<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 1997
REGISTRATION NO. 333-31193
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
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. / /
------------------------
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>
SUBJECT TO COMPLETION, DATED AUGUST 8, 1997
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>
1,416,667 SHARES
[LOGO]
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 1,416,667 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 August 7, 1997, the last reported bid price of the Common Stock on
the Nasdaq National Market was $12.00 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 212,500 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>
[LOGO]
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," "CAPITALIZATION," "BRANCH ACQUISITION,"
"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 June 30, 1997, Capital Corp had consolidated assets of $293
million, deposits of $258 million and shareholders' equity of $21 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 June 30, 1997, County Bank had assets of $262 million,
deposits of $234 million and shareholder's equity of $16 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 June
30, 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
$5.6 million based on estimated transferable deposits of $76.5 million at the
Branches at June 30, 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.
3
<PAGE>
The 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 intends to aim for 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 into Mariposa County. The Company believes
that the Branches present favorable 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 intends to grow by making strategic acquisitions such as the
acquisition of Town & Country in 1996, acquiring existing branches and
opening new branches. 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.
4
<PAGE>
- DIVERSIFIED REVENUE SOURCES. The Bank has expanded through branching to
provide geographic and economic diversity to its revenue base. In keeping
with this objective, over the last two years, the Bank has opened offices
in Turlock, Sonora and Modesto. 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
preferred 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. 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 91% 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. Analysis of
the Bank's exposure to changes in interest rates is conducted on a regular
basis.
- 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 amid rapidly-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. The Company also
intends to implement 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 20.4% of the portfolio as of June 30, 1997. Recent
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......................... 1,416,667 shares(1)
Common Stock to be Outstanding after the
Offering................................... 4,032,614 shares(1)(2). See "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 212,500 shares of Common Stock that may be sold by the
Company pursuant to the Underwriter's over-allotment option. See
"Underwriting."
(2) Excludes 249,305 shares of Common Stock that may be issued pursuant to
exercise of stock options outstanding as of June 30, 1997 at exercise prices
ranging from $5.40 to $12.50 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
SIX MONTHS ENDED
JUNE 30, 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................ $ 11,557 $ 8,563 $ 19,351 $ 15,873 $ 12,807 $ 11,483 $ 11,370
Interest expense............... 4,407 3,042 6,865 5,717 3,850 3,061 3,948
Net interest income............ 7,150 5,521 12,486 10,156 8,957 8,422 7,422
Provision for loan losses...... 3,476 310 1,513 228 -- 254 162
Noninterest income (loss)...... 1,946 1,255 2,935 (1,224) 805 679 884
Noninterest expense............ 6,420 5,206 10,736 8,146 6,923 6,459 6,302
Net income (loss).............. (430) 797 2,009 335 1,736 1,783 1,166
BALANCE SHEET
Total assets................... $ 293,024 $ 239,808 $ 265,989 $ 209,033 $ 178,121 $ 155,178 $ 141,988
Net loans...................... 193,092 161,988 180,455 132,035 111,979 105,377 95,719
Intangible assets.............. 2,325 -- 2,404 -- -- -- --
Deposits....................... 257,678 215,617 238,345 192,601 163,199 141,730 130,508
Other borrowed funds........... 14,294 1,605 106 107 107 -- --
Shareholders' equity........... 20,964 19,327 20,974 15,093 14,082 12,633 10,853
CAPITAL RATIOS (1)
Leverage ratio................. 6.52% 8.49% 7.37% 7.43% 8.38% 8.39% 7.70%
Tier 1 risk-based capital...... 7.99 9.17 9.04 9.22 10.50 10.20 9.40
Total risk-based capital....... 8.97 9.99 10.20 10.27 11.70 11.40 10.80
ASSET QUALITY RATIOS
Nonperforming loans/total loans
(2).......................... .98% 3.71% 3.04% 3.63% .62% 1.01% 1.24%
Nonperforming assets/total
assets (3)................... .79 2.71 2.64 2.34 .39 .70 1.33
Allowance for loan losses/
nonperforming loans.......... 119.06 33.91 50.14 35.07 231.90 161.31 133.66
Allowance for loan losses/total
loans........................ 1.16 1.26 1.52 1.27 1.43 1.63 1.66
PERFORMANCE RATIOS
Return (loss) on average
assets....................... (0.31)% 0.78% 0.88% .18% 1.05% 1.24% .86%
Return (loss) on average
equity....................... (3.97) 10.24 11.05 2.16 12.81 15.06 11.37
Net interest margin (4)........ 5.83 6.06 6.16 6.09 6.03 6.63 6.26
Net interest spread (5)........ 5.41 5.59 5.60 5.52 5.57 6.22 5.83
Average loans to average
deposits..................... 77.83 73.37 76.31 71.12 73.12 94.24 80.55
Efficiency ratio (6)........... 70.58 76.83 69.62 91.20 70.92 70.97 75.87
PER SHARE INFORMATION (7)
Net income (loss) (8).......... $(0.17) $0.36 $0.85 $0.16 $0.83 $0.85 $0.56
Dividends declared............. -- -- .03 -- -- -- --
Book value (9)................. 8.01 7.45 8.06 7.16 6.69 6.01 5.16
Tangible book value (9)........ 7.13 6.65 7.14 7.16 6.69 6.01 5.16
Shares outstanding at period
end (000).................... 2,616 2,595 2,602 2,103 2,101 1,999 1,999
Weighted average shares
outstanding (000)............ 2,599 2,199 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."
6
<PAGE>
(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 consolidated balance sheet
at June 30, 1997 and the Company's historical consolidated statements of
operations for the six months ended June 30, 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
$76.5 million in deposits and pays a $5.6 million deposit premium and $1.0
million for the branch premises and furniture, fixture and equipment in
connection with the Branch Acquisition. Pro forma accounting impacts on the
Company's balance sheet as of June 30, 1997 are based on the assumption that the
Branch Acquisition and the Offering had been completed on that date. Pro forma
accounting impacts on the Company's statement of operations for the six months
ended June 30, 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 statement of operations 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 statements of operations are
non-recurring charges that are related to the Branch Acquisition. These
non-recurring charges are expensed in the first six months of the pro forma
statements of operations. As a result, the impact to the pro forma statement of
operations for the six months ended June 30, 1997 is not indicative of ongoing
subsequent pro forma 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 SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
(IN THOUSANDS)
RESULTS OF OPERATIONS
Total interest income......................................................... $ 14,511 $ 25,259
Total interest expense........................................................ 5,456 8,777
-------------- -------
Net interest income........................................................... 9,055 16,482
Provision for loan losses..................................................... 3,476 1,583
-------------- -------
Net interest income after provision........................................... 5,579 14,899
Total other income............................................................ 2,294 3,626
Total other expenses.......................................................... 7,888 13,460
-------------- -------
Net income (loss) before taxes................................................ (15) 5,065
Provision (benefit) for income taxes.......................................... (56) 1,921
-------------- -------
Net income.................................................................... $ 41 $ 3,144
-------------- -------
-------------- -------
<CAPTION>
AT JUNE 30,
1997
--------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET
ASSETS
Cash and noninterest-bearing deposits......................................... $ 98,784
Time deposits with other banks................................................ 266
Federal funds sold............................................................ 7,775
Available-for-sale securities................................................. 42,747
Held-to-maturity securities................................................... 11,451
Loans, net.................................................................... 193,092
Interest receivable........................................................... 2,041
Premises and equipment, net................................................... 10,416
Intangibles................................................................... 7,896
Other assets.................................................................. 10,484
--------------
Total assets................................................................ $ 384,952
--------------
--------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits...................................................................... $ 334,196
Fed funds purchased and repurchase agreements................................. 5,722
Borrowings.................................................................... 8,572
Other liabilities............................................................. 88
Shareholders' equity:
Common stock................................................................ 31,074
Retained earnings........................................................... 5,273
Investment securities unrealized loss....................................... 27
--------------
Total shareholders' equity.................................................. 36,374
--------------
Total liabilities and shareholders'equity................................... $ 384,952
--------------
--------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30, 1997
----------------------
<S> <C> <C> <C> <C>
ACTUAL PRO FORMA
--------- -----------
FINANCIAL RATIOS
CAPITAL RATIOS (1)
Leverage ratio........................................................ 6.52% 7.54%
Tier 1 risk-based capital............................................. 7.99 11.22
Total risk-based capital.............................................. 8.97 12.13
ASSET QUALITY RATIOS
Nonperforming loans/total loans (2)................................... .98% .98%
Nonperforming assets/total assets (3)................................. .79 .52
Allowance for loan losses/nonperforming loans......................... 119.06 119.06
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED FOR THE YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------------- ----------------------
<S> <C> <C> <C> <C>
ACTUAL PRO FORMA ACTUAL PRO FORMA
--------- ----------- --------- -----------
PERFORMANCE RATIOS
Return (loss) on average assets....................................... (0.31%) 0.02% 0.88% 0.97%
Return (loss) on average equity....................................... (3.97) .22 11.05 9.26
Net interest margin (4)............................................... 5.83 5.47 6.16 5.68
Net interest spread (5)............................................... 5.41 5.08 5.60 5.24
Efficiency ratio (6).................................................. 70.58 69.50 69.62 67.14
PER SHARE INFORMATION (7)
Net income (loss) (8)................................................. $ (0.17) $ 0.01 $ 0.85 $ 0.82
Dividends declared.................................................... -- -- 0.03
Book value (9)........................................................ 8.01 9.02
Tangible book value (9)............................................... 7.13 7.06
Shares outstanding at period-end (000)................................ 2,616 4,033
Weighted average shares outstanding (000)............................. 2,599 4,016 2,367 3,784
</TABLE>
- ------------------------
(1) The risk-based and leverage capital ratios are defined in "Regulation and
Supervision" and are set forth in "Capitalization."
(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"). The Bank filed its application with the FDIC on July 28, 1997 and
with the Department on July 30, 1997. No assurance can be given that such
approvals will be received, that the other conditions will be 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 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
11
<PAGE>
Company by 31% from $293 million to approximately $385 million based on assets
at June 30, 1997. See "Branch Acquisition" and "Selected Unaudited Pro Forma
Combined Financial Information."
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 June 30, 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 property values and decreased demand for goods and services. In
addition, declines in defense and military expenditures resulted in a base
closure in the Company's service area. 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
$1,905,000 at June 30, 1997, and was as high as $7,034,000 at December 31, 1996.
The allowance for loan losses increased from $1,621,000 at December 31, 1994 to
$2,268,000 at June 30, 1997, but it decreased as a percentage of nonperforming
loans from 232% to 119%, respectively, as of those dates.
In the second quarter of 1997, the Company made a provision for loan losses
of $3,236,000 and charged off a real estate development loan with a balance of
$3,458,000. After giving effect to the provision and the charge-off, the
allowance for loan losses was $2,268,000 or 1.16% of total loans at June 30,
1997. The write-off substantially reduced the Company's nonperforming assets. At
June 30, 1997, nonperforming assets totaled $2,322,000 or .79% of total assets,
nonperforming loans totaled $1,905,000 or .98% of total loans and the allowance
for loan losses totaled 119.06% of nonperforming loans. 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."
12
<PAGE>
California is prone to earthquakes and other natural disasters, including
floods and droughts. As recently as January of 1997, parts of the Company's
service area experienced severe flooding. 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
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 June 30, 1997 were $293,024,000, 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; see "Unaudited Pro Forma
Combined Financial Information." 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."
13
<PAGE>
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
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 eliminate from its books by charge-off or collection all
assets classified "Loss" as of December 2, 1996 that had not previously been
collected or charged off; (iii) 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); (iv) 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%; (v) 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; (vi) not to pay cash dividends without the prior
written consent of the Department and the FDIC; and (vii) 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 $4.6 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
14
<PAGE>
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
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
Branch Acquisition 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 other acquisitions or expansion opportunities. At present
management has not identified any other potential acquisitions or expansion
opportunities. 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. See "Risk Factors--Branch Acquisition" and
"--Dividends."
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 August 7, 1997)..................................... 13.00 10.75
</TABLE>
On August 7, 1997, the last reported bid price of the Common Stock on the
Nasdaq National Market was $12.00 per share. As of June 30, 1997, there were
approximately 1,300 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. 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. See "Regulation and
Supervision--Limitations on Dividends."
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 and on a pro forma as adjusted basis to reflect (i) the sale of
1,416,667 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 JUNE 30, 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, 2,615,947 shares issued
and outstanding actual; 4,032,614 shares issued and outstanding
pro forma as adjusted (1)........................................ 15,664 31,074
Retained earnings.................................................. 5,273 5,273
Investment securities unrealized gain.............................. 27 27
--------- -------
Total shareholders' equity......................................... $ 20,964 $ 36,374
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) Excludes 249,305 shares of Common Stock that may be issued pursuant to
exercise of stock options outstanding as of June 30, 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 June 30, 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 $76.5 million in deposits and pays $1.0 million for Branch
premises and equipment and a premium of $5.6 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 JUNE 30, 1997
------------------------------------------------------
TIER 1 RISK-BASED TOTAL RISK-BASED
LEVERAGE RATIO CAPITAL RATIO CAPITAL RATIO
-------------- ------------------- -----------------
<S> <C> <C> <C>
CAPITAL CORP
As reported................................................... 6.52% 7.99% 8.97%
Pro forma for Offering........................................ 11.31 14.41 15.37
Pro forma for Offering and Branch Acquisition................. 7.54 11.22 12.13
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................................................... 6.32% 7.73% 8.72%
Pro forma for Offering........................................ 11.21 14.26 15.24
Pro forma for Offering and Branch Acquisition................. 7.11 10.72 11.62
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 "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 ratio differs from the leverage ratio because it is
calculated on period-end assets rather than quarterly average assets. 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.
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
19
<PAGE>
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 deposits that are designated as "Head Office Accounts" or that
secure loans or credit cards which at March 31, 1997 totalled $1.4 million.
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 $76,518,000 at the Branches as of June 30, 1997
(net of deposits not to be transferred), County Bank expects the premium to be
approximately $ 5,571,000. 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 June 30, 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........................... $ 24,587,000 $ 23,732,000
Dos Palos............................ 24,258,000 24,208,000
Mariposa............................. 29,043,000 28,578,000
------------- -------------
Total:............................... $ 77,888,000 $ 76,518,000 $ 5,571,000 $ 127,000 $ 860,000
------------- -------------
------------- -------------
</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. 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 a preliminary appraisal. The Company
believes that the aggregate purchase prices for the owned real estate will
not materially exceed $860,000.
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 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
20
<PAGE>
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. The Bank
filed its application with the FDIC on July 28, 1997 and with the Department on
July 30, 1997. 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 consolidated balance
sheet at June 30, 1997 and the Company's historical consolidated statements of
operations for the six months ended June 30, 1997 and the year ended December
31, 1996. Pro forma accounting impacts on the Company's balance sheet as of June
30, 1997 are based on the assumption that the Branch Acquisition and the
Offering had been completed on that date. Pro forma accounting impacts on the
Company's historical statement of operations for the six months ended June 30,
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
statement of operations 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 $76.5 million in deposits and pays a $5.6 million deposit
premium and $1.0 million for the branch premises, furniture, fixtures and
equipment in connection with the Branch Acquisition. Included in the pro forma
statements of operations are non-recurring charges that are related to the
Branch Acquisition. These non-recurring charges are expensed in the first six
months of the pro forma statements of operations. As a result, the impact to the
pro forma statements of operations is not indicative of ongoing subsequent pro
forma 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 operations 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 JUNE 30, 1997
----------------------------------------------
BRANCH
COMPANY ACQUISITION OFFERING PRO FORMA
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
ASSETS
Cash and noninterest-bearing deposits........................ $ 13,414 $ 69,960(1) $ 15,410(1) $ 98,784
Time deposits with other banks............................... 266 266
Federal funds sold........................................... 7,775 7,775
Available-for-sale securities................................ 42,747 42,747
Held-to-maturity securities.................................. 11,451 11,451
Loans, net................................................... 193,092 193,092
Interest receivable.......................................... 2,041 2,041
Premises and equipment, net.................................. 9,429 987(2) 10,416
Intangibles.................................................. 2,325 5,571(3) 7,896
Other assets................................................. 10,484 10,484
---------- ----------- --------- ----------
Total Assets............................................... $ 293,024 $ 76,518 $ 15,410 $ 384,952
---------- ----------- --------- ----------
---------- ----------- --------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits..................................................... $ 257,678 $ 76,518(4) $ 334,196
Fed funds purchased and repurchase agreements................ 5,722 5,722
Borrowings................................................... 8,572 8,572
Other liabilities............................................ 88 88
Shareholders' equity:
Common stock............................................... 15,664 15,410(5) 31,074
Retained earnings.......................................... 5,273 5,273
Investment securities unrealized loss...................... 27 27
---------- ----------- --------- ----------
Total shareholders' equity................................. 20,964 15,410 36,374
---------- ----------- --------- ----------
Total liabilities and shareholders' equity................. $ 293,024 $ 76,518 $ 15,410 $ 384,952
---------- ----------- --------- ----------
---------- ----------- --------- ----------
</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 $860,000 in premises and $127,000 in equipment. See "Branch
Acquisition."
(3) Represents a 7.28% premium on historical transferable deposits.
(4) Represents estimated transferable deposits at June 30, 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 SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------------------
BRANCH
COMPANY ACQUISITION OFFERING PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Total interest income.......................................... $ 11,557 $ 2,421(1) $ 533(1) $ 14,511
Total interest expense......................................... 4,407 1,049(2) 5,456
----------- ----------- ----- -----------
Net interest income............................................ 7,150 1,372 533 9,055
Provision for loan losses...................................... 3,476 3,476
----------- ----------- ----- -----------
Net interest income after provision............................ 3,674 1,372 533 5,579
Total other income............................................. 1,946 348(3) 2,294
Other expenses
Salaries and related benefits................................ 3,031 359(4) 3,390
Premises and occupancy....................................... 576 300(5) 876
Intangible amortization...................................... 79 398(6) 477
Other........................................................ 2,734 411(7) 3,145
----------- ----------- ----- -----------
Total other expenses......................................... 6,420 1,468 7,888
----------- ----------- ----- -----------
Net income (loss) before taxes................................. (800) 252 533 (15)
Provision (benefit) for income taxes........................... (370) 101(8) 213(8) (56)
----------- ----------- ----- -----------
Net income (loss).............................................. $ (430) $ 151 $ 320 $ 41
----------- ----------- ----- -----------
----------- ----------- ----- -----------
</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 6.92%, which represents the historical average yield on the
Company's taxable investment securities for the six months ended June 30,
1997.
(2) Represents historical expense multiplied by the ratio of historical Branch
deposits at June 30, 1997 to deposits at December 31, 1996.
(3) Represents 75% of historical fee income for the Branches.
(4) Represents historical expense plus six 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 six 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 six 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
six months of general Branch support expenses estimated at $120,000
annually.
(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 $ 4,842(1) $ 1,066(1) $ 25,259
Total interest expense......................................... 6,865 1,912(2) 8,777
----------- ----------- ----------- -----------
Net interest income............................................ 12,486 2,930 1,066 16,482
Provision for loan losses...................................... 1,513 70(3) 1,583
----------- ----------- ----------- -----------
Net interest income after provision............................ 10,973 2,860 1,066 14,899
Total other income............................................. 2,935 691(4) 3,626
Other expenses
Salaries and related benefits................................ 5,283 741(5) 6,024
Premises and occupancy....................................... 1,857 621(6) 2,478
Intangible amortization...................................... 69 796(7) 865
Other........................................................ 3,527 566(8) 4,093
----------- ----------- -----------
Total other expenses........................................... 10,736 2,724 13,460
----------- ----------- ----------- -----------
Net income before taxes........................................ 3,172 827 1,066 5,065
Provision for income taxes..................................... 1,163 331(9) 427(9) 1,921
----------- ----------- ----------- -----------
Net income..................................................... $ 2,009 $ 496 $ 639 $ 3,144
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) Assumes cash received as a result of the Branch Acquisition and Offering 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 10.38%, 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 6.77%, which represents
the historical average yield on the Company's taxable investment securities
for the year ended December 31, 1996.
(2) Represents historical expense multiplied by the ratio of historical Branch
deposits at June 30, 1997 to deposits at December 31, 1995.
(3) Represents a loan loss provision equal to 1% of projected loan originations
for the year.
(4) Represents 75% of historical Branch fee income.
(5) 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.
(6) 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.
(7) Represents one year of amortization of the purchase premium on Branch
deposits amortized over seven years.
(8) Represents historical expense plus $250,000 in one-time conversion costs
and $120,000 in annual general expenses to support the Branches.
(9) 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.
FINANCIAL CONDITION
Total assets at June 30, 1997 were $293,024,000, an increase of $27,035,000
or 10% compared with total assets of $265,989,000 at December 31, 1996, and an
increase of $53,216,000 or 22% compared with total assets of $239,808,000 at
June 30, 1996. Net loans were $193,092,000 at June 30, 1997, an increase of
$12,637,000 or 7.0% compared with net loans of $180,455,000 on December 31,
1996, and an increase of $31,104,000 or 19.2% compared with net loans of
$161,988,000 at June 30, 1996. The growth of the Company from June 30, 1996 to
June 30, 1997 was primarily the result of the the opening of two branch offices
of County Bank within that period.
The allowance for loan losses was $2,268,000 at June 30, 1997, representing
a decrease of 18.8% of the allowance at December 31, 1996 but an increase of
9.9% of the allowance at June 30 , 1996. The allowance at June 30, 1997
represented 1.16% of total loans, compared with 1.52% of total loans at December
31, 1996. Nonperforming loans at June 30, 1997 decreased by $3,663,000 from
December 31, 1996, moving from 3.04% of total loans to .98% of total loans. In
addition, the allowance for loan losses as a percentage of nonperforming loans
increased from 50.14% at December 31, 1996 to 119.06% at June 30, 1997.
Deposits were $257,678,000 at June 30, 1997, an increase of $19,333,000 or
8% compared with deposits of $238,345,000 at December 31, 1996, and an increase
of $42,061,000 or 20% compared with deposits of $215,617,000 at June 30, 1996.
Total shareholders' equity was $20,964,000 at June 30, 1997, a decrease of
$10,000 (less than 1%) from $20,974,000 at December 31, 1996, and an 8% increase
from $19,327,000 at June 30, 1996.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
OVERVIEW. For the six months ended June 30, 1997, the Company reported a
net loss of $430,000 compared with net income of $797,000 for the six months
ended June 30, 1996. Earnings (loss) per share were $(.17) and $.36,
respectively. The annualized return (loss) on average assets was (.31%) for the
first six months of 1997 compared with .78% for the same six months in 1996. The
Company's annualized return (loss) on average equity was (3.97%) and 10.74% for
the six months ended June 30, 1997 and 1996, respectively. The decreases in
earnings per share, return on average assets and return on average equity were
primarily attributable to the significant increase in the loan loss provision
taken in the first six months of 1997.
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 six months ended June 30, 1997 totaled
$7,150,000 compared with $5,521,000 for the same period in 1996, an increase of
$1,629,000 or 30%.
26
<PAGE>
Total interest and fees on earning assets were $11,557,000 for the first six
months of 1997, an increase of $2,994,000 or 35% from $8,563,000 for the same
six 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 six months of 1997 was primarily the
result of an increase in the volume of interest-earning assets. Average
interest-earning assets for the first six months of 1997 were $245,765,000
compared with $185,694,000 for the first six months of 1996, an increase of
$60,071,000 or 32%.
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 $4,407,000 for
the six months ended June 30, 1997, compared with $3,042,000 for the six months
ended June 30, 1996, an increase of $1,365,000 or 45%. This increase was
primarily the result of an increase in the volume of interest-bearing
liabilities. Average interest-bearing liabilities were $219,612,000 for the
first six months of 1997 compared with $160,500,000 for the same six months in
1996, an increase of $59,112,000 or 37%.
The Company's net interest margin, the ratio of net interest income to
average interest-earning assets, was 5.83% for the six months ended June 30,
1997 compared with 6.06% for the same period in 1996. Net interest margin
provides a measurement of the Company's ability to employ funds profitably
during the period being measured. The Company's decrease in net interest margin
was primarily attributable to a moderate change in the mix of interest-bearing
liabilities. Certificates of deposit as a percentage of average interest-bearing
liabilities increased from 19% for the six months ended June 30, 1996 to 29% for
the six months ended June 30, 1997.
27
<PAGE>
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 SIX MONTHS ENDED
------------------------------------------------------------------------
JUNE 30, 1997 JUNE 30, 1996
---------------------------------- ------------------------------------
INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID
---------- --------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Assets
Federal funds sold............................... $ 3,488 $ 92 5.29% $ 2,709 $ 71 5.26%
Taxable investment securities: (1)............... 50,080 1,727 6.92 38,174 1,304 6.85
Nontaxable investment securities................. 3,989 108 5.43 4,536 121 5.35
Loans, gross: (2)................................ 188,208 9,630 10.26 137,358 7,067 10.32
---------- --------- ----- ---------- ----------- -----
Total Earning Assets............................. 245,765 $ 11,557 9.43 182,777 $ 8,563 9.40
--------- -----------
Allowance for loan losses........................ (2,881) (1,794)
Cash and due from banks.......................... 10,998 10,103
Premises and equipment........................... 8,150 4,350
Interest receivable and other assets............. 15,294 9,736
---------- ----------
Total Assets..................................... $ 277,326 $ 205,172
---------- ----------
Liabilities and Shareholders' Equity
Interest-bearing demand deposits................. $ 34,769 $ 158 .91% $ 28,002 $ 127 .91%
Savings deposits................................. 111,588 2,272 4.08 99,768 2,061 4.14
Time deposits.................................... 63,305 1,716 5.44 30,687 807 5.27
Other borrowed funds............................. 9,950 261 5.26 1,665 47 5.66
---------- --------- ----- ---------- ----------- -----
Total interest-bearing liabilities............... 219,612 $ 4,407 4.02 160,122 $ 3,042 3.81
--------- -----------
Noninterest-bearing demand deposits.............. 32,166 28,748
Accrued interest, taxes and other liabilities.... 3,877 699
Total liabilities................................ 255,655 189,569
Shareholders' equity............................. 21,671 15,603
---------- ----------
Total Liabilities and Shareholders' Equity....... $ 277,326 $ 205,172
---------- ----------
Net interest income.............................. $ 7,150 $ 5,521
--------- -----------
Net interest margin (3).......................... 5.83% 6.06%
----- -----
</TABLE>
- ------------------------
(1) Interest on municipal securities is not computed on a tax-equivalent basis.
(2) Amounts of interest earned includes loan fees of $670,000 and $443,000 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>
SIX MONTHS ENDED JUNE 30, 1997
OVER SIX MONTHS ENDED
JUNE 30, 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.............................................................. $ 20 $ 1 $ 21
Taxable investment securities................................................... 407 16 423
Nontaxable investment securities(1)............................................. (15) 2 (13)
Loans, gross.................................................................... 2,602 (39) 2,563
--------- --- ---------
Total......................................................................... 3,014 (20) 2,994
INCREASE (DECREASE) IN INTEREST EXPENSE:
Interest-bearing demand deposits................................................ 31 0 31
Savings deposits................................................................ 240 (29) 211
Time deposits................................................................... 883 26 909
Other borrowed funds............................................................ 217 (3) 214
--------- --- ---------
Total......................................................................... 1,371 (6) 1,365
--------- --- ---------
--------- --- ---------
Total change in net interest income............................................. $ 1,643 $ (14) $ 1,629
--------- --- ---------
--------- --- ---------
</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 six
months of 1997 was $3,476,000 compared with $310,000 in the six months ended
June 30, 1996. 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
provision and the charge-off, the allowance was $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 $2,322,000 or .79% of total
assets, nonperforming loans totaled $1,905,000 or .98% of total loans and the
allowance for loan losses totaled 119.06% of nonperforming loans. 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."
NONINTEREST INCOME. Noninterest income increased by $691,000 or 55% to
$1,946,000 for the six months ended June 30, 1997 compared with $1,255,000 in
the same period in 1996. Service charges on deposit accounts increased by
$132,000 or 22%, income from the sale of real estate held for sale or
development increased by $435,000 and other income increased by $124,000 or 21%.
The increases in service charges are primarily due to general growth of the
Company. The increase in income from the sale of real estate held for sale or
development was due to increased sales. In the second quarter of 1997 four
finished lots and two parcels were sold. The primary reasons for the increase in
other income were increases from loan servicing income and retail investment
sales.
29
<PAGE>
NONINTEREST EXPENSE. Noninterest expenses increased by $1,214,000 or 23% to
$6,420,000 for the six months ended June 30, 1997 compared with $5,206,000 for
the same period in 1996. 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 six-month periods ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Salaries and employee benefits............................................. $ 3,031 $ 2,640
Furniture and equipment.................................................... 635 484
Occupancy expense.......................................................... 576 341
Marketing.................................................................. 311 196
Professional fees.......................................................... 260 332
Supplies................................................................... 251 123
Regulatory assessments..................................................... 35 21
Other...................................................................... 1,321 1,069
--------- ---------
Total.................................................................... $ 6,420 $ 5,206
--------- ---------
--------- ---------
</TABLE>
For the six months ended June 30, 1997 compared with the six months ended
June 30, 1996, salaries and related benefits increased by $391,000 or 15%,
equipment expenses increased $151,000 or 31%, occupancy expenses increased
$235,000 or 69%, marketing expenses increased by $115,000 or 59% and other
expenses, including professional fees, supplies, and regulatory assessments,
increased by $322,000 or 21%. 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 two branch offices since
June 1996.
PROVISION FOR INCOME TAXES. The Company recorded a $370,000 tax benefit for
the six months ended June 30, 1997 compared with a provision for income taxes of
$463,000 for the same six months in 1996. The benefit resulted from the net
losses attributable to the loss loan provisions of $3,476,000 and related
charge-offs of a real estate development loan of $3,458,000. Tax rates were also
affected by 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 June 30, 1997 and $1,700,000 as of June 30, 1996, resulting in
tax credits of $70,000 and $30,000, respectively.
NET INCOME (LOSS). The decrease in earnings in the first six months of 1997
compared with the first six months of 1996 resulted primarily from the increase
in the provision for loan losses and the related charge-off of a real estate
development loan. The increase in the loan loss provision was partially offset
by the increases in net interest income and in the sale of real estate that had
been previously written off. Excluding the effect of the increase in the
provision for loan losses and sales of real estate, net income for the six
months ended June 30, 1997 would have been approximately $1,250,000.
FOR THE 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
30
<PAGE>
Investment & Development, Inc. ("MAID"). The write-off resulted in a $1,757,000
reduction in after-tax earnings for 1995.
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 $37,054,000 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 almost equally to increases in the rates paid on
these liabilities and 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.
31
<PAGE>
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 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........................... 104,938 4,350 4.15 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 15,489
-------- --------
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 none 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 in 1995,
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 none 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 June 30, 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 JUNE 30, 1997
------------------------------------------------------------------------
AFTER 3 AFTER 1
BUT YEAR BUT
WITHIN WITHIN WITHIN AFTER NONINTEREST-
3 MONTHS 12 MONTHS 5 YEARS 5 YEARS BEARING TOTAL
----------- ----------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Time deposits at other
banks................. $ 167 $ 99 $ -- $ -- $ -- $ 266
Federal funds sold...... 7,775 -- -- -- -- 7,775
Investment securities... 1,859 5,706 12,456 34,177 -- 54,198
Loans................... 123,332 37,258 23,430 11,340 -- 195,360
Other interest-bearing
assets................ -- 3,210 -- -- -- 3,210
----------- ----------- ----------- --------- ----------- ---------
Total earning assets.... 133,133 46,273 35,886 45,517 -- 260,809
Noninterest-earning
assets and allowances
for loan losses....... -- -- -- -- 32,215 32,215
----------- ----------- ----------- --------- ----------- ---------
Total assets............ $ 133,133 $ 46,273 $ 35,886 $ 45,517 $ 32,215 $ 293,024
LIABILITIES AND
SHAREHOLDERS' EQUITY
Savings, money market
and NOW deposits...... $ 153,049 $ -- $ -- $ -- $ 33,263 $ 186,312
Time deposits........... 13,314 44,020 14,032 -- -- 71,366
Other interest-bearing
liabilities........... 5,620 -- 8,762 -- -- 14,382
Other liabilities and
shareholders'
equity................ -- -- -- -- 20,964 20,964
----------- ----------- ----------- --------- ----------- ---------
Total liabilities and
shareholders'
equity................ 171,983 44,020 22,794 -- 54,227 $ 293,024
----------- ----------- ----------- --------- -----------
Incremental gap......... (38,850) 2,253 13,092 45,517 $ (22,012)
Cumulative gap.......... $ (38,850) $ (36,597) $ (23,505) $ 22,012
Cumulative gap as a % of
earning assets........ (14.9)% (14.0)% (9.0)% 8.4%
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------------------------------------------
AFTER 3 AFTER 1
BUT YEAR BUT
WITHIN WITHIN WITHIN AFTER NONINTEREST-
3 MONTHS 12 MONTHS 5 YEARS 5 YEARS BEARING TOTAL
----------- ----------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Time deposits in other
banks................ $ 1,800 $ 308 $ 993 $ -- $ -- $ 3,101
Federal funds sold..... 3,735 -- -- -- -- 3,735
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 $36,597,000 or 14.0% of interest-earnings assets at June 30, 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 interest-sensitive asset and
liability. As a result of these factors, at any given time, the Company may be
37
<PAGE>
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 June 30, 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
In order to maintain adequate liquidity, the Company must have sufficient
resources available at all times to meet its cash flow requirements. 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 $64,202,000, $63,196,000 and
$64,269,000 on June 30, 1997, December 31, 1996, and December 31, 1995,
respectively, and constituted 21.9%, 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
$21,963,000 at June 30, 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 $12,822,000, of which $5,105,000 was
outstanding as of June 30, 1997 and $105,000 was outstanding as of December 31,
1996. 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 decreased by $10,000 or less than 1% from December 31, 1996
to June 30, 1997. The decrease was attributable to a net loss for the six months
ended June 30, 1997 of $430,000, offset in part by an increase as a result of
stock option exercises of $133,000, stock purchases pursuant to the Company's
benefit plans of $208,000 and $96,000 as a result of increases in unrealized
gains on investment securities. The Company's shareholders' equity increased
$5,881,000 in 1996, $1,011,000 in 1995 and
38
<PAGE>
$1,449,000 in 1994. The increase in 1996 was the result of issuance of
$3,969,000 in common stock in the acquisition of Town & Country, net income for
the year of $2,009,000, $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.
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 June 30, 1997 and December 31, 1996 the Company
had Tier 1 risk-based capital ratios of 7.99% and 9.04%, respectively, and total
risk-based capital ratios of 8.97% and 10.20%, respectively. The decreases were
due primarily to the increased loan loss reserve provisions in the second
quarter of 1997.
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 5% minimum for "well
capitalized" banks. As of June 30, 1997 and December 31, 1996, the Bank's
leverage capital ratio equaled 6.32% and 7.39%, respectively. The decrease was
due primarily to the increased loan loss reserve provisions in the second
quarter of 1997.
For a presentation of the actual and pro forma capitalization of the Company
and County Bank, see "Capitalization."
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 June 30, 1997, loans that were classified "Substandard" and "Doubtful" as
of December 2, 1996 were reduced to $4.6 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 (based on period-end assets rather than average assets) 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 waiver or forbearances will be given in the future should the Bank
fail to meet its commitments in the future.
39
<PAGE>
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 "Risk Factors--Government Regulation and Legislation" and
"Regulation and Supervision."
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 June 30, 1997, it had assets of $31
million, loans of $23 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. Town & Country's 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. In addition, the Bank
has received regulatory approval to open a branch in Madera, California and
intends to so in late 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 Avenue, Merced.............. Main branch Owned 1977
606 West 19th Street, Merced (1)........... Branch Leased 1981
1160 West Olive Avenue, Merced (1)......... Administrative Leased 1986
office
1170 West Olive Avenue, 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 1976
Modesto.................................... Branch Leased 1957
Visalia.................................... Branch Leased 1978
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.
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<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 JUNE 30, 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........... $ 5,673 $ 17,711 $ 22,521 $ 20,593
State and political
subdivisions................ 3,379 4,271 4,297 --
Mortgage-backed securities.... 32,634 20,751 17,932 --
Other securities.............. 1,061 645 552 487
--------- --------- --------- ---------
Total......................... $ 42,747 $ 43,378 $ 45,302 $ 21,080
--------- --------- --------- ---------
--------- --------- --------- ---------
HELD TO MATURITY
U.S. Treasury and U.S.
Government agency........... $ 11,451 $ 11,324 -- -- $ 8,175 $ 7,989
State and political
subdivisions................ -- -- -- -- 6,571 6,567
--------- --------- --------- --------- --------- ---------
Total......................... $ 11,451 $ 11,324 -- -- $ 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 JUNE 30, 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 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.... $ -- -- $ 4,355 6.36% $ 998 7.12% $ 320 7.42% $ 5,673
State and political
subdivisions......... 276 5.03% 2,799 5.38 304 4.22 -- -- 3,379
Mortgage-backed
securities........... 168 7.21 375 8.62 530 8.33 31,561 7.21 32,634
Equity securities...... 1,061 -- -- -- 1,061
--------- --------- --------- --------- ---------
Total.................. $ 1,505 $ 7,529 $ 1,832 $ 31,881 $ 42,747
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
HELD TO MATURITY
U.S. Treasury and U.S.
Government agency.... -- -- -- -- $ 7,051 6.94% $ 4,400 7.41% $ 11,451
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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
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. County Bank generally limits the amount
available to any one borrower under this program to $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. 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. The SBA granted the Bank preferred lender status on
July 8, 1997. This status will enable the Bank to originate SBA loans on a more
expedited basis than in the past.
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 an outside source
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
44
<PAGE>
inception but which have become delinquent beyond 60 days are also charged back
to the business customer through the reserve account.
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 June 30, 1997, the total of all commercial loans was $32,774,000 or 16.8%
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 June 30, 1997, the total of all agricultural loans was $39,886,000 or
20.4% 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 participate in joint
ventures or take an equity interest in connection with its construction lending.
45
<PAGE>
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. 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 June 30, 1997, real estate construction loans totaled $9,315,000 or 4.8%
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."
46
<PAGE>
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, interest rates
and other provisions of County Bank's ARMs and fixed rate loans are determined
by the direct lender, in most cases unaffiliated mortgage companies, and the
Bank receives fee income for packaging the loans.
At June 30, 1997, the total of all mortgage real estate loans, excluding
construction real estate loans, was $67,181,000 or 34.4% 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 June 30, 1997 were $20,669,000.
As of June 30, 1997, the total of all consumer loans held by the Company was
$46,234,000 or 23.7% of total loans.
LENDING PROCEDURES AND 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.
47
<PAGE>
As of June 30, 1997, County Bank's authorized legal lending limits were $2.7
million for unsecured loans plus an additional $1.8 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 losses on an unsecured basis (plus an additional 10% on a
secured basis). County Bank's primary capital plus allowance for loan losses at
June 30, 1997 totaled $18.7 million. County Bank's largest borrower as of June
30, 1997 had an aggregate loan liability totaling $2.5 million in secured loans.
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 DECEMBER 31,
AT JUNE 30, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
----------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial.............................. $ 32,744 $ 27,857 $ 20,374 $ 15,229 $ 16,896 $ 24,094
Agricultural............................ 39,886 43,929 45,187 40,598 38,029 32,997
Real estate--construction............... 9,315 13,923 12,006 11,726 9,143 7,131
Real estate--mortgage................... 67,181 57,098 42,128 34,743 32,984 21,338
Consumer................................ 46,234 40,440 14,039 11,304 10,072 11,775
----------- --------- --------- --------- --------- ---------
Total............................... $ 195,360 $ 183,247 $ 133,734 $ 113,600 $ 107,124 $ 97,335
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
</TABLE>
48
<PAGE>
The following tables show the maturity distribution of the loan portfolio at
June 30, 1997, and December 31, 1996, and the loan portfolio's sensitivity to
changes in interest rates.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-----------------------------------------------------
AFTER 1 BUT
WITHIN 1 WITHIN 5 AFTER 5
YEAR YEARS YEARS TOTAL
------------ ------------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and agricultural
Loans with floating interest rates...................... $ 43,556 $ 13,358 $ 2,535 $ 59,449
Loans with fixed interest rates......................... 6,565 5,159 1,457 13,181
------------ ------------- ------------ ----------
Subtotal.............................................. 50,121 18,517 3,992 72,630
------------ ------------- ------------ ----------
Real estate-construction
Loans with floating interest rates...................... 4,143 2,490 962 7,595
Loans with fixed interest rates......................... 222 953 545 1,720
------------ ------------- ------------ ----------
Subtotal.............................................. 4,365 3,443 1,507 9,315
------------ ------------- ------------ ----------
Real estate-mortgage...................................... 5,353 39,469 22,359 67,181
Consumer.................................................. 25,105 20,166 963 46,234
------------ ------------- ------------ ----------
Total................................................. $ 84,944 $ 81,595 $ 28,821 $ 195,360
------------ ------------- ------------ ----------
------------ ------------- ------------ ----------
</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 $ 20,150 $ 4,337 $ 64,002
Loans with fixed interest rates........................ 630 6,116 1,038 7,784
------------- ------------- ------------ ----------
Subtotal............................................. 40,145 26,266 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 JUNE 30, AT DECEMBER 31,
------------ --------------------
1997 1996 1995
------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate-construction...................................................... $ 7,956 $ 6,305 $ 4,232
Standby letters of credit..................................................... 2,586 3,231 2,465
Other......................................................................... 53,012 36,623 21,624
------------ --------- ---------
Total..................................................................... $ 63,554 $ 46,159 $ 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 DECEMBER 31,
AT JUNE 30, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
----------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash surrender value of life insurance.................... $ 3,210 $ 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.
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.
The following table summarizes the Company's nonperforming assets at the
dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
----------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans...................................... $ 1,568 $ 4,968 $ 4,626 $ 653 $ 1,019 $ 1,064
Accruing loans past due 90 days or more............... 337 600 224 46 64 145
----------- --------- --------- --------- --------- ---------
Total nonperforming loans............................. 1,905 5,568 4,850 699 1,083 1,209
Other real estate owned............................... 417 1,466 47 -- -- 676
----------- --------- --------- --------- --------- ---------
Total nonperforming assets............................ $ 2,322 $ 7,034 $ 4,897 $ 699 $ 1,083 $ 1,885
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
</TABLE>
Interest income on loans on nonaccrual status during the six months ended
June 30, 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 $223,000 and $497,000, respectively. In 1995, 1994, 1993 and
1992, the amounts of such interest income were not material.
50
<PAGE>
At June 30, 1997, nonperforming assets represented .79% of total assets, and
nonperforming loans represented .98% of total loans. Nonperforming loans that
were secured by first deeds of trust on real property were $211,000 at June 30,
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 decrease in nonperforming loans and nonperforming assets as of June 30,
1997 compared with their levels as of December 31, 1996, was due primarily to
the write-off of a commercial real estate development loan with a balance of
$3,458,000 (mentioned below) and the sale of one agricultural parcel previously
acquired through foreclosure. 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 and a purchased portfolio of lease receivables being
placed on nonaccrual status and two agricultural real estate properties being
acquired through foreclosure.
In late 1995, a commercial real estate development loan was placed on
nonaccrual status. 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 of $3,458,000. The Company will
nonetheless vigorously pursue efforts to realize a potential recovery on the
loan.
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 June 30, 1997, the Company had $417,000 in one agricultural property
acquired through foreclosure in late 1996. This property is carried at the lower
of its estimated market value, as evidenced by an independent appraisal, 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. The Company expects to sell this property 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
51
<PAGE>
projects for sale or development at June 30, 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 and four lots 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 $4,626,000.
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
June 30, 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 June 30, 1997 were $1,568,000 (all of
which were also nonaccrual loans), on account of which the Company had made
provisions to the allowance for loan losses of $226,000.
Except for loans that are disclosed above, there were no assets as of June
30, 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>
JUNE 30, 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.................................. -- 160 148 -- -- -- --
Provision for possible loan losses.................. 3,476 310 1,513 228 -- 254 162
Loans charged off
Commercial and agricultural....................... 403 101 518 160 206 217 250
Real estate-construction.......................... 3,456 -- -- -- -- -- --
Real estate-mortgage.............................. -- -- -- -- -- -- --
Consumer.......................................... 278 27 140 63 42 83 109
--------- --------- --------- --------- --------- --------- ---------
Total charge-offs............................... 4,137 128 658 223 248 300 359
Recoveries
Commercial and agricultural....................... 103 16 27 66 99 145 87
Real estate-construction.......................... -- -- -- -- 8 -- --
Real estate-mortgage.............................. -- -- -- -- -- -- --
Consumer.......................................... 34 5 61 9 15 32 27
--------- --------- --------- --------- --------- --------- ---------
Total recoveries................................ 137 21 88 75 122 177 114
--------- --------- --------- --------- --------- --------- ---------
Net charge-offs..................................... 4,000 107 570 148 126 123 245
--------- --------- --------- --------- --------- --------- ---------
Balance at end of period............................ $ 2,268 $ 2,064 $ 2,792 $ 1,701 $ 1,621 $ 1,747 $ 1,616
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Average loans outstanding, gross.................... $ 188,208 $ 137,358 $ 157,098 $ 120,620 $ 110,690 $ 102,236 $ 91,458
Total loans at end of period, gross................. $ 195,360 $ 164,052 $ 183,247 $ 133,736 $ 113,600 $ 107,124 $ 97,335
Net charge-offs/average loans outstanding........... 2.13% .08% 0.36% 0.12% 0.11% 0.12% 0.27%
Allowance at end of period/loans outstanding........ 1.16 1.26 1.52 1.27 1.43 1.63 1.66
Allowance/nonperforming loans....................... 119.06 33.91 50.14 35.07 231.90 161.31 133.66
</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 six months of 1997
of $3,476,000 compared with $310,000 in the same period of 1996. The increase
was due to the implementation of a new methodology for determining its allowance
for loan losses (mentioned below) and the need to replenish the allowance
following the charge-off of the real estate development loan previously
mentioned with a balance of $3,458,000. See "--Nonperforming Assets." The
Company
53
<PAGE>
made provisions to the allowance of $1,513,000 in the year ended 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 the
same commercial real estate development 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 $4,000,000 for the six
months ended June 30, 1997 compared with $107,000 for the same six months in
1996. The increase in charge-offs was primarily due to the charge-off of
$3,458,000 for the real estate development loan previously mentioned and a
$275,000 charge-off taken on the portfolio of lease receivables previously
mentioned. 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 June 30, 1997, the allowance for loan losses was $2,268,000 or 1.16%
of total loans outstanding, compared with $2,792,000 or 1.52% of total loans
outstanding as of December 31, 1996 and $1,701,000 or 1.27% of total 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. See "Risk Factors--Government Regulation and
Legislation" and "Regulation and Supervision."
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.
54
<PAGE>
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,
----------------------------------------------------------------------------
JUNE 30, 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....... $ 1,101 1.52% $ 840 1.17% $ 944 1.44% $ 898 1.61%
Real estate-
construction....... 265 2.84 1,421 10.21 708 5.90 218 1.86
Real
estate-mortgage.... 556 .83 219 .38 -- -- 376 1.08
Consumer............. 346 .75 312 .77 49 .35 129 1.14
----------- ----- ----------- ----- ----------- --- ----------- ---
Total.............. $ 2,268 1.16% $ 2,792 1.52% $ 1,701 1.27% $ 1,621 1.43%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<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 1.63% $ 1,616 1.66%
----------- -----------
----------- -----------
</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. As
recently as January of 1997, parts of the Company's market area experienced
severe flooding. 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 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."
55
<PAGE>
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 June 30, 1997, the
Company had a deposit mix of 46% in savings deposits, 27% in time deposits and
14% in interest-bearing checking accounts and 13% 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 June 30, 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
YEAR ENDED DECEMBER 31,
FOR THE ------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1997 1996 1995 1994
----------------------- ----------------------- ----------------------- ----------
AMOUNT % AMOUNT % AMOUNT % AMOUNT
---------- ----------- ---------- ----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand............ $ 32,166 -- $ 30,549 -- $ 26,478 -- $ 25,326
Interest-bearing demand............... 34,768 0.91% 29,376 0.91% 26,192 0.91% 25,126
Savings............................... 111,588 4.08 104,938 4.15 91,509 4.60 66,517
Time deposits under $100,000.......... 52,497 5.41 34,408 5.26 19,073 4.84 27,259
Time deposits $100,000 and over....... 10,808 5.56 6,586 5.43 6,358 5.17 7,160
---------- --- ---------- --- ---------- --- ----------
Total deposits...................... $ 241,828 3.44 $ 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 June 30, 1997 and December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT DECEMBER 31, 1996
----------------- --------------------
<S> <C> <C>
(IN THOUSANDS)
Three months or less................................. $ 3,301 $ 2,840
Over three to six months............................. 4,703 2,146
Over six to twelve months............................ 9,500 3,383
Over twelve months................................... 4,815 3,178
------- -------
Total.............................................. $ 22,319 $ 11,547
------- -------
------- -------
</TABLE>
The increase in time deposits from December 31, 1996 to June 30, 1997 was
attributable to a deposit promotion held in the recently opened Modesto branch
offices.
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
56
<PAGE>
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 June 30, 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 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
57
<PAGE>
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
"Risk Factors--Branch Acquisition," "--Competition" and "--Branch Acquisition."
EMPLOYEES
As of June 30, 1997, the Company employed a total of 154 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 "--Beneficial Ownership of Management and Principal
Shareholders."
<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 54 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 54 1977 1999 President, 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 Chairman, Tolladay, Fremming & Parson, a civil
engineering consulting firm
</TABLE>
- ------------------------
(1) Previously served on Board of Directors from 1977 to 1985.
No family relationships exist among the directors of the Company.
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.
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>
NAME AGE POSITIONS AND OFFICES EXECUTIVE OFFICER SINCE
- --------------------- --- ------------------------------------------------------------- -----------------------
<S> <C> <C> <C>
Thomas T. Hawker 54 President, Chief Executive Officer and Director of Capital 1991
Corp and County Bank
Carol L. Wix 60 Executive Vice President and Chief Operating Officer of 1992
County Bank
Janey E. Boyce 36 Senior Vice President and Chief Financial Officer of Capital 1992
Corp and County Bank
Michael D. Wells 41 Senior Vice President and Chief Credit Officer of County Bank 1996
</TABLE>
59
<PAGE>
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.
BENEFICIAL OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following tables show the number and percentage of shares each
beneficially owned as of July 31, 1997 by directors individually, directors and
executive officers as a group and by shareholders of Capital Corp holding 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) 18,774 *
Jack F. Cauwels (5) 33,007 1.2%
John D. Fawcett (6) 7,225 *
Thomas T. Hawker (7) 65,192 2.4%
Robert E. Holl (8) 62,055 2.4%
Bertyl W. Johnson (9) 57,540 2.2%
Tapan Munroe (10) 4,305 *
James W. Tolladay (11) 19,921 *
All directors and executive officers of Capital Corp as a group (13 in number) 350,272 12.2%
</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 July 31, 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 July 31, 1997, the
Company had a total of 2,630,380 shares of Common Stock issued and
outstanding and options exercisable for 234,872 shares within 60 days.
60
<PAGE>
(2) Includes 6,606 shares held in Living Trust with wife and options exercisable
for 4,075 shares within 60 days of July 31, 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 July 31,
1997.
(4) Includes 4,341 shares held by the Callister Family Trust, of which Mr.
Callister is trustee and options exercisable for 14,433 shares within 60
days of July 31, 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
July 31, 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 July 31, 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 48,225 shares within 60 days of July 31, 1997.
(8) Includes 49,557 shares held as joint tenancy with spouse and options
exercisable for 12,498 shares within 60 days of July 31, 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 July 31, 1997.
(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 July 31, 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
July 31, 1997.
No 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 as
of July 31, 1997, except as follows:
<TABLE>
<CAPTION>
BENEFICIALLY OWNED
--------------------------
NAME AND ADDRESS AMOUNT PERCENTAGE
- ----------------------------------------------------------------------- --------- ---------------
<S> <C> <C>
Capital Corp of the West ESOP ......................................... 166,072 6.3%
P.O. Box 552
Merced, California 95341
1867 Western Financial Corporation .................................... 156,564 6.0
301 E. Miner Road
Stockton, California 95202
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN
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 the voting rights related to those shares of Capital Corp's stock
61
<PAGE>
which are credited to the account of each participant are to be exercised. 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 eliminate from its books by charge-off or collection all
assets classified "Loss" as of December 2, 1996 that had not previously been
collected or charged off; (iii) 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); (iv) 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%; (v) 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; (vi) not to pay cash dividends without the prior
written consent of the Department and the FDIC; and (vii) 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 $4.6 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 ratio differs from the leverage ratio because it is
calculated on period-end assets rather than quarterly average assets. 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
64
<PAGE>
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 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
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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 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. At June 30, 1997, the Company's leverage, Tier 1
risk-based and total risk-based capital ratios were 6.52%, 7.99% and 8.97%,
respectively, and the Bank's leverage, Tier 1 risk-based and total risk-based
capital ratios were 6.32%, 7.73% and 8.72%, 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 (based on period-end assets rather than
average 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. 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
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following "supervisory subgroups." Subgroup A, B or C. Subgroup A institutions
are financially sound 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.
INTERSTATE BANKING
Riegle-Neal Interstate Banking and Branching Efficiency Act. The Riegle-Neal
Interstate Banking and Branching Efficiency Act (the "Riegle-Neal Act") was
enacted in 1994. Generally, provisions of the
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Riegle-Neal Act authorize interstate banking and interstate branching, subject
to certain state options. The following is a summary of its provisions:
INTERSTATE BANKING AND BRANCHING.
- 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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<PAGE>
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 30, 1997, there were 2,615,947 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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<PAGE>
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................................................... 1,416,667
-----------------
Total:..................................................................... 1,416,667
-----------------
-----------------
</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 212,500 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, 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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<PAGE>
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 other underwriters, if any, or dealers 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 does 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;
(b) Capital Corp's Quarterly Report on Form 10-Q for the period ended
March 31, 1997;
(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.
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<PAGE>
CAPITAL CORP OF THE WEST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
---------
Report of Independent Public Accountants.................................................................. F-2
Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994.................... F-3
Consolidated Balance Sheets at December 31, 1996 and 1995................................................. F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994...... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994................ F-6
Notes to Consolidated Financial Statements................................................................ F-7
Consolidated Statements of Income for the Six Months Ended June 30, 1997 and 1996 (Unaudited)............. F-25
Consolidated Balance Sheets at June 30, 1997 and 1996 (Unaudited)......................................... F-26
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 (Unaudited)......... F-27
Notes to Consolidated Financial Statements (Unaudited).................................................... F-28
</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>
<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 (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 collectively 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 (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
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 (CONTINUED)
losses and income tax credits. These income tax credits are earned over a
10-year period as a result of the 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.
F-13
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, 1994
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 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 (LESS AMOUNT (LESS
-------------------------- (LESS THAN THAN 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
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)
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 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
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)
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 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>
SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
----------------- -----------------
(IN THOUSANDS EXCEPT FOR PER SHARE
DATA)
<S> <C> <C>
Interest Income
Interest and fees on loans............................................. $ 9,630 $ 7,067
Interest on investment securities
Taxable.............................................................. 1,727 1,304
Non-taxable.......................................................... 108 121
Interest on federal funds sold....................................... 92 71
------ ------
Total Interest Income................................................ 11,557 8,563
------ ------
Interest Expense
Deposits
Negotiable orders of withdrawal...................................... 158 127
Savings.............................................................. 2,272 2,061
Time, under $100,000................................................. 1,417 622
Time, $100,000 and over.............................................. 299 185
Other................................................................ 261 47
------ ------
Total Interest Expense............................................... 4,407 3,042
------ ------
Net Interest Income...................................................... 7,150 5,521
Provision for loan losses................................................ 3,476 310
------ ------
Net Interest income after provision for loan losses...................... 3,674 5,521
------ ------
Other Income
Service charges on deposit accounts.................................... 733 601
Income from real estate held for sale or development................... 511 76
Other.................................................................. 702 578
------ ------
Total Other Income................................................... 1,946 1,255
Other Expenses
Salaries and related benefits.......................................... 3,031 2,640
Premises and occupancy................................................. 576 341
Equipment.............................................................. 635 484
Professional fees...................................................... 260 21
Marketing.............................................................. 311 332
Other.................................................................. 1,607 1,213
------ ------
Total Other Expenses................................................. 6,420 5,206
------ ------
Income (loss) before income taxes...................................... (800) 1,260
Provision (benefit) for income taxes................................... (370) 463
------ ------
Net Income (Loss)...................................................... (430) 797
------ ------
Net Income (Loss) Per Share............................................ $ (0.17) $ 0.36
------ ------
------ ------
</TABLE>
See accompanying notes.
F-25
<PAGE>
CAPITAL CORP OF THE WEST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DEC. 31,
JUNE 30, 1997 1996 JUNE 30, 1996
------------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Assets
Cash and noninterest-bearing deposits in other banks.................. $ 13,414 $ 12,982 $ 17,451
Federal funds sold.................................................... 7,775 3,735 575
Time deposits at other financial institutions......................... 266 3,101 --
Investment securities:
Available-for-sale securities, at fair value........................ 42,747 43,378 41,211
Held-to-maturity securities at amortized cost, market value of
$11,324,000 at June 30, 1997...................................... 11,451 -- --
Mortgage loans held for sale.......................................... -- 880 865
Loans, net of allowance for loan losses of $2,268,000 at June 30,
1997, $2,792,000 at December 31, 1996 and $2,064,000 at June 30,
1996................................................................ 193,092 180,455 161,988
Interest receivable................................................... 2,041 1,879 1,799
Premises and equipment, net........................................... 9,429 6,266 4,827
Other assets.......................................................... 12,809 13,313 11,092
------------- ------------ -------------
Total assets...................................................... $ 293,024 $ 265,989 $ 239,808
------------- ------------ -------------
------------- ------------ -------------
Liabilities
Deposits:
Noninterest-bearing demand.......................................... $ 33,263 $ 39,157 $ 35,082
Negotiable orders of withdrawal..................................... 36,829 34,303 26,920
Savings............................................................. 116,220 111,285 106,063
Time, under $100,000................................................ 49,047 42,053 39,548
Time, $100,000 and over............................................. 22,319 11,547 8,004
------------- ------------ -------------
Total Deposits.................................................... 257,678 238,345 215,617
------------- ------------ -------------
Federal funds purchased and securities sold under agreements to
repurchase.......................................................... 5,722 -- 1,500
Short-term borrowings................................................. 8,467 110 --
Long-term borrowings.................................................. 105 1,535 106
Accrued interest, taxes and other liabilities......................... 88 5,025 3,258
------------- ------------ -------------
Total liabilities................................................. 272,060 245,015 220,481
------------- ------------ -------------
Shareholders' Equity
Preferred stock, no par value; 10,000,000 shares authorized; none
outstanding......................................................... 15,664 15,321 15,298
Common stock, no par value; 30,000,000 shares authorized; 2,615,947
issued and outstanding at June 30, 1997; 2,601,711 issued and
outstanding at December 31, 1996 and 2,595,049 issued and
outstanding at June 30, 1996........................................ -- -- --
Retained earnings..................................................... 5,273 5,722 4,514
Investment securities unrealized gains (losses), net.................. 27 (69) (485)
------------- ------------ -------------
Total Shareholders' Equity............................................ 20,964 20,974 19,327
------------- ------------ -------------
Total Liabilities and Shareholders' Equity............................ $ 293,024 $ 265,989 $ 239,808
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
See accompanying notes.
F-26
<PAGE>
CAPITAL CORP OF THE WEST
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
6/30/97 6/30/96
---------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net income (loss)............................................................ $ (430) $ 797
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses.................................................. 3,476 310
Depreciation, amortization and accretion, net.............................. 713 609
Provision for deferred income taxes........................................ (35) (59)
Gain on sale of premises and equipment..................................... -- (121)
Net (increase) in interest receivable and other assets....................... (656) (3,854)
Net decrease (increase) in mortgage loans held for sale...................... 880 (364)
Net increase in deferred loan fees........................................... 63 3
Net (decrease) increase in accrued interest payable and other liabilities.... (2,686) 3,443
-------- --------
Net cash provided by operating activities.................................... 1,325 1,006
-------- --------
Investing activities:
Investment security purchases.............................................. (24,520) (7,699)
Proceeds from maturities of investment securities.......................... 10,264 1,757
Proceeds from sales of investment securities............................... 6,155 8,472
Proceeds from sales of commercial and real estate loans.................... 1,250 1,941
Net increase in loans...................................................... (17,427) (32,327)
Purchases of premises and equipment........................................ (3,680) (1,054)
Construction of real estate held for sale or development................... -- (504)
Proceeds from sales of real estate held for sale or development............ 1,050 135
-------- --------
Net (used) cash by investing activities...................................... (26,908) 29,279
-------- --------
Financing activities:
Net increase in demand, NOW and savings deposits........................... 1,567 3,783
Net increase in certificates of deposit.................................... 17,766 19,233
Net increase in other borrowings........................................... 10,398 --
Issuance of common stock for acquisition................................... -- 3,969
Exercise of stock options and purchases for benefit plans.................. 341 347
Cash in lieu of fractional shares.......................................... (17) --
-------- --------
Net cash provided by financing activities.................................... 30,055 27,332
-------- --------
Net increase (decrease) in cash and cash equivalents......................... 4,472 (941)
-------- --------
Cash and cash equivalents at beginning of year............................... 16,717 18,967
-------- --------
Cash and cash equivalents at end of quarter.................................. $ 21,189 $ 18,026
-------- --------
-------- --------
Supplemental Disclosure of noncash investing and financing activities:
Investment securities unrealized gain (loss)............................... 190 (1,306)
</TABLE>
See accompanying notes.
F-27
<PAGE>
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, DECEMBER 31, 1996 AND JUNE 30, 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 County 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 but is
currently inactive. 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 June 30, 1997 there were 2,615,947 common shares
outstanding, held of record by approximately 1,300 shareholders. There were no
preferred shares outstanding at June 30, 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 are 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
certificates 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, originally scheduled to mature on July 8, 1997, was extended until
October 1, 1997. For the interim period of extension, an interest rate of 6% is
being charged on the loan. 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........................................................ 3
Risk Factors.............................................................. 11
Use of Proceeds........................................................... 16
Price Range of Common Stock............................................... 17
Dividend Policy........................................................... 17
Capitalization............................................................ 18
Branch Acquisition........................................................ 19
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.............................................................. 71
Experts................................................................... 72
Legal Matters............................................................. 72
Available Information..................................................... 72
Information Incorporated by Reference..................................... 73
Index to Financial Statements............................................. F-1
</TABLE>
1,416,667 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
SUTRO & CO.
INCORPORATED
, 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................................ 17,500
Registrar and transfer agent fees................................. 5,000
Printing and distribution......................................... 100,000
Legal fees and expenses........................................... 200,000
Accounting fees and expenses...................................... 33,000
Miscellaneous..................................................... 36,105
---------
Total............................................................. $ 400,000
---------
---------
</TABLE>
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.
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
II-1
<PAGE>
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, filed as Exhibit 1.1 hereto, contains 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..................................................................
2.1 Branch Purchase and Assumption Agreement dated June 25, 1997, between County Bank and Bank of
America....................................................................................... (1)
5.1 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................................................. (1)
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............................................................................... (1)
</TABLE>
- ------------------------
(1) Filed with exhibits to Registration Statement on Form S-2, registration no.
333-31193, filed with the Commission on July 14, 1997
(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 Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Merced, State of California, on August 6, 1997.
<TABLE>
<S> <C> <C>
CAPITAL CORP OF THE WEST
(REGISTRANT)
By: /s/ THOMAS T. HAWKER
-----------------------------------------
Thomas T. Hawker
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 1 to 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
August 6, 1997 ------------------------------------------- and Director (Principal Executive
Thomas T. Hawker Officer)
/s/ JANEY E. BOYCE Senior Vice President and Chief
August 6, 1997 ------------------------------------------- Financial Officer (Principal
Janey E. Boyce Financial and Accounting Officer)
/s/ LLOYD H. AHLEM*
August 6, 1997 ------------------------------------------- Director
Lloyd H. Ahlem
/s/ DOROTHY L. BIZZINI*
August 6, 1997 ------------------------------------------- Director
Dorothy L. Bizzini
/s/ JERRY E. CALLISTER*
August 6, 1997 ------------------------------------------- Director
Jerry E. Callister
/s/ JACK F. CAUWELS*
August 6, 1997 ------------------------------------------- Director
Jack F. Cauwels
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
DATE SIGNATURE TITLE
- ------------------ ------------------------------------------------------ -------------------------------------
<S> <C> <C>
/s/ JOHN FAWCETT*
August 6, 1997 ------------------------------------------- Director
John Fawcett
/s/ ROBERT E. HOLL*
August 6, 1997 ------------------------------------------- Director
Robert E. Holl
/s/ BERTYL W. JOHNSON*
August 6, 1997 ------------------------------------------- Director
Bertyl W. Johnson
/s/ TAPAN MUNROE*
August 6, 1997 ------------------------------------------- Director
Tapan Munroe
/s/ JAMES W. TOLLADAY*
August 6, 1997 ------------------------------------------- Director
James W. Tolladay
*By /s/ THOMAS T. HAWKER
--------------------------------------
August 6, 1997 Thomas T. Hawker
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION OF EXHIBITS
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement..................................................................
2.1 Branch Purchase and Assumption Agreement dated June 25, 1997, between County Bank and Bank of
America....................................................................................... (1)
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................................................. (1)
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............................................................................... (1)
</TABLE>
- ------------------------
(1) Filed with exhibits to Registration Statement on Form S-2, registration no.
333-31193, filed with the Commission on July 14, 1997
<PAGE>
SUTRO & CO. INCORPORATED
___________________
UNDERWRITING AGREEMENT
<PAGE>
_______________ SHARES
CAPITAL CORP OF THE WEST
Common Stock
(No Par Value)
UNDERWRITING AGREEMENT
[Insert Date]
Sutro & Co. Incorporated
11150 Santa Monica Blvd. Suite 1500
Los Angeles, CA 90025
Attention: Equity Syndication Department
Dear Sirs:
1. INTRODUCTION. Capital Corp of the West, a bank holding company
organized under the laws of California (the "Company"), proposes to issue and
sell to the several Underwriters named in Schedule I hereto (the
"Underwriters"), for which Sutro & Co. Incorporated is acting as representative
(the "Representative"), an aggregate of _________ shares of the Company's Common
Stock, no par value (the "Common Stock"). The _______ shares of Common Stock to
be sold by the Company are referred to herein as the "Firm Shares." The Company
also proposes to issue and sell to the several Underwriters an aggregate of not
more than _____ additional shares of Common Stock (the "Additional Shares"), if
requested by the Underwriters in accordance with Section 9 hereof. The Firm
Shares and the Additional Shares are collectively referred to herein as the
"Shares." The words "you" and "your" refer to the Representative of the
Underwriters.
The Company hereby agrees with the several Underwriters as follows:
2. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents, warrants and agrees with each of the
Underwriters that:
(i) A registration statement on Form S-2 (File No. 333-
31193) under the Securities Act of 1933 as amended (the "Act"), with
respect to the Shares, including a form of prospectus subject to
completion, has been prepared by the Company in conformity with the
requirements of the Act and the rules and regulations of the Securities and
Exchange Commission (the "Commission") thereunder (the "Rules and
Regulations"). Such registration statement has been filed with the
Commission under the Act, and one or more amendments to such registration
statement may also have been so filed. After the execution of this
Agreement, the Company shall file with the Commission either (A) if such
registration statement, as it may have been amended, has been declared by
the Commission to be effective under the Act, a prospectus in the form most
recently included in an amendment to such registration statement filed with
the Commission (or, if no such amendment shall have been filed, in such
registration
2
<PAGE>
statement), with such insertions and changes as are required by Rule 430A
under the Act or permitted by Rule 424(b) under the Act as shall have been
provided to and approved by the Representative prior to the filing thereof,
or (B) if such registration statement, as it may have been amended, has not
been declared by the Commission to be effective under the Act, an amendment
to such registration statement, including a form of prospectus, a copy of
which amendment has been furnished to and approved by the Representative
prior to the filing thereof. As used in this Agreement, the term
"Registration Statement" means such registration statement, as amended at
the time when it was or is declared effective, including all financial
schedules and exhibits thereto, and to documents incorporated therein by
reference; the Registration Statement shall be deemed to include any
information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion contained in such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or
any amendment thereto or filed pursuant to Rule 424(a) under the Act at the
time it was or is declared effective); and the term "Prospectus" means the
prospectus first filed with the Commission pursuant to Rule 424(b) under
the Act or, if no prospectus is required to be filed pursuant to said Rule
424(b), such term means the prospectus included in the Registration
Statement. References herein to any document or other information
incorporated by reference in the Registration Statement shall include
documents or other information incorporated by reference in the Prospectus
(or, if the Prospectus is not in existence, in the most recent Preliminary
Prospectus). Reference made herein to any Preliminary Prospectus or the
Prospectus shall be deemed to include all documents and information
incorporated by reference therein and shall be deemed to refer to and
include any documents and information filed after the date of such
Preliminary Prospectus or Prospectus, as the case may be, and so
incorporated by reference, under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus and has not instituted or
threatened to institute any proceedings with respect to such an order.
When any Preliminary Prospectus was filed with the Commission it (A)
contained all statements required to be stated therein in accordance with,
and complied in all material respects with the requirements of, the Act and
the Rules and Regulations and (B) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances
under which they were made, not misleading. When the Registration
Statement or any amendment thereto was or is declared effective, it (A)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with
the requirements of, the Act and the Rules and Regulations and (B) did not
or will not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not
misleading. When the Prospectus and when any amendment or supplement
thereto is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or such amendment or supplement is not required to be so filed,
when the Registration Statement and when any amendment thereto containing
such amendment or supplement to the Prospectus was or is declared
effective) and at all times subsequent thereto up to and including the
Closing Date (as defined in Section 3 hereof) and the Option Closing Date
(as defined in Section 9 hereof), the Prospectus, as amended or
supplemented at any such time, (A) contained or will contain all statements
required to be stated therein in accordance with, and complied or will
comply in all material respects with the requirements of, the Act and the
Rules and Regulations and (B) did not or will not include any untrue
statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances
3
<PAGE>
under which they were made, not misleading. The foregoing provisions of
this paragraph (ii) shall not apply to statements or omissions made in any
Preliminary Prospectus, the Registration Statement or any amendment thereto
or the Prospectus or any amendment or supplement thereto in reliance upon,
and in conformity with, information furnished in writing to the Company by
or on behalf of the Underwriters through the Representative expressly for
use therein. The documents which are incorporated by reference in any
Preliminary Prospectus or the Prospectus or from which information is so
incorporated by reference, when they became effective or were filed with
the Commission, as the case may be, complied in all material respects with
the requirements of the Act and the Rules and Regulations or the Exchange
Act and the rules and regulations thereunder, as applicable, and did not,
when such documents were so filed, contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, and any
documents so filed and incorporated by reference subsequent to the
effective date of the Registration Statement shall, when they are filed
with the Commission, conform in all material respects with the requirements
of the Act and the Rules and Regulations and the Exchange Act and the rules
and regulations thereunder, as applicable.
(iii) The Company is a duly incorporated and validly existing
corporation in good standing under the laws of the state of California,
with full power and authority (corporate and other) to own or lease its
properties and to conduct its business as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus); and is duly qualified to do
business as a foreign corporation and is in good standing in each
jurisdiction (x) in which the conduct of its business requires such
qualification (except for those jurisdictions in which the failure so to
qualify has not had and will not have a Material Adverse Effect (as
hereinafter defined)) and (y) in which it owns or leases property. No
proceeding has been instituted in any such jurisdiction, revoking, limiting
or curtailing, or seeking to revoke, limit or curtail, such power and
authority or qualification. "Material Adverse Effect" means, when used in
connection with the Company or its subsidiaries (the "Subsidiaries"), any
development, change or effect that is materially adverse to the business,
properties, assets, net worth, condition (financial or other), results of
operations or prospects of the Company and the Subsidiaries taken as a
whole.
(iv) County Bank ("County Bank") is a wholly owned
Subsidiary of the Company and is a duly incorporated and validly existing
state banking corporation organized and in good standing under the laws of
California, with full power and authority (corporate and other) to own or
lease its properties and to conduct its business as described in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus); Town & Country Finance
and Thrift Company ("Town & Country") is a wholly owned Subsidiary of the
Company and a duly incorporated and validly existing industrial loan
company organized and in good standing under the laws of California, with
full power and authority (corporate and other) to own or lease its
properties and to conduct its business as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus); Capital West Group is a wholly
owned Subsidiary of the Company and is a duly incorporated and validly
existing corporation organized and in good standing under the laws of
California, with full power and authority (corporate and other) to own or
lease its properties and to conduct its business as described in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus); Merced Area Investment
and Development, Inc. ("MAID") is a
4
<PAGE>
wholly owned Subsidiary of County Bank and is a duly incorporated and
validly existing corporation organized and in good standing under the laws
of California, with full power and authority (corporate and other) to own
or lease its properties and to conduct its business as described in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus); there is no other
Subsidiary of the Company or of any Subsidiary of the Company engaged in
any business activity; each of County Bank, Town & Country, Capital West
Group and MAID is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction (x) in which the conduct of
its business requires such qualification (except for those jurisdictions in
which the failure so to qualify has not had and will not have a Material
Adverse Effect (as hereinafter defined)) and (y) in which it owns or leases
property. No proceeding has been instituted in any such jurisdiction,
revoking, limiting or curtailing, or seeking to revoke, limit or curtail,
such power and authority or qualification.
(v) The Company has the duly authorized and validly issued
outstanding capitalization set forth under the caption "Capitalization" in
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and will have the adjusted capitalization set forth
therein on the Closing Date and the Option Closing Date, based on the
assumptions set forth therein. The securities of the Company conform to
the descriptions thereof contained in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus). The
outstanding shares of Common Stock have been duly authorized and validly
issued by the Company and are fully paid and nonassessable. Except as
created hereby or referred to in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), there are no
outstanding options, warrants, rights or other arrangements requiring the
Company or any Subsidiary at any time to issue any capital stock. No
holders of outstanding shares of capital stock of the Company are entitled
as such to any preemptive or other rights to subscribe for any of the
Shares and neither the filing of the Registration Statement nor the
offering or sale of the Shares as contemplated by this Agreement gives rise
to any rights, other than those which have been waived or satisfied, for or
relating to, the registration of any securities of the Company. The Shares
have been duly authorized; on the Closing Date or the Option Closing Date
(as the case may be), after payment therefor in accordance with the terms
of this Agreement, (A) the Firm Shares and the Additional Shares to be sold
by the Company hereunder will be validly issued, fully paid and
nonassessable, and (B) good and marketable title to the Shares will pass to
the Underwriters on the Closing Date or the Option Closing Date (as the
case may be) free and clear of any lien, encumbrance, security interest,
claim or other restriction whatsoever. All the outstanding shares of
capital stock of each Subsidiary have been duly authorized and validly
issued, are fully paid and, except as provided by applicable law,
nonassessable, and are owned directly by the Company, free and clear of any
lien, encumbrance, security interest, claim or other restriction
whatsoever. The Common Stock (including the Shares) is registered pursuant
to Section 12(g) of the Exchange Act and is listed on the Nasdaq National
Market, and the Company has taken no action designed to, or likely to have
the effect of, terminating the registration of the Common Stock under the
Exchange Act or delisting the Common Stock from the Nasdaq National Market,
nor has the Company received any notification that the Commission or the
National Association of Securities Dealers, Inc. (the "NASD") is
contemplating terminating such registration or listing.
(vi) The consolidated financial statements and the related
notes and schedules thereto included in the Registration Statement, or
incorporated therein by reference, and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
5
<PAGE>
Prospectus) fairly present the consolidated financial condition, results of
operations, stockholders' equity and cash flows of the Company and its
subsidiaries at the dates and for the periods specified therein. Such
financial statements and the related notes and schedules thereto have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved (except as otherwise
noted therein), and such financial statements as are audited have been
examined by KPMG Peat Marwick LLP, who are independent public accountants
within the meaning of the Act and the Rules and Regulations, as indicated
in their reports filed therewith. The selected financial information and
statistical data set forth under the caption "Selected Financial
Information" in the Prospectus, or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) have been prepared on a basis
consistent with the financial statements of the Company and its
subsidiaries. The pro forma financial statements of the Company and its
subsidiaries, and the related notes thereto, set forth in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence the
most recent Preliminary Prospectus), have been prepared in conformity with
the requirements of the Act and the Rules and Regulations and present
fairly the information shown therein; and the pro forma adjustments on such
pro forma financial statements have been properly applied on the basis
described in the related notes thereto. The pro forma financial data set
forth in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), under the captions "Selected Unaudited
Pro Forma Combined Financial Information," "Capitalization" and "Unaudited
Pro Forma Combined Financial Information" have been prepared on a basis
consistent with the pro forma consolidated financial statements of the
Company and its subsidiaries.
(vii) The Company and each of its Subsidiaries has filed all
necessary federal, state and local income, franchise and other material tax
returns and has paid all taxes shown as due thereunder, and the Company has
no knowledge of any tax deficiency which might be assessed against the
Company which, if so assessed, may have a Material Adverse Effect.
(viii) The Company and each of its Subsidiaries maintain
insurance of the types and in amounts which they reasonably believe to be
adequate for their business in such amounts and with such deductibles as is
customary for companies in the same or similar business, all of which
insurance is in full force and effect.
(ix) Except as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
there is no action, suit, proceeding or investigation pending, or to the
Company's best knowledge, threatened against the Company or its
Subsidiaries action, suit, proceeding or investigation before or by any
court, regulatory body or administrative agency or any other governmental
agency or body, domestic or foreign, which (A) questions the validity of
the capital stock of the Company or this Agreement or of any action taken
or to be taken by the Company pursuant to or in connection with this
Agreement, (B) is required to be disclosed in the Registration Statement
which is not so disclosed (and such proceedings, if any, as are summarized
in the Registration Statement or incorporated therein by reference are
accurately summarized in all respects), or (C) may have a Material Adverse
Effect. The Company is not a party or subject to the provisions of any
material injunction, judgment, decree or order of any court, regulatory
body, administrative agency or other governmental body.
(x) The Company has full legal right, power and authority
to enter into this Agreement and to consummate the transactions provided
for herein. This Agreement has been duly authorized, executed and
delivered by the Company and, assuming it is a binding agreement
6
<PAGE>
of yours, constitutes a legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to
or affecting the enforcement of creditors' rights and the application of
equitable principles relating to the availability of remedies and except as
rights to indemnity or contribution may be limited by federal or state
securities laws and the public policy underlying such laws), and none of
the Company's execution or delivery of this Agreement, its performance
hereunder, its consummation of the transactions contemplated herein, its
application of the net proceeds of the offering in the manner set forth
under the caption "Use of Proceeds" or the conduct of its business as
described in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), conflicts or will conflict with or
results or will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, causes or
will cause (or permits or will permit) the maturation or acceleration of
any liability or obligation or the termination of any right under, or
result in the creation or imposition of any lien, charge, or encumbrance
upon, any property or assets of the Company or any of its Subsidiaries
pursuant to the terms of (A) the articles of incorporation or by-laws of
the Company or any of its Subsidiaries, (B) any indenture, mortgage, deed
of trust, voting trust agreement, stockholders' agreement, note agreement
or other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which any of them are or may be bound or to
which any of their respective property is or may be subject or (C) any
statute, judgment, decree, order, rule or regulation applicable to the
Company or any of its Subsidiaries of any government, arbitrator, court,
regulatory body or administrative agency or other governmental agency or
body, domestic or foreign, having jurisdiction over the Company, any of its
Subsidiaries or any of their respective activities or properties.
(xi) All executed agreements or copies of executed
agreements filed or incorporated by reference as exhibits to the
Registration Statement to which the Company or any of its Subsidiaries is a
party or by which any of them are or may be bound or to which any of their
assets, properties or businesses is or may be subject have been duly and
validly authorized, executed and delivered by the Company or such
Subsidiary, as the case may be, and constitute the legal, valid and binding
agreements of the Company or such Subsidiary, as the case may be,
enforceable against each of them in accordance with their respective terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or other similar laws relating to enforcement of
creditors' rights generally, and general equitable principles relating to
the availability of remedies, and except as rights to indemnity or
contribution may be limited by federal or state securities laws and the
public policy underlying such laws). The descriptions in the Registration
Statement or incorporated therein by reference of contracts and other
documents are accurate and fairly present the information required to be
shown with respect thereto by the Act and the Rules and Regulations, and
there are no contracts or other documents which are required by the Act or
the Rules and Regulations to be described in the Registration Statement or
filed as exhibits to the Registration Statement which are not described or
filed as required or incorporated therein by reference, and the exhibits
which have been filed are complete and correct copies of the documents of
which they purport to be copies.
(xii) Subsequent to the most recent respective dates as of
which information is given in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), and except as
expressly contemplated therein, neither the Company nor any of its
Subsidiaries has, other than in the ordinary course of its business, any
material liabilities or obligations, direct or contingent, purchased any of
its outstanding capital stock, paid or declared
7
<PAGE>
any dividends or other distributions on its capital stock or entered into
any material transactions not in the ordinary course of business, and there
has been no material change in capital stock or debt or an material adverse
change in the business, properties, assets, net worth, condition (financial
or other), or results of operations or prospects of the Company and its
Subsidiaries taken as a whole. Neither the Company nor any of its
Subsidiaries (nor the manner in which any of them conducts its business) is
in breach or violation of, or in default under, any term or provision of
(A) its articles of incorporation or bylaws, (B) any indenture, mortgage,
deed of trust, voting trust agreement, stockholders' agreement, note
agreement or other agreement or instrument to which it is a party or by
which it is or may be bound or to which any of its property is or may be
subject, or any indebtedness, the effect of which breach or default singly
or in the aggregate may have a Material Adverse Effect, or (C) any statute,
judgment, decree, order, rule or regulation applicable to the Company or
any of its Subsidiaries or of any arbitrator, court, regulatory body,
administrative agency or any other governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its Subsidiaries or
any of their respective activities or properties and the effect of which
breach or default singly or in the aggregate may have a Material Adverse
Effect.
(xiii) No labor disturbance by the employees of the Company or
any of its Subsidiaries exists or is imminent which may have a Material
Adverse Effect.
(xiv) Since its inception, the Company has not incurred any
material liability arising under or as a result of the application of the
provisions of the Act.
(xv) Each of the Company and its Subsidiaries owns, or is
licensed or otherwise has sufficient right to use, the proprietary
knowledge, inventions, patents, trademarks, service marks, trade names,
logo marks and copyrights used in or necessary for the conduct of its
business (collectively "Rights") as described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
No claims have been asserted against the Company or any of its Subsidiaries
by any person with respect to the use of any such Rights or challenging or
questioning the validity or effectiveness of any such Rights. The use, in
connection with the business and operations of the Company of such Rights
does not, to the Company's best knowledge, infringe on the rights of any
person.
(xvi) No consent, approval, authorization or order of or
filing with any court, regulatory body, administrative agency or any other
governmental agency or body, domestic or foreign, is required for the
performance of this Agreement or the consummation of the transactions
contemplated hereby, except such as have been or may be obtained under the
Act or may be required under state securities or Blue Sky laws in
connection with the Underwriters' purchase and distribution of the Shares.
(xvii) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities under the
Registration Statement (other than those that have been disclosed in the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), that have not been waived with respect to the
Registration Statement.
8
<PAGE>
(xviii) Neither the Company nor any of its officers, directors
or affiliates (within the meaning of the Rules and Regulations) has taken,
directly or indirectly, any action designed to stabilize or manipulate the
price of any security of the Company, or which has constituted or which
might in the future reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company,
to facilitate the sale or resale of the Shares or otherwise.
(xix) Each of the Company and the Subsidiaries has good and
marketable title to, or valid and enforceable leasehold interests in, all
properties and assets owned or leased by it, free and clear of all liens,
encumbrances, security interests, claims, restrictions, equities, claims
and defects, except (A) such as are described in the Registration Statement
and Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), or such as do not materially adversely affect the
value of any of such properties or assets taken as a whole and do not
materially interfere with the use made and proposed to be made of any of
such properties or assets, and (B) liens for taxes not yet due and payable
as to which appropriate reserves have been established and reflected in the
financial statements included or incorporated by reference in the
Registration Statement. The Company owns or leases all such properties as
are necessary to its operations as now conducted, and as proposed to be
conducted as set forth in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus); and the properties and business of the Company and its
Subsidiaries conform in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
All the material leases and subleases of the Company and its Subsidiaries,
and under which the Company or any Subsidiary holds properties or assets as
lessee or sublessee, constitute valid leasehold interests of the Company or
such Subsidiary free and clear of any lien, encumbrance, security interest,
restriction, equity, claim or defect, are in full force and effect, and
neither the Company nor any Subsidiary is in default in respect of any of
the material terms or provisions of any such material leases or subleases,
and neither the Company nor any Subsidiary has notice of any claim which
has been asserted by anyone adverse to the Company's or any of its
Subsidiary's rights as lessee or sublessee under either the material lease
or sublease, or affecting or questioning the Company's or any Subsidiary's
right to the continued possession of the leased or subleased premises under
any such material lease or sublease, which may have a Material Adverse
Effect.
(xx) Neither the Company nor any Subsidiary has violated any
applicable environmental, safety, health or similar law applicable to the
business of the Company, nor any federal or state law relating to
discrimination in the hiring, promotion, or pay of employees, nor any
applicable federal or state wages and hours law, nor any provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA") or the rules and
regulations promulgated thereunder, the consequences of which violation may
have a Material Adverse Effect.
(xxi) Each of the Company and its Subsidiaries holds all
franchises, licenses, permits, approvals, certificates and other
authorizations from federal, state and other governmental or regulatory
authorities necessary to the ownership, leasing and operation of its
properties or required for the present conduct of its business, and such
franchises, licenses, permits, approvals, certificates and other
governmental authorizations are in full force and effect and the Company
and its Subsidiaries are in compliance therewith in all material respects
except where the failure so to obtain, maintain or comply with would not
have a Material Adverse Effect. Without limitation of the foregoing, the
Company is duly registered as a Bank Holding
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Company under the Bank Holding Company Act of 1956, as amended (the "BHCA")
and has due authorization under the BHCA to own and operate each of its
Subsidiaries and to conduct through such Subsidiaries the business of each,
as described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus);
the deposit accounts of County Bank and Town & Country are insured by the
Bank Insurance Fund of the Federal Deposit Insurance Corporation in
accordance with applicable law; County Bank has due authorization under the
California Financial Code and the Federal Deposit Insurance Act to own and
operate MAID and to conduct its business as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(xxii) No Subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from
making any other distribution on such Subsidiary's capital stock, from
repaying to the Company any loans or advances to such Subsidiary from the
Company or from transferring any of such Subsidiary's property or assets to
the Company or any other Subsidiary of the Company, except as described in
or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(xxiii) The Company is not an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(xxiv) The Company has not distributed and will not distribute
prior to the Closing Date (as defined below) any offering material in
connection with the offering and sale of the Common Shares other than the
Preliminary Prospectus, the Prospectus, the Registration Statement and the
other materials permitted by the Act.
(xxv) The Company meets the requirements for use of Form S-2
under the Rules and Regulations.
3. PURCHASE, SALE AND DELIVERY OF THE SHARES. On the basis of the
representations, warranties, covenants and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company agrees to sell
to each Underwriter and each Underwriter, severally but not jointly, agrees to
purchase from the Company at a purchase price of $______ per Share, the number
of Firm Shares set forth opposite the name of such Underwriter in Column (1) of
Schedule I hereto.
Delivery of certificates and payment of the purchase price for the Firm
Shares shall be made at the offices of ________________________, or such other
location as shall be agreed upon by the Company and the Representative. Such
delivery and payment shall be made at [ask Sutro syndication] 10:00 a.m., [
] time, on _____________, 1997__ or at such other time and date
not more than ten business days thereafter as shall be agreed upon by the
Representative and the Company. The time and date of such delivery and payment
are herein called the "Closing Date." Delivery of the certificates for the Firm
Shares shall be made to the Representative for the respective accounts of the
several Underwriters against payment by the several Underwriters through the
Representative of the purchase price for the Firm Shares by same-day wire
transfer in immediately available United States funds payable to the order of
the Company. The certificates for the Shares to be so delivered will be in
definitive, fully registered form, will bear no restrictive legends and will be
in such denominations and registered in such names as the Representative shall
request not less than two full business days prior to the Closing Date. The
certificates for the Firm Shares will be made available to the Representative at
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such office or such other place as the Representative may designate for
inspection, checking and packaging not later than 9:30 a.m., New York time on
the business day prior to the Closing Date.
4. PUBLIC OFFERING OF THE SHARES. It is understood that the Underwriters
propose to make a public offering of the Shares at the price and upon the other
terms set forth in the Prospectus.
5. COVENANTS OF THE COMPANY.
(a) The Company covenants and agrees with each of the Underwriters
that:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto to become effective as promptly as
practicable. If required, the Company will file the Prospectus and any
amendment or supplement thereto with the Commission in the manner and
within the time period required by Rule 424(b) under the Act. During any
time when a prospectus relating to the Shares is required to be delivered
under the Act, the Company (A) will comply with all requirements imposed
upon it by the Act and the Rules and Regulations to the extent necessary to
permit the continuance of sales of or dealings in the Shares in accordance
with the provisions hereof and of the Prospectus, as then amended or
supplemented, and (B) will not file with the Commission the prospectus or
the amendment referred to in the third sentence of Section 2 (a) (i)
hereof, any amendment or supplement to such prospectus or any amendment to
the Registration Statement of which the Representative shall not previously
have been advised and furnished with a copy a reasonable period of time
prior to the proposed filing and as to which filing the Representative
shall not have given its consent.
(ii) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representative (A) when the
Registration Statement, as amended, has become effective; if the provisions
of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective;
(B) of any request made by the Commission for amending the Registration
Statement, for supplementing any Preliminary Prospectus or the Prospectus
or for additional information, or (C) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
or any post-effective amendment thereto or any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or the institution or threat of any
investigation or proceeding for that purpose, and will use its best efforts
to prevent the issuance of any such order and, if issued, to obtain the
lifting thereof as soon as possible.
(iii) The Company will (A) use its best efforts to arrange
for the qualification of the Shares for offer and sale under the state
securities or blue sky laws of such jurisdictions as the Representative may
designate, (B) continue such qualifications in effect for as long as may be
necessary to complete the distribution of the Shares, and (C) make such
applications, file such documents and furnish such information as may be
required for the purposes set forth in clauses (A) and (B); PROVIDED,
HOWEVER, that the Company shall not be required to qualify as a foreign
corporation or file a general or unlimited consent to service of process in
any such jurisdiction.
(iv) The Company consents to the use of the Prospectus (and
any amendment or supplement thereto) by the Underwriters and all dealers to
whom the Shares may be sold, in
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connection with the offering or sale of the Shares and for such period of
time thereafter as the Prospectus is required by law to be delivered in
connection therewith. If, at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any event occurs as a
result of which the Prospectus, as then amended or supplemented, would
include any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein not misleading, or if it
becomes necessary at any time to amend or supplement the Prospectus to
comply with the Act or the Rules and Regulations, the Company promptly will
so notify the Representative and, subject to section 5 (a) (i) hereof, will
prepare and file with the Commission an amendment to the Registration
Statement or an amendment or supplement to the Prospectus which will
correct such statement or omission or effect such compliance, each such
amendment or supplement to be reasonably satisfactory to counsel to the
Underwriters.
(v) As soon as practicable, but in any event not later than
45 days after the end of the 12-month period beginning on the day after the
end of the fiscal quarter of the Company during which the effective date of
the Registration Statement occurs (90 days in the event that the end of
such fiscal quarter is the end of the Company's fiscal year), the Company
will make generally available to its security holders, in the manner
specified in Rule 158(b) of the Rules and Regulations, and to the
Representative, an earnings statement which will be in the detail required
by, and will otherwise comply with, the provisions of Section 11(a) of the
Act and Rule 158(a) of the Rules and Regulations, which statement need not
be audited unless required by the Act or the Rules and Regulations,
covering a period of at least 12 consecutive months after the effective
date of the Registration Statement.
(vi) During a period of five years after the date hereof,
the Company will furnish to its stockholders, as soon as practicable,
annual reports (including financial statements audited by independent
public accountants) and unaudited quarterly reports of earnings, and will
deliver to the Representative:
(A) concurrently with furnishing such quarterly
reports to its stockholders, statements of income of the Company for
each quarter in the form furnished to the Company's stockholders and
certified by the Company's principal financial or accounting officer;
(B) concurrently with furnishing such annual reports
to its stockholders, a balance sheet of the Company as at the end of
the preceding fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the report thereon of independent
public accountants;
(C) as soon as they are available, copies of all
information (financial or other) mailed to stockholders;
(D) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the
Commission, the National Association of Securities Dealers, Inc.
("NASD") or any securities exchange;
(E) every press release and every material news item
or article of interest to the financial community in respect of the
Company or its affairs which was released or prepared by the Company;
and
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<PAGE>
(F) any additional information of a public nature
concerning the Company or its business which the Representative may
reasonably request.
During such five-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a consolidated
basis to the extent that the accounts of the Company and its subsidiaries
are consolidated, and will be accompanied by similar financial statements
for any significant subsidiary which is not so consolidated.
(vii) The Company will maintain a Transfer Agent and, if
necessary under the jurisdiction of incorporation of the Company, a
Registrar (which may be the same entity as the Transfer Agent) for its
Common Stock.
(viii) The Company will furnish, without charge, to the
Representative or on the Representative's order, at such place as the
Representative may designate, copies of the Preliminary Prospectus, the
Registration Statement and any pre-effective or post-effective amendments
thereto (two of which copies will be signed and will include all financial
statements and exhibits) and the Prospectus, and all amendments and
supplements thereto, in each case as soon as available and in such
quantities as the Representative may reasonably request.
(ix) The Company will not, directly or indirectly, without
the prior written consent of the Representative, issue, offer, sell, grant
any option to purchase or otherwise dispose (or announce any issuance,
offer, sale, grant of any option to purchase or other disposition) of any
shares of Common Stock or any securities convertible into, or exchangeable
or exercisable for, shares of Common Stock for a period of 180 days after
the date hereof, except pursuant to this Agreement , except for issuances
pursuant to the exercise of stock options outstanding on or granted
subsequent to the date hereof, pursuant to a stock option or other employee
benefit plan in existence on the date hereof and except as contemplated by
the Prospectus.
(x) The Company will cause the Shares to be listed, subject
to official notice of issuance, on the Nasdaq National Market.
(xi) Neither the Company nor any of its officers or
directors, nor affiliates of any of them (within the meaning of the Rules
and Regulations) will take, directly or indirectly, any action designed to,
or which might in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any securities of the
Company.
(xii) The Company will apply the net proceeds of the offering
received by it in the manner set forth under the caption "Use of Proceeds"
in the Prospectus. Without limitation of the foregoing, the Company shall
use its best efforts to cause County Bank to consummate the acquisition of
the three branches of Bank of America NT & SA and otherwise to fulfill its
obligations under and in accordance with the Branch Purchase and Assumption
Agreement dated June 25, 1997 between County Bank and Bank of America NT &
SA.
(xiii) The Company will timely file all such reports, forms or
other documents as may be required from time to time, under the Act, the
Rules and Regulations, the Exchange Act, and the rules and regulations
thereunder, and all such reports, forms and documents filed
13
<PAGE>
will comply as to form and substance with the applicable requirements
under the Act, the Rules and Regulations, the Exchange Act and the rules
and regulations thereunder.
6. EXPENSES.
(a) Regardless of whether the transactions contemplated in this
Agreement are consummated, and regardless of whether for any reason this
Agreement is terminated, the Company will pay, and hereby agrees to indemnify
each Underwriter against, all fees and expenses incident to the performance of
the obligations of the Company under this Agreement, including, but not limited
to, (i) fees and expenses of accountants and counsel for the Company, (ii) all
costs and expenses incurred in connection with the preparation, duplication,
printing, filing, delivery and shipping of copies of the Registration Statement
and any pre-effective or post-effective amendments thereto, any Preliminary
Prospectus and the Prospectus and any amendments or supplements thereto
(including postage costs related to the delivery by the Underwriters of any
Preliminary Prospectus or Prospectus, or any amendment or supplement thereto),
this Agreement, the Agreement Among Underwriters, any Selected Dealer Agreement,
Underwriters' Questionnaire, Underwriters' Power of Attorney and all other
documents in connection with the transactions contemplated herein, including the
cost of all copies thereof, (iii) fees and expenses relating to qualification of
the Shares under state securities or blue sky laws, including the cost of
preparing and mailing the preliminary and final blue sky memoranda and filing
fees and disbursements and fees of counsel and other related expenses, if any,
in connection therewith, (iv) filing fees of the Commission and the NASD
relating to the Shares, (v) any fees and expenses in connection with the
quotation of the Shares on the National Association of Securities Dealers
Automated Quotations National Market System, (vi) costs and expenses incident to
the preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Shares, including transfer agent's and registrar's fees and any
applicable transfer taxes incurred in connection with the delivery to the
Underwriters of the Shares to be sold by the Company pursuant to this Agreement,
(vii) costs and expenses incident to any meetings with prospective investors in
the Shares (other than as shall have been specifically approved by the
Representative to be paid for by the Underwriters) and (viii) costs and expenses
of advertising relating to the offering of the Shares (other than as shall have
been specifically approved by the Representative to be paid for by the
Underwriters).
(b) If the purchase of the Shares as herein contemplated is not
consummated for any reason other than the Underwriters' default under this
Agreement or other than by reason of Section 11(a), the Company shall reimburse
the several Underwriters for their out-of-pocket expenses (including reasonable
counsel fees and disbursements) in connection with any investigation made by
them, and any preparation made by them in respect of marketing of the Shares or
in contemplation of the performance by them of their obligations hereunder.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligation of each
Underwriter to purchase and pay for the Shares set forth opposite the name of
such Underwriter in Schedule I is subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date as if they had been made on and as of the Closing Date;
the accuracy on and as of the Closing Date of the statements of officers of the
Company made pursuant to the provisions hereof; the performance by the Company
on and as of the Closing Date of its covenants and agreements hereunder; and the
following additional conditions:
(a) If the Company has elected to rely on Rule 430A under the Act,
the Registration Statement shall have been declared effective, and the
Prospectus (containing the information omitted pursuant to Rule 430A) shall have
been filed with the Commission not later than the Commission's close
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<PAGE>
of business on the second business day following the date hereof or such later
time and date to which the Representative shall have consented; if the Company
does not elect to rely on Rule 430A, the Registration Statement shall have been
declared effective not later than 11:00 a.m., New York time, on the date hereof
or such later time and date to which the Representative shall have consented; if
required, in the case of any changes in or amendments or supplements to the
Prospectus in addition to those contemplated above, the Company shall have filed
such Prospectus as amended or supplemented with the Commission in the manner and
within the time period required by Rule 424(b) under the Act; no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued, and no proceedings for that purpose shall have
been instituted or threatened or, to the knowledge of the Company or the
Representative, shall be contemplated by the Commission; and the Company shall
have complied with any request of the Commission for additional information (to
be included in the Registration Statement or the Prospectus or otherwise).
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Representative shall have
received from counsel to the Underwriters, such opinion or opinions with respect
to the issuance and sale of the Firm Shares, the Registration Statement and the
Prospectus and such other related matters as the Representative reasonably may
request and such counsel shall have received such documents and other
information as they request to enable them to pass upon such matters.
(d) On the Closing Date the Underwriters shall have received the
opinion, dated the Closing Date, of McCutchen, Doyle, Brown & Enersen, LLP,
counsel to the Company ("Company Counsel"), to the effect set forth below:
(i) The Company is a duly organized and validly existing
corporation in good standing under the laws of California, has the
corporate power and authority to own its properties, conduct its business
as described in the Registration Statement and the Prospectus (or if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
perform its obligations under this Agreement; County Bank is a duly
incorporated and validly existing state banking corporation organized and
in good standing under the laws of California, with full power and
authority (corporate and other) to own or lease its properties and to
conduct its business as described in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus); Town & Country is a duly incorporated and validly
existing industrial loan company organized and in good standing under the
laws of California, with full power and authority (corporate and other) to
own or lease its properties and to conduct its business as described in the
Registration Statement and the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus); Capital West
Group is a wholly owned Subsidiary of the Company and is a duly
incorporated and validly existing corporation organized and in good
standing under the laws of California, with full power and authority
(corporate and other) to own or lease its properties and to conduct its
business as described in the Registration Statement and the Prospectus (or,
if the Prospectus is
15
<PAGE>
not in existence, the most recent Preliminary Prospectus); Merced Area
Investment and Development, Inc. ("MAID") is a wholly owned Subsidiary of
County Bank and is a duly incorporated and validly existing corporation
organized and in good standing under the laws of California, with full
power and authority (corporate and other) to own or lease its properties
and to conduct its business as described in the Registration Statement and
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus); there is no other Subsidiary of the Company or of
any Subsidiary of the Company engaged in any business activity; the
Company and each of its Subsidiaries is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction (x) in
which the conduct of its business requires such qualification (except for
those jurisdictions in which the failure so to qualify can be cured without
having a Material Adverse Effect) and (y) in which it owns or leases
property.
(ii) The Company has authorized capital stock as set forth
in the Prospectus; the securities of the Company conform in all material
respects to the description thereof contained in the Prospectus; the
outstanding shares of Common Stock have been duly authorized and validly
issued by the Company, are fully paid and nonassessable, and are free of
any preemptive or other rights to subscribe for any of the Shares; the
Company has duly authorized the issuance and sale of the Shares to be sold
by it hereunder; such Shares, when issued by the Company and paid for in
accordance with the terms hereof, will be validly issued, fully paid and
nonassessable and will conform in all material respects to the description
thereof contained in the Prospectus and will not be subject to any
preemptive, subscription or other similar rights; and the Shares have been
duly authorized for listing on the Nasdaq National Market;
(iii) The Registration Statement is effective under the Act;
any required filing of the Prospectus pursuant to Rule 424(b) has been made
in the manner and within the time period required by Rule 424(b); and no
stop order suspending the effectiveness of the Registration Statement or
any amendment thereto has been issued, and no proceedings for that purpose
have been instituted or are pending or, to the best knowledge of such
counsel, are threatened or contemplated under the Act; the registration
statement originally filed with respect to the Shares and each amendment
thereto and the Prospectus and, if any, each amendment and supplement
thereto (except for the financial statements, schedules and other financial
data included therein, as to which such counsel need not express any
opinion), complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations; the descriptions
contained and summarized in the Registration Statement and the Prospectus
of contracts and other documents, are accurate and fairly represent in all
material respects the information required to be shown by the Act and the
Rules and Regulations; to the best knowledge of such counsel, there are no
contracts or documents which are required by the Act to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement which are not described or filed as required by the
Act and the Rules and Regulations; to the best knowledge of such counsel,
there is not pending or threatened against the Company or any Subsidiary of
the Company any action, suit, proceeding or investigation before or by any
court, regulatory body, or administrative agency or any other governmental
agency or body, domestic or foreign, of a character required to be
disclosed in the Registration Statement or the Prospectus which is not so
disclosed therein;
(iv) Such consel has reviewed the statements set forth in
the Registration Statement and the Prospectus under the captions "Risk
Factors--Government Regulation and Legislation"; "Risk Factors--
Antitakeover Effect of Certain Charter Provisions"; "Business of
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Capital Corp of the West--Litigation"; "Regulation and Supervision"; and
"Description of Capital Stock" and such statements accurately summarize the
matters set forth therein;
(v) The Company has full legal right, power, and authority
to enter into this Agreement and to consummate the transactions provided
for herein; this Agreement has been duly authorized, executed and delivered
by the Company; and this Agreement, assuming due authorization, execution
and delivery by each other party hereto, is a valid and binding agreement
of the Company, enforceable in accordance with its terms, except as limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other
laws now or hereafter in effect relating to or affecting creditors' rights
generally or by general principles of equity relating to the availability
of remedies and except as rights to indemnity and contribution may be
limited by federal or state securities laws or the public policy underlying
such laws. None of the Company's execution or delivery of this Agreement,
its performance hereof, its consummation of the transactions contemplated
herein or its application of the net proceeds of the offering in the manner
set forth under the caption "Use of Proceeds," conflicts or will conflict
with or results or will result in any breach or violation of any of the
terms or provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon, any
property or assets of the Company or any of its Subsidiaries pursuant to
the terms of the articles of incorporation or by-laws of the Company or any
of its Subsidiaries; the terms of any indenture, mortgage, deed of trust,
voting trust agreement, stockholder's agreement, note agreement or other
agreement or instrument known to such counsel after reasonable
investigation to which the Company or any of its Subsidiaries is a party or
by which it or any of its Subsidiaries is or may be bound or to which any
of their respective properties may be subject; any statute, rule or
regulation of any regulatory body or administrative agency or other
governmental agency or body, domestic or foreign, having jurisdiction over
the Company or any of its Subsidiaries or any of their respective
activities or properties; or any judgment, decree or order, known to such
counsel after reasonable investigation, of any government, arbitrator,
court, regulatory body or administrative agency or other governmental
agency or body, domestic or foreign, having such jurisdiction; and no
consent, approval, authorization or order of any court, regulatory body or
administrative agency or other governmental agency or body, domestic or
foreign, has been or is required for the Company's performance of this
Agreement or the consummation of the transactions contemplated hereby,
except such as have been obtained under the Act or may be required under
state securities or blue sky laws in connection with the purchase and
distribution by the Underwriters of the Shares;
(vi) To the best of such counsel's knowledge, the conduct of
the businesses of the Company and its Subsidiaries is not in violation of
any federal or state statute, administrative regulation or other law, which
violation is likely to have a Material Adverse Effect; and each of the
Company and its Subsidiaries has obtained all licenses, permits,
franchises, certificates and other authorizations from state, federal and
other regulatory authorities as are necessary or required for the
ownership, leasing and operation of its properties and the conduct of its
business as presently conducted and as contemplated in the Prospectus,
except where the failure to obtain such licenses, permits, franchises,
certificates and other authorizations would not have a Material Adverse
Effect; The Company is duly registered as a Bank Holding Company under the
Bank Holding Company Act of 1956, as amended (the "BHCA") and has due
authorization under the BHCA to own and operate each of its Subsidiaries
and to conduct through such Subsidiaries the business of each, as described
in the Registration Statement and the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus); County Bank is
duly licensed by the California Department of
17
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Financial Institutions to engage in the business of banking; Town &
Country is duly licensed by the California Department of Financial
Institutions to engage in the business of an industrial loan company;
the deposit accounts of County Bank and Town & Country are insured by
the Bank Insurance Fund of the Federal Deposit Insurance Corporation in
accordance with by applicable law; County Bank has due authorization
under the California Financial Code and the Federal Deposit Insurance
Act to own and operate MAID and to conduct its business as described in
the Registration Statement and the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus); and
(vii) The issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are owned by the Company or by County Bank in the
case of MAID free and clear of any perfected security interests or, to the
best knowledge of such counsel, any other liens, encumbrances, claims or
security interests; to the best of such counsel's knowledge, no Subsidiary
of the Company is currently prohibited, directly or indirectly, from paying
any dividends to the Company, from making any other distribution on such
Subsidiary's capital stock, from repaying to the Company any loans or
advances to such Subsidiary from the Company or from transferring any of
such Subsidiary's property or assets to the Company or any other Subsidiary
of the Company, except as described in or contemplated by the Prospectus;
(viii) Each of the Company and its Subsidiaries owns, or is
licensed or otherwise has sufficient rights to use, the Rights used in, or
necessary for, the conduct of its business as described in the Prospectus.
To the best of such counsel's knowledge, except as described in the
Prospectus, no claims have been asserted against the Company or any of its
Subsidiaries by any person to the use of any such rights or challenging or
questioning the validity or effectiveness of any such rights. The use, in
connection with the business and operations of the Company and its
Subsidiaries of such rights does not, to the best of such counsel's
knowledge, infringe on the rights of any person.
(ix) Except as disclosed in or specifically contemplated by
the Prospectus, to the best of such counsel's knowledge, there are no
outstanding options, warrants or other rights calling for the issuance of,
and no commitments, plans or arrangements to issue, any shares of capital
stock of the Company or any security convertible into or exchangeable for
capital stock of the Company; and
(x) To the best of such counsel's knowledge, no holders of
securities of the Company have rights which have not been waived to the
registration of shares of Common Stock or other securities, because of the
filing of the Registration Statement by the Company or the offering
contemplated hereby.
In addition, such counsel shall state that in the course of the
preparation of the Registration Statement and the Prospectus, such counsel
has participated in conferences with officers and representatives of the
Company and with the Company's independent public accountants, at which
conferences such counsel made inquiries of such officers, representatives
and accountants and discussed the contents of the Registration Statement
and the Prospectus and (without taking any further action to verify
independently the statements made in the Registration Statement and the
Prospectus and, except as stated in the foregoing opinion, without assuming
responsibility for the accuracy, completeness or fairness of such
statements) nothing has come to such counsel's attention that causes such
counsel to believe that either the
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Registration Statement as of the date it is declared effective and as of
the Closing Date or the Prospectus as of the date thereof and as of the
Closing Date contained or contains any untrue statement of a material fact
or omitted or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading (it being
understood that such counsel need not express any opinion with respect to
the financial statements, schedules and other financial data included in
the Registration Statement or the Prospectus).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (d) shall include any amendment or supplement thereto at the date
of such opinion.
(e) On or prior to the Closing Date, counsel to the Underwriters
shall have been furnished such documents, certificates and opinions as they may
reasonably require in order to evidence the accuracy, completeness or
satisfaction of any of the representations or warranties of the Company, or
conditions herein contained.
(f) At the time that this Agreement is executed by the Company, the
Underwriters shall have received from KPMG Peat Marwick LLP a letter as of the
date this Agreement is executed by the Company in form and substance
satisfactory to you (the "Original Letter"), and on the Closing Date the
Underwriters shall have received from such firm a letter dated the Closing Date
stating that, as of a specified date not earlier than five (5) days prior to the
Closing Date, nothing has come to the attention of such firm to suggest that the
statements made in the Original Letter are not true and correct.
(g) On the Closing Date, the Underwriters shall have received a
certificate, dated the Closing Date, of the principal executive officer and the
principal financial or accounting officer of the Company to the effect that each
of such persons has carefully examined the Registration Statement and the
Prospectus and any amendments or supplements thereto and this Agreement, and
that:
(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the Closing
Date, and the Company has complied with all agreements and covenants and
satisfied all conditions contained in this Agreement on its part to be
performed or satisfied at or prior to the Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or, to the best knowledge of each of
such persons are contemplated or threatened under the Act and any and all
filings required by Rule 424 and Rule 430A have been timely made;
(iii) The Registration Statement and Prospectus and, if any,
each amendment and each supplement thereto, contain all statements and
information required to be included therein, and neither the Registration
Statement nor any amendment thereto includes any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and
neither the Prospectus (or any supplement thereto) or any Preliminary
Prospectus includes or included any untrue statement of a material fact or
omits or omitted to state any material fact required to be stated
therein or
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<PAGE>
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus up to
and including the Closing Date, neither the Company nor any of the
Subsidiaries has incurred, other than in the ordinary course of its
business, any material liabilities or obligations, direct or contingent;
neither the Company nor any of the Subsidiaries has purchased any of its
outstanding capital stock or paid or declared any dividends or other
distributions on its capital stock; neither the Company nor any of the
Subsidiaries has entered into any transactions not in the ordinary course
of business; and there has not been any change in the capital stock; any
increase in consolidated long-term debt or decreases in net assets or
shareholders' equity of the Company or any material adverse change to the
business properties, assets, net worth, condition (financial or other),
results of operations or prospects of the Company and its Subsidiaries
taken as a whole; neither the Company nor any of the Subsidiaries has
sustained any material loss or damage to its property or assets, whether or
not insured; there is no litigation which is pending or threatened against
the Company or any of its Subsidiaries which is required under the Act or
the Rules and Regulations to be set forth in an amended or supplemented
Prospectus which has not been set forth; and there has not occurred any
event required to be set forth in an amended or supplemented Prospectus
which has not been set forth.
References to the Registration Statement and the Prospectus in this
paragraph (g) are to such documents as amended and supplemented at the date
of the certificate.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus up to and including the
Closing Date there has not been (i) any change or decrease specified in the
letter or letters referred to in paragraph (f) of this Section 7 or (ii) any
change, or any development involving a prospective change, in the business or
properties of the Company or its Subsidiaries which change or decrease in the
case of clause (i) or change or development in the case of clause (ii) makes it
impractical or inadvisable in the Representative's judgment to proceed with the
public offering or the delivery of the Shares as contemplated by the Prospectus.
(i) No order suspending the sale of the Shares in any jurisdiction
designated by you pursuant to Section 5(a)(iii)(A) hereof has been issued on or
prior to the Closing Date and no proceedings for that purpose have been
instituted or, to your knowledge or that of the Company, have been or are
contemplated.
(j) The Representative shall have received from each person who is a
director or officer of the Company or who owns more than 5% of the outstanding
shares of Common Stock, except for 1867 Western Financial Corporation and its
affiliates, an agreement to the effect that such person will not, directly or
indirectly, without the prior written consent of the Representative, offer,
sell, grant any option to purchase or otherwise dispose (or announce any offer,
sale, grant of an option to purchase or other disposition) of any shares of
Common Stock or any securities convertible into, or exchangeable or exercisable
for, shares of Common Stock for a period of 180 days after the date of this
Agreement.
(k) The Company shall have furnished the Underwriters with such
further opinions, letters, certificates or documents as you or counsel for the
Underwriters may reasonably request. All opinions, certificates, letters and
documents to be furnished by the Company will comply with the provisions hereof
only if they are reasonably satisfactory in all material respects to the
Underwriters and
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to counsel for the Underwriters. The Company shall furnish the Underwriters
with conformed copies of such opinions, certificates, letters and documents in
such quantities as you reasonably request. The certificates delivered under
this Section 7 shall constitute representations, warranties and agreements of
the Company as to all matters set forth therein as fully and effectively as if
such matters had been set forth in Section 2 of this Agreement.
(l) The Shares have been duly authorized for listing on the Nasdaq
National Market
8. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any
and all losses, claims, damages or liabilities, joint or several (and actions in
respect thereof), to which such Underwriter or such controlling person may
become subject, under the Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or actions arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or the Prospectus or any Preliminary Prospectus, or any amendment or
supplement thereto, or any blue sky application or other document executed by
the Company specifically for the purpose of qualifying, or based upon written
information furnished by the Company filed in any state or other jurisdiction in
order to qualify, any or all of the Shares under the securities or blue sky laws
thereof (any such application, document or information being hereinafter called
a "Blue Sky Application"), or arise our of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements not misleading and will reimburse, as
incurred, such Underwriter or such controlling persons for any legal or other
expenses incurred by such Underwriter or such controlling persons in connection
with investigating, defending or appearing as a third party witness in
connection with any such loss, claim, damage, liability or action; PROVIDED,
HOWEVER, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage, liability or action arises out of or is based upon
any untrue statement or alleged untrue statement or omission or alleged omission
made in any of such documents in reliance upon and in conformity with
information furnished in writing to the Company on behalf of such Underwriter
through the Representative expressly for use therein, and PROVIDED, FURTHER,
that such indemnity with respect to any Preliminary Prospectus shall not inure
to the benefit of any Underwriter (or to the benefit of any person controlling
such Underwriter) from whom the person asserting any such loss, claim, damage,
liability or action purchased Shares which are the subject thereof to the extent
that any such loss, claim, damage, liability or action (i) results from the fact
that such Underwriter failed to send or give a copy of the Prospectus (as
amended or supplemented) to such person at or prior to the confirmation of the
sale of such Shares to such person in any case where such delivery is required
by the Act and (ii) arises out of or is based upon an untrue statement or
omission of a material fact contained in such Preliminary Prospectus that was
corrected in the Prospectus (as amended and supplemented), unless such failure
resulted from non-compliance by the Company with Section 5 (a) (viii) hereof.
The indemnity agreement in this paragraph (a) shall be in addition to any
liability which the Company may otherwise have.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act against any and all losses, claims, damages or liabilities
(and
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actions in respect thereof) to which the Company or any director, officer, or
controlling person may become subject, under the Act or other federal or state
statutory law or regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or actions arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement or the Prospectus or any Preliminary Prospectus, or
any amendment or supplement thereto or in any Blue Sky Application, or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with information furnished in writing by
that Underwriter through the Representative to the Company expressly for use
therein; and will reimburse, as incurred, all legal or other expenses reasonably
incurred by the Company or any director, officer, controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action. The Company acknowledges that the statements with respect
to the public offering of the Shares set forth in the last paragraph of the
outside front cover, in the last paragraph of the inside front cover, and under
the heading "Underwriting" and the stabilization legend in the Prospectus have
been furnished by the Underwriters to the Company expressly for use therein and
constitute the only information furnished in writing by or on behalf of the
Underwriters for inclusion in the Prospectus. The indemnity agreement contained
in this subsection (b) shall be in addition to any liability which the
Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against one or more indemnifying parties
under this Section 8, notify such indemnifying party or parties of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a) or (b) of this Section 8 or to the extent
that the indemnifying party was not adversely affected by such omission. In
case any such action is brought against an indemnified party and it notifies an
indemnifying party or parties of the commencement thereof, the indemnifying
party or parties against which a claim is to be made will be entitled to
participate therein and, to the extent that it or they may wish, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party;
PROVIDED HOWEVER, that if the defendants in any such action include both the
indemnified party and the indemnifying party has reasonably concluded that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and otherwise to participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of its election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 8 for any legal or other expenses (other than the reasonable
costs of investigation) subsequently incurred by such indemnified party in
connection with the defense thereof unless (i) the indemnified party has
employed such counsel in connection with the assumption of such different or
additional legal defenses in accordance with the proviso to the immediately
preceding sentence, (ii) the indemnifying party has not employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of the action, or
(iii) the indemnifying party has authorized in writing the employment of counsel
for the indemnified party at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) above in respect of any losses, claims, damages, expenses
or liabilities (or actions in respect thereof) referred to therein, then each
indemnifying
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party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions in
respect thereof) (i) in such proportion as is appropriate to reflect the
relative benefits received by each of the contributing parties, on the one hand,
and the party to be indemnified, on the other hand, from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
each of the contributing parties, on the one hand, and the party to be
indemnified, on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. Relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact
relates to information supplied by the Company or by the Underwriters, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this paragraph
(d) shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this paragraph (d), the
Underwriters shall not be required to contribute any amount in excess of the
underwriting discount applicable to the Shares purchased by the Underwriters
hereunder. The Underwriters' obligations to contribute pursuant to this
paragraph (d) are several in proportion to their respective underwriting
obligations, and not joint. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (d), (i) each person, if any,
who controls an Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act shall have the same rights to contribution as
such Underwriter and (ii) each director of the Company, each officer of the
Company who has signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act shall have the same rights to contribution as the Company,
subject in each case to this paragraph (d). Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect to which a claim for contribution may
be made against another party or parties under this paragraph (d), notify such
party or parties from whom contribution may be sought, but the omission so to
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any other obligation (x) it or they may have
hereunder or otherwise than under this paragraph (d) or (y) to the extent that
such party or parties were not adversely affected by such omission. The
contribution agreement set forth above shall be in addition to any liabilities
which any indemnifying party may otherwise have.
9. RIGHT TO INCREASE OFFERING. At anytime during a period of 30 days
from the date of the Prospectus, the Underwriters, by no less than two business
days' prior notice to the Company, may designate a closing (which may be
concurrent with, and part of, the closing on the Closing Date with respect to
the Firm Shares or may be a second closing held on a date subsequent to the
Closing Date, in either case such date shall be referred to herein as the
"Option Closing Date") at which the Underwriters may purchase all or less that
all of the Additional Shares in accordance with the provisions of this Section 9
at the purchase price per share to be paid for the Firm Shares. In no event
shall the Option Closing Date be later than 10 business days after written
notice of election to purchase Additional Shares is given.
The Company agrees to sell to the several Underwriters on the Option
Closing Date the number of Additional Shares specified in such notice and the
Underwriters agree severally but not jointly, to purchase such Additional Shares
on the Option Closing Date. Such Additional Shares shall be
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purchased for the account of each Underwriter in the same proportion as the
number of Firm Shares set forth opposite the name of such Underwriter in Column
(3) of Schedule I bears to the total number of Firm Shares (subject to
adjustment by you to eliminate fractions) and may be purchased by the
Underwriters only for the purpose of covering over-allotments made in connection
with the sale of the Firm Shares.
No Additional Shares shall be sold or delivered unless the Firm Shares
previously have been, or simultaneously are, sold and delivered. The right to
purchase the Additional Shares or any portion thereof may be surrendered and
terminated at any time upon notice by you to the Company.
Except to the extent modified by this Section 9, all provisions of
this Agreement relating to the transactions contemplated to occur on the Closing
Date for the sale of the Firm Shares shall apply, MUTATIS MUTANDIS, to the
Option Closing Date for the sale of the Additional Shares.
10. REPRESENTATIONS, ETC. TO SURVIVE DELIVERY. The respective
representations, warranties, agreements, covenants, indemnities and statements
of, and on behalf of, the Company and its officers, and the Underwriters,
respectively, set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of
the Underwriters, and will survive delivery of and payment for the Shares. Any
successors to the Underwriters shall be entitled to the indemnity, contribution
and reimbursement agreements contained in this Agreement.
11. EFFECTIVE DATE AND TERMINATION.
(a) This Agreement shall become effective at 11:00 a.m., New York
time on the first business day following the date hereof, or at such earlier
time after the Registration Statement becomes effective as the Representative,
in its sole discretion, shall release the Shares for the sale to the public
unless prior to such time the Representative shall have received written notice
from the Company that it elects that this Agreement shall not become effective,
or the Representative on behalf of the Underwriters elects that this Agreement
shall not become effective; PROVIDED, HOWEVER, that the provisions of this
Section and of Section 6 and Section 8 hereof shall at all times be effective.
For purposes of this Section 11(a), the Shares to be purchased hereunder shall
be deemed to have been so released upon the earlier of notification by the
Representative to securities dealers releasing such Shares for offering or the
release by the Representative for publication of the first newspaper
advertisement which is subsequently published relating to the Shares.
(b) This Agreement (except for the provisions of Sections 6 and 8
hereof) may be terminated by the Representative by notice to the Company in the
event that the Company has failed to comply in any respect with any of the
provisions of this Agreement required on its part to be performed at or prior to
the Closing Date or the Option Closing Date, or if any of the representations or
warranties of the Company is not accurate in any respect or if the covenants,
agreements or conditions of, or applicable to the Company herein contained have
not been complied with in any respect or satisfied within the time specified on
the Closing Date or the Option Closing Date, respectively, or if prior to the
Closing Date or the Option Closing Date.
(i) the Company or any of its Subsidiaries shall have
sustained a loss by strike, fire, flood, earthquake, accident or other
calamity of such a character as to interfere materially with the conduct of
the business and operations of the Company and its Subsidiaries takes as a
whole regardless of whether or not such loss was insured;
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(ii) trading in the Common Stock shall have been suspended
by the Commission or the NASD or trading in securities generally on the
Nasdaq National Market shall have been suspended or a material limitation
on such trading shall have been imposed or minimum or maximum prices shall
have been established on any such market system;
(iii) a banking moratorium shall have been declared by New
York, California or United States authorities;
(iv) there shall have been an outbreak or escalation of
hostilities between the United States and any foreign power or an outbreak
or escalation of any other insurrection or armed conflict involving the
United States; or
(v) there shall have been a material adverse change in (A)
general economic, political or financial conditions or (B) the present or
prospective business or condition (financial or other) of the Company and
its Subsidiaries taken as a whole that, in each case, in the
Representative's good faith judgment makes it impracticable or inadvisable
to make or consummate the public offering, sale or delivery of the
Company's Shares on the terms and in the manner contemplated in the
Prospectus and the Registration Statement.
(c) Termination of this Agreement under this Section 11 or Section 12
after the Firm Shares have been purchased by the Underwriters hereunder shall be
applicable only to the Additional Shares. Termination of this Agreement shall
be without liability of any party to any other party other than as provided in
Sections 6 and 8 hereof.
12. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters
shall fail or refuse (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 7 or 11 hereof) to
purchase and pay for (a) in the case of the Closing Date, the number of Firm
Shares agreed to be purchased by such Underwriter or Underwriters upon tender to
you of such Firm Shares in accordance with the terms hereof or (b) in the case
of the Option Closing Date, the number of Additional Shares agreed to be
purchased by such Underwriter or Underwriters upon tender to you of such
Additional Shares in accordance with the terms hereof, and the number of such
Shares shall not exceed 10% of the Firm Shares or Additional Shares required to
be purchased on the Closing Date or the Option Closing Date, as the case may be,
then, each of the non-defaulting Underwriters shall purchase and pay for (in
addition to the number of such Shares which it has severally agreed to purchase
hereunder) that proportion of the number of Shares which the defaulting
Underwriter or Underwriters shall have so failed or refused to purchase on such
Closing Date or Option Closing Date, as the case may be, which the number of
Shares agreed to be purchased by such non-defaulting Underwriter bears to the
aggregate number of Shares so agreed to be purchased by all such non-defaulting
Underwriters on such Closing Date or Option Closing Date, as the case may be.
In such case, you shall have the right to postpone the Closing Date or the
Option Closing Date, as the case may be, to a date not exceeding seven full
business days after the date originally fixed as such Closing Date or the Option
Closing Date, as the case may be, pursuant to the terms hereof in order that any
necessary changes in the Registration Statement, the Prospectus or any other
documents or arrangements may be made.
If one or more of the Underwriters shall fail or refuse (otherwise than for
a reason sufficient to justify the termination of this Agreement under the
provisions of Section 7 or 11 hereof) to purchase and pay for (a) in the case of
the Closing Date, the number of Firm Shares agreed to be purchased by such
Underwriter or Underwriters upon tender to you of such Firm Shares in accordance
with the terms hereof or (b) in the case of the Option Closing Date, the number
of Additional Shares agreed to be purchased by
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such Underwriter or Underwriters upon tender to you of such Additional Shares in
accordance with the terms hereof, and the number of such Shares shall exceed 10%
of the Firm Shares or Additional Shares required to be purchased by all the
Underwriters on the Closing Date or the Option Closing Date, as the case may be,
then (unless within 48 hours after such default arrangements to your
satisfaction shall have been made for the purchase of the defaulted Shares by an
Underwriter or Underwriters) and subject to the provisions of Section 11(b)
hereof, this Agreement will terminate without liability on the part of any non-
defaulting Underwriter or on the part of the Company except as otherwise
provided in Sections 6 and 8 hereof. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
paragraph. Nothing in this Section 12, and no action taken hereunder, shall
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
13. NOTICES. All communications hereunder shall be in writing and if sent
to the Representative shall be mailed or delivered or telegraphed and confirmed
by letter or telecopied and confirmed by letter to Sutro & Co. Incorporated,
11150 Santa Monica Blvd. Suite 1500, Los Angeles, CA 90025, Attention: Equity
Syndication Department, or, if sent to the Company, shall be mailed or delivered
or telegraphed and confirmed by letter or telecopied and confirmed by letter to
Capital Corp of the West, 1160 West Olive Avenue, Suite A, Merced, California,
95384, Attention: Thomas T. Hawker.
14. SUCCESSORS. This Agreement shall inure to the benefit of and be
binding upon the Company and each Underwriter and the Company's and each
Underwriter's respective successors and legal representatives, and nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any other person any legal or equitable right, remedy or claim under or in
respect of this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person, except that the
representations, warranties, indemnities and contribution agreements of the
Company contained in this Agreement shall also be for the benefit of any person
or persons, if any, who control any Underwriter within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, and except that the Underwriters'
indemnity and contribution agreements shall also be for the benefit of the
directors of the Company, the officers of the Company who have signed the
Registration Statement, any person or persons, if any, who control the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act.
No purchaser of Shares from the Underwriters will be deemed a successor because
of such purchase.
15. APPLICABLE LAW; JURISDICTION. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to the choice of law or conflict of law principles thereof. Each party
hereto consents to the jurisdiction of each court in which any action is
commenced seeking indemnity or contribution pursuant to Section 8 above and
agrees to accept, either directly or through an agent, service of process of
each such court.
16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
If the forgoing correctly sets forth our understanding, please indicate the
Underwriters' acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement between us.
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Very truly yours,
CAPITAL CORP OF THE WEST
By: ________________________________
Name:
Title:
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Accepted as the date first above written:
SUTRO & CO. INCORPORATED
By: ____________________________
Acting on its own behalf and as the
Representative of the several
Underwriters referred to in the
foregoing Agreement
By: _______________________________
Title: ______________________________
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SCHEDULE I
UNDERWRITERS
Underwriting Agreement dated _______ __, 1997
Number of
Firm Shares Option Amount
----------- -------------
Name and Address
- ----------------
Sutro & Co. Incorporated................. ................
201 California Street
Attention: Equity Syndication Department
San Francisco, California 94111
................. ................
______________ _________________
Total.................................... ................
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Exhibit 5.1
[Letterhead of McCutchen, Doyle, Brown & Enersen LLP]
August 6, 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 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
August 7, 1997
