the Closing.
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ARTICLE 8
TERMINATION
8.1 EVENTS OF TERMINATION. This Agreement may be terminated at any time
prior to Closing:
(a) By the mutual written agreement of the Seller and the Buyer;
(b) By the Seller or by the Buyer in the event that the Closing has not
occurred on or before the date indicated in the third proviso in Section 2.2(a),
or such other date as the Seller and the Buyer shall agree in writing, unless
the failure to so consummate by such time is due to a breach of this Agreement
by the party seeking to terminate;
(c) By the Seller or by the Buyer if consummation of the transactions
contemplated hereby would violate any nonappealable final order, decree or
judgment of any court or governmental body having competent jurisdiction;
(d) By the Seller or the Buyer, in the event of a material breach by the
other of any representation, warranty or agreement contained herein which is not
cured or cannot be cured within thirty (30) calendar days after written notice
of such termination has been delivered to the breaching party; PROVIDED,
HOWEVER, that (i) termination pursuant to this Section 8.1(d) shall not relieve
the breaching party of liability for such breach or otherwise and (ii) this
Section 8.1(d) shall not under any circumstances provide the Buyer with a basis
for termination due to any actual or alleged breach relating to Hazardous
Substances, Buyer's sole remedies with respect to Hazardous Substances being
contained in Section 4.4; and
(e) By the Seller, in the event that the Buyer's equity capital offering
shall not have been consummated by November 14, 1997.
Any party desiring to terminate this Agreement pursuant to any of the
foregoing clauses shall give written notice of such termination to the other
party.
8.2 LIABILITY FOR TERMINATION. If this Agreement is terminated as
permitted by Section 8.1, except as provided in Sections 5.2(i) and 8.1(d), such
termination shall be without liability of either party (or any shareholder,
director, officer, employee, agent, consultant or representative of such party)
to the other party to this Agreement, except that, subject to Section 4.4, if
such termination shall result from the willful failure of a party to fulfill a
condition to the performance of the obligations of the other party or to perform
a covenant of this Agreement or from a willful misrepresentation or breach of a
warranty, covenant or agreement hereunder by
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either party to this Agreement, such party shall be fully liable for any and
all damages, costs and expenses (including, but not limited to, reasonable
attorney's fees) sustained or incurred by the other party as a result of such
failure or breach.
ARTICLE 9
SURVIVAL, INDEMNIFICATION
9.1 SURVIVAL. The covenants, agreements, representations and warranties
of the parties hereto made, contained in or to be performed pursuant to this
Agreement, the Schedules hereto or the officers' certificates delivered pursuant
hereto or in connection herewith shall survive Closing and remain operative and
in full force and effect until the first anniversary of the Closing Date, except
for the provisions of Sections 2.4, 3.2(h), 4.4(e)(ii), 10.1 and 11.11, which
shall survive such first anniversary. Notwithstanding the preceding sentence,
any covenant, agreement, representation, warranty or claim in respect of which
indemnity may be sought under Sections 9.2 or 9.3 shall survive the time at
which it would otherwise terminate pursuant to the preceding sentence if notice
of the claim, inaccuracy or breach giving rise to such right to indemnity shall
have been given to the party against whom such indemnity may be sought prior to
such time. After Closing, the sole and exclusive remedy of the Buyer and the
Seller for any breach of any covenant or agreement or any inaccuracy of any such
representation or warranty by the Seller or the Buyer shall be the indemnities
contained in Sections 9.2 and 9.3, respectively, which shall survive Closing,
PROVIDED HOWEVER, THAT the provisions of Section 4.4 shall exclusively govern
the rights and obligations of the Seller and Buyer with regard to Hazardous
Substances.
9.2 SELLER'S INDEMNITY. Subject to the proviso in the final sentence of
Section 9.1, the Seller hereby indemnifies the Buyer against and agrees to hold
it harmless from any and all damage, loss, liability and expense (including,
without limitation, reasonable expenses of investigation and attorney's fees and
expenses in connection with any action, suit or proceeding brought against the
Buyer) demanded, claimed or threatened in writing against the Buyer or incurred
or suffered by the Buyer arising out of (i) any action taken or omitted to be
taken by the Seller prior to the Closing relating to the ownership or operation
of the Branches or their business and properties prior to Closing, but excluding
any damage, loss, liability or expense resulting from actions taken by the
Seller at the written direction of the Buyer or resulting from defects in title
to the Branch Real Estate; (ii) any misrepresentation or breach of warranty,
covenant or agreement made, contained in or to be performed by the Seller
pursuant to this Agreement, the Schedules hereto or the Seller's officer's
certificate; and (iii) any claim or demand by any Branch employee of the Seller
who shall not become an employee of the Buyer (except as may be
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the result of any action or inaction of the Buyer). Any direct claim by the
Buyer against the Seller, as distinguished from a claim against the Buyer by
a third party, shall be settled by arbitration pursuant to Section 9.4. The
Seller shall not be liable under this Section 9.2 for any settlement effected
without its consent (which consent shall not be unreasonably withheld) of any
claim, litigation or proceeding in respect of which indemnity may be sought
hereunder. The Buyer agrees to give prompt notice to the Seller of the
assertion of any claim, or the commencement of any suit, action or proceeding
in respect of which indemnity may be sought hereunder. The Seller may, and
at the request of the Buyer shall, participate in and control the defense of
any such suit, action or proceeding at its own expense.
9.3 BUYER'S INDEMNITY. Subject to the proviso in the final sentence of
Section 9.1, the Buyer hereby indemnifies the Seller against and agrees to hold
it harmless from any and all damage, loss, liability and expense (including,
without limitation, reasonable expenses of investigation and attorney's fees and
expenses in connection with any action, suit or proceeding brought against the
Seller) demanded, claimed or threatened in writing against the Seller or
incurred or suffered by the Seller arising out of (i) ownership or operation of
the Branches or their business and properties on and after Closing (except as to
such damage, liability, loss or expense resulting from actions taken by the
Buyer at the written direction of the Seller); and (ii) any misrepresentation or
breach of warranty, covenant or agreement made, contained in or to be performed
by the Buyer pursuant to this Agreement, the Schedules hereto or the Buyer's
officer's certificate. Any direct claim by the Seller against the Buyer, as
distinguished from a claim against the Seller by a third party, shall be settled
by arbitration pursuant to Section 9.4. The Buyer shall not be liable under
this Section 9.3 for any settlement effected without its consent (which consent
shall not be unreasonably withheld) of any claim, litigation or proceeding in
respect of which indemnity may be sought hereunder. The Seller agrees to give
prompt notice to the Buyer of the assertion of any claim, or the commencement of
any suit, action or proceeding in respect of which indemnity may be sought
hereunder. The Buyer may, and at the request of the Seller shall, participate
in and control the defense of any such suit, action or proceeding at its own
expense.
9.4 ARBITRATION OF DISPUTES. (A) ANY CONTROVERSY OR CLAIM ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR ANY AGREEMENTS OR INSTRUMENTS RELATING HERETO
OR DELIVERED IN CONNECTION HEREWITH, INCLUDING, BUT NOT LIMITED TO A CLAIM BASED
ON OR ARISING FROM AN ALLEGED TORT WILL, AT THE REQUEST OF ANY PARTY, BE
DETERMINED BY ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (9
U.S.C. SECTION 1 ET SEQ.) UNDER THE AUSPICES AND RULES OF THE AMERICAN
ARBITRATION ASSOCIATION ("AAA"). THE AAA WILL BE INSTRUCTED BY EITHER OR BOTH
PARTIES TO PREPARE A LIST OF THREE (3) JUDGES WHO HAVE RETIRED FROM THE
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SUPERIOR COURT OF THE STATE OF CALIFORNIA, A HIGHER CALIFORNIA COURT OR ANY
FEDERAL COURT. WITHIN TEN (10) CALENDAR DAYS OF RECEIPT OF THE LIST, EACH
PARTY MAY STRIKE ONE (1)NAME FROM THE LIST. THE AAA WILL THEN APPOINT THE
ARBITRATOR FROM THE NAME(S) REMAINING ON THE LIST. THE ARBITRATION WILL BE
CONDUCTED IN SAN FRANCISCO, LOS ANGELES OR SAN DIEGO, WHICHEVER IS THE
CLOSEST CITY TO THE NEXUS OF THE DISPUTE. ANY CONTROVERSY IN INTERPRETATION
OR ENFORCEMENT OF THIS PROVISION OR WHETHER A DISPUTE IS ARBITRABLE, WILL BE
DETERMINED BY THE ARBITRATOR. JUDGMENT UPON THE AWARD RENDERED BY THE
ARBITRATOR MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. THE INSTITUTION
AND MAINTENANCE OF AN ACTION FOR JUDICIAL RELIEF OR IN PURSUIT OF AN
ANCILLARY REMEDY DOES NOT CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY,
INCLUDING THE PLAINTIFF, TO SUBMIT THE CONTROVERSY OR CLAIM TO ARBITRATION.
(B) IN ANY ARBITRATION PROCEEDING, THE ARBITRATOR IS AUTHORIZED TO
APPORTION COSTS AND EXPENSES, INCLUDING INVESTIGATION, LEGAL AND OTHER EXPENSES,
WHICH WILL INCLUDE, IF APPLICABLE, A REASONABLE ESTIMATE OF ALLOCATED COSTS AND
EXPENSE OF IN-HOUSE LEGAL COUNSEL AND LEGAL STAFF. SUCH COSTS AND EXPENSES ARE
TO BE AWARDED ONLY AFTER THE CONCLUSION OF THE ARBITRATION AND WILL NOT BE
ADVANCED DURING THE COURSE OF SUCH ARBITRATION.
NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE
ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION" PROVISION DECIDED BY
NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY
RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR BY JURY
TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS
TO DISCOVERY AND APPEAL UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE
"ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS
ARBITRATION PROVISION IS VOLUNTARY.
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING
OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION TO
NEUTRAL ARBITRATION.
BUYER'S INITIALS /s/JB SELLER'S INITIALS /s/BAD
--------- ---------
9.5 LIMIT ON INDEMNITIES. (a) Notwithstanding any other provision hereof,
an indemnifying party shall not be liable under this Article 9 for any losses
sustained by the indemnified party with respect to a Branch unless and until the
aggregate amount of all such losses sustained by the indemnified party with
respect to that Branch (including any amount for which the indemnifying party
may become liable to provide indemnification pursuant to Section 4.4), shall
exceed $25,000, in which event the indemnifying party shall be liable only for
such losses in excess of $25,000 (it being the intention of the parties that
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losses sustained by a party with respect to one Branch shall not be combined
with losses sustained with respect to another Branch to satisfy such minimum
$25,000 amount). The minimum $25,000 amount shall not apply to amounts which
one party may be required to pay to the other under Sections 2.4, 3.2, 4.1(g),
4.1(h), 4.6 and 10.1 of this Agreement or other provisions dealing with
customary and foreseeable post-closing adjustments. In no event shall the
aggregate losses for which the Seller may be liable under this Article 9 or
Section 4.4 or any other basis exceed the amount of the Initial Base Amount. IN
ADDITION, THE INDEMNIFYING PARTY SHALL HAVE NO OBLIGATIONS UNDER THIS AGREEMENT
FOR ANY CONSEQUENTIAL LIABILITY, DAMAGE OR LOSS OF THE INDEMNIFIED PARTY THAT
THE INDEMNIFIED PARTY MAY SUFFER.
(b) Each party's right to indemnification under this Article 9 shall
preclude any other monetary award (whether at law or in equity) and shall
preclude assertion by such party of any right to any such monetary award from
the indemnifying party.
ARTICLE 10
TAXES
10.1 OBLIGATIONS OF THE BUYER AND THE SELLER. The Buyer and the Seller
shall each assume and pay one-half of the following: any documentary, stamp,
deed, sales, use or other transfer taxes, recording fees and escrow fees
relating to the sale of the Assets and assumption of the Liabilities, including
but not limited to the assignment of the Leases. On the Closing Date, all real
and personal property taxes and current installments of special assessments
levied or assessed with respect to the Branch Real Estate, the Improvements, the
Leasehold Improvements and the Furniture, Fixtures and Equipment shall be
prorated between the Seller and the Buyer on a daily basis as of the Closing
Date based upon the fiscal year of the appropriate taxing authority.
10.2 ACCESS TO INFORMATION. For the applicable period required by law,
the Seller and the Buyer shall have a right to have access to and to copy all of
the records of the other party relevant to the Assets and the Liabilities and
necessary for the preparation of income tax returns, employee tax returns,
employee reports, employee benefits calculations, and for customary accounting
functions and other similar bona fide purposes. Additionally, the Buyer and the
Seller each agree to make available to the other party, at reasonable times and
upon reasonable advance notice, relevant records and personnel in connection
with an investigation or the preparation of or participation in a defense,
negotiation or settlement relating to any pending, future, or threatened
litigation or government agency proceeding (including a tax audit) involving the
conduct or interest of such other party.
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10.3 ALLOCATION OF CONSIDERATION. The Buyer and the Seller shall use
reasonable efforts to allocate the consideration payable hereunder at the
Closing among the Assets, tangible and intangible, on the basis of an allocation
(the "Allocation") to be agreed upon by the Buyer and the Seller prior to the
Closing.
ARTICLE 11
MISCELLANEOUS
11.1 PUBLIC NOTICE. All written notices to third parties, including
customers of the Branches, all oral or written notices or general communications
to employees of the Branches, and all public announcements and press releases
concerning the transactions contemplated by this Agreement made prior to Closing
shall be jointly planned and coordinated by the Buyer and the Seller. Neither
party shall act unilaterally in this regard without the prior approval of the
other party, which shall not be unreasonably withheld or delayed; PROVIDED,
HOWEVER, that in the event that a party reasonably concludes that a public
announcement or release is required by applicable law and the parties cannot
reach agreement upon a mutually acceptable release, the party releasing the
information, announcement or public statement shall not be deemed to be in
breach of this Agreement.
11.2 ASSIGNMENT. Neither party shall assign this Agreement or any of its
rights, duties or obligations hereunder without the prior written consent of the
other party.
11.3 NOTICES. Notices and legal process to be delivered to or served upon
either party hereto shall be deemed to have been duly delivered or served when
delivered in written form by hand or by telegraph, telex or facsimile
transmission, or the day after being sent from within the continental United
States by overnight delivery or courier service, or three (3) calendar days
after posting by registered mail or certified mail with return receipt
requested, to the parties hereto at the following addresses:
If to the Seller:
BankAmerica Corporation
Corporate Development Department #13262
315 Montgomery Street, Suite 1300
San Francisco, CA 94104
Attention: Director of Corporate Development
Fax: (415) 953-0390
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With copies to:
Bank of America NT&SA
Legal Department #3017
555 California Street, 8th Floor
San Francisco, CA 94104
Attention: Legal Department - Corporate Advice
Fax: (415) 622-6291
And to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street, 14th Floor
San Francisco, CA 94104
Attention: James C. Olson, Esq.
Fax: (415) 983-1200
If to the Buyer:
County Bank
1170 W. Olive, Suite B
Merced, CA 95348
Attention: Thomas T. Hawker
President and Chief Executive Officer
Fax: (209) 725-2277
With a copy to:
McCutchen, Doyle, Brown & Enersen
3 Embarcadero Center
San Francisco, CA 94111
Attention: James M. Rockett, Esq.
Fax: (415) 393-2286
or to such other authorized agent or address as either party may hereafter
select by written notice to the other party.
11.4 TIME. Time shall be of the essence for all purposes connected with
this Agreement.
11.5 EXPENSES. Except as otherwise expressly provided herein, the Buyer
and the Seller shall each bear its own out-of-pocket expenses incurred in
connection with the transactions contemplated by this Agreement.
11.6 COMMUNICATIONS. If for any reason any payment or communication to
which one party is entitled is received by the other party hereto, the receiving
party shall promptly forward such payment or communication to the other party.
11.7 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding between the parties hereto and supersedes all prior agreements and
understandings, except that
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certain Confidentiality Agreement between the parties hereto which was
executed by the Seller as of March 24, 1997 (the "Confidentiality
Agreement"), relating to the subject matter of this Agreement. The
Confidentiality Agreement shall survive, in accordance with its own terms,
the execution, delivery and performance of this Agreement.
11.8 AMENDMENT. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated orally. Any such change, waiver,
discharge or termination may be effected only by an instrument in writing signed
by the party against which enforcement of such change, waiver, discharge or
termination is sought.
11.9 GOVERNING LAW, SEVERABILITY. This Agreement shall be governed by and
construed in accordance with the laws of the State of California. If any one or
more of the provisions of this Agreement shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, and
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision were not contained herein.
11.10 WAIVER. No delay or omission to exercise any right, power or remedy
accruing to either party upon any breach or default under this Agreement shall
impair any such right, power or remedy of such party, nor shall it be construed
to be a waiver of any such breach or default, or an acquiescence therein, or in
any similar breach or default thereafter occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach of default
theretofore or thereafter occurring. Any waiver, permit, consent or approval or
any kind or character of any breach or default under this Agreement, or any
waiver of any provision or condition of this Agreement, must be in writing and
shall be effective only to the extent specifically set forth in such writing.
All rights and remedies, either under this Agreement or by law or otherwise
afforded to a party, shall be cumulative and not alternative.
11.11 CONFIDENTIALITY. The Buyer and its representatives, agents and
designees shall keep confidential and shall not disclose to any person or
entity, without Seller's prior written consent: the amount of the Purchase
Premium, the fact that confidential information has been made available to
Buyer, the existence of this Agreement or any of the terms or conditions hereof,
the status of the transactions contemplated hereby, all information concerning
the books, records, accounts and documents of Seller to which it has access
under this Agreement and any information developed in connection with any
Environmental Assessments that are performed by or on behalf of the Buyer
(including without limitation any reports or sampling results and analysis).
These restrictions, however, shall not apply to any such information (i) that
becomes public knowledge
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through no fault, act or omission of Buyer or its representatives, agents or
designees (for purposes of this Section 11.11 collectively the "Buyer"), (ii)
that Buyer lawfully acquires from an entity not under an obligation of
confidentiality to Seller, (iii) that is independently developed by Buyer,
(iv) where the Buyer is legally compelled to disclose such information,
provided that the Seller is provided with advance written notice of the
intention of Buyer to disclose to allow the Seller to contest the proposed
disclosure before any court or agency with jurisdiction unless such notice
impedes a duty or obligation of the Buyer under applicable laws, regulations
or legal requirements to timely report such information, in which event Buyer
shall concurrently advise Seller of Buyer's disclosure, or (v) where the
Buyer, upon advice of counsel, is required to disclose such information in
connection with a public offering of its equity securities. In case of any
actual or purported inconsistency or conflict between the provisions of this
Agreement and the provisions of the Confidentiality Agreement with respect to
obligations of the Buyer to maintain confidentiality as to any information,
the provisions which impose a higher standard of confidentiality on the Buyer
with respect to such information shall control and govern as to such actual
or purported inconsistency or conflict.
11.12 THIRD PARTY RIGHTS. Other than the provisions of Section 2.4,
nothing contained in this Agreement, whether express or implied, is intended to
(i) confer any rights or remedies upon any persons other than the parties hereto
and their respective successors and assigns, (ii) relieve or discharge the
obligations or liabilities of any third person to either party to this
Agreement, or (iii) give any third person any right of subrogation or action
over either party to this Agreement.
11.13 HEADINGS. The headings and captions used herein and in the
Schedules are included for purposes of convenience of reference only and shall
not limit or define the meaning of any provisions of this Agreement.
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11.14 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument, but
all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers or representatives as of the date
first above written.
SELLER:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By /s/ Brian A. Dunne
---------------------------------
Its Vice President
----------------------------
BUYER:
COUNTY BANK
By /S/ Janey Boyce
---------------------------------
Its SVP/CFO
----------------------------
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SCHEDULE A
LIST OF BRANCHES
Dos Palos
Livingston
Mariposa
<PAGE>
Exhibit 5.1
[Letterhead of McCutchen, Doyle, Brown & Enersen LLP]
July 10, 1997 Direct: (415) 393-2188
[email protected]
Capital Corp of the West
1160 W. Olive Avenue, Suite A
Merced, CA 95348-3198
REGISTRATION STATEMENT ON FORM S-2
Ladies and Gentlemen:
We have acted as counsel for Capital Corp of the West, a California
corporation (the "Company"), in connection with the Registration Statement on
Form S-2 filed by the Company under the Securities Act of 1933, as amended,
relating to the registration of shares of Common Stock, no par value, of the
Company.
We are of the opinion that the foregoing securities have been duly
authorized and, when sold pursuant to the terms described in the Registration
Statement, will be duly and validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Prospectus included therein.
Very truly yours,
McCUTCHEN, DOYLE, BROWN & ENERSEN, LLP
By
A Member of the Firm
<PAGE>
Exhibit 21
List of Significant Subsidiaries
County Bank Incorporated in California
Town and Country Finance and Thrift Company Incorporated in California
<PAGE>
Exhibit 23.1
[Letterhead of KPMG Peat Marwick LLP]
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
Capital Corp of the West
We consent to the use of our reports included herein and the reference to our
firm under the heading "Experts" in the prospectus. The report on the 1995
financial statements reflects the adoption of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, as amended by Statement No. 118, ACCOUNTING
BY CREDITORS FOR IMPAIRMENT OF A LOAN-INCOME RECOGNITION AND DISCLOSURES.
/s/ KPMG Peat Marwick LLP
Sacramento, California
July 14, 1997
