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U. S. SECURITIES AND EXCHANGE COMMISSION FORM 10-K/A
Washington, D. C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1996
Commission File Number: 0-27384
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CAPITAL CORP OF THE WEST
(Exact name of registrant as specified in its charter)
California 77-0405791
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1160 West Olive Avenue, Suite A, Merced, California 95348-1952
(Address of principal executive offices) (Zip Code)
(209) 725-2200
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act (Title of Class):
Common Stock, no par value.
Preferred Stock, no par value.
The Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Company was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
X Yes No
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Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $32,165,469 (based on the $18.50 average of bid and
ask prices per common share on February 28, 1997). The number of shares
outstanding of the Registrant's common stock, no par value, as of February 28,
1997 was 1,738,674. No shares of preferred stock, no par value, were outstanding
at February 28, 1997.
Documents incorporated by reference:
Portions of the definitive proxy statement for the 1997 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A are incorporated by reference in Part I, Item 4; Part II, Item 9
and Part III, Items 10 through 13 and portions of the Annual Report to
Shareholders for 1996 are incorporated by reference in Part II, Item 5 through
8.
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Capital Corp of the West
Table of Contents
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Page Reference
PART I
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ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
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ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . .32
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ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 34
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF Proxy Statement for
SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . 34 1997 Annual Meeting
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PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
STOCK AND RELATED SECURITY HOLDER Page 23 of 1996 Annual
MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 Report
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ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . 34 Page 24 of 1996 Annual
Report
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF Pages 19-22 of 1996
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Annual Report
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY Pages 9-18 of 1996
DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Annual Report
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND Proxy Statement for 1997
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . 34 Annual Meeting
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE Proxy Statement for 1997
REGISTRANT. . . . . . . . . . . . . . . . . . . . . . . . . . .34 Annual Meeting
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ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . 35 Proxy Statement for 1997
Annual Meeting
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL Proxy Statement for 1997
OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . . . 35 Annual Meeting
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED Proxy Statement for 1997
TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . .35 Annual Meeting
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PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K . . . . . . 35
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37-38
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PART I
ITEM 1. BUSINESS
General Development of the Company
General
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 and purchased the
Thrift. 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 20,000,000 shares
of Common Stock, no par value, and 10,000,000 shares of Preferred Stock. As of
February 28, 1997 there were 1,738,674 common shares outstanding, held of record
by approximately 1,175 shareholders. There were no preferred shares outstanding
at February 28, 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,
the Bank's subsidiaries, Capital West Group and the Thrift, unless the context
otherwise requires.
Information about Commercial Banking & General Business of the Company and its
Subsidiaries
The Bank was organized on August 1, 1977, as County Bank of Merced, a California
state banking corporation. The Bank commenced operations on December 22, 1977.
In November 1992, the Bank changed its legal name to County Bank. The Bank's
securities consist of one class of Common Stock, no par value and is wholly
owned by the Company. The Bank's deposits are insured under the Federal Deposit
Insurance Act, by the Federal Deposit Insurance Corporation ("FDIC"), up to
applicable limits stated therein. Like most state-chartered banks of its size in
California, it is not a member of the Federal Reserve System.
The Company acquired the Thrift on June 28, 1996 for a combination of cash and
stock with an aggregate value of approximately $5.8 million. The Thrift is an
industrial loan company with four offices. It specializes in direct loans to the
public and the purchase of financing contracts principally from automobile
dealerships and furniture stores. It was originally incorporated in 1957. Its
deposits (technically known as investment certificate or certificates of deposit
rather than deposits) are insured by the FDIC up to applicable limits.
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 Merced 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. 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. (See "ITEM 2.
PROPERTIES")
Competition
The Company's primary market area consists of Merced, Tuolomne and Stanislaus
Counties and nearby communities of adjacent counties. The banking business in
California generally, and specifically in the Company's primary market area, is
highly competitive with respect to both loans and deposits. The banking business
is dominated by a relatively small number of major banks which have many offices
operating over wide geographic areas. Many of the major commercial banks offer
certain services (such as international, trust and
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securities brokerage services) which are not offered directly by the Company or
through its correspondent banks. By virtue of their greater total
capitalization, such banks have substantially higher lending limits than the
Company and substantial advertising and promotional budgets.
However, smaller independent financial institutions, savings and loans and
credit unions also represent a competitive force. To illustrate the Bank's
relative market share, based upon total deposits in the County of Merced,
California at June 30, 1996 (more recent data is not available), the Bank's
deposits represented approximately 15.7% of total deposits in all other
financial institutions in the county. Deposits in Stanislaus and Tuolomne
counties were not material as of that date.
In the past, an independent bank's principal competitors for deposits and loans
have been other banks (particularly major banks), savings and loan associations
and credit unions. To a lesser extent, competition was also provided by thrift
and loans, mortgage brokerage companies and insurance companies. Other
institutions, such as brokerage houses, credit card companies, and even retail
establishments have offered new investment vehicles, such as money-market funds,
which also compete with banks. The direction of federal legislation in recent
years seems to favor competition between different types of financial
institutions and to foster new entrants into the financial services market, and
it is anticipated that this trend will continue. It should be noted, however,
that savings and loan institutions have now been restricted in their ability to
make commercial loans under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") legislation.
To compete with major financial institutions in its service area, the Bank
relies upon specialized services, responsive handling of customer needs, local
promotional activity, and personal contacts by its officers, directors and
staff, as opposed to large multi-branch banks which compete primarily by rate
and location of branches. For customers whose loan demands exceed the Bank's
lending limits, the Bank seeks to arrange funding for such loans on a
participation basis with its correspondent banks or other independent commercial
banks. The Bank also assists customers requiring services not offered by the
Bank to obtain such services from its correspondent banks.
Bank's Services and Markets
Bank
The Bank conducts a general commercial banking business including the acceptance
of demand (includes interest bearing), savings and time deposits. The Bank also
offers 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. Although Management believes there is demand for trust services in
its service area, the Bank does not operate a trust department nor does it offer
these services through a correspondent banking relationship to its customers.
The four general areas in which the Bank has directed virtually all of its
lendable assets are (i) commercial loans, including agricultural loans, (ii)
consumer installment loans, (iii) real estate mortgage loans, and (iv) real
estate construction loans. As of December 31, 1996, these four categories
accounted for approximately 39%, 22%, 31% and 8%, respectively, of the Bank's
loan portfolio.
In 1990, the Bank entered into a cooperative agreement with Prudential
Agricultural Group to offer agricultural real estate loans to farmers in Merced,
Stanislaus, San Joaquin, Madera, Monterey, Santa Cruz and San Benito Counties.
The program is designed to have a select group of independent banks throughout
the United States generate farm real estate loans and process them within the
underwriting standards of the proposed Farmer Mac program. The qualifying loans
are for the purchase or refinance of production oriented agricultural properties
and are secured by a first deed of trust on the property. Loan terms range from
5 to 20 years in length and loan amounts range from $500,000 to $3.0 million.
The Bank originates, packages and subsequently sells these loans to the
Prudential Agricultural Group and retains servicing rights on these loans. The
Bank is the only representative in Merced and Stanislaus Counties to offer this
program.
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In addition in 1992, the Bank became a certified Farmers Home Administration
lender, now known as the Farm Service Agency. The Bank originates loans under
the guidelines of such program both to retain for the Bank's loan portfolio and
to sell in the secondary market. The Bank may also sell loans, in the $100,000
range, direct to Farmer Mac.
In 1994, the Bank organized a department to originate loans within the
underwriting standards of Small Business Administration. The Bank originates
packages and subsequently sells these loans in the secondary market and retains
servicing rights on these loans.
The Bank's deposits are attracted primarily from individuals and small- and
medium-sized business-related sources. The Bank also attracts some deposits from
municipalities and other governmental agencies and entities. In connection with
the deposits of municipalities or other governmental agencies, the Bank is
generally required to pledge securities to secure such deposits, except when the
depositor signs a waiver with respect to the first $100,000 of such deposits,
which amount is insured by the FDIC.
The principal sources of the Bank's revenues are (i) interest and fees on loans,
(ii) interest on investment securities (principally U.S. Government securities
and municipal bonds), and (iii) service charges on deposit accounts. For the
year ended December 31, 1996, these sources comprised approximately 106%, 20%,
and 8% respectively, of the Bank's total operating income.
Bank's Business Not Dependent upon a Small Number of Individuals
Most of the Bank's business originates from individuals, businesses and
professional firms located in and around Merced, Tuolomne and Stanislaus
Counties. The Bank is not dependent upon a single customer or group of related
customers for a material portion of its deposits, nor is a material portion of
the Bank's loans concentrated within a single industry or group of related
industries. As of December 31, 1996, the largest industry within the Bank's loan
portfolio is it's real estate mortgage loans at 31% of the loan portfolio.
Agriculture loans are 24% including dairy loans of 15%. Thus, the quality of
these Bank assets and Bank earnings could be adversely affected by a downturn in
the local economy, including the dairy industry sector.
Bank's Real Estate Subsidiary (MAID)
General
As authorized by Section 751.3 of the California Financial Code, California
state-chartered banks are allowed to engage in real estate development
activities either directly or through investment in a wholly-owned subsidiary.
Pursuant to this authorization, the Bank established MAID, its wholly-owned
subsidiary, as a California corporation on February 18, 1987.
In late 1995, the Company wrote down the entire remaining investment in MAID in
the amount of $2,881,000. The uncertainty about the effect of the investment in
MAID on the results of future operations caused management to recognize the
complete write-down in 1995.
At December 31, 1996, MAID held two real estate projects including improved and
unimproved land in various stages of development. MAID continues to market these
projects, and any amounts realized upon sale or other disposition of these
assets above their current carrying value of zero will result in non-interest
income at the time of such sale or disposition. The following is a general
discussion of these properties:
(1) This project consists of 9 remaining improved lots and 117 additional
unimproved lots. MAID does not currently intend to develop the subsequent three
phases (117 lots) of this property.
(2) This project is comprised of 230 unimproved lots of which 143 are remaining.
MAID does not currently intend to develop the remaining property.
Bank's subsidiary, County Asset Advisors
General
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Pursuant to section 772 of the California Financial code, the Bank established
County Asset Advisors, a wholly-owned subsidiary, as a California corporation in
1994. County Asset Advisors is not currently engaged in any activities.
The Thrift
General
The Thrift is a licensed California Industrial Loan Company specializing in
direct loans to the public and the purchase of financing contract principally
from car dealerships and furniture stores. The Thrift offers certain deposit
products including savings and time deposits which are technically referred to
as installment investment certificates and fully paid investment certificates.
An industrial loan company is prohibited by the Industrial Loan Company Law to
offer transaction accounts to its customers.
Capital West Group
General
Capital West Group was formed in April 1996 as a wholly owned subsidiary of
Capital Corp. The subsidiary specializes in a variety of consulting work for
independent financial institutions located primarily in the western states.
Consulting services would include strategic planning, capital planning, new bank
formation, providing fairness opinions and other special projects for both
boards and management of client institutions.
Research Activities
The Company has not engaged in any material research activities relating to the
development of new services or the improvement of existing banking services
during the past two fiscal years. During that time, however, Company directors,
officers and employees have continually engaged in marketing activities,
including the evaluation and development of new services, in order to maintain
and improve the Company's competitive position in its primary service area. The
costs of these activities have not been significant during this period.
The Company has no present plans to introduce a new product or line of business
which would require the invest ment of a material amount of the Company's total
assets.
Number of Employees
As of December 31, 1996, the Company employed a total of 141 full-time
equivalent employees. The Company beleives that employee relations are
excellent.
Seasonal Trends in the Company's Business
Although the Company does experience some immaterial seasonal trends in deposit
growth and funding of its dairy and construction loan portfolios, in general the
Company's business is not seasonal.
Operations in Foreign Countries
The Company conducts no operations in any foreign country.
Supervision and Regulation
Overview
The Company is subject to extensive regulation by federal and state authorities.
As a California chartered bank holding company, the Company is subject to and
examined by the Board of Governors of the Federal Reserve System ("FRB"). The
Bank, as a California state licensed bank with accounts insured by the FDIC to
the maximum amount permitted by law, is subject to regulation, supervision and
regular examination by the California Superintendent of Banks ("Superintendent")
and the FDIC. The Bank is also subject to certain regulations of the FRB. The
Thrift, as an industrial loan company with accounts insured by the FDIC to the
maximum amount
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permitted by law is subject to regulation, supervision and regular examination
by the California Department of Corporations and the FDIC. The Company is
subject to the periodic requirements of Section 15(d) of the Securities Exchange
Act of 1934, as amended, which include, but are not limited to filing, annual,
quarterly, and other current reports with the Securities and Exchange
Commission. The primary current function of the Company is to hold the stock of
the Bank and its other subsidiaries.
Most aspects of the Bank's business and operations, including periodic reports,
investments, loans, certain checkclearing activities, branching, reserves
against deposits, the permissible scope of the Bank's activities, and numerous
other areas, are governed by federal and state statutes and regulations,
including the regulations of the FDIC and the FRB. The banking industry in the
United States is affected by the extensive regulation of commercial banking
activities and, on an ongoing basis, by the enactment of federal and state
legislation. Such legislation may have the effect of increasing or decreasing
the cost of doing business, may modify permissible activities, and could enhance
the competitive position of non-bank financial institutions. Any change in
applicable laws or regulations may have a material adverse effect on the
business and prospects of the Bank.
In addition to the challenges presented by the great breadth of the regulatory
subject matter which will affect the Company, it should also be noted that the
regulatory agencies which have jurisdiction over the Company have broad
discretion in exercising their supervisory powers. For example, under federal
law the FDIC has authority to prohibit a state bank from engaging in banking
practices which it considers unsafe and unsound.
The laws of the State of California also affect the Bank's business and
operations. Pursuant to the California Financial Code, if it appears to the
Superintendent that a bank is violating its articles of incorporation or state
law, or is engaging in unsafe or injurious business practices, the
Superintendent can order the bank to comply with the law or to cease the unsafe
or injurious practices. The Superintendent has the power to suspend or remove
bank officers, directors and employees who (i) violate any law or regulation
relating to the business of the bank or breach any fiduciary duty to the bank,
(ii) engage in any unsafe or unsound practices related to the business of the
bank, or (iii) are charged with or convicted of a felony involving dishonesty or
breach of trust. The Superintendent is also required to order the Bank to
correct any impairment of its contributed capital and to assess the shares of
the Bank's stock to correct such impairment if necessary.
In addition to the regulation and supervision outlined above, banks must also
deal with judicial scrutiny of their lending and collection practices. For
example, some banks have been found liable for exercising remedies which their
loan documents authorized upon the borrower's default. This has occurred in
cases where the exercise of those remedies has been determined to be
inconsistent with the previous course of dealing between the bank and the
borrower. As a result, banks have had to exercise increased caution, incur
greater expense and face increased exposure to liability when dealing with
nonperforming loans.
Bank Holding Company Act
Capital Corp is a bank holding company within the meaning of the Bank Holding
Company Act ("BHC") Act and is registered as such with the FRB. A bank holding
company is required to file with the FRB annual reports and other information
regarding its business operations and those of its subsidiaries. It is also
subject to examination by the FRB and is required to obtain FRB approval before
acquiring, directly or indirectly, ownership or control of any voting shares of
any bank, if after such acquisition, it would directly or indirectly own or
control more than 5% of the voting stock of that bank, unless it already owns a
majority of the voting stock of that bank. The BHC Act further provides that the
FRB shall not approve any such acquisition that would result in or further the
creation of a monopoly, or the effect of which may be substantially to lessen
competition, unless the anti-competitive effects of the proposed transaction are
clearly outweighed by the probable effect in meeting the convenience and needs
of the community to be served.
Under the BHC Act, a bank holding company is, with limited exceptions,
prohibited from (i) acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any company which is not a bank or (ii) engaging
in any activity other than managing or controlling banks. With the prior
approval of the FRB, however, a bank holding company may own shares of a company
engaged in activities which the FRB has determined to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
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The FRB has by regulation determined that certain activities are so closely
related to banking as to be a proper incident thereto within the meaning of the
BHC Act. These activities include, but are not limited to: operating an
industrial loan company, industrial bank, Morris Plan bank, savings association,
mortgage company, finance company, credit card company or factoring company;
performing certain data processing operations; providing investment and
financial advice; operating a trust company in certain instances, selling
traveler's checks, United States savings bond and certain money orders;
providing certain courier services; providing management consulting advice to
nonaffiliated depository institutions in some instances; acting as insurance
agent for certain types of credit-related insurance; leasing property or acting
as agent, broker or advisor for leasing property on a "full pay-out basis";
acting as a consumer financial counselor, including tax planning and return
preparation; performing futures and options advisory services, check guarantee
services and discount brokage activities; operating a collection or credit
bureau; or performing personal property appraisals. Capital Corp has no present
intention to engage in any of such permitted activities, except operating an
industrial loan company and providing management consulting advice to
nonaffiliated depository institutions.
The FRB has also determined that certain activities are not so closely related
to banking to be a proper incident thereto within the meaning of the BHC Act.
Such activities include real estate brokerage and syndication; land development;
property management; underwriting of life insurance not related to credit
transactions; and, with certain exceptions, securities underwriting, and equity
financing.
Under the BHC Act, a bank holding company and its subsidiaries are prohibited
from acquiring and voting shares of interest in all or substantially all of the
assets of any bank located outside the state in which the operations of the bank
holding company's banking subsidiaries are principally conducted, unless the
acquisition is specifically authorized by the law of the state in which the bank
to be acquired is located or unless the transaction qualifies under federal law
as "emergency interstate acquisition" of a closed or failing bank. California
law expressly permits interstate banking.
Regulations and policies of the FRB 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 conditions, the FRB may conclude that certain
actions of a bank holding company, such as payment of cash dividends, would
constitute an unsafe and unsound practice because they violate the FRB's "source
of strength" doctrine.
A bank holding company and its subsidiaries are prohibited from certain tie-in
arrangements in connections with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions, a bank
may not condition an extension of credit on a promise by its customer to obtain
other services provided by it, its holding company or other subsidiaries, or on
a promise by its customer not to obtain other services from a competitor. In
addition, federal law imposes certain restrictions on transactions between
Capital Corp and its subsidiaries. In addition, Capital Corp is subject, with
certain exceptions, to provisions of federal law imposing limitations on and
requiring collateral for, extensions of credit by Capital Corp's subsidiary bank
to its other affiliates.
Directors, officers and principal shareholders of Capital Corp, and the
companies with which they are associated, have had and will continue to have
banking transactions with the Bank and the Thrift in the ordinary course of
business. Any loans and commitments to lend included in such transactions are
made in accordance with applicable law, on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons of similar creditworthiness, and on
terms not involving more than the normal risks of collectibility or presenting
other unfavorable features. At December 31, 1996, loans to such persons totaled
$573,000 or 2.7% of Capital Corp's shareholders' equity.
Capital Adequacy Requirements
Federal regulators have established minimum risk-based capital standards for
commercial banks and bank holding companies. These guidelines provide a measure
of capital levels and are intended to reflect the degree of risk associated with
both on- and off-balance sheet items. The risk-based capital rules establish
minimum standards; they do not evaluate all factors affecting an organization's
financial condition, and overall capital assessments by federal regulators
include analysis of such additional factors as (i) overall interest rate
exposure; (ii) liquidity,
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funding and market risk; (iii) quality and level of earnings; (iv) investment or
loan portfolio concentrations; (v) quality of loans and investments; (vi) the
effectiveness of loan and investment policies; and (vii) management's overall
ability to monitor and control other financial and operating risks.
A financial institution's risk-based capital ratio is calculated by dividing its
qualifying capital by its period-end risk-weighted assets. Financial
institutions, including the Bank and the Thrift, generally are expected to meet
a minimum ratio of qualifying total capital to risk-weighted assets of eight
percent, at least one-half of which capital must be in the form of core (Tier 1)
capital, consisting of common stock, noncumulative perpetual preferred stock,
minority interests in equity capital accounts of consolidated subsidiaries and
limited amounts of qualifying mortgage servicing rights, less most other
intangible assets. Supplementary (Tier 2) capital consists of, among other
things, the allowance for loan losses up to 1.25 percent of risk-weighted
assets, cumulative, perpetual and term preferred stock, certain hybrid capital
instruments, and term subordinated debt. The maximum amount of Tier 2 capital
which may be recognized for risk-based capital purposes is limited to 100
percent of Tier 1 capital (after any deductions for disallowed intangibles and
other items). The aggregate amount of term subordinated debt and intermediate
term preferred stock that may be treated as Tier 2 capital is limited to 50
percent of Tier 1 capital. Certain other limitations and restrictions apply as
well.
The risk-based capital requirements did not replace or eliminate the minimum
leverage ratios of capital to total assets that are required to be maintained by
financial institutions. The federal regulatory agencies have adopted a three
percent minimum leverage ratio, which is intended to supplement risk-based
capital requirements and to ensure that all financial institutions, even those
that invest predominantly in low-risk assets, continue to maintain a minimum
level of core capital. These regulations provide that a financial institution's
minimum leverage ratio is determined by dividing its Tier 1 capital by its
quarterly average total assets, less intangibles not includable in Tier 1
capital.
Under these rules, a minimum leverage ratio of three percent is required for
institutions which have been determined to be in the highest of the five
categories used by regulators to rate financial institutions. All other
organizations are required to maintain leverage ratios of at least l00 to 200
basis points above the three percent minimum. It is improbable, however, that an
institution with a three percent leverage ratio would be rated in the highest
category, since a strong capital position is so closely tied to the rating
system. Therefore, the "minimum" leverage ratio is, for all practical purposes,
significantly above three percent.
The leverage ratio establishes a minimum standard affecting the ability of
financial institutions, including the Bank and the Thrift, to increase assets
and liabilities without increasing capital proportionately. A state bank or
thrift which fails to maintain sufficient capital to meet both capital
requirements is required to submit a plan to the FDIC describing the means and
schedule by which the institution will achieve its minimum capital ratios.
Failure to submit a plan, or failure to comply with an approved plan, may
subject a institution to restrictions on its operations and activities, and to
other regulatory actions, including assessments of civil money penalties.
Pursuant to federal law, continued failure to achieve minimum capital
requirements may result in placement of the institution under a conservatorship
or receivership and, ultimately, in liquidation by the FDIC. Pursuant to
California law, the Superintendent has authority, under certain circumstances
(e.g., if the institution's capital is impaired or the institution is conducting
its business in an unsafe or unsound manner) to take possession of the property
and business of the institution and tender it to the FDIC for liquidation. In
addition, if the Superintendent believes that a institution's capital is
impaired, the Superintendent is required to order the institution to correct the
impairment. In such a case, the institution must levy and collect an assessment
on the shares of the institution's common stock.
Regulatory Ratios
As of December 31, 1996, the Company's total risk-based capital ratio was
approximately 11.2% and its leverage ratio was approximately 8.2%. The Company
does not presently expect that compliance with the risk-based capital guidelines
or minimum leverage requirements will have a materially adverse effect on its
business in the reasonably foreseeable future. For further information about
regulatory capital requirements see "Note 8--Notes to Consolidated Financial
Statements" section entitled "Regulatory Matters" at page 16 of the Company's
1996 Annual Report to the Shareholders incorporated herein by reference.
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Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires federal regulators to take "prompt corrective action" with respect to
institutions that do not meet minimum capital requirements. In response to this
requirement, federal regulators adopted rules based upon FDICIA's five capital
tiers. These rules, which will apply to the Bank and the Thrift, provide that an
institution is "well capitalized" if its risk-based capital ratio is ten percent
or greater, its Tier 1 risk-based capital ratio is six percent or greater, its
leverage ratio is five percent or greater, and the institution is not subject to
a capital directive or other enforceable order by federal regulators. An
institution is "adequately capitalized" if its risk-based capital ratio is eight
percent or greater, its Tier 1 risk-based capital ratio is four percent or
greater; and its leverage ratio is four percent or greater (three percent or
greater for the most highly-rated institutions, as rated by federal regulators).
An institution is considered "undercapitalized" if its risk-based capital ratio
is less than eight percent; its Tier 1 risk-based capital ratio is less than
four percent; or its leverage ratio is four percent or less (less than three
percent for the most highly-rated institutions). An institution is
"significantly undercapitalized" if (i) its risk-based capital ratio is less
than six percent; (ii) its Tier 1 risk-based capital ratio is less than three
percent; or (iii) its leverage ratio is less than three percent. An institution
is deemed to be "critically undercapitalized" if its ratio of tangible equity
(Tier 1 capital) to total assets is equal to or less than two percent. An
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if the FDIC determines that the
institution is in an unsafe and unsound condition or if the FDIC deems the bank
to be engaged in an unsafe or unsound banking practice.
No sanctions apply to institutions which are "well capitalized." "Adequately
capitalized" institutions are prohibited from accepting brokered deposits
without the consent of their primary federal regulator. "Undercapitalized"
institutions are (i) required to submit a capital restoration plan for improving
capital, and are prohibited from making capital distributions or paying
management fees to controlling persons if such distributions or fees would
result in the institution being undercapitalized; (ii) may be subject to growth
limitations; and (iii) acquisitions, branching and entering into new lines of
business would be subject to prior regulatory approval. Finally, the
institution's regulatory agency has discretion to impose certain of the
restrictions generally applicable to "significantly undercapitalized"
institutions.
In the event an institution is deemed to be "significantly undercapitalized," it
may be required to (i) sell additional shares of its stock; (ii) merge or be
acquired; (iii) restrict transactions with affiliates; (iv) restrict interest
rates paid; (v) restrict asset growth or reduce total assets; (vi) divest a
subsidiary; or (vii) dismiss specified directors or officers. A "critically
undercapitalized" institution is generally prohibited from making payments on
subordinated debt and among other things may not, without the prior approval of
the FDIC, (i) enter into a material transaction other than in the ordinary
course of business; (ii) engage in certain transactions with affiliates; or
(iii) pay excessive compensation or bonuses. "Critically undercapitalized"
institutions are subject to appointment of a receiver or conservator by the
institution's federal regulator. As of the most recent data available, the Bank
and Thrift were both well capitalized institutions.
Enforcement Powers
FIRREA provided civil and criminal penalties that are available for use by the
federal regulatory agencies against depository institutions and certain
"institution-affiliated parties" (primarily including management, employees and
agents of a financial institution, independent contractors such as attorneys and
accountants, and others who participate in the conduct of the financial
institution's affairs). These practices can include the failure of an
institution to timely file required reports or the filing of false or misleading
information or the submission of inaccurate reports. Civil penalties may be as
high as $1 million a day for violations and criminal penalties for financial
institution crimes range up to 20 years. In addition, federal regulators are
provided with great flexibility to commence enforcement actions against
institutions and institution-affiliated parties. Possible enforcement actions
include the termination of deposit insurance. Furthermore, FIRREA expanded the
appropriate banking agencies' power to issue cease and desist orders that may,
among other things, require affirmative action to correct any harm resulting
from a violation or practice, including restitution, reimbursement,
indemnifications or guarantees against loss. A financial institution may also be
ordered to restrict its growth, dispose of certain assets,
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rescind agreements or contracts, or take other actions as determined by the
ordering federal agency to be appropriate.
In addition, California law provides the Superintendent with certain enforcement
powers. For example, if it appears to the Superintendent that a bank is
violating its articles of incorporation or state law, or is engaging in unsafe
or unsound business practices, the Superintendent can order the bank to comply
with the law or to cease the unsafe or injurious practices. The Superintendent
also has the power to suspend or remove bank officers, directors and employees
who (i) violate any law, regulation or fiduciary duty to the bank; (ii) engage
in any unsafe or unsound practices related to the business of the bank, or (iii)
are charged with or convicted of a crime involving dishonesty or breach of
trust.
Limitations on Dividends by the Company
Under the California General Corporation Law (The "California Law") the holders
of common stock are entitled to receive dividends when and as declared by the
Board of Directors, out of funds legally available therefor, subject to the
restrictions set forth in the California Law. The California Law provides that a
corporation may make a distribution to its shareholders if the corporation's
retained earnings will equal at least the amount of the proposed distribution.
The California Law further provides that in the event sufficient retained
earnings are not available for the proposed distribution a corporation may
nevertheless make a distribution to its shareholders if, after giving effect to
the distribution, it meets two conditions, which generally stated ate as
follows: (i) the corporation's assets must equal at least 125% of its
liabilities; and (ii) the corporation's current assets must equal at least its
current liabilities or, if the average of the corporation's earnings before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of the corporation's current assets must equal at
least 125% of its current liabilities. Most bank holding companies are unable to
meet this test.
The payment of cash dividends by the Company depends on various factors,
including the earnings and capital requirements of itself and its subsidiaries,
and other financial conditions. The primary source of funds for payment of
dividends by the Company to its shareholders is the receipt of dividends and
management fees from the Bank and, to a lesser extent, the Thrift.
Payment of Dividends
Under California law, the directors of California state-licensed banks,
including the Bank, may declare distributions to shareholders (which include
cash dividends), subject to the restriction that the amount available for the
payment of cash dividends shall be the lesser of retained earnings of the bank
or the bank's net income for its last three fiscal years (less the amount of any
distributions to shareholders made during such period). If the above test is not
met, distributions to shareholders may be made with the prior approval of the
Superintendent in an amount not exceeding the greatest of (i) the bank's
retained earnings, (ii) the bank's net income for its last fiscal year, or (iii)
the bank's net income for its current fiscal year. If the Superintendent finds
that the shareholders' equity of a bank is not adequate, or that the making by a
bank of a distribution to shareholders would be unsafe or unsound for the bank,
the Superintendent can order the bank not to make any distribution to
shareholders.
The ability of the Bank to pay dividends is further restricted under FDICIA,
which prohibits a bank from paying dividends if, after making such payment, the
bank would fail to meet any of its minimum capital requirements. As a result of
these provisions, the Bank may find it difficult to pay dividends out of
retained earnings from historical periods prior to the most recent fiscal year
or to take advantage of earnings generated by extraordinary items. Under the
Financial Institutions Supervisory Act and FIRREA, federal regulators also have
authority to prohibit financial institutions from engaging in business practices
which are considered to be unsafe or unsound. It is possible, depending upon the
financial condition of the Bank and other factors, that the regulators could
assert that the payment of dividends in some circumstances might constitute
unsafe or unsound practices, and that the regulators might prohibit the payment
of dividends even though under the circumstances such payments would be
technically permissible.
Accordingly, the future payment of cash dividends of the Company will not only
depend upon the Bank's earnings during any fiscal period but will also depend
upon an assessment by the Bank's Board of Directors of
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the capital requirements of the Bank and other factors, including the dividend
guidelines and the maintenance of an adequate allowance for loan and lease
losses. As noted above the Bank pays dividends to the Company which in turn can
pay dividends to its shareholders subject to the laws limiting corporate
dividends.
The Thrift may not pay dividends unless its remaining capital exceeds $750,000
plus $50,000 for each branch office.
Governmental Monetary Policies
The principal sources of funds essential to the business of banks are deposits,
shareholders' equity, and borrowed funds. The availability of these sources of
funds and other potential sources, such as preferred stock or commercial paper,
and the extent to which they are utilized, depends on many factors, the most
important of which are the FRB's monetary policies and the relative costs of
different types of funds. An important function of the FRB is to regulate the
national supply of bank credit in order to combat recession and curb
inflationary pressures. Among the instruments of monetary policy used by the FRB
to implement these objectives are (i) open market operations in United States
Government securities, (ii) changes in the discount rate on bank borrowings, and
(iii) changes in reserve requirements against bank deposits.
The monetary policies of the FRB have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future. Since banking is a business which depends largely on interest rate
differentials, the influence of economic conditions and monetary policies on
interest rates may directly affect the Company's earnings. In view of the recent
changes in regulations affecting commercial banks and other actions and proposed
actions by the federal government and its monetary and fiscal authorities,
including proposed changes in the structure of banking in the United States, no
prediction can be made as to future changes in interest rates, credit
availability, deposit levels or the overall performance of banks generally or of
the Company in particular.
Community Reinvestment Act
Pursuant to the Community Reinvestment Act of 1977, the federal regulatory
agencies which oversee the banking industry are required to use their authority
to encourage financial institutions to help meet the credit needs of the local
communities in which such institutions are chartered, consistent with safe and
sound banking practices. When conducting an examination of a financial
institution such as the Bank and the Thrift, the agencies assess the
institution's record of meeting the credit needs of its entire community,
including low- and moderate-income neighborhoods. This record is taken into
account in an agency's evaluation of an application for creation or relocation
of domestic branches or for merger with another institution. Failure to address
the credit needs of a institution's community may also result in the imposition
of certain other regulatory sanctions, including a requirement that corrective
action be taken. As of the last exam in August of 1995 and April 1995
respectively, the Bank and the Thrift were each given "satisfactory" ratings for
community reinvestment.
New Community Reinvestment Act Regulations
Under the revised CRA regulations, the agencies determine an institution's
rating under the CRA by evaluating its performance on lending, service and
investment tests, with the lending test as the most important. The tests are to
be applied in an "assessment context" that is developed by the agency for the
particular institution. The assessment context takes into account demographic
data about the community, the community's characteristics and needs, the
institution's capacities and constraints, the institution's product offerings
and business strategy, the institution's prior performance, and data on
similarly situated lenders. Since the assessment context is developed by the
regulatory agencies, a particular bank will not know until it is examined
whether its CRA programs and efforts have been sufficient.
Larger institutions are required under the revised regulations to compile and
report certain data on their lending activities in order to measure performance.
Some of this data is already required under other laws, such as the ECOA. Small
institutions (with less than $250 million in assets) are now being examined on a
"streamlined assessment method." The streamlined method focuses on the
institution's loan to deposit ratio, degree of local lending, record of lending
to borrowers and neighborhoods of differing income levels, and record of
responding to complaints. The Federal regulators who are implementing the new
regulations have reported that the time spent
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at the banks during CRA examination is reduced under the new regulations, and
the institutions spend less time on paperwork evidencing compliance.
Large and small institutions have the option of being evaluated for CRA purposes
in relation to their own pre-approved strategic plan. Such a strategic plan must
be submitted to the institution's regulator three months before its effective
date and be published for public comment.
Limitation on Activities
FDICIA prohibits state chartered-banks and their subsidiaries from engaging, as
principal, in activities not permissible to national banks and their
subsidiaries, unless the FDIC determines the activity poses no significant risk
to the Bank Insurance Fund and the state bank is and continues to be adequately
capitalized. Similarly, state bank subsidiaries may not engage, as principal, in
activities impermissible to subsidiaries of national banks. This prohibition
extends to acquiring or retaining any investment, including those that would
otherwise be permissible under California law.
Bank Sales of Insurance Products
If the Bank elects to make insurance products available to its customers, those
sales will be subject to various legal and regulatory restrictions. California
state-chartered banks now have statutory authority to engage in the insurance
business as an agent or broker. FDICIA prohibits state-chartered banks and their
subsidiaries from engaging, as principal, in activities not permissible to
national banks and their subsidiaries, unless the FDIC determines the activity
poses no significant risk to the bank insurance fund and the state bank is and
continues to be adequately capitalized. Similarly, state bank subsidiaries may
not engage, as principal, in activities impermissible to subsidiaries of
national banks. This prohibition extends to insurance underwriting activities by
California state chartered banks. It does not, however, prevent California
chartered banks from engaging in insurance agency activities.
Change in Senior Executives or Board Members
Certain banks and bank holding companies must file a notice with their primary
regulator prior to (i) adding or replacing a member of the board of directors,
or (ii) the employment of or a change in the responsibilities of a senior
executive officer. Notice is required if the bank or holding company is failing
to meet its minimum capital standards or is otherwise in a "troubled condition,"
as defined in FDIC regulations, has undergone a change in control within the
past two years, or has received its bank charter within the past two years.
Environmental Liability
Compliance with federal, state and local regulations regarding the discharge of
materials into the environment could have a substantial effect on the capital
expenditures, earnings and competitive position of the Company. Under federal
law, liability for environmental damage and the cost of cleanup may be imposed
upon any person or entity who is an owner or operator of contaminated property.
State law provisions, which were modeled after federal law, are substantially
similar. Especially relevant for the Company are judicial interpretations of the
law which have held that banks that take real estate as security for loans may
be deemed to be owners or operators of the property if their involvement with
the borrower's management is broad enough to support an inference that the
institution, if it chose to do so, could affect hazardous waste disposal
decisions made by the borrower.
Environmental Regulation
Both Federal and state laws were amended in 1996 to provide generally that a
lender who is not actively involved in causing contamination to property will
not be liable to clean up the property, even if the lender has a security
interest in the property or becomes an owner of the property through
foreclosure, so long as it merely maintains the property and moves to divest it
at the earliest possible time after foreclosure. Under California law, a lender
generally will not be liable to the State for the cost associated with cleaning
up contaminated property unless the lender realized some benefit from the
property, failed to divest the property promptly after foreclosure, caused or
contributed to the release of the hazardous materials or made the loan primarily
for purpose of investing in the property. This amendment to California law
became effective with respect to judicial proceedings filed and orders issued
after January 1, 1997.
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It is the Bank's policy to perform environmental due diligence procedures in the
following cases: prior to foreclosure upon any commercial or industrial property
or any suspect residential property; prior to commitment on any commercial or
industrial or/and real estate development loan greater than $100,000 or any
single family or multifamily loan greater than $200,000. Due diligence
procedures include an environmental questionnaire completed by the borrower,
onsite inspection of the property by the originating loan officer and, in
certain cases, a formal environmental audit report. A formal environmental audit
report may be required on properties that are in a high risk category, where
Management believes potential risk exists on a property or where the loan amount
exceeds $500,000. The Bank establishes a list of approved environmental
consultants which it contracts with for these services.
The extent of the protection provided by both the federal and state lender
protection statutes will depend on their interpretation by the administrative
agencies and courts, and the Company cannot predict whether it will be
adequately protected for the types of loans made by the Bank.
In the event the Bank was held liable as an owner or operator of a toxic
property, it could be responsible for the entire cost of the environmental
damage and cleanup. Depending on the amount of liability assessed and the amount
of cleanup required, such an outcome could have a serious effect on the
Company's consolidated financial condition.
In addition, the Company and the Bank are still subject to the risks that a
borrower's financial position will be impaired by liability under the
environmental laws and that property securing a loan made by the Bank may be
environmentally impaired and not provide adequate security for the Bank.
California law provides some protection against the second risk, by establishing
certain additional, alternative remedies for a lender in the situation where the
property securing a loan is later found to be environmentally impaired.
Primarily, the law permits the lender in such a case to pursue remedies against
the borrower other than foreclosure under the deed of trust.
Money Laundering Control Act
The Money Laundering Control Act of 1986 provides sanctions for the failure to
report high levels of cash deposits to non-bank financial institutions. Federal
banking regulators possess the power to revoke the charter or appoint a
conservator for any institution convicted of money laundering. Offending
state-chartered banks could lose their federal deposit insurance, and bank
officers could face lifetime bans from working in financial institutions. The
Community Development Act, which contains a number of provisions which amend the
Bank Secrecy Act, allows the Secretary of the Treasury to exempt certain
currency transactions from reporting requirements, and allows the federal
banking agencies to impose civil money penalties on banks for violations of the
currency transaction reporting requirements.
Recent Accounting Rules
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount which the carrying value exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. Adoption of this Statement did not have a material impact on
the Company's financial position, results of operations, or liquidity.
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 Accounting Principles Board ("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
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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.
Interstate Banking and The Riegle-Neal Interstate Banking and Branching
Efficiency Act Certain restrictions in the BHC Act, have historically prevented
interstate banking. Provisions of FIRREA allow out-of-state bank holding
companies to acquire depository institutions located in California which have
failed or are in danger of failing provided certain requirements are satisfied,
including an assessment of the estimated cost to the FDIC of not allowing the
acquisition.
Since 1991, California law has allowed banks and bank holding companies to be
acquired by bank holding companies from other states on a reciprocal basis; that
is, such transactions are permissible if the state in which the bank holding
company is located would permit a California bank holding company to acquire a
bank located in that state on substantially the same terms and conditions as are
applicable to bank holding companies located in that state.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("IBBEA") was enacted to enable banks and bank holding companies to merge with
and acquire other banks and bank holding companies without geographic
limitations. Beginning in September 1995, bank holding companies were permitted
to acquire banks located in any state regardless of state laws that prohibit
such acquisition. Bank holding companies are only permitted to make such
acquisitions if they are adequately capitalized and managed. Beginning June 1,
1997, banks will be permitted to merge with banks located in other states,
provided that neither state acts to opt out of the IBBEA before that date. The
IBBEA also permits a bank to establish an agency relationship with an affiliated
insured depository institution located in another state for the purpose of
receiving deposits, renewing time deposits, closing loans, servicing loans and
receiving payments. Additionally, the IBBEA allows states to enact statutes
permitting interstate bank mergers before June 1, 1997.
The IBBEA prohibits an interstate acquisition where the resulting bank or bank
holding company would control more than ten percent of the insured deposits held
by depository institutions nationwide or more than 30 percent of the insured
deposits in any state affected by the merger. States are permitted to waive or
increase the 30 percent limit. Further, the IBBEA permits states to prohibit the
acquisition of banks that have been established fewer than five years.
In October 1995, the California Interstate Banking and Branching Act of 1995,
became effective. Assembly Bill 1482 was designed to implement important
features of the IBBEA in California. Assembly Bill 1482 opts-in early to
interstate branching by permitting a bank domiciled in another state to acquire
an entire California bank by merger or purchase and thereby establish one or
more California branch offices. To be eligible to be acquired, a California bank
must have been in existence for at least five years. In addition, while the
IBBEA authorizes agency relationships only between affiliated financial
institutions, Assembly Bill 1482 is more expansive in that it allows California
state banks to establish agency relationships with both affiliated and
unaffiliated insured depository institutions. It also expands the list of
authorized agency activities to include, in addition to the activities listed in
the IBBEA, the evaluation of loan applications and the disbursement of loan
funds.
The full impact of interstate banking legislation cannot be estimated at this
time. However, the IBBEA and Assembly Bill 1482 are generally expected to have
the effect of increasing competition and consolidation within the financial
services industry.
The Riegle Community Development and Regulatory Improvement Act of 1994
The Riegle Community Development and Regulatory Improvement Act of 1994
("Community Development Act") is broad in scope, and many aspects of banking
regulation are affected. Among other things, the Act encourages and provides
funding for community development institutions. Also included are provisions
meant to increase small business access to capital. The Act also amends the
Truth in Lending Act by creating additional restrictions on and requiring
disclosures for some loans secured by a consumer's principal dwelling, and by
creating penalties for violations of Truth in Lending.
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The Community Development Act offers banks regulatory relief by requiring the
federal banking agencies to coordinate examinations, to streamline their
regulations, to consider the burden of compliance when enacting new
requirements, and to create a formal appeals process for material examination
determinations. Additionally, the Community Development Act created a new,
alternative procedure for the formation of a bank holding company, with the time
period within which a merger or acquisition governed by the BHC Act can be
affected following FRB approval reduced from 30 days to 15 days. The Community
Development Act also modified and clarified the FDIC's powers as receiver or
conservator, provided an exemption under the Truth in Savings Act for business
purpose accounts, and simplified certain disclosure requirements for mortgage
lenders. A number of the Act's provisions were directed at suppressing money
laundering.
The full impact of the Community Development Act cannot be estimated until the
federal banking agencies complete implementation of regulations under the Act.
It is anticipated that the Act may reduce the overall regulatory burden on the
Bank.
Safety and Soundness Standards
FDICIA, along with the Community Development Act, mandated the creation of
safety and soundness standards that will allow federal regulators to identify
and address problems at financial institutions before capital becomes impaired.
Accordingly, the federal regulators have adopted a Safety and Soundness Rule and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines"). Rather than requiring rules, the Community Development Act
allows the regulators to enact guidelines that do not dictate how institutions
must be managed and operated. The Guidelines create standards for a wide range
of operational and managerial matters including (i) internal controls,
information systems, and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate exposure; (v) asset growth; and (vi)
compensation and benefits. In addition, the agencies will soon issue proposed
standards for asset quality and earnings for public comment.
The Community Development Act required the agencies to prescribe standards
prohibiting as an unsafe and unsound practice the payment of excessive
compensation that could result in material financial loss to an institution, and
to specify when compensation, fees or benefits become excessive. The Guidelines
characterize compensation as excessive if it is unreasonable or disproportionate
to the services actually performed by the executive officer, employee, director
or principal shareholder being compensated.
The federal regulators have stated that the Guidelines are meant to be flexible
and general enough to allow each institution to develop its own systems for
compliance. With the exception of the standards for compensation and benefits, a
failure to comply with the Guidelines' standards does not necessarily constitute
an unsafe or unsound practice or an unsafe and unsound condition. On the other
hand, an institution in conformance with the standards may still be found to be
engaged in an unsafe and unsound practice or to be in an unsafe and unsound
condition.
Although meant to be flexible, an institution that falls short of the
Guidelines' standards may be requested to submit a compliance plan or be
subjected to regulatory enforcement actions. Generally, the federal banking
agencies will request a compliance plan if an institution's failure to meet one
or more of the standards is of such severity that it could threaten the safe and
sound operation of the institution. An institution must file a compliance plan
within 30 days of request by its primary federal regulator (the FDIC in the case
of the Bank and the Thrift). The Guidelines provide for prior notice of and an
opportunity to respond to the agency's proposed order. An enforcement action may
be commenced if, after being notified that it is in violation of a safety and
soundness standard, the institution fails to submit an acceptable compliance
plan or fails in any material respect to implement an accepted plan. The Federal
Deposit Insurance Act provides the agencies with a wide range of enforcement
powers. An agency may, for example, obtain an enforceable cease and desist order
in the United States District Court, or may assess civil money penalties against
an institution or its affiliated parties.
Insurance Premiums
FDICIA also required the FDIC to adopt a risk-based assessment system for
insurance premiums. For an individual institution, the FDIC must take into
consideration the probability that the Bank Insurance Fund ("BIF") will incur a
loss with respect to the institution. In making that assessment, the FDIC must
consider the different categories and concentrations of assets and liabilities
of the institution, the likely amount of any loss, the revenue
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needs of BIF, and any other factors the FDIC considers relevant. The FDIC is
permitted to establish separate risk-based assessment systems for large and
small members of BIF. Regardless of the potential risk to BIF, FDICIA prohibited
assessment rates from falling below 23 cents per $100 of eligible deposits if
the FDIC has outstanding borrowings from the U.S. Treasury Department or if the
reserve ratio is below 1.25 percent.
The 1.25 percent reserve ratio was met during 1995. The FDIC will continue the
risk-based assessment system for insurance premiums, causing premiums to vary
between institutions. The assessment for the highest-rated institutions is
currently set at the statutory annual minimum of $2,000. Assessment rates for
institutions that are not well capitalized can range as high as 27 cents per
$100. The FDIC has maintained the current assessment rate schedule of 23 to 31
cents per $100 of deposits for the institutions whose deposits are subject to
assessment by the Savings Association Insurance Fund ("SAIF").
The disparity between the cost of deposit insurance for healthy banks and
similarly situated thrifts over the last several years caused many healthy
thrifts to seek ways to either convert to BIF insurance or to obtain BIF
insurance for some portions of their deposits, in order to remain competitive
with banks. The migration of deposits increased the pressure on the remaining
thrifts to build up reserves at the SAIF and pay the cost of servicing Financing
Company ("FICO") bonds that were issued to cover some of the losses incurred by
failed savings associations in the late 1980s.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the
"Economic Growth Act") required all remaining SAIF institutions (subject to
certain exceptions) to pay a one-time deposit assessment of $.657 per $100 of
insured deposits in 1996 in order to recapitalize the SAIF fund. The banking
agencies are now required by law to take actions to prevent the migration of
deposits from the SAIF to the BIF funds until the year 2000. In addition, the
cost of carrying the FICO bonds will now be allocated between BIF insured
institutions and SAIF insured institutions, with BIF insured institutions paying
1/5 the amount paid by SAIF insured institutions. The FDIC recently estimated
that 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.
The legislation will increase the Bank's premiums, as it will now 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.
The Economic Growth Act also included other regulatory relief provisions
applicable to the Company and the Bank. Application procedures for the Company
to engage in certain non-banking activities will be streamlined, so long as the
Company maintains an adequate financial position and is considered well-managed.
The lending restrictions on directors and officers have been relaxed to permit
loans having favorable terms under employee benefit plans. The FRB and the
Department of Housing and Urban Development ("HUD") are required to simplify and
improve their regulations with respect to disclosures relating to certain
mortgage loans, and certain exemptions from the disclosure requirements were
added.
The Economic Growth Act also provides protection for lenders who self-test for
compliance with the Equal Credit Opportunity Act (the "ECOA") and the Fair
Housing Act ("FHA"). The ECOA now provides that the results or reports generated
or obtained by a institution from a self-test may not be obtained by an agency,
department or applicant to be used with respect to any proceeding or civil
action alleging a violation of the ECOA. This change in the law protects the
Company against liability based on the results of internal tests done to enhance
compliance with the law and encourages the Company to use self-testing to
evaluate its compliance with the ECOA and the FHA.
Additional Requirements of FDICIA
FDICIA restricted the acceptance of brokered deposits by insured depository
institutions and included a number of consumer banking provisions, including
disclosure requirements and substantive contractual limitations with respect to
deposit accounts. FDICIA contained numerous other provisions, including new
reporting, examination, and auditing requirements, termination of the "too big
to fail" doctrine except in special cases, and revised
17
<PAGE>
regulatory standards for, among other things, real estate lending. FDICIA also
expanded the grounds upon which a conservator or receiver of a institution can
be appointed. For example, a conservator or receiver can be appointed for a
institution which fails to maintain minimum capital levels and has no reasonable
prospect of becoming adequately capitalized.
Under FDICIA, the federal regulatory agencies are required to establish
loan-to-value guidelines for real estate loans, and to revise risk-based capital
guidelines to reflect interest-rate risk, concentration of credit risk, the risk
of nontraditional activities and the actual performance of nontraditional real
estate loans. The federal bank regulatory agencies are in the process of
developing interagency risk exposure guidelines which will establish risk-based
capital standards for interest rate and other risk exposures.
FDICIA also requires, with some exceptions, that each institution have an annual
examination performed by its primary federal regulatory agency, and that each
bank with $500 million or more in assets have an annual outside independent
audit. The outside audit must consider bank regulatory compliance in addition to
financial statement reporting. Although the independent audit requirements only
apply to institutions with assets of $500 million or more, the FDIC encourages
all institutions, regardless of size or charter, to have an annual independent
audit of their financial statements. The Company intends to have an annual audit
conducted by the Company's independent public accountants.
Implementation of the various provisions of FDICIA are subject to the adoption
of regulations by the various federal banking agencies or to certain phase-in
periods. The effect of the FDICIA provisions cannot be determined until such
regulations are promulgated.
State Bank Sales of Non-deposit Investment Products
Securities activities of state nonmember banks, as well as the activities of
their subsidiaries and affiliates, are governed by guidelines and regulations
issued by the securities and financial institution regulatory agencies. These
agencies have taken the position that bank sales of alternative investment
products, such as mutual funds and annuities, raise substantial bank safety and
soundness concerns involving consumer confusion over the nature of the products
offered, as well as the potential for mismanagement of sales programs which
could expose a bank to liability under the anti-fraud provisions of federal
securities laws.
Accordingly, the agencies have issued guidelines which require, among other
things, the establishment of a compliance and audit program to monitor (i)
bank's mutual funds sales activities and its compliance with applicable federal
securities laws; (ii) the provision of full disclosures to customers about the
risks of such investments (including the possibility of loss of the customer's
principal investment); and (iii) the conduct of securities activities of bank
subsidiaries or affiliates in separate and distinct locations. In addition, the
guidelines prohibit bank employees involved in deposit-taking activities from
selling investment products or giving investment advice. Banks are also required
to establish qualitative standards for the selection and marketing of the
investments offered by the bank, and to maintain appropriate documentation
regarding the suitability of investments recommended to bank customers.
Increased Permitted Activities
During 1996, the Federal banking agencies, especially OCC and the FRB, took
steps to increase the types of activities in which national banks and bank
holding companies can engage, and to make it easier to engage in such
activities. The FRB adopted interim regulations on November 1, 1996 to permit
certain well-capitalized bank holding companies to engage (de novo or by
acquisition) in activities previously approved by regulation without submitting
a prior application. In order to qualify, a bank holding company must be
well-capitalized and have received a sufficiently high composite rating and
management rating at its last examination.
To be well-capitalized for this purpose, a bank holding company must (i) have a
total risk-based capital ratio of 10% or more, (ii) have a Tier 1 risk-based
capital ratio of 6% or more, (iii) have either (a) a Tier leverage ratio of 4%
or more (b) a composite rating of 1 or uses a market risk adjustment of its
risk-based capital ratio, and has a tier 1 leverage ratio of 3% or more, and
(iv) not be subject to any written agreement, order or capital directive issued
by the Federal Reserve. The Company is considered well-capitalized under this
rule.
18
<PAGE>
On November 20, 1996, the OCC issued final regulations permitting national banks
to engage in a wider range of activities through subsidiaries. "Eligible
Institutions" (those national banks that are well capitalized, have a high
overall rating and a satisfactory CRA rating, and are not subject to an
enforcement order) may engage in activities related to banking through operating
subsidiaries after going through a new expedited application process. In
addition, the new regulations include a provision whereby a national bank may
apply to the OCC to engage in an activity through a subsidiary in which the bank
itself may not engage. In determining whether to permit the subsidiary to engage
in the activity, the OCC will evaluate why the bank itself is not permitted to
engage in the activity and whether a Congressional purpose will be frustrated if
the OCC permits the subsidiary to engage in the activity. Parity legislation in
California may permit state-licensed banks to engage in similar new activities,
subject to the discretion of the Superintendent. See "State Bank Parity Act"
below.
State Bank Parity Act
Recent California legislation has ended some of the disparities between national
banks and California state-chartered banks. Commencing January 1, 1996, state
banks are able to repurchase their shares with the prior approval of the
California State Banking Department. Moreover, like national banks, they are no
longer required to publish their statement of condition in a local newspaper
(replaced by a lobby notice requiring prompt availability of a copy upon
request). In addition, much of the confusing interplay between the federal and
state insider lending rules (Pursuant to the Federal Reserve Regulation 0) has
been ironed out. Lastly, the legislation included, a "wild card" statute
empowering the Superintendent to remove future disparities by regulation.
ATM Fee Legislation
In April of 1996, two of the larger Automatic Teller Machines ("ATM") networks
lifted their prior restriction prohibiting ATM operators from directly
surcharging the users of the ATMs, which triggered a series of legislative
proposals and hearings with respect to whether the fees charged by the operators
of ATM machines should be regulated. The lifting of the prior restriction on
surcharges was controversial in part because customers may be required to pay
two charges for a single transaction, one to the bank issuing the ATM card and
another to the operator of the ATM being used.
Currently, Federal law requires a bank at which a depositor has an account to
disclose to its own customers the amount of fees it charges, and California law
requires an ATM operator to disclose to users of the ATM machine who are using
an ATM card issued by someone other than the ATM operator that a fee will be
charged. California law was amended in 1996, effective July 1, 1997, to require
the operators of ATMs in California to disclose to customers any surcharge or
fee that the operator of the machine will charge, including charges for
mini-statements and other services.
This legislation will not have a significant effect on the Bank as it is
currently stated. Other proposed changes could affect the Bank by limiting ATM
charges to customers, but the impact would not be material to the financial
condition of the Company.
Americans With Disabilities Act
The Americans With Disabilities Act ("ADA") enacted by Congress, in conjunction
with similar California legislation, is having an impact on institutions and
increasing their cost of doing business. The legislation requires employers with
15 or more employees and all businesses operating "commercial facilities" or
"public accommodations" to accommodate disabled employees and customers. The ADA
has two major objectives: (1) to prevent discrimination against disabled job
applicants, job candidates and employees, and (2) to provide disabled persons
with ready access to commercial facilities and public accommodations. Commercial
facilities, such as the Bank and the Thrift, must ensure all new facilities are
accessible to disabled persons, and in some instances may be required to adapt
existing facilities to make them accessible, such as ATMs and bank premises.
Recent and Proposed Legislation and Regulation
From time to time, legislation is proposed or enacted which has the potential to
increase the cost of doing business, limit or change permissible activities, or
affect the competitive balance between banks and other financial institutions.
In recent years, legislation has resulted in major changes to interest-rate
structures and the permissible powers of banks, increasing the relative cost of
funds and generally exposing banks to interest rate
19
<PAGE>
risks in their liability portfolios. At the same time, legislation authorizing
changes in the powers of other types of financial institutions has had a
substantial impact on certain fundamental aspects of the Bank's business.
Proposals to change the laws and regulations governing the operations and
taxation of bank holding companies, banks and other financial institutions are
frequently made in Congress, in the California legislature and before various
bank holding company and bank regulatory agencies. The likelihood of any major
changes and the impact such changes might have been impossible to predict.
Conclusions
It is impossible to predict with any degree of accuracy the competitive impact
the laws and regulations described above will have on commercial banking in
general and on the business of the Company in particular, or to predict whether
or when any of the proposed legislation and regulations will be adopted. It is
anticipated that the banking industry will continue to be a highly regulated
industry. Additionally, if experience is any indication, there appears to be a
continued lessening of the historical distinction between the services offered
by financial institutions and other businesses offering financial services.
Finally, the trend toward nationwide interstate banking is expected to continue
as a result of the enactment of the IBBEA and Assembly Bill 1482. As a result of
these factors, it is anticipated banks will experience increased competition for
deposits and loans and, possibly, further increases in their cost of doing
business.
Selected Statistical Information
The following tables in pages 21 through 30 present certain statistical
information concerning the business of the Company. This information should be
read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" at ITEM 7, at page 19 of the Bank's 1996
Annual Report to Shareholders incorporated herein by reference, and with the
Bank's Consolidated Financial Statements and the Notes thereto included in Item
14, at pages 9 through 18 of the Company's 1996 Annual Report to Shareholders
incorporated herein by reference. Statistical information below is generally
based on average daily amounts.
20
<PAGE>
Item I. Distribution of Average Assets, Liabilities and Shareholders' Equity;
Interest Rates and Differentials
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 table for computational purposes, but the nonaccrued interest
thereon is excluded.
Average Balance Sheet & Analysis of Net Interest Earnings
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1995
------------------------------------- -------------------------------------
Interest Average Interest Average
Average Income/ Interest Average Income/ Interest
Balance Expense Rate Balance Expense Rate
--------- --------- ----- --------- --------- ----
(Dollar amounts 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 interest
earning assets 203,880 19,351 9.49% 166,826 15,873 9.51%
Allowance for loan losses (1,913) (1,616)
Cash and noninterest-
bearing deposits at
other banks 10,436 8,832
Premises and equipment,
net 4,775 3,783
Interest, receivable
and other assets 10,946 8,056
--------- ---------
Total Assets $ 228,124 $ 185,881
========= =========
LIABILITIES AND SHAREHOLDER
EQUITY
Interest-bearing demand $ 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 borrowings 1,020 80 7.84% 141 11 7.80%
--------- ----- ----- --------- ----- -----
Total interest-bearing
liabilitiies 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
======= =======
Total shareholders'
equity 18,810 15,489
--------- ---------
Total Liabilities and
shareholder's equity $ 228,124 $ 185,881
========= =========
Net interest income
and margin(3) $ 12,486 6.12% $ 10,156 6.09%
</TABLE>
Year Ended December 31, 1994
-----------------------------
Interest Average
Average Income/ Interest
Balance Expense Rate
------ ------- ----
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 interest
earning assets 148,565 12,807 8.62%
Allowance for loan losses (1,690)
Cash and noninterest-
bearing deposits at
other banks 8,750
Premises and equipment,
net 2,578
Interest, receivable
and other assets 7,528
--------
Total Assets $165,831
========
LIABILITIES AND SHAREHOLDER
EQUITY
Interest bearing demand $25,126 237 .94%
Savings deposits 65,516 2,298 3.45%
Time deposits 34,420 1,312 3.81%
Other borrowings 48 3 6.25%
------- ----- ----
Total interest-bearing
liabilitiies 126,110 3,850 3.05%
Noninterest-bearing
demand deposits 25,326
Accrued interest,
taxes and other liabilities 842
-------
Total Liabilities 152,278
=======
Total shareholders'
equity 13,553
---------------
Total Liabilities and
shareholder's equity $ 165,831
===============
Net interest income
and margin(3) $8,957 6.03%
- ----------
(1) Interest on municipal securities is not computed on tax-equivalent basis.
(2) Amounts of interest earned includes loan fees of $1,106,000, $901,000 and
$812,000 for 1996, 1995, and 1994, respectively.
(3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
21
<PAGE>
The following tables set 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 change in interest due to both rate and
volume has 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.
Net Interest Income Changes Due to Volume and Rate
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
------------- -------------
Due to Due to Total Due to Due to Total
Volume Rate Change Volume Rate Change
------- ------- ------- ------- ------- -------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Investment securities $ 276 $ 101 $ 377 $ 434 $ 306 $ 740
Tax-exempt investment securities (74) (7) (81) 70 (15) 55
Federal funds sold (125) (26) (151) (3) 100 97
Loans, gross (2) 3,767 (434) 3,333 1,015 1,159 2,174
------- ------- ------- ------- ------- -------
Total 3,844 (366) 3,478 1,516 1,550 3,066
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 borrowings 69 -- 69 7 1 8
------- ------- ------- ------- ------- -------
Total 1,342 (194) 1,148 942 925 1,867
Net Interest Income $ 2,502 $ (172) $ 2,330 $ 574 $ 625 $ 1,199
======= ======= ======= ======= ======= =======
</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 for 1996 and
$901,000 for 1995.
22
<PAGE>
Interest Rate Sensitivity
The interest rate gaps reported in the table 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 below, repricing of fixed-rate instruments is based upon the
contractual maturity of the applicable instruments. Actual payment patterns may
differ from contractual payment patterns.
Interest Rate Sensitivity
<TABLE>
<CAPTION>
By Repricing Interval
----------------------------------------------------------------------
After three After one
months, year,
Within three within one within five After five Noninterest-
months year years years bearing funds Total
------ ---- ----- ----- ------------- -----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold $ 3,735 $ -- $ -- $ -- $ -- $ 3,735
Time deposits at other institutions 1,800 308 993 -- -- 3,101
Investment securities 315 3,976 8,279 30,808 -- 43,378
Loans 115,848 20,857 36,856 9,686 -- 183,247
Other interest-bearing assets 880 3,134 -- -- -- 4,014
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 & 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' equ 157,768 30,668 11,543 105 65,905 $ 265,989
=========
Interest rate sensitivity
Gap (35,190) (2,393) 34,585 40,389 $ (37,391)
--------- -------- --------- --------- =========
Cumulative interest rate
Sensitivity Gap $ (35,190) $(37,583) $ (2,998) $ 37,391
========= ======== ========= =========
</TABLE>
23
<PAGE>
Item II: Investment Portfolio
All Company securities are classified available-for-sale as of December 31,
1996. The following table sets forth the fair value of investment securities at
the dates indicated:
Fair Value of Investment Securities
<TABLE>
<CAPTION>
Fair Value
December 31
------------------------------------
1996 1995 1994
---- ---- ----
(Amount in thousands)
<S> <C> <C> <C>
U.S. Treasury, U.S. Government agencies and corporatio $17,711 $22,521 $20,593
Obligations of states and political subdivisions 4,271 4,297 6,571
Mortgage-backed securities 20,751 17,932 8,175
Other securities 645 552 487
------- ------- -------
Total $43,378 $45,302 $35,826
======= ======= =======
</TABLE>
The following table sets forth the maturities of investment securities at
December 31, 1996 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.
Securities Available-for-Sale-Fair Value and Maturity Distribution
<TABLE>
<CAPTION>
Stated Maturity
-------------------------------------------------------------------------------------------------
Within One Year One to Five Years Five to Ten Years Over Ten Years
------------------ -------------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Total
------ ----- ------ ----- ------ ----- ------ ----- -----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government
agencies and corporations (1) $ 362 7.03% $ 6,455 6.05% $ 8,276 7.19% $ 23,369 7.35% $ 38,462
State and political subdivisions 619 9.05% 2,439 5.60% 83 4.20% 37 6.92% 4,271
------- -------- -------- -------- --------
Total debt securities 981 8,894 9,111 23,747 42,733
Equity securities - - - - 645
-------
Total $ 981 $ 8,894 $ 9,111 $ 23,747 $ 43,378
======= ======== ======== ======== ========
</TABLE>
(1) Mortgage-backed securities are shown in this table at the contractual
maturity dates.
The Company does not own securities of a single issuer whose aggregate book
value is in excess of 10% of its total equity.
24
<PAGE>
Item III: Loan Portfolio
The following table shows the composition of the loan portfolio at the dates
indicated:
Loans Outstanding
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 71,786 $ 65,563 $ 55,827 $ 54,925 $ 57,091
Real estate--construction 13,923 12,006 11,726 9,143 7,131
Real estate--mortgage 57,098 42,128 34,743 32,984 21,338
Installment 40,440 14,039 11,304 10,072 11,775
--------- --------- --------- --------- ---------
Total 183,247 133,736 113,600 107,124 97,335
Less: Allowance for possible loan losses (2,792) (1,701) (1,621) (1,747) (1,616)
--------- --------- --------- --------- ---------
Total loans, net $ 180,455 $ 132,035 $ 111,979 $ 105,377 $ 95,719
========= ========= ========= ========= =========
</TABLE>
At December 31, 1996, the Company had approximately $46,159,000 in undisbursed
loan commitments of which approximately $6,305,000 related to real estate
construction loans. This compares with $28,321,000 at December 31, 1995 of which
$4,232,000 related to real estate construction loans. Standby letters of credit
were $3,213,000 and $2,465,000, respectively, at December 31, 1996 and December
31, 1995. For further information about the composition of the Company's loan
portfolio see "ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" section entitled "Asset Quality" at page 21
of the Company's 1996 Annual Report to Shareholders incorporated herein by
reference.
The Company seeks to mitigate the risks inherent in its loan portfolio by
adhering to certain underwriting practices. They include careful analysis of
prior credit histories, financial statements, tax returns and cash flow
projections of its potential borrowers as well as obtaining independent
appraisals on real property and chattel taken as collateral and audits of
accounts receivable or inventory pledged as security.
The Company also has an internal loan review system as well as periodic external
reviews. The results of these external reviews are assessed by the Company's
audit committee. Collection of delinquent loans is generally the responsibility
of the Company's credit administration staff. However, certain problem loans may
be dealt with by the originating loan officer. The Board of Directors review the
status of delinquent and problem loans on a monthly basis. The Company's
underwriting and review practices notwithstanding, in the normal course of
business, the Company expects to incur loan losses in the future.
25
<PAGE>
The table that follows shows the maturity distribution of the portfolio of
commercial, financial, and agricultural loans and real estate construction loans
on December 31, 1996, as well as sensitivity to changes in interest rates:
Loan Maturity Distribution and Sensitivity to Changes in Interest Rates
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------------
Within One to Over
One Year Five Years Five Years Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Commerical, financial and agricultural
Loans with floating rates $ 39,515 $ 20,150 $ 4,337 $ 64,002
Loans with predetermined rates 630 6,116 1,038 7,784
-------- -------- -------- --------
Subtotal 40,145 26,266 5,375 71,786
Real Estate--Construction
Loans with floating rates 5,419 4,528 2,542 12,489
Loans with predetermined 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
Installment 3,909 33,192 3,339 40,440
-------- -------- -------- --------
Total $ 54,531 $103,863 $ 24,793 $183,247
======== ======== ======== ========
</TABLE>
Item IV: Nonperforming Assets
The following table summarizes the Company's nonaccrual, 90 days or more past
due and other real estate owned:
December 31
-----------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Nonaccrual loans $4,968 $4,626 $ 653 $1,019 $1,064
Accruing loans past due
90 days or more 600 224 46 64 145
Other real estate owned 1,466 47 -- -- 676
------ ------ ------ ------ ------
$7,034 $4,897 $ 699 $1,083 $1,885
====== ====== ====== ====== ======
26
<PAGE>
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.
Interest income of loans on nonaccrual status during the year ended December 31,
1996, that would have been recognized during that same year if the loans had
been current in accordance with their original terms was approximately $497,000.
In the prior years of 1995, 1994, 1993 and 1992 the amounts were not material.
Nonperforming loans are those in which the borrower fails to perform under the
original terms of the obligation and are categorized as loans past due 90 days
or more, loans on nonaccrual status and restructured loans. Nonperforming loans
on December 31, 1996 amounted to $8,220,000. As of December 31, 1995, such loans
were $4,850,000. Included in these totals are loans secured by first deeds of
trust on real property totaling $3,626,000 in 1996 and $3,286,000 in 1995. The
reason for the increase is the purchased portfolio of the lease receivables
discussed below, a newly restructured commercial real estate loan and two
agricultural real estate properties acquired through foreclosure.
In late 1995, a $3.4 million commercial real estate development loan was placed
on non-accrual status due to restructuring of the loan and is included in
nonperforming loans for both years.
The Bank purchased a portfolio of lease receivables in 1994. The company which
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 Securities and Exchange Commission with participating in securities fraud.
More than 360 banks nationwide had acquired similar lease receivable contracts.
The Bank has $1,281,000 of these leases on nonaccrual status as of December 31,
1996. The Bank has retained counsel jointly with other California banks and is
monitoring its position to ascertain the extent of loss the Bank may incur. As
of December 31, 1996, specific reserves of $385,000 have been established for
this portfolio. As of February 12, 1997, the Bank signed a settlement agreement
in regards to this portfolio of leases that established the projected recovery
rate at 78.5% or approximately $1,006,000.
The Bank closely monitors its loans classified by the regulatory agencies and
such loans totaled $10,239,000 at December 31, 1996.
Except for loans which are disclosed above, there are no assets as of December
31, 1996, 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.
At December 31, 1996, the Company had $1,466,000 in real estate acquired through
foreclosure. At December 31, 1995, the Company had $47,000 in real estate
acquired through foreclosure. The increase was due to the foreclosure on two
agricultural properties in late 1996. Current projections are that these two
properties will be sold in 1997.
27
<PAGE>
Reconciliation of allowance for possible loan losses
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
(Dollar amount in thousands)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,701 $ 1,621 $ 1,747 $ 1,616 $ 1,699
Due to Acquisition of Thrift 148 -- -- -- --
Provision for Possible Loan Losses 1,513 228 -- 254 162
Charge-Offs
Commercial, Financial, and Agricultural 518 160 206 217 250
Real Estate--Construction and
Land Development -- -- -- -- --
Real Estate--Mortgage -- -- -- -- --
Installment Loans to Individuals 140 63 42 83 109
-------- -------- -------- -------- --------
Total Loans Charged Off 658 223 248 300 359
Recoveries
Commercial, Financial, and Agricultural 27 66 99 145 87
Real Estate--Construction and
Land Development -- -- 8 -- --
Real Estate--Mortgage -- -- -- -- --
Installment Loans to Individuals 61 9 15 32 27
-------- -------- -------- -------- --------
Total Recoveries 88 75 122 177 114
Net Loans Charged Off 570 148 1,621 123 245
-------- -------- -------- -------- --------
Balance at End of Period $ 2,792 $ 1,701 $ 1,621 $ 1,747 $ 1,616
======== ======== ======== ======== ========
Loans:
Average Loans Outstanding During Period,
Gross $157,098 $120,620 $110,690 $102,236 $ 91,458
Total Loans at End of Period, Gross $183,247 $133,736 $113,600 $107,124 $ 97,335
Ratio of net charge-offs to average
loans outstanding 0.36% 0.12% 0.12% 0.12% 0.27%
</TABLE>
28
<PAGE>
29
<PAGE>
The provision for loan losses represents Management's determination of the
amount necessary to be added to the allowance for loan losses to bring it to a
level which is considered adequate in relation to the risk of foreseeable losses
inherent in the loan portfolio. Immediately upon determination of a specific
loss in the portfolio, an adjustment to the loan loss reserve is made.
In making this determination, Management takes into consideration the overall
growth trend in the loan portfolio, examinations of bank supervisory
authorities, internal and external credit reviews, prior loan loss experience
for the Company, concentrations of credit risk, delinquency trends, general and
local economic conditions and the interest rate environment. The normal risks
considered by Management with respect to real estate construction loans include
fluctuations in real estate values, the demand for housing and the availability
of permanent financing in the Company's market area and the home buyers 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. 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 of adequate water resources in the Company's
local market area. Additionally, the Company relies upon data obtained through
independent appraisals for significant properties in specific identification of
loss exposure in nonperforming loans.
The allowance for loan losses does not represent a specific judgment that loan
charge-offs of that magnitude will necessarily occur. 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.
The following table summarizes a breakdown of the allowance for loan losses by
loan category and the percentage by loan category of total loans for the dates
indicated:
Allocation of the Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 840 39% $ 944 49% $ 898 49% $ 974 51% $ 835 59%
Real estate - constructio 1,421 8% 708 9% 218 10% 317 9% 305 7%
Real estate - mortgage 219 31% -- 31% 376 31% 296 31% 275 22%
Installment 312 22% 49 11% 129 10% 160 9% 201 12%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $2,792 100% $1,701 100% $1,621 100% $1 747 100% $1,616 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The following table relates to other interest bearing assets not disclosed above
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 totaling $3,839,000 for the salary continuation plan.
Other Interest-Bearing Assets
December 31
----------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Cash surrender value of life insurance $3,134 $1,290 $ 288 $ - $ -
------ ------ ------ ------ -----
30
<PAGE>
Item V Deposits
The following table sets forth the average balance and the average rate paid for
the major categories of deposits for the dates indicated:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------------------------------
(Amounts in thousands except yield)
1996 1995 1994 1993 1992
------------------ ------------- ----------------- --------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- -------- ------ ------- ------ -------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 30,549 -- $ 26,478 -- $ 25,326 -- $ 22,913 -- $ 19,662 --
Interest-bearing demand deposits 29,376 0.91% 26,192 0.91% 25,126 0.94% 21,782 12.7% 19,341 2.03%
Savings deposits 104,938 4.15% 91,509 4.60% 66,517 3.45% 52,385 2.81% 46,440 3.53%
Time deposits under $100,000 34,408 5.26% 19,073 4.84% 27,259 3.82% 24,048 3.86% 26,981 4.98%
Time deposits $100,000 or more 6,586 5.43% 6,358 5.17% 7,160 3.78% 10,148 3.77% 12,080 4.77%
-------- -------- -------- -------- --------
Total deposits $205,857 $169,610 $151,388 $131,276 $124,504
======== ======== ======== ======== ========
</TABLE>
Maturities of Time Certificates of Deposits of $100,000 or More
Maturities of time certificates of deposits of $100,000 or more outstanding at
December 31, 1996 are summarized as follows:
December 31, 1996
-----------------
(In thousands)
Remaining Maturity:
Three months or less $ 2,840
Over three through six months 2,146
Over six through twelve months 3,383
Over twelve months 3,178
-----------
Total $ 11,547
==========
Item VI Return on Equity and Assets
The following table sets forth certain financial ratios for the periods
indicated (averages are computed using actual daily figures):
Return on Average Equity and Assets
For the year ended
December 31
--------------------------
1996 1995 1994
---- ---- ----
Return on average assets 0.88% 0.18% 1.05%
Return on average equity 11.05% 2.16% 12.81%
Dividend payout ratio .05% - -
Average equity to average assets 7.96% 8.33% 8.17%
Item VII Short Term Borrowings
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.
31
<PAGE>
ITEM 2. PROPERTIES
The Bank
(1) Main Office
The Bank's main office is located at 490 West Olive Avenue in Merced, and
consists of a single-story building with approximately 5,600 square feet of
interior floor space. This building was constructed in 1978 at a cost of
approximately $400,000 and is situated on a lot of approximately 47,000 square
feet, which the Bank purchased in 1977 for approximately $186,000. The site
contains 43 parking spaces and six drive-up lanes, and Management believes that
this facility will be adequate to accommodate the operations of this branch for
the foreseeable future.
(2) Downtown Merced Branch
The Bank's downtown Merced Branch is located at 606 West 19th Street in Merced.
In August 1991, the Bank entered into an 8-1/2 year lease with two additional
five-year renewal options with a nonaffiliated third party for the lease of the
facility. The facility is approximately 7,680 square feet in size and is
intended to accommodate the current needs of the existing branch and the
agriculture and agriculture real estate departments. The annual rental under
this lease is $69,120 for the first three years and increases to $78,336 per
year for the remaining 5-1/2 years. Leasehold improvements including remodeling
and redecorating were approximately $235,000. In conjunction with the plans to
move the administrative facilities of the Company and Bank, as discussed below,
this branch will be relocated. Leasehold improvements will have been written off
and the Bank is currently seeking possible tenants for the remainder of the
lease term.
(3) Atwater Branch
On October 5, 1981, the Bank opened a branch office at 735 Bellevue Road,
Atwater. The branch is located on a lot of approximately 40,000 square feet, for
which the Bank entered into a 35-year ground lease with a nonaffiliated third
party, commencing on October 5, 1981. The building contains approximately 6,000
square feet of interior floor space, and was built at a total cost of
approximately $500,000. In 1994, the Bank purchased the lot at a cost of
$316,000. Management of the Bank believes that this facility will be adequate to
accommodate the operations of this branch for the foreseeable future. This
office has been subsequently remodeled and also accommodates the Company's data
processing and central services support personnel including the related
equipment. The data processing and central service support personnel and related
equipment will be relocated to the new facility in downtown Merced, as discussed
below.
(4) Administrative Headquarters
On August 22, 1986, the Bank entered into an eight-year lease with a
nonaffiliated third party for the relocation of the Bank's administrative
headquarters, located at 1160 West Olive Avenue, Suite A, in Merced. The lease
commenced on January 1, 1987 with one eight-year option to renew. The monthly
rental under the lease is $3,054 per month for the first three years, with an
annual increase of 3% for years four, five and six, and an increase of 5%
annually for years seven and eight. The building contains approximately 3,000
square feet of interior floor space. In 1995, the Bank extended its lease until
April 1, 1997. The facility also accommodates the staff of Capital West Group.
The Company plans to move the personnel at this facility to the new site
discussed below.
In addition, the Bank leased an additional 1,375 square feet located at 1170
West Olive Avenue, Suite B in September 1990 for administrative personnel. The
Bank entered into a two-year lease in April of 1992 for this facility at a cost
of $1,645 per month for the first year with a 5% increase for the second year.
In 1995, the Bank extended its lease until April 1, 1997. This facility also
accommodates the staff of Capital West Group. The Company plans to move the
personnel at this facility to the new site discussed below.
The Company's administrative headquarters are currently located at 1160 West
Olive Avenue, Suite A, in Merced, California. Effective July 15, 1995 the
Company entered into an agreement to relocate its existing administrative office
and an existing branch in downtown Merced to a new facility in downtown Merced.
Construction began in the summer of 1996 and is expected to be complete in late
summer of 1997. The estimated construction cost of the new 29,000 square foot
facility including a parking structure is estimated at approximately $4.7
million. In conjunction with the construction of the facility, the Merced
Redevelopment Agency has provided the Company with an interest-free loan in the
amount of $3.0 million. The loan matures on August 31, 1997. It is anticipated
that upon completion of the facility, a permanent mortgage loan will be obtained
from an unaffiliated lender.
(5) Real Estate Office
In September of 1992, the Bank relocated its real estate office to 1170 West
Olive Avenue, Suite I, in Merced. The Bank entered into a two-year lease
commencing in October of 1992 with a nonaffiliated third party at a cost per
month of $3,377. In 1995, the
32
<PAGE>
Bank extended its lease until April 1, 1997. The facility contains approximately
3,200 square feet of interior floor space. It is the location for the Bank's
real estate department as well as centralized credit administration, credit card
services and the headquarters for MAID, the Bank's wholly owned subsidiary. The
Company plans to move the personnel at this facility to the new administrative
site discussed above.
(6) Los Banos Branch
On August 15, 1989, the Bank opened a fourth branch office at 1341 East Pacheco
Boulevard, Los Banos, located in the new Canal Farm Shopping Center. The Bank
entered into a five-year lease with a nonaffiliated third party, commencing on
August 1, 1989. In October of 1994, the Los Banos branch was relocated to 953 W.
Pacheco Boulevard, Los Banos. The Bank entered into a ten-year lease with a
non-affiliated third party on the facility. The new facility contains 4,928
square feet of interior floor space, parking facilities, a walk-up ATM and
drive-up facilities. Remodeling and redecorating expenses were approximately
$355,000. Management believes that this facility will be adequate to accommodate
the operation of the branch for the foreseeable future.
(7) Hilmar Branch
On November 15, 1993, the Bank opened a fifth branch office at 8019 N. Lander
Avenue, Hilmar. The building was purchased at a cost of $328,000 and consists of
a single story building of approximately 4,456 square feet of interior floor
space. The site contains 22 parking spaces and a drive-up facility. Remodeling
and redecorating expenses were approximately $53,000. Management believes that
this facility will be adequate to accommodate the operation of this branch for
the foreseeable future.
(8) Sonora Branch
On January 12, 1996, the Bank received approval to open a full service banking
facility at the Crossroads Shopping Center and entered into a five-year lease
with a non-affiliated third party on January 12, 1996 for a 2,500 square foot
facility. The branch opened April 1, 1996. Management is currently reviewing its
options for relocating this branch to a larger facility.
(9) Turlock Branch
On September 1, 1995, the Bank opened a branch in Turlock, California. In May
1995 the Bank acquired 2 lots for $297,000 at 2001 Geer Road, Turlock. The Bank
completed the construction of a permanent facility in February 1997 at a cost of
approximately $694,000 and the branch was subsequently relocated there from a
temporary facility at the same location.
(10) Modesto Branches
On January 24, 1996, the Bank received approval to open a full service banking
facility in Modesto and entered into a ten-year lease with a non-affiliated
third party on December 2, 1996 for an approximately 5,413 square foot building
at 3508 McHenry Avenue, Modesto. The branch opened for business on December 10,
1996. Management believes that this facility will be adequate to accommodate the
branch for the foreseeable future.
On September 26, 1996, the Bank received approval to open a second branch in
Modesto and entered into a four-year lease with a non-affiliated third party on
December 1, 1996 for an approximately 8,208 square foot building at 1003 12th
Street, Modesto. The branch opened for business on December 31, 1996. Management
believes that this facility will be adequate to accommodate the banking
operation for the foreseeable future.
The Thrift
The Thrift currently operates with four branch offices. The main office is the
office in Turlock and the other branch offices are located in Modesto, Visalia
and Fresno. All branch offices are leased facilities with minimal leasehold
improvements which are anticipated to be adequate to serve the needs of the
Thrift in the foreseeable future.
33
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1996, the Company is not a party to, nor is any of its
property the subject of, any material pending legal proceedings, nor are any
such proceedings known to be contemplated by government authorities.
The Company is, however, also exposed to certain potential claims encountered in
the normal course of business. In the opinion of Management, the resolution of
these matters will not have a material adverse effect on the Company's
consolidated financial position or results of operations in the foreseeable
future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As permitted by the Securities and Exchange Commission, the information called
for by this Item relating to Executive Officers is incorporated by reference
from the section of the Company's 1997 Proxy Statement titled "Executive
Officers Of Capital Corp" which is incorporated herein by reference and was
filed on or about March 20, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
For information concerning the market for the Company's common stock and related
shareholder matters, see page 23 of the Company's 1996 Annual Report to
Shareholders incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
For selected consolidated financial data concerning the Company, see page 24 of
the Company's 1996 Annual Report to Shareholders incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For management's discussion and analysis of financial condition and results of
operations, see pages 19 through 22 of the Company's 1996 Annual Report to
Shareholders incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Audited Consolidated Balance Sheets as of December 31, 1996 and 1995 and Audited
Consolidated Statements of Income, Shareholders' Equity and Cash Flows for the
fiscal years ending December 31, 1996, 1995, and 1994 appear on pages 9 through
11 of the Company's 1996 Annual Report to Shareholders incorporated herein by
reference. Notes to the Consolidated Financial Statements appear on pages 12
through 18 of the Company's 1996 Annual Report to Shareholders incorporated
herein by reference. The Independent Auditors' Report appears on page 23 of the
Company's 1996 Annual Report to Shareholders incorporated herein by reference.
SELECTED QUARTERLY FINANCIAL INFORMATION
The following tables present selected historical consolidated financial
information, including per share information, for each of the quarterly periods
indicated. The following financial data should be read in conjunction with the
consolidated financial statements of Capital Corp included or incorporated by
reference in this annual report.
SELECTED QUARTERLY FINANCIAL INFORMATION
(In thousands except per share data)
1995 FIRST SECOND THIRD FOURTH
Interest income $ 3,636 $ 3,893 $ 4,077 $4,267
Interest expense 1,360 1,413 1,449 1,495
Net interest income 2,276 2,480 2,628 2,772
Noninterest income 355 288 225 (2,092)
Noninterest expense 1,894 2,064 2,112 2,076
Net income (loss) 421 406 452 (944)
Net income (loss) per share(1) 0.20 0.19 0.22 (0.45)
1996 FIRST SECOND THIRD FOURTH
Interest income $ 4,250 $ 4,313 $ 5,226 $ 5,562
Interest expense 1,512 1,530 1,869 1,954
Net interest income 2,738 2,783 3,357 3,608
Noninterest income 571 684 694 986
Noninterest expense 2,353 2,853 2,986 2,544
Net income (loss) 501 296 613 599
Net income (loss) per share(1) 0.24 0.13 0.24 0.23
1997 FIRST SECOND
Interest income $ 5,601 $ 5,956
Interest expense 2,072 2,335
Net interest income 3,529 3,621
Noninterest income 734 1,212
Noninterest expense 3,240 3,180
Net income (loss) 513 (943)
Net income (loss) per share(1) 0.20 (0.36)
(1) 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 and is based on weighted average shares outstanding excluding shares
issuable upon exercise of outstanding options.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in and there were no disagreements with accountants on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As permitted by Securities and Exchange Commission Regulation 14a, the
information called for by this item is incorporated by reference from the
section of the Company's 1997 Proxy Statement titled "Election of Directors,"
which was filed on or about March 20, 1997.
34
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
section of the Company's 1997 Proxy Statement titled "Compensation and Other
Transactions With Management and Others" which was filed on or about
March 20, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
Company's 1997 Proxy Statement, which was filed on or about March 20, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
Company's 1997 Proxy Statement, which was filed on or about March 20, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements and Schedules
An index of all financial statements and schedules filed as part of this
Form 10-K appears below and the pages of the Company's Annual Report to
Shareholders for the year ended December 31, 1996 listed, are incorporated
herein by reference in response to Item 8 of this report.
Financial Statement Schedules: Page
----------------------------- ----
Independent Auditor's Report 23
Consolidated Balance Sheets as of December 31, 1996 and 10
1995
Consolidated Statements of Income for the Years Ended 9
1996, 1995, and 1994
Consolidated Statements of Shareholders' Equity for the 10
Years Ended 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the Years Ended 11
1996, 1995, and 1994
Notes to Consolidated Financials 12
(b) Reports on Form 8-K
There were no reports filed in the quarter ending December 31, 1996 on Form
8-K.
35
<PAGE>
(c) Exhibits
The following is a list of all exhibits required by Item 601 of Regulation
S-K to be filed as part of this Form 10-K:
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
------ ------- ----------
<S> <C> <C>
3.1 Articles of Incorporation (filed as Exhibit 3.1 of the Company's *
September 30, 1996 Form 10Q filed with the SEC on or about
November 14, 1996).
3.2 Bylaws (filed as Exhibit 3.2 of the Company's September 30, 1996 Form *
10Q filed with the SEC on or about November 14, 1996).
10 Employment Agreement between Thomas T. Hawker and Capital Corp.
10.1 Administration Construction Agreement (filed as Exhibit 10.4 of the *
Company's 1995 Form 10K filed with the SEC on or about March 31,
1996).
10.2 Stock Option Plan (filed as Exhibit 10.6 of the Company's 1995 Form *
10K filed with the SEC on or about March 31, 1996).
10.3 401(k) Plan (filed as Exhibit 10.7 of the Company's 1995 Form 10K *
filed with the SEC on or about March 31, 1996).
10.4 Employee Stock Ownership Plan (filed as Exhibit 10.8 of the *
Company's 1995 Form 10K filed with the SEC on or about March 31,
1996).
11 Statement Regarding the Computation of Earnings Per Share is
incorporated herein by reference from Note 1 of the Company's
Consolidated Financial Statements.
13 Annual Report to Security Holders.
23.1 Consent of KPMG Peat Marwick LLP
* Denotes documents which have been incorporated by reference.
</TABLE>
(d) Financial Statement Schedules
All other supporting schedules are omitted because they are not applicable,
not required, or the information required to be set forth therein is
included in the financial statements or notes thereto incorporated herein by
reference.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, as amended, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 26th day of
August, 1997
CAPITAL CORP OF THE WEST
By: /s/ THOMAS T. HAWKER
----------------------------------------------
THOMAS T. HAWKER
(President and Chief Executive Officer
of Capital Corp of the West)
By: /s/ JANEY E. BOYCE
----------------------------------------------
JANEY E. BOYCE
(Senior Vice President and Chief Financial Officer
of Capital Corp of the West)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ JERRY E. CALLISTER Chairman of the August 26, 1997
- ----------------------------------- Board of Directors
JERRY E. CALLISTER
/s/ ROBERT E. HOLL Director August 26, 1997
- ----------------------------------
ROBERT E. HOLL
/s/ BERTYL W. JOHNSON Director August 26, 1997
- ----------------------------------
BERTYL W. JOHNSON
/s/ DOROTHY L. BIZZINI Director August 26, 1997
- ----------------------------------
DOROTHY L. BIZZINI
/s/ LLOYD H. AHLEM Director August 26, 1997
- ----------------------------------
LLOYD H. AHLEM
/s/ JAMES W. TOLLADAY Director August 26, 1997
- ----------------------------------
JAMES W. TOLLADAY
/s/ JACK F. CAUWELS Director August 26, 1997
- ----------------------------------
JACK F. CAUWELS
37
<PAGE>
/s/ THOMAS T. HAWKER Director/CEO August 26, 1997
- ----------------------------------
THOMAS T. HAWKER
/s/ JOHN FAWCETT Director August 26, 1997
- ----------------------------------
JOHN FAWCETT
/s/ TAPAN MONROE Director August 26, 1997
- ----------------------------------
TAPAN MONROE
/s/ JANEY E. BOYCE Chief Financial & August 26, 1997
- ---------------------------------- Accounting Officer
JANEY E. BOYCE
CAPITAL CORP OF THE WEST
</TABLE>
38
<PAGE>
EMPLOYMENT AGREEMENT
DATE: March 11, 1997
PARTIES: CAPITAL CORP. OF THE WEST, a California Bank Holding
Company, hereinafter referred to as "Employer"; and
THOMAS T. HAWKER, herein after referred to as
"Employee".
RECITALS:
1. Employee is currently employed as the Chief Executive Officer
of Employer (previously known as County Bank) under a written
Employment Agreement which will expire at the close of
business on February 28, 1997.
2. The Parties desire to enter into a new Employment
Agreement ("Agreement") for the purpose of extending the
employment of Employee.
AGREEMENT:
Employer hereby employs Employee, and Employee hereby accepts
employment with Employer, upon the terms and conditions hereinafter set forth.
1. Duties.
Employee is hereby employed as the President and Chief Executive
Officer of Employer. Employee shall perform the customary duties of a Chief
Executive Officer of a California bank holding company, including but not
limited to, the supervision of Employer's business and all subsidiary
corporations and businesses owned or related to Employer and such kindred duties
as may from time to time be reasonably requested of Employee by the Board of
Directors of Employer. As used herein the term "business of Employer" shall
include the business of any of Employer's subsidiaries and related entities.
- -1-
<PAGE>
2. Appointment to Board of Directors.
Employer hereby agrees that Employee shall remain a member of the Board
of Directors of Employer for so long as Employee is elected to a position on the
board by the shareholders of Employer, or until this Agreement has been
terminated. During the period of Employee's election to the Board of Directors,
Employee shall serve as a member of any or all committees to which he is
appointed, except the audit committee. Employee also hereby agrees to accept
appointment to other boards of directors and committees of subsidiary and
related organizations of Employer. Employee shall fulfill all of Employee's
duties as a board and committee member without additional compensation. Upon the
termination of this Agreement by either Employee or Employer, Employee agrees to
immediately resign from the Board of Directors, from all committees and from all
corporate offices of Employer and from all of Employer's subsidiaries and
related companies; further, all fringe benefits, such as insurance, shall be
terminated on the last day of service of Employee, unless otherwise mandated by
the terms of this Agreement, Employer's personnel policy, or any other benefit
policies in effect at the time of such termination.
3. Term.
This Agreement shall be effective for a period of forty-six (46)
months. It shall commence on March 1, 1997 and unless sooner terminated as
provided herein shall end on December 31, 2000 ("Term").
4. Extent of Services.
Employee shall donate his full time, attention and energies to the
business of Employer, and shall not during the Term of this Agreement be engaged
in any other business activities, except personal investments, without the prior
written consent of Employer.
- 2 -
<PAGE>
5. Regular Compensation.
In consideration for the services which Employee is to render under
this Agreement, Employer shall pay to Employee an initial base salary ("Base
Salary") of One Hundred Fifty-one Thousand Two Hundred Fifty-nine Dollars
($151,259.00) per year. On July 1, 1997, the Board of Directors agrees to
reevaluate the Base Salary, and if the earnings are in line with projected
budget figures and if the present concerns regarding several large loans in the
troubled loan portfolio of County Bank are rectified to the satisfaction of the
Board of Directors, the Base Salary shall be increased thereafter to One Hundred
Sixty-seven Thousand Dollars ($167,000.00) per year (prorated for partial
years), or it shall be changed to said figure as soon after said date as the
Board of Directors is satisfied that the troubled loan portfolio is at an
acceptable level and the earnings of the corporation are in line with projected
budget figures. The Base Salary shall be payable to Employee in equal
semi-monthly installments on the fifteenth and the last working day of each
month during the period of employment, prorated for any partial employment
period. The Base Salary shall be subject to an annual economic adjustment on the
first day of each calendar year to reflect changes in the cost of living in the
San Joaquin Valley in an amount to be determined by the Board of Directors of
Employer. Employer by its Board of Directors and at its sole discretion, may
also give due consideration to the question of salary increases on each
anniversary of the effective date of this Agreement.
6. Discretionary Incentive Compensation.
Employee shall be entitled to participate in any incentive programs
which may be adopted from time to time by Employer for Employee. Amounts awarded
to Employee under any said incentive program shall be determined at the sole
discretion of Employer, including the vesting of any incentive awards.
- 3 -
<PAGE>
7. Business Expenses.
Employee shall be reimbursed for all ordinary and necessary, documented
expenses reasonably incurred by Employee in connection with his employment
associated with managing the business of Employer and other expenses which may
be authorized from time to time by the Board of Directors of Employer, including
expenses for club membership, entertainment, travel and similar items. Travel
and other expenses for attendance at conventions and banking education programs
that are approved by the Board of Directors shall also be reimbursed. Employer
will pay for or will reimburse Employee for such expenses upon presentation by
Employee from time to time of receipts evidencing such expenditures.
8. Automobile.
Employer shall provide an automobile for the use of Employee. Employer
shall pay all fuel, operating, maintenance and insurance costs associated with
such automobile. Employee shall be entitled to limited use of the automobile for
personal use, but shall primarily use it for business purposes associated with
his employment.
9. Vacation.
During each full year of employment Employee shall be entitled to
annual vacation leave at full salary at the discretion of Employee as time
allows, so long as it is reasonable and does not jeopardize his
responsibilities, of sixteen (16) days each year plus an additional four (4)
bonus days if he receives a "satisfactory" or higher rating on his Annual
Employee Performance Evaluation; provided that Employee each calendar year shall
take as a portion of his vacation leave at least ten (10) consecutive business
days.
Recognizing that Employee would like to receive additional vacation
time in the year 2,000, Employer and Employee agree to
- 4 -
<PAGE>
enter into a separate incentive program whereby certain goals and objectives are
set for Employee. If Employee meets the objectives and goals of said plan by
December 31, 1999, Employee shall be entitled to an additional 2 weeks vacation
in the year 2,000, which additional vacation time must be taken in said year.
10. Disability.
If Employee becomes permanently disabled during the Term because of
sickness, physical or mental disability, so that he is unable to perform his
full duties hereunder, Employer agrees to continue the salary (i) ninety (90)
days from commencement of the disability, (ii) until Employee is able to return
to work, (iii) until payments commence under any disability insurance policy
obtained by Employee, or (iv) when any payments commence to Employee under the
separate Salary Continuation Agreement executed between the parties, whichever
is less.
11. Insurance.
Employer shall provide to Employee, his wife and qualifying children,
during the Term at Employer's expense the same medical insurance, dental
insurance, and disability insurance coverage, if any, which may be offered to
Employer's other full-time employees under any benefit plans as may be in effect
from time to time.
It is acknowledged that Employee currently has a $400,000.00 term life
insurance policy with Sun Life Insurance Company, Employer has under its
previous employment agreement with Employee given Employee extra compensation to
cover the premiums on said policy. Under this agreement Employee's Base Salary
has been increased so that Employee may determine whether to maintain said life
insurance policy and use the increase in Base Salary to cover the premiums
thereon, or to discontinue or alter said policy and to use the additional Base
Salary for other purposes. Employer shall have no duty under this agreement to
give Employee any extra
- 5 -
<PAGE>
compensation to cover life insurance premiums or to maintain any life insurance
on Employee's life.
12. Stock Options and Bonuses.
As additional consideration for entering into this Employment Agreement
Employer hereby grants to Employee a stock option to purchase 8,000 shares of
Employer's stock at a price equal to the fair market value of such stock on the
date of execution of this agreement. The stock purchase rights under said stock
option shall vest in Employee as follows:
(1) Twenty percent (20%) upon commencement of
the Employment Term under this Agreement;
(2) Additional twenty percent (20%) on January 1, 1998;
(3) Additional twenty percent (20%) on January 1, 1999;
(4) Additional twenty percent (20%) on January 1, 2000;
(5) Additional twenty percent (20%) on January 1, 2001.
Said vesting shall occur only if Employee is still employed by Employer
under the terms of this Agreement on the date said vesting is to occur.
Employer may consider granting additional stock options and bonuses
from time to time during the term, but shall not be obligated to do so.
13. Retirement Plan.
Employer shall be entitled to participate in any retirement plans
offered to other employees of Employer such as Employee's participation in
Employer's 401K plan and participation in Employer's Stock Option Plan (ESOP).
In addition it is acknowledged that Employer and Employee have entered into a
separate "Amended and Restated Salary Continuation Agreement" dated October 30,
1996, which provides for gradual vesting of retirement
- 6 -
<PAGE>
benefits to Employee based on his continued employment with Employer. The
Parties to this agreement understand that the participation by Employee in said
salary continuation plan does not assure in any way, or guarantee, the continued
employment of Employee under this Employment Agreement.
14. Printed Material.
All written, printed, visual or audio materials used by Employee in
performing duties for Employer, other than Employee's personal notes and
diaries, are and shall remain the property of Employer. Upon termination of
employment on any basis, Employee shall return all such materials to Employer.
15. Disclosure of Information.
In the course of employment, Employee may have access to confidential
information and trade secrets relating to Employer's business. Except as
required in the course of employment by Employer, Employee shall not, without
Employer's prior written consent, directly or indirectly disclose to anyone any
confidential information relating to Employer or any financial information,
trade secrets or "know-how" which is germane to Employer's business and
operations. Employee recognizes and acknowledges that any financial information
concerning any of Employer's customers, as it may exist from to time, is
strictly confidential and is a valuable, special and unique asset of Employer's
business. Employee shall not, either before or after termination of this
Agreement, disclose to anyone said financial information, or any part thereof,
for any reason or purposes whatsoever.
16. Prohibited Activities and Investments.
During the Term of this Agreement, Employee shall not, directly or
indirectly, either as an employee, employer, consultant, agent, principal,
partner, principal stockholder (i.e., ten percent or more) or corporate officer,
directly, or in any
- 7 -
<PAGE>
other individual or representative capacity, engage or participate in any
banking business competitive with that of Employer.
17. Surety Bond.
Employee agrees to furnish all information and take any other steps
necessary to enable Employer to obtain and maintain a fidelity bond conditional
on the rendering of a true account by Employee of all moneys, goods, or other
property which may come into the custody, charge, or possession of Employee
during the Term of Employee's employment. The surety company issuing such bond
and the amount of the bond must be acceptable to Employer. All premiums on the
bond are to be paid by Employer. If Employee cannot personally qualify for a
surety bond at any time during the Term of this Agreement, Employer shall have
the option to terminate this Agreement immediately and said termination shall be
deemed to be a termination for cause.
18. Moral Conduct.
Employee agrees to conduct himself at all times with due regard to
public conventions and morals and to abide by and reflect in his personal
actions all of the "core values" adopted by Employer and its subsidiaries from
time to time. Employee further agrees not to do or commit any act that will
reasonably tend to degrade him or to bring him into public hatred, contempt or
ridicule, or that will reasonably tend to shock or offend any community in which
Employer engages in business, or to prejudice Employer or the banking industry
in general.
19. Termination of Agreement.
(a) Termination for Cause.
Employer reserves the right to terminate this Agreement "for cause."
Termination for cause shall include termination because of Employee's (i)
personal dishonesty, (ii) incompetence, (iii) will-
- 8 -
<PAGE>
ful misconduct, (iv) breach of fiduciary duty involving personal profit, (v)
material breach of any of the terms of this Agreement, (vi) intentional failure
to perform assigned duties, (vii) willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or (viii) the willful or permanent breach by Employee of
any obligations owed to Employer pursuant to this Agreement. In addition,
Employer reserves the right to terminate this Agreement "for cause" in the event
that actions are effected by any regulatory agency having jurisdiction to remove
or suspend Employee from office, or upon the directive of any such regulatory
agency that Employer must remove Employee as its Chief Executive Officer,
regardless of whether such directive is given orally or in writing.
(b) Statutory Grounds for Termination.
Employee's employment under this Agreement shall terminate immediately
upon the occurrence of any of the following events, which events are described
in sections 2920 and 2921 of the California Labor Code:
(1) The occurrence of circumstances that make it impossible or
impractical for the business of Employer to be continued.
(2) The death of Employee.
(3) The loss of Employee of legal capacity. This does not
affect Employee's rights under Section 10 of this Agreement.
(4) The loss by Employer of legal capacity to contract.
(5) Subject to Section 10 of this Agreement, the continued
incapacity on the part of Employee under this Agreement, unless waived by
Employer.
- 9 -
<PAGE>
(c) Termination for Bankruptcy.
This Agreement may be terminated immediately be either party at the
option of either party and without prejudice to any other remedy to which either
party may be entitled at law, in equity or under this Agreement if either party:
(1) Files a petition in bankruptcy court or is adjudi-
cated a bankrupt;
(2) Institutes or suffers to be instituted against it or
him any procedure in bankruptcy court for reorganization or re-
arrangement of his financial affairs;
(3) Has a receiver of his assets or property appointed
because of insolvency; or
(4) Makes a general assignment for the benefit of credi-
tors.
(d) Automatic Termination in the Event of Acquisition of
Employer.
This Agreement shall automatically terminate upon the consummation of
any event by which substantially all of the stock and/or assets of Employer are
acquired by a person, a group of persons, a financial institution or other
entity.
At the closing of such acquisition, Employee shall receive an
acquisition payment ("Acquisition Payment") in the amount equal to six (6)
month's Base Salary at the then current rate of compensation.
In the event of any such acquisition of Employer and the consequent
automatic termination of this Agreement, no provision contained in this
Agreement should be construed to prevent Employee
- 10 -
<PAGE>
from negotiating a new employment agreement with either Employer or the acquiror
of Employer, should the parties desire to do so.
It is mutually agreed by the parties that the above-referenced
Acquisition Payment shall be received by Employee in lieu of any and all claims
and/or damages which may be sustained by Employee due to the acquisition of
Employer and the termination of Employee's employment and will be accepted by
Employee in full satisfaction of all such claims and damages.
20. Severance Pay.
Upon early termination of this Agreement (i) pursuant to Section 19(d)
of this Agreement, (ii) by Employee for any reason, (iii) by Employer "for
cause" (pursuant to Section 19(a) of this Agreement), or (iv) because of the
death, incapacity or disability of Employee, Employee shall not receive any
Severance Payment of any sort or any bonus for the calendar year in which
termination is effected.
The parties acknowledge that it would be difficult to determine the
damages which Employee would suffer if his employment is terminated by Employer
without cause or on statutory grounds. Therefore it is agreed that if this
agreement is terminated early by Employer on any basis other than those listed
in the first paragraph of this Section 20, then Employee shall be entitled to
receive a cash payment ("Severance Payment") in the amount equal to one year's
Base Salary at the then current rate of compensation. It is mutually agreed by
the parties that the payment of the cash Severance Payment set forth above shall
be received by Employee in lieu of any and all claims and/or damages which may
be sustained by Employee by reason of his early termination and will be accepted
by Employee in full satisfaction of all such claims and damages and as payment
in full for all benefits received from Employee's services. The parties
understand and agree under no circumstances would Employee be entitled to
receive both the Acquisition Payment and the Severance Payment.
- 11 -
<PAGE>
21. Notices.
Any notice to Employer required or permitted under this Agreement shall
be given in writing to Employer, either by personal service or by certified
mail, postage prepaid, addressed to the chairman of the Board of Directors of
Employer at its then principal place of business. Any such notice to Employee
shall be given in like manner and, if mailed, shall be addressed to Employee at
Employee's home address then shown on Employer's files. For the purpose of
determining compliance with any time limit in this Agreement, a notice shall be
deemed to have been duly given (a) on the date of service, if personally served
on the party to whom notice is to be given, or (b) the fifth business day after
mailing, if mailed to the party to whom notice is to be given in the manner
provided in this Section.
22. Nonassignability.
Neither this Agreement nor any right or interest hereunder shall be
assignable by Employee, his beneficiaries or legal representatives without
Employer's prior written consent; provided, however, that nothing in this
Section 22 shall preclude (i) Employee from designating a beneficiary to receive
any benefit payable hereunder upon his death, or (ii) the executors,
administrators, or other legal representatives of Employee or his estate from
assigning any rights hereunder to the person or persons entitled thereto.
23. No Attachment.
Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge or hypothecation or to execution,
attachment, levy or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to effect any such action shall be null, void
and of no effect.
- 12 -
<PAGE>
24. Binding Effect.
This Agreement shall be binding upon, and inure to the benefit of,
Employee and Employer and their respective permitted successors and assigns.
25. Modification and Waiver.
(a) Amendment of Agreement
This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) Waiver.
No term or condition of this Agreement shall be deemed to have been
waived nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition for the future or as to any act other than
that specifically waived. No delay in exercising any rights shall be construed
as a waiver, nor shall a waiver on one occasion operate as a waiver of such
right on any future occasion.
26. Entire Agreement.
This Agreement supersedes any and all other agreements, either oral or
in writing, between the parties hereto with respect to the employment of
Employee by Employer. This Agreement contains all of the covenants and
agreements between the parties with respect to such employment in any manner
whatsoever. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, orally or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not
- 13 -
<PAGE>
embodied herein, and that no other agreement, statement or promise not contained
in this Agreement shall be valid and binding.
27. Partial Invalidity.
If any provision in this Agreement is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
shall nevertheless continue in full force without being impaired or invalidated
in any way.
28. Governing Law.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.
29. Injunctive Relief.
Employer and Employee acknowledge and agree that the services to be
performed under this Agreement are of a special, unique, unusual, extraordinary
and intellectual character which give them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in an action at law.
Employer and Employee therefore expressly agree that Employer and Employee, in
addition to any other rights or remedies which Employer and Employee may
possess, shall be entitled to injunctive and other equitable relief to prevent a
breach of this Agreement by Employee and Employer.
30. Bank Regulatory Agencies.
The obligations and rights of the parties hereunder are expressly
conditioned upon the approval or non-disapproval of (i) this Agreement and/or
(ii) Employee, in the event such approvals are required, by those banking
regulatory agencies which have jurisdiction over Employer or any of its
subsidiaries.
- 14 -
<PAGE>
31. Duplicate Originals.
This Agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which
together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.
EMPLOYER: CAPITAL CORP OF THE WEST
By: __________________________
Jerry E. Callister
Chairperson of the Board
EMPLOYEE: ___________________________
Thomas T. Hawker
- 15 -
Exhibit 13
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.
9
<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
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY Common Stock
-----------------------------------------------------------------------------
Number Unrealized
of Retained Securities Gains
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.
10
<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
11
<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:
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
- --------------------------------------------------------------------------------
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 statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenue and
expense for the period. Actual results could differ from those estimates applied
in the preparation of the consolidated financial statements.
Cash and Cash Equivalents: The Company maintains deposit balances with various
banks which are necessary for check collection and account activity charges.
Cash in excess of immediate requirements is invested in federal funds sold or
other short term investments. Generally, federal funds are sold for periods from
one to thirty days. Cash, noninterest-bearing deposits in other banks and
federal funds sold are considered to be cash and cash equivalents for the
purposes of the consolidated statements of cash flows. At December 31, 1996, the
Company's average cash reserve balances as required by the Federal Reserve Bank
were approximately $2,190,000. The Company maintained sufficient balances of
vault cash to satisfy its reserve requirements.
Investment Securities: Investment securities at December 3 1, 1996 and 1995
consist of U.S. Treasury and U.S. Government agency obligations, municipal
securities and mortgage-backed securities. At the time of purchase of a
security, the Company designates the security as held-to-maturity or as
available-for-sale, based on its investment objectives, operational needs and
intent. The Company does not purchase securities with the intent of actively
trading them. Held-to-maturity securities are recorded at amortized cost,
adjusted for amortization or accretion of premiums or discounts.
Available-for-sale securities are recorded at fair value with unrealized holding
gains and losses, net of the related tax effect, and are reported as a separate
component of stockholders' equity until realized.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary, results in a charge to
earnings and the corresponding establishment of a new cost basis for the
security. No such declines have occurred.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to yield using a method which approximates the
effective interest method. Dividend and interest income are recognized when
earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings and are derived
using the specific identification method for deter-mining the cost of securities
sold.
Mortgage Loans Held for Sale: Real estate mortgage loans held for sale are
carried at the lower of cost or market at the balance sheet date or the date on
which investors have committed to purchase such loans.
Loans: Loans are carried at the principal amount outstanding, net of deferred
origination fees, less an allowance for loan losses. During 1995, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for the Impairment of a Loan as amended by Statement No.
118, Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures (SFAS 114). Under SFAS 114, an impaired loan is measured based upon
the present value of future cash flows discounted at the loan's effective rate,
the loan's observable market price, or the fair value of collateral if the loan
is collateral dependent. Interest on impaired loans is recognized on a cash
basis. SFAS 114 does not apply to large groups of small balance homogenous loans
that are collec-tively evaluated for impairment.
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
12
<PAGE>
CAPITAL CORP of the WEST
losses based on management's assessment of various factors affecting the loan
portfolio, which include a review of problem loans, business conditions and an
overall evaluation of the quality of the portfolio. The allowance is increased
by provisions for loan losses charged to operations and reduced by loans charged
to the allowance, net of recoveries. The allowance for loan losses is a
subjective estimation and may be adjusted in the future depending on economic
conditions. Also regulatory examiners may require the Company to recognize
additions to the allowance based upon their judgments about information
available to them at the time of an examination.
Loan Servicing Income: The Company services both the sold and retained portions
of United States Small Business Administration (SBA) loans and a portfolio of
mortgage loans. Servicing income is realized through the retention of an ongoing
rate differential between the rate paid by the borrower to the Company and the
rate paid by the Company to the investor in the loan.
Premises and Equipment: Premises and equipment are stated at cost and
depreciated on the straight-line method over the estimated useful lives of the
assets as follows:
Buildings - 35 years Leasehold improvements - term of lease
Furniture and equipment - 3 to 15 years
Real Estate Held for Sale or Development: Real estate held for sale or
development is recorded at the lower of cost or net realizable value.
Revenue recognition on the disposition of real estate is dependent upon the
transaction meeting certain criteria relating to the nature of the property sold
and the terms of the sale. Under certain circumstances, revenue recognition may
be deferred until these criteria are met.
Other Real Estate: In accordance with the provisions of the Statement of
Financial Account Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, other real estate acquired
through foreclosure is carried at the lower of cost or fair value less estimated
costs to sell at the date of foreclosure. Fair value of other real estate is
determined based on an appraisal of the property. Credit losses arising from the
acquisition of such properties are charged against the allowance for possible
loan losses. Any subsequent costs or losses are charged against income when
incurred.
Investment Tax Credits: The Company has investments in limited partnerships in
low income affordable housing which provides the investor affordable housing
income tax credits. As an investor in these partnerships, the Company receives
tax benefits in the form of tax deductions from partnership operating losses and
income tax credits. These income tax credits are earned over a 10-year period as
a result of the 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.
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 Estimated
1996 Amortized cost unrealized gains unrealized 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>
13
<PAGE>
CAPITAL CORP of the WEST
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.
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.
Estimated
1996 Amortized Cost Fair Value
- --------------------------------------------------------------------------------
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
================================================================================
NOTE 3: Loans
Loans outstanding at December 31 consist of the following:
1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
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.
Following is a summary of changes in the allowance for loan losses during the
years ended December 31:
1996 1995 1994
- --------------------------------------------------------------------------------
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
================================================================================
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:
1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
NOTE 4. Premises and Equipment Premises and equipment consists of the following
at December 31:
1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
14
<PAGE>
CAPITAL CORP of the WEST
Included in the totals on the previous page for December 31, 1996 is
construction in progress for the new branch and administrative facilities in
downtown Merced and the branch under construction in Turlock totaling
$1,428,000.
NOTE 5: Real Estate Operations
As of December 31, 1996, MAID held two real estate projects, including
improved and unimproved land. Based on the general state of the local real
estate climate, the Bank reduced its carrying value of its 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:
Condensed December 31,
Balance Sheets 1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
Condensed Statement December 31,
of Operations 1996 1995
- --------------------------------------------------------------------------------
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)
================================================================================
NOTE 6. Income Taxes
The provision for income taxes for the years ended December 31 is comprised of
the following:
1996 Federal State Total
- --------------------------------------------------------------------------------
Current $ 1,049,000 $ 441,000 $ 1,490,000
Deferred (283,000) (44,000) (327,000)
- --------------------------------------------------------------------------------
$ 766,000 $ 397,000 $ 1,163,000
1995
- --------------------------------------------------------------------------------
Current $ 1,020,000 $ 394,000 $ 1,414,000
Deferred (860,000) (331,000) (1,191,000)
- --------------------------------------------------------------------------------
$ 160,000 $ 63,000 $ 223,000
1994
- --------------------------------------------------------------------------------
Current $ 972,000 $ 366,000 $ 1,338,000
Deferred (204,000) (31,000) (235,000)
- --------------------------------------------------------------------------------
$ 768,000 $ 335,000 $ 1,103,000
================================================================================
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:
1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
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>
15
<PAGE>
CAPITAL CORP of the WEST
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.
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
For Capital Under Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated: Amount Ratio Amount Ratio Amount Ratio
(less than (less than (less than (less than
or equal to) (or equal to)(or equal to) (or equal to)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 10.0%
Tier I capital (to risk weighted assets) 21,043,000 9.6 $ 8,407,000 4.0 $12,686,000 6.0
Tier I capital (to average assets) 21,043,000 8.2 $10,293,000 4.0 $12,868,000 5.0
- ------------------------------------------------------------------------------------------------------------------------------------
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 10.0
Tier I capital (to risk weighted assets) 16,667,000 8.9 $ 7,483,000 4.0 $11,224,000 6.0
Tier I capital (to average assets) $16,667,000 7.3% $ 9,150,000 4.0% $11,438,000 5.0%
====================================================================================================================================
</TABLE>
NOTE 9. Commitments and Financial Instruments With Off-Balance Sheet Credit Risk
At December 31, 1996, the Company has operating lease rental commitments for
remaining terms of one to ten years. The Company has options to renew one of its
leases for a period of 15 years. The minimum future commitments under
noncancellable lease agreements having terms in excess of one year at December
31, 1996 aggregates approximately $2,469,000 as follows:
1997: $451,000 1998: $427,000 1999: $385,000 2000: $323,000 2001: $171,000
Thereafter: $712,000 = $2,469,000
Rent expense was approximately $391,000, $272,000, and $248,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. Effective July 15, 1995
the Company entered into an agreement to relocate its existing administrative
office and an existing branch in downtown Merced to a new facility in downtown
Merced. Construction began in the summer of 1996 and is expected to be complete
in late summer of 1997. The estimated construction cost of the new 29,000 square
foot facility including a parking structure is estimated at approximately $4.7
million. In conjunction with the construction of the facility, the Merced
Redevelopment Agency has provided the Bank with an interest-free loan in the
amount of $3.0 million. The loan matures on August 31, 1997. It is anticipated
that upon completion of the facility, a permanent mortgage loan will be obtained
from an unaffiliated lender.
In addition, the Company has a loan with an unaffiliated lender with an
outstanding balance of $791,000 as of December 31, 1996. The loan matures in
July of 1998. The loan was related to the cash portion of the purchase of the
Thrift.
At December 31, 1996 the aggregate maturities for time deposits in excess of
one year are as follows:
1997: $10,263,000 1998: $863,000 1999: $417,000 2000: --- 2001: ----
= $11,543,000
In the ordinary course of business, the Company enters into various types of
transactions which involve financial instruments with off-balance sheet risk.
These instruments include commitments to 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).
December 31, 1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
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.
16
<PAGE>
CAPITAL CORP of the WEST
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held for
standby letters of credit is based on an individual evaluation of each
customer's credit worthiness, but may include cash, equipment, inventory and
securities.
NOTE 10. Concentrations of Credit Risk
The Bank's business activity is with customers located primarily within
Merced and Stanislaus and Tuolomne counties. The Bank specializes in real
estate, real estate construction, commercial and dairy lending. Although the
Bank has a diversified loan portfolio, a significant portion of its customers'
ability to repay loans is dependent upon economic factors affecting residential
real estate, construction, dairy, agribusiness and consumer goods retailing.
Generally, loans are secured by various forms of collateral. The Bank's loan
policy requires sufficient collateral be secured as necessary to meet the Bank's
relative risk criteria for each borrower. The Bank's collateral consists
primarily of real estate, dairy cattle, accounts receivable, inventory,
equipment and marketable securities. A small portion of the Bank's loans are not
supported by specific collateral but rather by the general financial strength of
the borrower.
The Thrift's business activity is with customers located primarily within
Stanislaus, Fresno and Tulare counties. The Thrift specializes in direct
consumer loans and the purchase of financing contracts principally from
automobile dealerships and furniture stores. Generally, loans are secured by
various forms of collateral. The Thrift's collateral consists primarily of
automobiles and flooring inventory. A small portion of the Thrift's loans are
not supported by specific collateral but rather by the general financial
strength of 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 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 Grant Options Outstanding Exercise 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.
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.
17
<PAGE>
CAPITAL CORP of the WEST
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, 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.
1996 Carrying Amount Fair Value
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
Contract Amount
------------------------------
Off-balance sheet:
Commitments $ 28,321,000 $ 2,832,100
Standby letters of credit 2,465,000 24,600
================================================================================
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:
- --------------------------------------------------------------------------------
Condensed Balance Sheets (In thousands) 1996 1995
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
================================================================================
- --------------------------------------------------------------------------------
Condensed Statements of Income (In thousands) 1996 1995
Equity in undistributed income of subsidiary $ 2,094 $ 335
Expenses 85 --
Net income $ 2,009 $ 335
================================================================================
Condensed Statements of Cash Flows (In thousands) 1996 1995
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
================================================================================
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.
18
<PAGE>
CAPITAL CORP of the WEST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, liquidity and capital
resources. The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto. 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. It also includes the Bank's
subsidiary, Merced Area Investment Development, Inc. ("MAID").
Overview Total net income for 1996 was $2,009,000 compared to $335,000 in 1995
and $1,736,000 in 1994. Earnings per share were $1.27 in 1996 compared to $.24
in 1995 and $1.24 in 1994. The return on average assets was .90% in 1996 as
compared with .18% in 1995 and 1.05% in 1994. The Company's return on beginning
equity for the same periods was 13.3%, 2.4% and 13.7%, respectively. Included in
1995 earnings is a complete write-off of the Bank's investment in real estate
held by its real estate subsidiary. This real estate write-off in 1995 totaled
$2,881,000 and resulted in a $1,757,000 reduction in 1995 after tax earnings.
Total assets at December 31, 1996 reached $266 million, up $57 million or 27%
from December 31, 1995. Net loans grew to $180 million at year end 1996, a 37%
increase and deposits grew to $238 million, a 16% increase. Total equity capital
grew to $21 million, a 39% increase over year end 1995. Growth is in part due to
the acquisition of the Thrift as of June 28, 1996. As of December 31, 1996, the
Thrift had $28 million in assets, $20 million in loans and $23 million in
deposits.
Liquidity To maintain adequate liquidity requires that sufficient resources be
available at all times to meet cash flow requirements of the Company. The need
for liquidity in a banking institution arises principally to provide for deposit
withdrawals, the credit needs of its customers and to take advantage of
investment opportunities as they arise. A company may achieve desired liquidity
from both assets and liabilities. The Company considers cash and deposits held
in other banks, federal funds sold, other short term investments, maturing loans
and investments, payments of principal and interest on loans and investments and
potential loan sales as sources of asset liquidity. Deposit growth and access to
credit lines established with correspondent banks and market sources of funds
are considered by the Company as sources of liability liquidity.
The Company reviews its liquidity position on a regular basis based upon its
current position and expected trends of loans and deposits. Management believes
that the Company maintains adequate amounts of liquid assets to meet its
liquidity needs. These assets include cash and deposits in other banks,
available-for-sale securities and federal funds sold. The Company's liquid
assets totaled $63,196,000 and $64,269,000 at December 31, 1996 and 1995,
respectively, and are 23.8% and 30.7%, respectively, of total assets on those
dates. The decrease in liquid assets in 1996 is primarily due to loan growth in
excess of deposit growth during the 1996 year. In analyzing liquidity for the
Company, consideration is also taken for the pledging requirements of the
Company's investment securities. Total pledged securities were $16,678,000 at
December 31, 1996 and $18,157,00 at December 31, 1995, respectively.
Although the Company's primary sources of liquidity include liquid assets and
a stable deposit base, the Company maintains lines of credit with certain
correspondent banks and the Federal Reserve Bank aggregating $7,623,000 of which
$105,000 was outstanding as of December 31, 1996. This compares with lines of
credit of $5,270,000 of which $106,000 was outstanding as of December 31, 1995.
Capital Resources 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 had a net increase of $5,881,000 in 1996,
$1,011,000 in 1995, and $1,449,000 in 1994. The increase in 1996 was the result
of net income for the year of $2,009,000, $208,000 in stock options exercised
and $162,000 due to the issuance of shares pursuant to the employee benefit
plans. This is partially offset by a total of $86,000 in cash dividends paid
lieu of fractional shares on stock dividends and the 5 cents per share cash
dividend and a net reduction in the net unrealized value in the
available-for-sale investment portfolio of $381,000. Finally, the purchase of
the Thrift added $3,969,000 to capital for the Company. The 1995 increase was
the result of net income of $335,000, $15,000 on the exercise of stock options
and $667,000 increase in the unrealized gain in the available-for-sale
investment portfolio. This is in part offset by $6,000 in cash dividends paid in
lieu of fractional shares on stock dividends.
The Company is 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 the regulators that, if undertaken, could have a material effect on
the Company's financial statements. Management believes, as of December 31,
1996, that the Company, the Bank and the Thrift meet all capital requirements to
which they are subject. The Company's leverage capital ratio at December 31,
1996 was 8.2% as compared with 7.4% as of December 31, 1995. The Company's
risk-based capital ratio at December 31, 1996 was 11.2% of which 9.6% was common
shareholders' equity as compared to 10.3% (9.2% was common shareholders' equity)
as of December 31, 1995. Management believes that, under the current
regulations, the Company will continue to meet its minimum capital requirements
in the foreseeable future.
Results of Operations Net income in 1996 was $2,009,000 compared to $335,000 in
the prior year and $1,736,000 in 1994. This represents a 500% increase in
earnings compared to 1995, following a 81% decrease in 1995 compared to 1994
results. Earnings per share in 1996 were $1.27 compared to $.24 in 1995 and
$1.24 in 1994. Included in 1995 earnings is a complete write-off of the
Company's investment in real estate held by its real estate subsidiary. This
real estate write-off in 1995 totaled $2,881,000 and result-ed in a $1,757,000
reduction in 1995 earnings.
The increase in earnings in 1996 as compared to 1995 is primarily due to the
complete write-off of the real estate subsidiary in 1995. Excluding that item,
earnings were down approximately $83,000. The areas where the Company showed
earnings improvement include a net interest income increase of $2,330,000 or
23%, and increases in noninterest income, exclusive of the 1995 real estate
writeoff, of $1,278,000 or 77%. This is more than offset by increases in
provisions for loan losses of $1,285,000 or 564% and in noninterest expenses of
$2,591,000 or 32%.
The decrease in earnings in 1995 resulted primarily from the complete
write-off of the Bank's remaining investment in its real estate held by its real
estate subsidiary totaling $2,881,000. This compares with provisions for loss on
real estate held for sale or development of $798,000 in 1994. Net interest
income increased $1,199,000 or 13%. Noninterest income, exclusive of the real
estate provisions increased by $324,000. These increases are partially offset by
increased loan loss provisions of $228,000 and increased noninterest expenses of
$1,223,000 or 18%.
19
<PAGE>
CAPITAL CORP of the WEST
When evaluating the earnings performance of banking organizations, two
measures of profitability commonly used are return on average assets and return
on beginning equity. Return on average assets measures a bank's ability to
profitably employ its resources. Return on average assets in 1996 was .90%. This
compares with .18% in 1995 and 1.05% in 1994. Return on beginning equity is a
measure of a bank's ability to generate income on the capital invested in the
company by its shareholders. Return on beginning equity was 13.3% in 1996 as
compared to 2.4% in 1995 and 13.7% in 1994. The decrease in return on average
assets and beginning equity in 1996, exclusive of the real estate write-off, was
generally attributed to a moderate increase in the net interest income and
increases in noninterest income which was more than offset by increases in
noninterest expenses and loan loss provisions.
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 obtained to fund those assets. The difference between the two is
referred to as net interest income.
Total interest and fee income on earning assets increased from $15,873,000 to
$19,351,000, a $3,478,000 or 22% increase in 1996. This compares with an
increase from $12,807,000 to $15,873,000, a $3,066,000 or 24% increase in 1995.
The level of interest income is affected by changes in the volume (growth) and
the rates earned on interest earning assets. Interest-earning assets consist
pri-marily of loans, investment securities and federal funds sold. Average
interest-earning assets in 1996 were $203,046,000 as compared with $166,826,000
in 1995, a $36,220,000 or 22% increase. Of the 1996 increase in interest income
of $3,478,000, $3,451,000 was the result of growth in these assets and $27,000
was a result of increases in yields on these assets. Of the 1995 increase in
interest income of $3,066,000, $1,663,000 was the result of growth in these
assets and $1,403,000 was as a result of increases in yields on these assets.
Interest expense is a function of the volume (growth) of and rates paid for
interest-bearing liabilities. Interest-bearing liabilities consist primarily of
certain deposits and borrowed funds. Total average interest-bearing liabilities
in 1996 were $176,333,000 as compared with $143,131,000 in 1995, a $33,202,000
or 23% increase. Total interest expense increased $1,148,000 or 20% and
increased $1,867,000 or 48% in 1995. Of the 1996 increase in interest expense of
$1,148,000, $1,289,000 was the result of growth in these liabilities and was
partially offset by $141,000 as a result of decreased costs of these
liabilities. Of the 1995 increase of $1,867,000, $568,000 was the result of
growth in these liabilities and $1,299,000 was the result of increases in costs
of these liabilities.
The Bank's net interest margin, the ratio of net interest income expressed as
a percent of average interest-earning assets for 1996 was 6.16%. This is an
increase of .07% compared to the 1995 margin of 6.09% and .06% compared to the
1994 margin of 6.03%. This provides a measurement of the Bank's ability to
purchase and employ funds profitably during the period being measured. The
mod-est improvement in net interest margin is due to increases in loan volume as
a percentage of earning assets, which was partially off-set by the increase in
nonearning loans.
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 and include maturing time certificates, certain savings and
interest-bearing demand deposits. The difference between the aggregate amount of
assets and liabilities that are repricing 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" 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.
As of December 31, 1996 the Company was moderately "liability-sensitive" with
a cumulative negative one-year gap of $42,922,000 or 16% of total assets. This
compares with the Company being moderately "liability-sensitive" with a
cumulative negative one-year gap of $14,718,000 or 7% of total assets at
December 31, 1995. In general, based upon the Company's mix of deposits, loans
and investments, declines in interest rates would be expected to moderately
increase the Company's net interest margin. Increases in interest rates would be
expected to have the opposite effect. The increase in the cumulative negative
one year gap is due primarily to the purchase of the Thrift and its
"liability-sensitive" profile as of December 31, 1996.
The change in net interest income may not, however, always follow the general
expectations of an "asset-sensitive" or "liability-sensitive" balance sheet
during periods of changing interest rates. This results from interest rates paid
changing by differing increments and at different time intervals for each type
of interest-sensitive asset and liability.
An additional measure of interest rate sensitivity that the Company monitors
is its expected change in earnings. This model's esti-mate 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 December 31, 1996 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%.
This compares with a cumulative one year expected decrease in return on equity
of less than 1% as of December 31, 1995. As both of these measures of interest
rate risk indicate, the Company is not subject to significant risk of change in
its net interest margin as a result of changes in interest rates.
Allowance and Provision for Loan Losses 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 the growth trend in the
portfolio, examinations of financial institution supervisory authorities,
internal and external credit reviews, prior loan loss experience for the
Company, concentrations of credit risk, delinquency trends, general economic
conditions and the interest rate environment. 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.
20
<PAGE>
CAPITAL CORP of the WEST
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 had provisions to the allowance in 1996 of $1,513,000 as compared to
228,000 in 1995 and none in 1994.
The Company's charge-offs, net of recoveries, were $570,000 in 1996 as
compared with $148,000 in 1995 and $126,000 in 1994. This represents loan loss
experience ratios of .32%, .12% and .12% in those respective years stated as a
percentage of average net loans outstanding for each year. As of December 31,
1996 the allowance for loan losses was $2,792,000 or 1.5% of total loans
outstanding. This compares with an allowance for loan losses of $1,701,000 or
1.3% in 1995 and $1,621,000 or 1.5% in 1994. The increase in loan loss provision
in 1996 was primarily due to increased reserves established for a large
commercial real estate loan that was deemed impaired, reserves required for a
portfolio of lease receivables purchased in 1994 and to support the general loan
growth of the Company. The increase in net chargeoffs in 1996 was primarily due
to the loss recognized on the foreclosure of a real estate secured agricultural
loan currently held as other real estate owned.
Asset Quality Management recognizes the importance of asset quality as a key
ingredient to the successful financial performance of a financial institution.
The level of nonperforming loans and real estate acquired through foreclosure
are two indicators of asset quality. Nonperforming loans are those in which the
borrower fails to perform under the original terms of the obligation and are
cat-egorized as loans past due 90 days or more, loans on nonaccrual status and
restructured loans. Loans are generally placed on nonaccrual status and accrued
but unpaid interest is reversed against current year income 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, is deemed to
be in the process of collection. Additional loans which are 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 the collection of principal or interest is in question.
Management defines impaired loans as those loans, regardless of past due
status, in which principal and interest is 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 of principal and interest process
has been exhausted. At December 31, 1996 and 1995, impaired loans were 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.
The Company had nonperforming loans at December 31, 1996 of $5,568,000 as
compared with $4,850,000 at year end 1995 and $699,000 at year end 1994.
Included in the 1996 totals, $3,626,000 are loans secured by first deeds of
trust on real property as compared with $3,286,000 in 1995 and $422,000 in 1994.
Impaired loans as of December 31, 1996 were $7,020,000 which had specific
allowances for possible loss of $1,827,000 as compared with $4,326,000 as of
December 31, 1995 which had specific allowances for possible loss of $605,000.
Other forms of collateral, such as inventory, chattel and equipment, secure the
remaining nonperforming loans as of each date. Included in the nonperforming and
impaired loans in 1996 and 1995 was a $3.4 million commercial real estate loan
that has been restructured but is still shown as a nonperforming loan. The loan
is expected to remain on nonaccrual status until substantial performance on the
loan occurs. The restructured loan matures in 1998.
In addition, the Bank purchased a portfolio of lease receivables in 1994. The
company which 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 Securities Exchange Commission with participating in securities
fraud. More than 360 banks nationwide had acquired similar lease receivable
contracts. The Bank has $1,281,000 of these leases on nonaccrual status as of
December 31, 1996. The Bank has retained counsel jointly with other California
banks and is monitoring its position to ascertain the extent of loss the Bank
may incur. As of December 31, 1996 specific reserves of $385,000 have been
established for this portfolio. As of February 12, 1997, the Bank signed a
settlement agreement in regards to this portfolio of leases that established the
projected recovery rate at 78.5% or approximately $1,006,000.
At December 31, 1996 the Bank had $1,466,000 in two real estate properties
acquired through foreclosure compared with $47,000 as of December 31, 1995 and
at year end 1994 the Company had no real estate acquired through foreclosure.
Total nonperforming assets represented 30% of the allowance for loan losses
and shareholders' equity as of December 31, 1996. This compares with
nonperforming assets of 29% and 5% of the allowance for loan losses and total
equity as of December 31, 1995 and December 31, 1994, respectively.
Net loans grew to $180,455,000 at December 31, 1996, a $48,420,000 or 37%
increase from the end of the prior year. The Company's loan portfolio consists
primarily of commercial, agricultural, real estate mortgage, real estate
construction and consumer installment loans. Loan growth was principally in
agricultural, real estate mortgage, real estate construction and consumer loans.
In addition, the Company purchased the Thrift and its approximately $20 million
consumer finance operation as of June 1996. As of December 31, 1996, the loan
portfolio mix was comprised as follows: commercial loans (15%), agriculture
loans (24%), real estate construction loans (8%), real estate mortgage loans
(31%) and consumer loans (22%). The largest segment within the agriculture
portfolio is the Company's dairy loans. Dairy loans comprised 15% of the
Company's loan portfolio as of December 31, 1996.
The above referenced loan portfolio mix has not materially changed from the
prior year. There have been moderate increases in consumer loans as a percentage
of the portfolio due primarily to the purchase of the Thrift.
As a result of the Company's loan portfolio mix, the future quality of these
assets could be affected by adverse trends in these local or regional economic
sectors. There have been significant floods throughout parts of California
occurring in January 1997. The Company has done an analysis of its collateral as
a result of the recent floods. Current estimates indicate that there were no
mate-rial adverse effects to the collateral position of the Company as of the
date of this report.
Additionally, the Company has investments in residential real estate in
Merced County through its wholly owned subsidiary, Merced Area Investment and
Development, Inc. (MAID). MAID held two separate properties held for sale or
development at December 31, 1996. These investments were completely written-off
in 1995, although the Bank still retains title to these properties. This
compares with a carrying value of $3,853,000 at December 31, 1994. These
properties consist of residential lots in varying stages of development.
Other Income or Loss Total noninterest income in 1996 increased by $4,159,000 or
340%. Total noninterest income in 1995 includes a complete write-off of its
remaining real estate held by the Bank's real estate subsidiary of $2,881,000.
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 are due to Company's growth as well as
increased service charges implemented in 1996.
21
<PAGE>
CAPITAL CORP of the WEST
Other income has 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 showed increases of $20,000 or 2%, income from
the sale of real estate held for sale or development show increases of $74,000
and other income shows an increase of $237,000 or 57%. Other income increases in
1995 are due to the addition of commission fees earned on investment product
sales and increases in loan servicing fee income.
The Company recognized $508,000 in gains on the sale of real estate held for
sale in 1996. This was the result of the sale of 40 improved lots and four
single family homes in two real estate projects. This compares with $88,000 in
gains on the sale of real estate held for sale or development in 1995. This is
the result of sales of 8 single family homes and 56 improved lots in three real
estate projects. This compares with gains of $14,000 in 1994 on the sale of 9
single family homes and 2 improved lots in three real estate projects.
The Company records its investment in real estate held for sale or
development at the lower of cost or net realizable value, based on management's
best estimate of the local real estate market, along with appraised values and
prospects for sales in the future. In 1995, the Bank decided to take a complete
write-off of its remaining investment of its real estate held by MAID. This
resulted in provisions for loss of $2,881,000 in 1995. The Bank provided
$798,000 for future losses on the sales of certain of its real estate projects
in 1994.
Other Expense Total noninterest expense increased $2,590,000 or 32% in 1996 as
compared with an increase of $1,223,000 or 18% in 1995 as compared to 1994.
Salaries and related benefits increased by $1,122,000 or 27% in 1996 as
compared with an increase of $621,000 or 17% in 1995. The salary increase in
1996 was primarily due to two factors. First, the purchase of Town & Country and
the establishment of Capital West Group added $473,000 to total salaries. In
addition, the Bank underwent a reengineering project in 1996, whereby Bank
operations were streamlined and voluntary separation packages were offered to
all employees. A total of 23 employees accepted the package, and total
separation expenses were $286,000. Current projections are that the project
resulted in salary savings in existing branch operations of approximately
$114,000 per quarter with benefits being realized starting in the third and
fourth quarters of 1996. Other increases relate to overall Bank growth in new
branches in late 1995 through 1996. The salary and related benefits increase in
1995 was primarily due to an increase in full time equivalents. This was in part
due to the opening of a new branch and two new loan production offices in 1995.
Full time equivalents were 115 on average in 1995, compared to 103 in 1994, a
11.7% increase. Normal merit increases and related benefit expenses also
contributed to the overall increase.
Premises and occupancy expenses increased $223,000 or 36% in 1996 and $25,000
or 4% in 1995 as compared with an increase of $50,000 or 9% in 1994. The 1996
and 1995 increases are primarily due to the purchase of the Thrift and its four
branch offices as of June 1996 and the opening of branches of the Bank in
November 1995, April 1996 and two in December 1996.
Bank assessments by both the FDIC and the California State Banking Department
totaled $48,000, $183,000 and $394,000 respectively in the years ended December
31, 1996, 1995 and 1994. The decreases in 1995 and 1996 are due to reduced FDIC
premiums beginning in May of 1995. FDIC assessment levels for the Company were
$2,000 in 1996 as compared with $.04 cents per $100 in deposits in 1995 and $.26
cents per $100 in deposits in 1994.
The Bank's professional fees increased by $351,000 or 87% in 1996 as compared
with an increase of $105,000 or 35% in 1995 over the same period in 1994.
Professional fees include legal, consulting, audit and accounting fees. The
primary reason for the 1996 increase was consulting fees incurred in conjunction
with the reengineering project undertaken by the Bank in 1996. The increases in
1995 were primarily due to legal fees increases which related to corporate
matters such as the bank holding company formation and the expanded proxy
statement.
Other noninterest expenses changed as follows: equipment expenses increased
by $233,000 or 30% in 1996 as compared with $48,000 or 10% in 1995; supplies
increased by $58,000 or 25% in 1996 as compared with increases of $110,000 or
89% in 1995; marketing expenses increased by $158,000 or 75% in 1996 as compared
with increases of $38,000 or 16% in 1995; and other operating expenses increased
by $280,000 or 32% in 1996 as compared with $356,000 in 1995. Increases relate
primarily to overall growth of the Company through the purchase of the Thrift,
branch expansion in late 1995 and 1996, and the establishment of Capital West
Group.
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 as compared with 39.9% in 1995 and 38.8% in
1994. In part the effective tax rate of the Company has been 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 impacted by the
effective tax benefit derived from interest income on loans and securities
exempt from 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.
Impact of Inflation The primary impact of inflation on the Company is its effect
on interest rates. The Company's primary source of income is net interest income
which is affected by changes in interest rates. The Company attempts to limit
inflation's impact on its net interest margin through management of
rate-sensitive assets and liabilities and the analysis of interest rate
sensitivity. The effect of inflation on premises and equipment as well as
noninterest expenses has not been significant for the periods covered in this
report.
22
<PAGE>
CAPITAL CORP of the WEST
MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCK MATTERS
Effective January 18, 1996, the Company's stock was listed on NASDAQ, a national
market symbol with a stock quotation symbol of CCOW. During 1995, the Company's
common stock was not listed on any stock exchange nor quoted on NASDAQ, it was
traded through the electronic bulletin board.
The following table indicates the range of high and low sales prices,
excluding brokers' commissions, for the periods shown, based upon information
provided by the NASDAQ for 1996 and the Company's market makers and known to
management for 1995.
1996 High Low
- --------------------------------------------------------------------------------
4th quarter $ 16.25 $ 13.75
3rd quarter 14.75 12.63
2nd quarter 15.00 13.00
1st quarter $ 15.00 $ 12.50
================================================================================
1995 High Low
- --------------------------------------------------------------------------------
4th quarter $ 12.25 $ 12.00
3rd quarter 13.25 12.00
2nd quarter 14.00 12.50
1st quarter $ 13.50 $ 12.00
================================================================================
As of December 31, 1996, the number of stockholders of the Company on record
was approximately 1,175. A California corporation may pay a cash dividend or
other shareholder distribution only if (i) the distribution would not exceed its
retained earnings or (ii) either (a) the sum of its assets (net of goodwill,
capitalized research and development expenses and deferred charges) would be
less than 125% of its liabilities (net of deferred taxes, income and other
credits), or (b) current assets would not be less than current liabilities
(except that if its average earnings before taxes for the last two years had
been less than average interest expenses, current assets must be not less than
125% of current liabilities).
Under the California Financial Code, a state licensed bank may declare cash
dividends in an amount not to exceed the lesser of the bank's retained earnings
or net income for its last three fiscal years (less any distributions to
shareholders made during the such period) or, with the prior approval of the
California Superintendent of Banks, in an amount not to exceed the greatest of
(i) retained earnings of the bank; (ii) the net income of the bank for its last
fiscal year; or (iii) the net income of the bank for its current fiscal year. If
the Superintendent finds that the shareholders' equity in a bank is not adequate
or that the payment of a dividend would be unsafe or unsound, the Superintendent
may order the bank not to pay a dividend to shareholders.
Federal law also restricts the payment of dividends under certain
circumstances. The FDIC Improvement Act prohibits a bank from paying dividends
if after making such payment, the bank would fail to meet any of its capital
requirements. Also, under the Financial Institution Supervisory Act, the FDIC
has the authority to prohibit a bank from engaging in business practices which
the FDIC considers unsafe or unsound. It is possible, depending on the
financial condition of the bank and other factors, that the FDIC could assert
that the payment of dividends or other payments in some circumstances might be
such an unsafe or unsound practice and therefore prohibit such payment.
Generally, the Company has retained earnings to support the growth of the
Company and has not paid regular cash dividends. The Company declared a 5% stock
dividend and a $.05 per share cash dividend in August of 1996 for shareholders
of record as of September 15, 1996. This resulted in the issuance of an
additional 82,384 shares in 1996 and cash dividends to shareholders of $86,000.
In addition in 1996, the Bank paid $100,000 and the Thrift paid $825,000 in cash
dividends to the holding company. The Thrift dividend was due to the cash
portion of the purchase price of the Thrift and was in accordance with its
dividend authority as defined by the Department of Corporations.
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
23
<PAGE>
CAPITAL CORP of the WEST
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of operations
Total interest income $ 19,351,000 $ 15,873,000 $ 12,807,000 $ 11,483,000 $ 11,370,000
Total interest expense 6,865,000 5,717,000 3,850,000 3,061,000 3,948,000
Net interest income 12,486,000 10,156,000 8,957,000 8,422,000 7,422,000
Provision for loan losses 1,513,000 228,000 -- 254,000 162,000
Net interest income after provision
for loan losses 10,973,000 9,928,000 8,957,000 8,168,000 7,260,000
Total other income 2,935,000 (1,224,000) 805,000 679,000 884,000
Total other expense 10,736,000 8,146,000 6,923,000 6,459,000 6,302,000
Income before income taxes 3,172,000 558,000 2,839,000 2,388,000 1,842,000
Provision for income taxes 1,163,000 223,000 1,103,000 905,000 676,000
Cumulative effect of change
in accounting for income taxes -- -- -- (300,000) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,009,000 $ 335,000 $ 1,736,000 $ 1,783,000 $ 1,166,000
- ------------------------------------------------------------------------------------------------------------------------------------
Per share
Weighted average number of
shares outstanding 1,578,198 1,333,923 1,333,456 1,332,414 1,332,414
Net income $ 1.27 $ .24 $ 1.24 $ 1.27 $ .84
Cash dividends $ .05 -- -- -- --
Shareholders' equity (book value) $ 12.09 $ 10.74 $ 10.03 $ 9.01 $ 7.74
- ------------------------------------------------------------------------------------------------------------------------------------
Balance sheet
Cash and noninterest-bearing
deposit in other banks $ 12,982,000 $ 18,967,000 $ 14,190,000 $ 10,936,000 $ 5,539,000
Time deposits and federal 6,836,000 -- 2,300,000 4,700,000 5,300,000
funds sold
Investment securities 43,378,000 45,302,000 35,826,000 22,823,000 21,980,000
Loans, net 180,455,000 132,035,000 111,979,000 105,377,000 95,719,000
Other assets 22,338,000 12,729,000 13,826,000 11,342,000 13,450,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 265,989,000 209,033,000 178,121,000 155,178,000 141,988,000
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 39,157,000 39,726,000 31,924,000 29,392,000 24,041,000
Interest-bearing deposits 199,188,000 152,875,000 131,275,000 112,338,000 106,467,000
Other liabilities 6,670,000 1,339,000 840,000 815,000 627,000
Shareholders' equity 20,974,000 15,093,000 14,082,000 12,633,000 10,853,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 265,989,000 $ 209,033,000 $ 178,121,000 $ 155,178,000 $ 141,988,000
====================================================================================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
24
<PAGE>
Exhibit 23.1
Independent Auditors' Consent
To the Board of Directors of Capital Corp of the West
We consent to the incorporation by reference in the Registration Statement
(No. 333-31193) on Form S-2 of Capital Corp of the West of our report dated
January 31, 1997, relating to the consolidated balance sheets of Capital Corp of
the West and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1996, which report
appears in the December 31, 1996 annual report on Form 10-K of Capital Corp
of the West. The report on the 1995 financial statements reflects the adoption
of the Financial Accounting Standards Board Statement of Financial Accounting
Standard, 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 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Capital Corp
of the West Annual Report for 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,982,000
<SECURITIES> 43,378,000
<RECEIVABLES> 183,247,000
<ALLOWANCES> (2,792,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 11,368,000
<DEPRECIATION> (5,102,000)
<TOTAL-ASSETS> 265,989,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 20,974,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 265,989,000
<SALES> 0
<TOTAL-REVENUES> 22,286,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,736,000
<LOSS-PROVISION> 1,513,000
<INTEREST-EXPENSE> 6,865,000
<INCOME-PRETAX> 3,172,000
<INCOME-TAX> 1,163,000
<INCOME-CONTINUING> 2,009,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,009,000
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.27
</TABLE>
