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U. S. SECURITIES AND EXCHANGE COMMISSION FORM 10-K
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, 1999
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)
550 WEST MAIN STREET, MERCED, CALIFORNIA 95340
(Address of principal executive offices) (Zip Code)
(209) 725-2269
(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.
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
- --- ---
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. / /
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $37,090,818 (based on the $9.00 average of bid and
ask prices per common share on March 7, 2000). The number of shares outstanding
of the Registrant's common stock, no par value, as of March 7, 2000 was
4,512,862.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement for the 2000 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A are incorporated by reference in Part III, Items 10 through 13
and portions of the Annual Report to Shareholders for 1999 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
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PART I
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ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . 3
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ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . 19
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ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . 21
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE Proxy Statement for 2000
OF SECURITY HOLDERS . . . . . . . . . . . . . . . 21 Annual Meeting
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PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK Page 20 of 1999 Annual
AND RELATED SECURITY HOLDER MATTERS . . . . . . . 22 Report
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ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . 19 Page 11 of 1999 Annual
Report
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL Pages 12 through 21 of
CONDITION AND RESULTS OF OPERATIONS . . . . . . . 19 1999 Annual Report
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . 19 Pages 23 through 46 of
1999 Annual Report
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON Proxy Statement for 2000
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . 19 Annual Meeting
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. 19 Proxy Statement for 2000
Annual Meeting
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ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . 19 Proxy Statement for 2000
Annual Meeting
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND Proxy Statement for 2000
MANAGEMENT . . . . . . . . . . . . . . . . . . . . 20 Annual Meeting
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . 20 Proxy Statement for 2000
Annual Meeting
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PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 20
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SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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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"). During 1999, Town and Country Finance and Thrift (the "Thrift) was
merged into County Bank. The Company's primary asset is the Bank and the Bank is
the Company's primary source of income. As of December 31, 1999, the Company's
securities consist of 4,496,201 shares of Common Stock, no par value, and no
shares of Preferred Stock. As of March 7, 2000 there were 4,511,835 common
shares outstanding, held by approximately 3,000 shareholders. There were no
preferred shares outstanding at February 25, 2000. The Bank has two wholly owned
subsidiaries, Merced Area Investment & Development, Inc. ("MAID") and County
Asset Advisors ("CAA"). CAA is currently inactive. All references herein to the
"Company" include the Bank and the Bank's subsidiaries, 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 in 1977. In November
1992, the Bank changed its legal name to County Bank. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC"), up to applicable
limits. The Bank 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 was an
industrial loan company with four offices. It specialized in direct loans to the
public and the purchase of financing contracts principally from automobile
dealerships and furniture stores. It was originally incorporated in 1957. Its
deposits (technically known as investment certificates or certificates of
deposit rather than deposits) are insured by the FDIC up to applicable limits.
On November 23, 1999, the Thrift was merged into County Bank, and the separate
Thrift charter was eliminated. The existing branch offices of Town and Country
were converted into County Bank branches, and the operations of the Modesto
downtown Thrift branch were consolidated with the Bank's Modesto downtown
location.
INDUSTRY & MARKET AREA
The Bank engages in general commercial banking business primarily in Fresno,
Madera, Mariposa, Merced, Stansilaus, Tulare and Tuolomne counties. The Bank has
sixteen branch offices; two of which are located in Merced with the branch
located in downtown Merced currently serving as the both a branch and as
administrative headquarters. There are offices in Atwater, Hilmar, Los Banos,
Sonora, two offices in Modesto, two offices in Turlock and one office in
Visalia. In 1997, the Bank also opened an office in Madera and purchased three
branch offices from Bank of America in Livingston, Dos Palos and Mariposa. In
1999, the Bank opened an office in Fresno. The Bank's administrative
headquarters also provides accommodations for the activities of MAID, the Bank's
wholly owned real estate development subsidiary. (See "ITEM 2. PROPERTIES")
COMPETITION
The Company's primary market area consists of Fresno, Madera, Mariposa, Merced,
Tulare, Tuolomne and Stanislaus Counties and nearby communities. 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
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operating over wide geographic areas. Many of the major commercial banks offer
certain services (such as international, trust and 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.
Smaller independent financial institutions, savings and loans and credit unions
also serve as competition in our service area. At June 30, 1999, the Bank
maintained a market share of 28% of total FDIC insured deposits in the County of
Merced, California. The Bank's market share of FDIC insured deposits in the
counties of Mariposa, Stanislaus and Tuolumne, California was 34%, 3% and 2%,
respectively. The Bank's market share of total FDIC insured deposits in the
counties of Fresno, Madera and Tulare, California were less than 1% of the total
FDIC insured deposits in those counties.
In the past, the 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.
To compete effectively in our 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. 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.
See also the discussion under "Regulation and Supervision - Financial Services
Modernization Legislation."
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. The Bank does not operate a trust department nor does it offer these
services through a correspondent banking relationship to its customers.
The five general areas in which the Bank has directed its lendable assets are
(i) real estate mortgage loans, (ii) consumer loans, (iii) agricultural loans,
(iv) commercial loans, and (v) real estate construction loans. As of December
31, 1999, these five categories accounted for approximately 36%, 26%, 18%, 16%
and 4%, 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 Federal Agricultural Mortgage Corporation ("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 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, directly
to Farmer Mac.
In 1994, the Bank organized a department to originate loans within the
underwriting standards of Small Business Administration ("SBA"). 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,
mortgage-backed securities, collateralized mortgage obligations, corporate bonds
and municipal bonds), and (iii) service charges on deposit accounts. For the
year ended December 31, 1999, these sources comprised approximately 64%, 21%,
and 7% respectively, of the Bank's total interest and noninterest income.
Most of the Bank's business originates from individuals, businesses and
professional firms located in its service area. 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. The quality of Bank assets and
Bank earnings could be adversely affected by a downturn in the local economy,
including the agricultural sector.
BANK'S REAL ESTATE SUBSIDIARY (MAID)
GENERAL
California state-chartered banks previously were allowed, under state law, 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. MAID engaged in real estate activities for approximately
seven years.
Federal law now precludes banks from engaging in real estate development. The
uncertainty about the effect of the investment in MAID on the results of future
operations caused management to recognize a write-down equal to the total
investment in MAID in late 1995. At December 31, 1999, MAID held one real estate
project consisting of one unimproved parcel of land. MAID does not currently
intend to develop the remaining properties. MAID continues to market these
properties, and any amounts realized upon sale or other disposition of these
assets above their current carrying value of zero will result in noninterest
income at the time of such sale or disposition.
EMPLOYEES
As of December 31, 1999, the Company employed a total of 231 full-time
equivalent employees. The Company believes 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 agricultural 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.
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REGULATION AND SUPERVISION
REGULATORY ENVIRONMENT
The banking and financial services industry is heavily regulated. Regulations,
statutes and policies affecting the industry are frequently under review by
Congress and state legislatures, and by the federal and state agencies charged
with supervisory and examination authority over banking institutions. Changes in
the banking and financial services industry can be expected to occur in the
future. Some of the changes may create opportunities for the Company and the
Bank to compete in financial markets with less regulation. However, these
changes also may create new competitors in geographic and product markets which
have historically been limited by law to bank institutions, such as the Bank.
Changes in the regulation, statutes or policies that impact the Company and the
Bank cannot necessarily be predicted and may have a material effect on their
business and earnings.
The operations of bank holding companies and their subsidiaries are affected by
the credit and monetary policies of the Federal Reserve Bank (FRB). An important
function of the FRB is to regulate the national supply of bank credit. Among the
instruments of monetary policy used by the FRB to implement its objectives are
open market operations in U.S. government securities, changes in the discount
rate on bank borrowings and changes in reserve requirements on bank deposits.
These instruments of monetary policy are used in varying combinations to
influence the overall level of bank loans, investments and deposits, the
interest rates charged on loans and paid for deposits, the price of the dollar
in foreign exchange markets, and the level of inflation. The credit and monetary
policies of the FRB will continue to have a significant effect on the Bank and
on the Company.
Set forth below is a summary of significant statutes, regulations and policies
that apply to the operation of banking institutions. This summary is qualified
in its entirety by reference to the full text of such statutes, regulations and
policies.
BANK HOLDING COMPANY ACT
As a bank holding company, Capital Corp is subject to regulation under the BHC
Act, and is registered as such with, and subject to examination by, the FRB.
Pursuant to the BHC Act, Capital Corp is subject to limitations on the kinds of
businesses in which it can engage directly or through subsidiaries. It may of
course manage or control banks. Generally, however, it is prohibited, with
certain exceptions, from acquiring direct or indirect ownership or control of
more than five (5) percent of any class of voting shares of an entity engaged in
nonbanking activities, unless the FRB finds such activities to be "so closely
related to banking" as to be deemed "a proper incident thereto" within the
meaning of the BHC Act. Removal of many of the activity limitations is currently
under review by Congress, but whether any legislation liberalizing permitted
bank holding company activities will be enacted is not known. As a bank holding
company, the Company may not acquire more than (5) percent of the voting shares
of any domestic bank without the prior approval of (or, for "well managed"
companies, prior written notice to) the FRB.
The BHC Act subjects bank holding companies to minimum capital requirements. See
"--Regulatory Capital Requirements." Regulations and policies of the FRB also
require a bank holding company to serve as a source of financial and managerial
strength to its subsidiary banks. It is the FRB's policy that a bank holding
company should stand ready to use available resources to provide adequate
capital funds to a subsidiary bank during periods of financial stress or
adversity and should maintain the financial flexibility and capital-raising
capacity to obtain additional resources for assisting a subsidiary bank. Under
certain conditions, the FRB may conclude that certain actions of a bank holding
company, such as a payment of a cash dividend, would constitute an unsafe and
unsound banking practice.
COUNTY BANK
County Bank is a California state-licensed bank. The Bank is a member of the
Federal Reserve Bank (FRB) and maintains deposits insured by the Federal Deposit
Insurance Corporation (FDIC) and thus is subject to the rules and regulations of
the FDIC pertaining to deposit insurance, including deposit insurance
assessments. The Bank is subject to regulation and supervision by the FRB and
the California Department of Financial Institutions (the "Department" or DFI).
Applicable federal and state regulations address many
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aspects of the Bank's business and activities, including investments, loans,
borrowings, transactions with affiliates, branching, reporting and other areas.
County Bank may acquire other banks or branches of other banks with approval of
the FRB, FDIC and the Department. County Bank is subject to examination by both
the FRB and the Department.
DIVIDENDS
The Company may make a distribution to its shareholders if the corporation's
retained earnings equal at least the amount of the proposed distribution. In the
event sufficient retained earnings are not available for the proposed
distribution, such a corporation may nevertheless make a distribution to its
shareholders if, after giving effect to the distribution, the corporation's
assets equal at least 125% of its liabilities and certain other conditions are
met. Since the 125% ratio translates into a minimum capital ratio of 20%, most
bank holding companies, including the Company based on its current capital
ratios, are unable to meet this last test.
The primary source of funds for payment of dividends by the Company to its
shareholders is the receipt of dividends from the Bank. The Company's ability to
receive dividends from the Bank is limited by applicable state and federal law.
A California state-licensed bank may not make a cash distribution to its
shareholders in excess of the lesser of the following: (i) the bank's retained
earnings, or (ii) the bank's net income for its last three fiscal years, less
the amount of any distributions made by the bank to its shareholders during such
period. However, with the approval of the Commissioner of Financial Institutions
(the "Commissioner"), a bank may pay dividends in an amount not to exceed the
greater of (i) a bank's retained earnings, (ii) its net income for its last
fiscal year, or (iii) its net income for the current fiscal year.
The FRB, FDIC and the Commissioner have authority to prohibit a bank from
engaging in practices which are considered to be unsafe and unsound. Depending
on the financial condition of the Bank and upon other factors, the FRB or the
Commissioner could determine that payment of dividends or other payments by the
Bank might constitute an unsafe or unsound practice. Finally, any dividend that
would cause a bank to fall below required capital levels could also be
prohibited.
REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are required to maintain a minimum risk-based capital
ratio of 8% (at least 4% in the form of Tier 1 capital) of risk-weighted assets
and off-balance sheet items. "Tier 1" capital consists of common equity,
non-cumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries and excludes goodwill. "Tier 2" capital
consists of cumulative perpetual preferred stock, limited-life preferred stock,
mandatory convertible securities, subordinated debt and (subject to a limit of
1.25% of risk-weighted assets) general loan loss reserves. In calculating the
relevant ratio, a bank's assets and off-balance sheet commitments are
risk-weighted: thus, for example, loans are included at 100% of their book value
while assets considered less risky are included at a percentage of their book
value (20%, for example, for interbank obligations, and 0% for vault cash and
U.S. Government securities).
The Company and the Bank are also subject to leverage ratio guidelines. The
leverage ratio guidelines require maintenance of a minimum ratio of 3% Tier 1
capital to total assets for the most highly rated organizations. Institutions
that are less highly rated, anticipating significant growth or subject to other
significant risks will be required to maintain capital levels ranging from 1% to
2% above the 3% minimum.
Recent federal regulation established five tiers of capital measurement ranging
from "well capitalized" to "critically undercapitalized." Federal bank
regulatory authorities are required to take prompt corrective action with
respect to inadequately capitalized banks. If a bank does not meet the minimum
capital requirements set by its regulators, the regulators are compelled to take
certain actions, which may include a prohibition on payment of dividends to a
parent holding company and requiring adoption of an acceptable plan to restore
capital to an acceptable level. Failure to comply will result in further
sanctions, which may include orders to raise capital, merge with another
institution, restrict transactions with affiliates, limit asset growth or reduce
asset size, divest certain investments and /or elect new directors. It is
Capital Corp's intention to maintain risk-based capital ratios for itself and
for the Bank at above the minimum for the "well capitalized" level (6% Tier 1
risk-based; 10% total risk-based) and to maintain the leverage capital ratio for
County Bank above the 5% minimum for "well-capitalized" banks. At December 31,
1999, the Company's leverage, Tier 1 risk-based and total risk-based capital
ratios were 7.50%, 9.99% and 11.24%, and the Bank's leverage, Tier 1 risk-
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based and total risk-based capital ratios were 7.09%, 9.47% and 10.73%. No
assurance can be given that the Company or the Bank will be able to maintain
capital ratios in the "well capitalized" level in the future.
CROSS-INSTITUTION ASSESSMENTS
Any insured depository institution owned by the Company can be assessed for
losses incurred by the FDIC in connection with assistance provided to, or the
failure of, any other depository institution owned by the Company.
INSURANCE PREMIUMS AND ASSESSMENTS
The FDIC has authority to impose a special assessment on members of the Bank
Insurance Fund (the "BIF") to ensure that there will be sufficient assessment
income for repayment of BIF obligations and for any other purpose which it deems
necessary. The FDIC is authorized to set semi-annual assessment rates for BIF
members at levels sufficient to increase the BIF's reserve ratio to a designated
level of 1.25% of insured deposits. The BIF achieved this level in mid-1995.
Congress is considering various proposals to merge the BIF with the Savings
Association Insurance Fund ("SAIF") or otherwise to require banks to contribute
to the insurance funds for savings associations. Adoption of any of these
proposals might increase the cost of deposit insurance for all banks, including
the Bank.
The FDIC has developed a risk-based assessment system, under which the
assessment rate for an insured depository institution will vary according to the
level of risk incurred in its activities. An institution's risk category is
based upon whether the institution is well capitalized, adequately capitalized
or less than adequately capitalized. Each insured depository institution is also
to be assigned to one of the following "supervisory subgroups": Subgroup A, B or
C. Subgroup A institutions are financially sound institutions with few minor
weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses
which, if not corrected, could result in significant deterioration; and Subgroup
C institutions are institutions for which there is a substantial probability
that the FDIC will suffer a loss in connection with the institution unless
effective action is taken to correct the areas of weakness. The FDIC assigns
each member institution an annual FDIC assessment rate which, as of the date of
this Prospectus, varies between 0.0% per annum with a $2,000 minimum (for well
capitalized Subgroup A institutions) and 0.27% per annum (for undercapitalized
Subgroup C institutions). Insured institutions are not permitted to disclose
their risk assessment classification.
Under recent legislation, the cost of carrying bonds issued by the Financing
Corporation ("FICO") to cover losses of failed savings associations will be
allocated between BIF-insured institutions and SAIF-- insured institutions, with
BIF-insured institutions paying twenty (20) percent of the amount paid by
SAIF--insured institutions. The FDIC recently estimated that to cover these
costs BIF institutions will pay an assessment of approximately $.0128 annually
per $100 insured deposits, and SAIF institutions will pay approximately $.0644
annually per $100 of insured deposits. Starting in the year 2000, BIF and SAIF
institutions will share the FICO bond costs equally, with an estimated
assessment of $.0243 annually per $100 of insured deposits.
This legislation will increase the Bank's premiums, as it will be required to
share in the cost of carrying the FICO bonds. The increase will be slight until
the year 2000, at which time it will increase.
AUDIT REQUIREMENTS
All depository institutions are required to have an annual, full-scope on-site
examination. Those depository institutions with assets greater than $500 million
are required to have annual independent audits and to prepare all financial
statements in accordance with generally accepted accounting principles. Each
institution is required to have an independent audit committee comprised
entirely of outside directors.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each bank to identify the
communities served by the bank's offices and to identify the types of credit the
bank is prepared to extend within such communities. It also requires the bank's
regulators to assess the bank's performance in meeting the credit needs of its
community and to take such assessment into consideration in reviewing
application for mergers, acquisitions and other transactions, such as the Branch
Acquisition. An unsatisfactory rating may be the basis for denying such an
application. The Bank completed a CRA examination as of December 1997, and
received an "outstanding" rating.
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POTENTIAL ENFORCEMENT ACTIONS
Banks and their institution-affiliated parties may be subject to potential
enforcement actions by the bank regulatory agencies for unsafe or unsound
practices in conducting their businesses, or for violations of any law, rule or
regulation or provision, any consent order with any agency, any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver,
cease-and-desist orders and written agreements, the termination of insurance of
deposits, the imposition of civil money penalties and removal and prohibition
orders against institution-affiliated parties. See " -- County Bank".
INTERSTATE BANKING
Riegle-Neal Interstate Banking and Branching Efficiency Act. The Riegle-Neal
Interstate Banking and Branching Efficiency Act (the "Riegle-Neal Act") was
enacted in 1994. Generally, provisions of the Riegle-Neal Act authorize
interstate banking and interstate branching, subject to certain state options.
The following is a summary of its provisions:
INTERSTATE BANKING AND BRANCHING
- Interstate acquisition of banks by holding companies was permitted in
all states on and after September 29, 1995. However, states may continue to
prohibit acquisition of banks that have been in existence less than five years
and interstate chartering of new banks.
- Interstate mergers of banks were permitted as of June 1, 1997, unless
a state adopted legislation before June 1, 1997 to "opt out" of interstate
merger authority. Individual states were permitted to enact legislation to
permit interstate mergers earlier than that date.
- Interstate acquisition of branches is permitted to a bank only if the
law of the state where the branch is located expressly permits interstate
acquisition of a branch without acquiring the entire bank.
- Interstate de novo branching is permitted to a bank only if a state
adopts legislation to "opt in" to interstate de novo branching authority.
LIMITATIONS ON CONCENTRATIONS. An interstate banking application may
not be approved if the applicant and its depository institution affiliates would
control more than 10% of insured deposits nationwide or more than 30% of insured
deposits in the state in which the bank to be acquired in located. These limits
do not apply to mergers solely between affiliates. States may waive the 30% cap
on a nondiscriminatory basis. Nondiscriminatory state caps on deposit market
share of a depository institution and its affiliates are not affected.
AGENCY AUTHORITY. A bank subsidiary of a bank holding company is
authorized to receive deposits, renew time deposits, close loans, service loans
and receive payments on loans as an agent for a depository institution affiliate
without being deemed a branch of the affiliate. A bank is not permitted to
engage, as agent for an affiliate, in any activity as agent that it could
conduct as a principal, or to have an affiliate, as its agent, conduct any
activity that it could not conduct directly, under federal or state law.
HOST STATE REGULATION. Out-of-state banks seeking to acquire or
establish a branch are required to comply with any nondiscriminatory filing
requirements of the host state where the branch is located. The host state may
set notification and reporting requirements for a branch of an out-of-state
bank. A branch of an out-of-state bank is subject to all of the laws of the host
state regarding intrastate branching, consumer protection, fair lending and
community reinvestment. A branch of an out-of-state bank is not permitted to
conduct any activities at the branch that are not permissible for a bank
chartered by the host state.
MEETING LOCAL CREDIT NEEDS. CRA evaluations are required for each state
in which an interstate bank has a branch. Interstate banks are prohibited from
using out-of-state branches "primarily for the purpose of deposit production."
Federal banking agencies have adopted regulations to ensure that interstate
branches are being operated with a view to the needs of the host communities.
CALIFORNIA LAW. In October 1995, California enacted state legislation
in accordance with authority under the Riegle-Neal Act. This law permits banks
headquartered outside California to acquire or merge with California banks that
have been in existence for at least five years, and thereby establish one or
more California branch offices. An out-of-state bank may not enter California by
acquiring one or more branches of a California bank or other operations
constituting less than the whole bank. The law authorizes waiver of the 30%
limit on state-wide market share for deposits as permitted by the Riegle-Neal
Act. This law also authorizes California state-licensed banks to conduct certain
banking activities (including receipt of
9
<PAGE>
deposits and loan payments and conducting loan closings) on an agency basis on
behalf of out-of-state banks and to have out-of-state banks conduct similar
agency activities on their behalf.
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 these factors, it is anticipated banks will experience increased
competition for deposits and loans and, possibly, further increases in their
cost of doing business.
FINANCIAL SERVICES MODERNIZATION LEGISLATION
On November 12, 1999 President Clinton signed into law the Gramm-Leach-Bliley
Act of 1999 (the "Modernization Act"). The Modernization Act repeals the two
affiliation provisions of the Glass-Steagall Act: Section 20, which restricts
the affiliation of Federal Reserve member banks with firms "engaged principally"
in specified securities activities; and Section 32, which restricts officer,
director, or employee interlocks between a member bank and any company or person
"primarily engaged" in specified securities activities. In addition, the
Modernization Act also expressly preempts any state law restricting the
establishment of financial affiliations, primarily related to insurance. The law
establishes a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms, and other financial service
providers by revising and expanding the BHC Act framework to permit a holding
company system to engage in a full range of financial activities through a new
entity known as a Financial Holding Company. "Financial activities" is broadly
defined to include not only banking, insurance, and securities activities, but
also merchant banking and additional activities that the nature, incidental to
such financial activities, or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally.
In order for the Company to take advantage of the ability provided by the
modernization Act to affiliate with other financial service providers, it must
become a "Financial Holding Company." To do so, the Company would file a
declaration with the Federal Reserve, electing to engage in activities
permissible for Financial Holding companies and certifying that it is eligible
to do so because its insured depository institution subsidiary (the Bank) is
well-capitalized and well-managed. In addition, the Federal Reserve must also
determine that an insured depository institution subsidiary has at least a
"satisfactory" rating under the Community Reinvestment Act. [The Company
currently meets the requirements for Financial Holding Company status]. The
Company will continue to monitor its strategic business plan to determine
whether, based on market conditions and other factors, the Company wishes to
utilize any of its expanded powers provided in the modernization Act.
The Modernization Act also includes a new section of the Federal Deposit
Insurance Act governing subsidiaries of state banks that engage in "activities
as principal that would only be permissible" for a national bank to conduct in a
financial subsidiary. It expressly preserves the ability of a state bank to
retain all existing subsidiaries. Because California permits commercial banks
chartered by the state to engage in any activity permissible for national banks,
the Bank will be permitted to form subsidiaries to engage in the activities
authorized by the Modernization Act to the same extent as a national bank. In
order to form a financial subsidiary, the Bank must be well-capitalized, and the
Bank would be subject to the same capital deduction, risk management and
affiliate transaction rules as applicable to national banks. [the Bank currently
meets those requirements.]
Under the Modernization Act, securities firms and insurance companies that elect
to become Financial Holding Companies may acquire banks and other financial
institutions. The Company does not believe that the Modernization Act will have
a material adverse effect on its operations in the near-term. However, to the
extent that it permits banks, securities firms, and insurance companies to
affiliate, the financial services industry may experience further consolidation.
The Modernization Act is intended to grant to community banks certain powers as
a matter of right that larger institutions have accumulated on an ad hoc basis.
10
<PAGE>
Nevertheless, this act may have the result of increasing the amount of
competition that the Company and the Bank face from larger institutions and
other types of companies offering financial products, many of which may have
substantially more financial resources than the Company and the Bank.
11
<PAGE>
SELECTED STATISTICAL INFORMATION
The following tables in pages 12 through 17 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, pages 9 through 21 of the
Company's 1999 Annual Report to Shareholders incorporated herein by reference,
and with the Company's Consolidated Financial Statements and the Notes thereto
included in Item 14, pages 23 through 46 of the Company's 1999 Annual Report to
Shareholders incorporated herein by reference. The statistical information that
follows is generally based on average daily amounts.
INTEREST RATES AND MARGINS:
Managing interest rates and margins is essential to the Company in order to
maintain profitability. The following table presents, for the periods indicated,
the distribution of average assets, liabilities and shareholder's equity, as
well as the total dollar amount of interest income from average interest-earning
assets and resultant yields and the dollar amounts of interest expense and
average interest-bearing liabilities, expressed both in dollars and rates.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
(Dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 9,140 $ 443 4.85% $ 23,469 $ 1,253 5.34% $ 6,288 $ 344 547%
Time deposits at other financial institutions 2,691 156 5.80 1,040 57 5.48 1,124 53 4.21
Nontaxable investment securities(1) 30,057 1,378 4.58 16,320 797 4.88 4,358 231 5.30
Taxable investment securities 114,402 7,129 6.23 121,728 7,348 6.66 68,900 4,638 6.73
Loans, gross 303,463 30,255 9.97 242,989 25,159 10.35 198,140 20,646 10.42
------- ------ ------- ------ ------- ------
Total interest-earning assets 459,753 39,361 8.56 405,546 34,614 8.54 278,810 25,912 9.29
Allowance for loan losses (5,902) (4,158) (2,615)
Cash and noninterest-bearing deposits
at other banks 24,579 19,610 14,384
Premises and equipment, net 13,146 13,390 9,596
Interest receivable and other assets 24,310 22,084 14,016
-------- -------- --------
Total assets $515,886 $456,472 $314,191
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Negotiable orders of withdrawal $ 68,134 458 .67% $ 57,602 503 .87% $ 38,164 345 .90%
Savings deposits 174,301 5,752 3.30 156,956 5,696 3.63 117,357 4,770 4.06
Time deposits 141,497 7,074 5.00 112,555 6,143 5.46 71,808 3,983 5.55
Other borrowings 10,772 756 7.02 20,862 1,292 6.19 18,721 1,092 5.83
------- ------ ------- ------ ------ -----
Total interest-bearing liabilities 394,704 14,040 3.56 347,975 13,634 3.92 246,050 10,190 4.14
Noninterest-bearing deposits 74,979 63,243 38,023
Accrued interest, taxes and other liabilities 3,118 2,976 2,583
------ ------ ------
Total liabilities 472,801 414,194 286,656
Total shareholders' equity 43,085 42,278 27,535
------ ------ ------
Total liabilities and shareholders' equity $515,886 $456,472 $314,191
======== ======== ========
NET INTEREST INCOME AND MARGIN (2) $25,321 5.51% $20,980 5.17% $15,722 5.64%
</TABLE>
(1) INTEREST ON MUNICIPAL SECURITIES IS NOT COMPUTED ON TAX-EQUIVALENT BASIS.
(2) NET INTEREST MARGIN IS COMPUTED BY DIVIDING NET INTEREST INCOME BY TOTAL
AVERAGE INTEREST-EARNING ASSETS.
The Company's net interest income is affected by changes in the amount and mix
of interest-earning assets and
12
<PAGE>
interest-bearing liabilities. It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and borrowed
funds. The following table sets forth changes in interest income and interest
expense for each major category of interest-earning asset and interest-bearing
liability and the amount of change attributable to volume and rate changes for
the years indicated. The changes due to both rate and volume have been allocated
to rate and volume in proportion to the relationship of the absolute dollar
amount of the change in each.
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 COMPARED TO 1998 1998 COMPARED TO 1997
- -----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME VARIANCE ANALYSIS VOLUME RATE TOTAL VOLUME RATE TOTAL
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST INCOME:
Loans $6,059 $ (963) $5,096 $4,644 $ (131) $4,513
Taxable investment securities (452) 233 (219) 3,233 (523) 2,710
Nontaxable investment securities 633 (52) 581 586 (20) 566
Federal funds sold (704) (106) (810) 917 (8) 909
Time deposit at other institutions 96 3 99 (4) 8 4
------- ------ ------ ------ ------- ------
Total 5,632 (885) 4,747 9,376 (674) 8,702
INCREASE (DECREASE) IN INTEREST EXPENSE:
Interest-bearing demand deposits 83 (128) (45) 159 (1) 158
Savings deposits 598 (542) 56 1,088 (162) 926
Time deposits 1,480 (549) 931 2,162 (2) 2,160
Other borrowings (690) 154 (536) 130 70 200
------- ------- ------ ------ ------- ------
Total 1,471 (1,065) 406 3,539 (95) 3,444
------- ------- ------ ------ ------- ------
INCREASE (DECREASE) IN NET INTEREST INCOME $4,161 $ 180 $4,341 $5,837 $ (579) $5,258
======= ======= ====== ====== ======= ======
</TABLE>
INVESTMENT PORTFOLIO MATURITIES
The following table sets forth the maturities of debt securities at December 31,
1999 and the weighted average yields of such securities calculated on a book
value basis using the weighted average yield within each scheduled maturity
grouping. Maturities of mortgage-backed securities and collateralized mortgage
obligations are stipulated in their respective contracts, however, actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call prepayment penalties.
Yields on municipal securities have not been calculated on a tax-equivalent
basis.
<TABLE>
<CAPTION>
Within One Year One to Five Years Five to Ten Years Over Ten Years
------------------------------------------------------------------------------------
(Dollars in thousands) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale debt
securities:
U.S. Treasury and U.S.
government agencies $ - -% $12,277 6.72% $ 4,371 7.05% $ 108 5.19% $ 16,756
State and political
subdivisions 515 3.80 - - 3,342 5.07 19,514 5.65 23,371
Mortgage-backed securities - - 1,081 7.37 578 7.46 42,064 7.21 43,723
Collateralized mortgage
obligations 157 6.82 5,131 7.27 4,088 7.14 10,965 7.50 20,341
Corporate debt securities - - 4,120 7.41 - - 5,540 7.18 9,660
Held to maturity debt
securities:
U.S. Treasury and U.S.
government agencies - - - - 1,004 5.79 - - 1,004
State and political
subdivisions - - - - - - 4,389 4.85 4,389
Mortgage-backed securities - - - - - - 24,161 7.18 24,161
----- ---- ------- ---- ------- ---- -------- ---- --------
Total debt securities $ 672 4.51% $22,609 7.00% $13,383 6.51% $106,741 6.85% $143,405
===== ==== ======= ==== ======= ==== ======== ==== ========
</TABLE>
13
<PAGE>
The Company does not own securities of a single issuer whose aggregate book
value is in excess of 10% of its total equity.
ASSET / LIABILITY REPRICING
The interest rate gaps reported in the table below 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 reflect 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.
<TABLE>
<CAPTION>
BY REPRICING INTERVAL
-------------------------------------------------------------------------------
After three
Within months, After one Noninterest-
three Within year, within After bearing
(Dollars in thousands) months one year five years five years funds Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 8,640 $ - $ - $ - $ - $ 8,640
Time deposits at other institutions 850 - - - - 850
Investment securities 5,648 7,384 18,766 111,607 3,963 147,368
Loans 128,738 44,462 110,452 47,616 - 331,268
Noninterest-earning assets and
allowance for loan losses - - - - 75,424 75,424
---------- --------- --------- --------- --------- ---------
Total assets $ 143,876 $ 51,846 129,218 $ 159,223 $ 79,387 $ 563,550
========= ========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ - $ - $ - $ - $ 87,564 $ 87,564
Savings, money market & NOW deposits 236,946 - - - - 236,946
Time deposits 47,286 94,727 28,378 - - 170,391
Other interest-bearing liabilities 15,000 2,600 - 3,214 - 20,814
Other liabilities and shareholders' equity - - - - 47,835 47,835
--------- --------- --------- --------- --------- --------
Total liabilities and shareholders' equity $ 299,232 $ 97,327 $ 28,378 $ 3,214 $ 135,399 $ 563,550
========= ========= ========= ========= ========= =========
Interest rate sensitivity gap $(155,356) $ (45,481) $ 100,840 $ 156,009 $ (56,012) $ -
Cumulative interest rate sensitivity gap $(155,356) $(200,837) $ (99,997) $ 56,012 $ - -
</TABLE>
14
<PAGE>
LOAN PORTFOLIO
At December 31, 1999, the Company had approximately $101,847,000 in undisbursed
loan commitments. This compares with $76,894,000 at December 31, 1998. Standby
letters of credit were $2,674,000 and $2,694,000, at December 31, 1999 and
December 31, 1998. 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 "Credit Risk
Management and Asset Quality," pages 18 through 20 of the Company's 1999 Annual
Report to Shareholders incorporated herein by reference.
The following table shows the composition of the loan portfolio of the Company
by type of loan on the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------
Amount Amount Amount Amount Amount
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 112,179 $ 87,245 $ 78,550 $ 71,786 $ 65,563
Real estate -construction 11,926 13,840 12,657 13,923 12,006
Real estate - mortgage 120,978 96,957 70,802 57,098 42,128
Consumer installment 86,185 70,891 55,968 40,440 14,039
--------- --------- --------- --------- ---------
Total $ 331,268 $ 268,933 $ 217,977 $ 183,247 $ 133,736
========= ========= ========= ========= =========
</TABLE>
The table that follows shows the maturity distribution of the portfolio of
commercial and agricultural, real estate construction, real estate mortgage and
installment loans on December 31, 1999 by fixed and floating rate attributes:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------
Within One to Over
(Dollars in thousands) One Year Five Years Five Years Total
-------- ---------- ---------- -----
<S> <C> <C> <C> <C>
COMMERCIAL AND AGRICULTURAL
Loans with floating rates $ 45,955 $ 27,877 $ 17,535 $ 95,367
Loans with predetermined rates 8,605 6,016 6,191 16,812
--------- --------- --------- ---------
Subtotal 54,560 33,893 23,726 112,179
REAL ESTATE--CONSTRUCTION
Loans with floating rates 4,730 1,169 1,578 7,477
Loans with predetermined rates 2,738 1,711 - 4,449
--------- --------- --------- ---------
Subtotal 7,468 2,880 1,578 11,926
REAL ESTATE--MORTGAGE
Loans with floating rates 7,027 68,770 24,041 99,838
Loans with predetermined rates 4,232 16,908 - 21,140
--------- --------- --------- ---------
Subtotal 11,259 85,678 24,041 120,978
CONSUMER INSTALLMENT
Loans with floating rates 19,186 9,593 - 28,779
Loans with predetermined rates 23,129 33,301 976 57,406
--------- --------- --------- ---------
Subtotal 42,315 42,894 976 86,185
Total $ 115,602 $ 165,345 $ 50,321 $ 331,268
========= ========= ========= =========
</TABLE>
The Company seeks to mitigate the risks inherent in its loan portfolio by
adhering to certain underwriting practices. They include analysis of prior
credit histories, financial statements, tax returns and cash flow
15
<PAGE>
projections of its potential borrowers as well as obtaining independent
appraisals on real and personal property taken as collateral and audits of
accounts receivable or inventory pledged as security.
The Company also has an internal loan review process as well as periodic
external reviews. The results of these 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 Directors Loan Committee
reviews 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.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table summarizes nonperforming loans of the Company as of the
dates indicated:
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) -------------------------------------------------------
1999 1998 1997 1996 1995
Amount Amount Amount Amount Amount
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 1,984 $ 1,164 $ 2,611 $ 4,968 $ 4,626
Accruing loans past due 90 days or more 6 413 131 600 224
------- ------- ------- ------- -------
Total nonperforming loans 1,990 1,577 2,742 5,568 4,850
Other real estate owned 247 60 60 1,466 47
------- ------- ------- ------- -------
Total nonperforming assets $ 2,237 $ 1,637 $ 2,802 $ 7,034 $ 4,897
======= ======= ======= ======= =======
Nonperforming loans to total loans 0.60% 0.59% 1.26% 3.04% 3.63%
Nonperforming assets to total assets 0.40% 0.33% 0.66% 2.64% 2.34%
</TABLE>
Loans with significant potential problems or impaired loans are placed on
nonaccrual status. Management defines impaired loans as those loans, regardless
of past due status, in which management believes the collection of principal and
interest is in doubt. The amount of gross interest income that would have been
recorded in the periods then ended if the loans had been current in accordance
with the original terms and had been outstanding throughout the period or since
origination, if held for part of the period, was $143,000, $91,000, $189,000,
$489,000 and $25,000 in 1999, 1998, 1997, 1996 and 1995. The amount of interest
income on these loans that was included in net income was $126,000, $134,000,
$471,000, $625,000 and $216,000 in 1999, 1998, 1997, 1996 and 1995.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
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:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------
Loans Loans Loans Loans Loans
% to % to % to % to % to
total total total total Total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 3,365 34% $ 2,618 33% $ 1,868 36% $ 840 39% $ 944 49%
Real estate -construction 358 4 376 5 640 6 1,421 8 708 9
Real estate - mortgage 1,815 36 1,260 36 1,058 32 219 31 - 31
Installment 1,004 26 521 26 267 26 312 22 49 11
------- --- ------- --- ------- --- ------- --- ------- ---
Total $ 6,542 100% $ 4,775 100% $ 3,833 100% $ 2,792 100% $ 1,701 100%
======= === ======= === ======= === ======= === ======= ===
</TABLE>
16
<PAGE>
OTHER INTEREST-BEARING ASSETS
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 a deferred compensation plan for
participating board members. The plans are informally linked with universal life
insurance policies containing cash surrender values as listed in the following
table:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------
(Dollars in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash surrender value of life insurance $ 6,292 $ 4,104 $ 3,839
</TABLE>
ITEM V DEPOSITS
The following table sets forth the average balance and the average rate paid for
the major categories of deposits for the years indicated:
Deposits
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
---- ---- ----
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 74,979 - % $ 63,243 - % $ 38,023 - %
Interest-bearing demand deposits 68,134 0.67 57,602 0.87 38,164 0.90
Savings deposits 174,301 3.30 156,956 3.63 117,357 4.06
Time deposits under $100,000 90,586 4.73 86,020 5.34 58,262 5.41
Time deposits $100,000 and over 50,911 5.48 26,535 5.84 13,546 6.13
</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, 1999 are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Remaining Maturity:
Three months or less $ 21,157
Over three through six months 20,655
Over six through twelve months 16,901
Over twelve months 10,283
--------
Total $ 68,996
=========
</TABLE>
17
<PAGE>
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
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Return on average assets 0.99% 0.60% 0.13%
Return on average equity 11.86 6.48 1.46
Dividend payout ratio - - -
Average equity to average assets 8.35% 9.26% 8.76%
</TABLE>
MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCK MATTERS
The Company's stock is included for quotation on the Nasdaq National Market
System with a stock quotation symbol of CCOW. The following table indicates the
range of high and low sales prices for the period shown, based upon information
provided by the Nasdaq National Market System. Such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily reflect actual transactions. There were
approximately 3,000 CCOW shareholders as of December 31, 1999.
<TABLE>
<CAPTION>
- ------------------------------------------
1999 HIGH LOW
- ------------------------------------------
<S> <C> <C>
4th quarter $ 12.00 $ 8.50
3rd quarter 13.88 11.75
2nd quarter 14.09 9.75
1st quarter $ 10.75 $ 8.50
<CAPTION>
1998 HIGH LOW
- ------------------------------------------
<S> <C> <C>
4th quarter $ 12.00 $ 9.38
3rd quarter 13.37 9.81
2nd quarter 15.35 12.75
1st quarter $ 14.28 $ 11.67
- ------------------------------------------
</TABLE>
18
<PAGE>
ITEM 2. PROPERTIES
THE BANK
(1) NORTH MERCED OFFICE
The Bank's north Merced office is located at 490 West Olive Avenue in Merced
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. 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 was located at 606 West 19th Street in Merced
until September 2, 1997. On that date, the Bank relocated its downtown Merced
branch to 550 West Main Street in Merced and it was re-designated as the main
branch of the Bank. The branch and certain centralized lending operations occupy
the first floor of the three story building, occupying approximately 9,200
square feet. The Bank continued to lease the previously occupied building
through June, 1999. Management believes that the new facility will be adequate
to accommodate the operations of this branch for the foreseeable future.
(3) ATWATER BRANCH
On October 5, 1981, the Bank opened a branch office at 735 Bellevue Road,
Atwater. 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. The data processing and central service support
personnel and related equipment were relocated to the new facility in downtown
Merced, as discussed above in late 1997.
(4) ADMINISTRATIVE HEADQUARTERS
On September 2, 1997, the Company vacated its three previously leased
administrative facilities in Merced and relocated to 550 West Main Street in
Merced. The facility is a three story facility with a two story attached parking
facility and is approximately 29,000 square feet. Approximately 19,800 square
feet is occupied by the administrative and central support functions. The
facility cost was approximately $5.1 million. Management believes that this
facility will be adequate to accommodate the operations of Company for the
foreseeable future.
(5) LOS BANOS BRANCH
On August 15, 1989, the Bank opened a branch office at 1341 East Pacheco
Boulevard, Los Banos, located in the 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. 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.
(6) HILMAR BRANCH
On November 15, 1993, the Bank opened a 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. 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.
(7) 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
19
<PAGE>
2,500 square foot facility. The branch opened April 1, 1996. On August 28,
1998, the Bank relocated from the Crossroads Shopping Center to a larger
facility of 3,131 square feet in a nearby shopping center. As part of the
move the Bank entered into a ten-year lease with a non-affiliated third
party. Management believes that this facility will be adequate to accommodate
the operation of this branch for the foreseeable future.
(8) TURLOCK BRANCHES
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 facility is approximately 3,300 square feet.
Additionally, in November, 1999, the Bank received approval to convert the
Turlock Town and Country branch into a full service County Bank branch. The
original lease was signed with a non-affiliated third party on March 1, 1995 and
covered a five year term. This lease was assumed by County Bank and is for an
approximate 2,160 square foot facility located at 410 East Olive Avenue,
Turlock, California. Management believes that this facility will be adequate to
accommodate the operation of this branch for the foreseeable future.
(9) 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.
(10) ACQUIRED BRANCHES - DOS PALOS, LIVINGSTON, AND MARIPOSA
On December 11, 1997, the Bank purchased the sites of three former branches of
Bank of America. These facilities are located at 640 Main Street, Livingston,
1507 Center Street, Dos Palos and 5121 Hwy 140, Mariposa. The branch in
Livingston was purchased at a cost of $251,000 and is a 5,699 square feet
facility. The Dos Palos branch was purchased at a cost of $296,000 and is an
8,274 square feet facility. The Mariposa branch was purchased for a cost of
$313,000 and is a 4,200 square feet facility. Management believes that these
facilities will be adequate to accommodate the banking operation for the
foreseeable future.
(11) MADERA BRANCH
In October, 1999, the Bank entered into a 3 year lease with a nonaffiliated
third party for an approximate 4,000 square foot facility located at 413
Yosemite Avenue, Suite 101, Madera, California. The branch relocated to this
larger facility on October 29, 1999 from a temporary facility that was rented on
a month to month basis. Management believes the new facility will be adequate to
accommodate the banking operation for the foreseeable future.
(12) FRESNO BRANCH
In November, 1999, the Bank received approval to convert the Fresno Town and
County branch into a full service County Bank office. The Bank relocated the
previous Thrift office to a larger facility, entering into a 4 year lease with a
nonaffiliated party for an approximate 5,200 square foot facility located at
2150 West Shaw Avenue, Fresno, California. The new lease agreement was entered
into in August, 1999. Management believes the new facility will be adequate to
accommodate the banking operation for the foreseeable future.
(13) VISALIA BRANCH
In November, 1999, the Bank received approval to convert the Visalia Town and
Country branch into a full service County Bank office. The Town and Country
lease signed in May, 1998 covered a five year term and was assumed by County
Bank. The facility encompasses approximately 1,275 square feet located at 725
20
<PAGE>
West Main Street, Visalia, California. Management believes the new facility
will be adequate to accommodate the banking operation for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1999, the Company, is not a party to, nor is any of their
property the subject of, any material pending legal proceedings, nor are any
such proceedings known to be contemplated by government authorities, except
as discussed in Regulation and Supervision --- County Bank."
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
The Company did not commit any matters to a vote of security holders in the
quarter ended December 31, 1999.
21
<PAGE>
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 20 of the Company's 1999 Annual Report
to Shareholders incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
For selected consolidated financial data concerning the Company, see page 11 of
the Company's 1999 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 12 through 24 of the Company's 1999 Annual Report to
Shareholders incorporated herein by reference.
ITEM 7A. MARKET RISK
For management's discussion and analysis of market risk and interest rate
risk management, see pages 20 through 21 of the Company's 1999 Annual Report
to Shareholders incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Audited Consolidated Balance Sheets as of December 31, 1999 and 1998 and
Audited Consolidated Statements of Income and Comprehensive Income,
Shareholders' Equity and Cash Flows for the fiscal years ending December 31,
1999, 1998, and 1997 appear on pages 28 through 31 of the Company's 1999
Annual Report to Shareholders incorporated herein by reference. Notes to the
Consolidated Financial Statements appear on pages 32 through 48 of the
Company's 1999 Annual Report to Shareholders incorporated herein by
reference. The Independent Auditors' Report appears on page 27 of the
Company's 1999 Annual Report to Shareholders incorporated herein by reference.
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 1999 Proxy Statement titled "Election of Directors,"
which is to be filed on or about March 7, 2000.
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 "Information Pertaining
to Election of Directors," which is to be filed on or about March 7, 2000.
22
<PAGE>
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 1999 Proxy Statement, which is to be filed on or about March 7,
2000.
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 1999 Proxy Statement, which was filed on or about March 7, 2000.
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 material which begins on the pages of the
Company's Annual Report to Shareholders for the year ended December 31, 1999
listed, are incorporated herein by reference in response to Item 8 of this
report.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Financial Statements: Page
- -------------------- ----
<S> <C>
- ------------------------------------------------------------------------------------------------------------
Independent Auditors' Report 27
- ------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets as of December 31, 1999 and 1998 28
- ------------------------------------------------------------------------------------------------------------
Consolidated Statements of Income and Comprehensive Income for the Years Ended 1999,
1998, and 1997 29
- ------------------------------------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity for the Years Ended 1999, 1998, and 1997 30
- ------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows for the Years Ended 1999, 1998, and 1997 31
- ------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financials 32
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed in the quarter ending December
31, 1999.
(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).
- -------------------------------------------------------------------------------------------------------------
Bylaws (filed as Exhibit 3.2 of the Company's September 30, 1996 Form
3.2 10Q filed with the SEC on or about November 14, 1996). *
- -------------------------------------------------------------------------------------------------------------
23
<PAGE>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
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).
- -------------------------------------------------------------------------------------------------------------
10.5 Purchase Agreement for three branches from Bank of America is *
incorporated herein by reference from Exhibit 2.1 Registration
Statement on Form S-2 filed July 14, 1997, File No. 333-31193.
- -------------------------------------------------------------------------------------------------------------
10.6 Change-in-Control Agreement between R. Dale McKinney and Capital Corp
of the West
- -------------------------------------------------------------------------------------------------------------
10.7 Deferred Compensation Agreement between members of the board of
directors and Capital Corp of the West
- -------------------------------------------------------------------------------------------------------------
10.8 Executive Salary Continuation Agreement between certain members of
executive management and Capital Corp of the West
- -------------------------------------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------------------------------------
* 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.
Consent of accountant (for incorporation by reference of report of
accountants into form S-8 registration statement.)
24
<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 7th day of March,
2000.
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/ R. DALE MCKINNEY
----------------------
R. DALE MCKINNEY
(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/ LLOYD H. ALHEM Chairman of the March 7, 2000
- ------------------- Board of Directors
LLOYD H. ALHEM
/s/ DOROTHY L. BIZZINI Director March 7, 2000
- ----------------------
DOROTHY L. BIZZINI
/s/ JERRY E. CALLISTER Director March 7, 2000
- ----------------------
JERRY E. CALLISTER
/s/ JACK F. CAUWELS Director March 7, 2000
- -------------------
JACK F. CAUWELS
/s/ JOHN FAWCETT Director March 7, 2000
- ----------------
JOHN FAWCETT
/s/ THOMAS T. HAWKER Director/CEO and March 7, 2000
- -------------------- Principal Operations Officer
THOMAS T. HAWKER
/s/ BERTYL W. JOHNSON Director March 7, 2000
- ---------------------
BERTYL W. JOHNSON
25
<PAGE>
/s/ JAMES W. TOLLADAY Director March 7, 2000
- ---------------------
JAMES W. TOLLADAY
/s/ TOM A.L. VAN GRONINGEN Director March 7, 2000
- --------------------------
TOM A.L. VAN GRONINGEN
</TABLE>
26
<PAGE>
EXHIBIT 10.6
CHANGE IN CONTROL AGREEMENT
---------------------------
- -----------------------
Date
Dale McKinney
3915 Fairley
Dallas, TX 75209
Dear Dale,
It is a pleasure to extend to you this offer of employment as CHIEF FINANCIAL
OFFICER at Capital Corp of the West and, subject to regulatory
"non-disapproval", County Bank. We are proud of our commitment to our
shareholders, customers and community and believe you will be a valuable
asset to our team. Please review the initial terms and conditions of your
employment, as summarized for you below - they will supersede any other
verbal and/or written communications that have taken place between you and
any employee or agent of County Bank, or Capital Corp of the West.
The position of Chief financial Officer with a beginning salary of
$10,833.33 per month. Performance and salary will be reviewed annually
with other officers beginning February 1, 2000.
Eligibility to participate in the executive bonus plan, as adopted each
year by the Board of Directors, effective February 1, 1999, or your
date of hire.
Upon Approval by the Board of Directors you will be awarded: 1) the
title of Senior Vice-President, and ; 2) options for 10,000 shares of
Capital Corp of the West stock. Stock options vest as follows: 25% at
time of grant and 25% per year thereafter to 100% after 3 years of
service. The options have an acceleration provision in the case of
change of control.
Upon approval by the Board of Directors, you will be eligible for a
Salary Continuation Plan, which will provide you with up to $60,000 per
year for fifteen years after you retire at the age of 65. Benefits of
this plan vest as follows: 0% up to 4 years of service, then 40% after
4 years of service and 10% each year thereafter to 100% after 10 years
of service. Benefit becomes 100% vested automatically in the event of a
change of control. Benefit is subject to taking an insurance physical.
Any rating resulting from the physical would affect the salary
continuation plan benefit.
<PAGE>
___________________ Date
Dale McKinney
Offer of Employment
Page 2
Payment of a non-accountable moving allowance of $30,000 upon
satisfactory proof of relocation. We will provide up to eight (8) round
trip airplane tickets between Dallas and Fresno/Merced which you agree
to make best efforts to order with sufficient notice to obtain advance
purchase discounts.
All Standard employee health benefits, including: medical, dental,
vision, life, and long term disability coverage to commence on the date
of hire. The usual 90 day waiting period will be waived. Benefit for
Life and AD&D is 3x annual salary, and LTD pays 60% of monthly pay, up
to $6,000, after 90 days of disability.
Annual paid time off of up to twenty days beginning in 1999. Per our
policy, this is comprised of 16 days of accrued vacation and 4
Performance Bonus days, which are awarded based upon annual review
ratings and available to you in 2000.
Eligibility to participate in our 401 (k) plan effective 1/1/2000, and
enrollment, automatically, in our non-contributory Employee Stock
Ownership Plan effective 7/1/2000, provided all eligibility
requirements are met.
For a period not to exceed ninety (90) days form your date of hire,
Capital Corp to the West agrees to provide housing and utilities, at
it's expense, for your personal use.
Severance Payment: It is agreed that if your employment is terminated
early by employer for any reason other than for "cause", you shall be
entitled to a Severance Payment. This would constitute a right to
continue to receive your regular monthly salary, at the then current
rate of compensation, for twelve (12) consecutive months. This is
contingent upon your having permanently relocated to Merced. It is
expressly agreed that the payments of cash shall be received by you in
full satisfaction of any and all claims and/or damages which may be
sustained by you by reason of you early termination.
Acquisition Payment: Upon the consummation of any event by which
substantially all of the stock and/or assets of Capital Corp of the
West are acquired by a person, a group of persons, a financial
institution or other entity, and as a result of which your duties,
responsibilities and compensation are substantially changed, you shall
receive an Acquisition payment in the amount equal to six (6) month's
regular salary at your then current rate of compensation.
By your signature below you understand and agree that under no
circumstances would you be entitled to receive both the Acquisition
Payment and the Severance Payment.
<PAGE>
______________Date
Dale McKinney
Offer of Employment
Page 3
If you agree to accept employment under these terms and conditions, please sign
below where indicated.
On behalf of Capital Corp of the West, I look forward to having you join our
team.
Sincerely,
/s/ Donielle Kramer
- -------------------
Donielle Kramer
Assistant Vice President
Personnel Officer
Capital Corp of the West, to include subsidiaries, is an at-will
employer and employs the policy of allowing its employees to terminate
their employment relationship at any time, for any reason, with or
without notice. The company also reserves the right to terminate the
relationship at any time, for any reason, with or without notice. Any
deviation from this policy must be made in writing by the President of
Board of Directors.
<PAGE>
______________Date
Dale McKinney
Offer of Acceptance
Page 4
ACCEPTANCE
I accept this offer of employment and understand that this offer
supersedes any previous offer or discussion that may have taken place
between myself and any employee or agent of Capital Corp of the West.
Furthermore, I understand that this offer is subject to regulatory
notice of non-disapproval and satisfactory completion of a background
and credit history check; and
I understand that I must provide satisfactory records to document my
eligibility to work In the United States; and
I understand that I must be bondable.
------------------------------------------------
Signature Date
<PAGE>
EXHIBIT 10.7
COUNTY BANK
DEFERRED COMPENSATION AGREEMENT
This Deferred Compensation Agreement ("Agreement") is made this
________ day of _____________, 1995, by and between Capital Corp of the West, a
California corporation and County Bank, a California banking corporation on the
one hand (Collectively the "Bank"), their successors or assigns, and
____________________________ (the "Director").
RECITAL
To encourage the Director to remain a member of the Bank's Board of
Directors, the Bank is willing to provide to the Director a deferred
compensation opportunity. The Bank will pay the benefits from its general
assets. The Bank will purchase a life insurance policy on the Director's
life, owned by the Bank and with the Bank as the sole beneficiary, in order
to provide the director or his or her beneficiary with certain benefits
payable upon the death of the Director, or upon the Director's normal
termination date.
AGREEMENT
The Director and the Bank agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. Whenever used in this Agreement, the following words
and phrases shall have the meanings specified:
<PAGE>
1.1.1 A "Change of Control" shall be deemed to have occurred
if (i) a tender offer shall be make and consummated for the ownership of
25% or more of the outstanding voting securities of the Bank; (ii) the Bank
shall be merged or consolidated with another bank or corporation and as a
result of such merger or consolidation less than 75% of the outstanding
voting securities or the surviving or resulting bank or corporation shall
be owned in the aggregate by the former shareholders of the Bank, other
than affiliates (within the meaning of the Securities Exchange Act of 1934)
of the party to such merger or consolidation, as the same shall have
existed immediately prior to such merger of consolidation; (iii) the Bank
shall sell substantially all of its assets to another bank or corporation
which is not a wholly owned subsidiary; or (iv) a person, within the
meaning or Section 3(a)(9) or of Section 13(d)(3) (as in effect on the
date hereof) of the Securities Exchange Act of 1934, shall acquire 25% or
more of the outstanding voting securities of the Bank (whether directly,
indirectly, beneficially or of record). For purposes hereof, ownership of
voting securities shall take into account and shall include ownership as
determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in
effect on the date hereof) pursuant to the Securities Exchange Act of 1934.
1.1.2 "Code" means the Internal Revenue Code of 1986, as amended.
References to a Code section shall be deemed to be to that section
as it now exists and to any successor provision.
1.1.3 "Disability" shall mean the inability of the Director to perform
the duties and responsibilities of his or her position with the
Bank in a normal and regular manner, due to mental or physical
illness of injury, for a period of ninety (90) consecutive days,
or for fifty percent (50%) of more of the normal working days
during a period of one hundred eighty (180) consecutive days.
Determination of the Director's Disability shall be made by the
Bank's Board of Director's, which determination shall not be
unreasonable or arbitrary and shall be supported by medical
opinion. The Director shall be ineligible to participate in such
disability determination. Director shall, if requested by the
Bank's board of Directors, submit to a mental or physical
examination to assist the Board of Directors in making its
determination of Disability hereunder. The psychiatrist or
physician performing such examination shall be selected by the
Bank and Director, or the Director's representative if the
Director is not able to participate in such selection.
1.1.4 "Election Form" means the Form attached as Exhibit 1.
1.1.5 "Fees" means the total director's fees payable to the Director.
1.1.6 "Normal Termination Date" means the Director attaining age
seventy (70) and completing ten (10) Years of Service beginning
on the date of this Agreement.
1.1.7 "Termination of Service" means the Director ceasing to be a
member of the Bank's Board of Directors for any reason whatsoever.
<PAGE>
1.1.8 "Years of Service" means the total number of twelve-month periods
during which the Director serves as a member of the Bank's Board
of Directors.
ARTICLE 2
DEFERRAL ELECTION
2.1 INITIAL ELECTION. The Director shall make as initial deferral
election under this Agreement by filing with the Bank a signed
Election Form within 30 days after the date of this Agreement. The
Election Form shall set forth the amount of Fees to be deferred and
the form of benefit payment. The Election Form shall be effective to
defer only Fees earned after the date the Election Form is received by
the Bank.
2.2 ELECTION CHANGES.
2.2.1 GENERALLY. The Director may modify the amount of Fees
to be deferred by filing a subsequent signed Election Form
with the Bank. The modified deferral shall not be effective
until the calender year following the year in which the
subsequent Election form is received by the Bank. The Director
may not change the form of benefit payment initially elected
under Section 2.1.
2.2.2 HARDSHIP. If an unforeseeable financial emergency
arising from the death of a family member, divorce, sickness,
injury, catastrophe of similar event outside the control of
the Director occurs, the Director, by written instructions to
the Bank, may reduce future deferrals under this Agreement.
ARTICLE 3
DEFERRAL ACCOUNT
3.1 ESTABLISHING AND CREDITING. The Bank shall establish a Deferral
Account on its books for the Director, and shall credit to the
Deferral Account the following amounts:
3.1.1 DEFERRALS. The Fees deferred by the Director as of the
time the fees would have otherwise been paid to the Director.
<PAGE>
3.1.2 INTEREST. On the first day of each month and immediately
prior to the payment of any benefits, interest on the account
balance at an annual rate, equal to the prime interest rate as
published in the West Coast edition of THE WALL STREET JOURNAL.
The interest rate shall be adjusted annually on January 1 and
shall continue unchanged for the year until the next adjustment
date.
3.2 STATEMENT OF ACCOUNTS. The Bank shall provide to the Director,
prior to April 15 of each year, a statement setting forth the Deferral
Account balance.
3.3 ACCOUNTING DEVICE ONLY. The Deferral Account is solely a
device for measuring amounts to be paid under this Agreement. The
Deferral Account is not a trust fund of any kind. The Director is a
general unsecured creditor of the Bank for the payment of benefits.
The benefits represent the mere promise by the Bank to pay such
benefits. The Director's rights are not subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment, or garnishment by the Director's creditors.
ARTICLE 4
LIFETIME BENEFITS
4.1 NORMAL TERMINATION BENEFIT. Upon the Director's Termination of
Service on the normal termination date as described in Section 1.1.6,
the Bank shall pay to the Director the benefit described in this
Section 4.1.
4.1.1 AMOUNT OF BENEFIT. The benefit under this Section 4.1 is
$13,914 per year for ten (10) years commencing on the date
elected by the Director.
4.1.2 The benefit as described in 4.1.1 is in lieu of the
balance in the Deferral Account. Said balance reverts back to
the Bank.
4.2 EARLY TERMINATION BENEFIT. If the Director terminates service
as a director before the Normal Termination Date, and for reasons
other than death or Disability, the Bank shall pay to the Director the
benefit described in this Section 4.2.
4.2.1 AMOUNT OF BENEFIT. The benefit under this Section 4.2 is
the Deferral Account balance at the time of early termination.
4.2.2 PAYMENT OF BENEFIT. The Bank shall pay the benefit to the
Director in the form elected by the Director or on the Election
Form. The Bank shall continue to credit interest under Section
3.1.2.
<PAGE>
4.3 DISABILITY BENEFIT. If the Director terminates service as a
director for Disability prior to the Normal Retirement Date, the Bank
shall pay to the Director the benefit described in this Section 4.3.
4.3.1 AMOUNT OF BENEFIT. The benefit under this Section 4.3 is
the Deferral Account balance at the Director's Termination of
Service.
4.3.2 PAYMENT OF BENEFIT. The Bank shall pay the benefit to the
Director in the form elected by the Director on the Election
Form. The Bank shall continue to credit interest under Section
3.1.2.
4.4 CHANGE OF CONTROL BENEFIT. Upon a Change of Control while
the Director is in the active service of the Bank, the Bank shall pay
to the Director the benefit described in this Section 4.4 in lieu of
any other benefit under this Agreement.
4.4.1 AMOUNT OF BENEFIT. The benefit under this Section 4.4 is
the Deferral Account balance at the date of the Director's
Termination of Service.
4.4.2 PAYMENT OF BENEFIT. The Bank shall pay the benefit to the
Director in a lump sum within ninety (90) days after the
Director's Termination of Service.
4.5 HARDSHIP DISTRIBUTION. Upon the Bank's determination
(following petition by the Director has suffered an unforeseeable
financial emergency as described in Section 2.2.2, the Bank shall
distribute to the Director all or a portion of the Deferral Account
balance as determined by the Bank, but in no event shall the
distribution be greater than is necessary to relieve the financial
hardship.
ARTICLE 5
DEATH BENEFITS
5.1 DEATH DURING ACTIVE SERVICE. If the Director dies while in the
active service of the Bank, the Bank shall pay to the Director's
beneficiary the benefit described in this Section 5.1.
5.1.1 AMOUNT OF BENEFIT. The benefit under Section 5.1 is an
annual amount of $13,914 for ten (10) years, commencing within
ninety (90) days following the day that the Bank receives
notification of the Director's death, and paid on that same
date annually thereafter until the tenth (10) year after the
Director's death.
<PAGE>
5.1.2 The benefit as described in 5.1.1 is in lieu of the
balance in the Deferral Account. Said balance reverts back to
the Bank.
5.2 DEATH DURING BENEFIT PERIOD. If the Director dies after benefit
payments have commenced under this Agreement but before receiving all
such payments, the Bank shall pay the remaining benefits to the
Director's beneficiary at the same time and in the same amounts they
would have been paid to the Director had the Director survived.
ARTICLE 6
BENEFICIARIES
6.1 BENEFICIARY DESIGNATIONS. The Director shall designate a
beneficiary by filing a written designation with Bank. The Director
may revoke or modify the designation at any time by filing a new
designation. However, designations will only be effective if signed by
the Director and accepted by the Bank during the Director's lifetime.
The Director's beneficiary designation shall be deemed automatically
revoked if the beneficiary predeceases the Director, or if the
Director names a spouse as beneficiary and the marriage is
subsequently dissolved. If the Director dies without a valid
beneficiary designation, all payments shall be made to the Director's
surviving spouse, if any, and if none, to the Director's surviving
children and the descendants of any deceased child by right of
representation, and if no children of descendants survive, to the
Director's estate.
6.2 FACILITY OF PAYMENT. If a benefit is payable to
a minor, to a person declared incompetent, or to a person
incapable of handling the disposition of his or her property, the
Bank may pay such benefit to the guardian, legal representative or
person having the care or custody of such minor, incompetent
person or incapable person. The Bank may require proof of
incompetency, minority or guardianship as it may deem appropriate
prior to distribution of the benefit. Such distribution shall
completely discharge the Bank from all liability with respect to
such benefit
ARTICLE 7
GENERAL LIMITATION
7.1 SUICIDE. If the Director commits suicide within two (2) years
after the date of this Agreement, or if the director has made any
material misstatement of fact on any application for life insurance
purchased by the Bank, the only benefits payable will be limited to
the balance of the Deferral Account.
<PAGE>
7.1.1 PAYMENT OF BENEFIT. The Bank shall pay the benefit to the
Director's beneficiary in the form elected by the Director on
the Election Form. The Bank shall continue to credit interest
under Section 3.1.2.
ARTICLE 8
CLAIMS AND REVIEW PROCEDURES
8.1 CLAIMS PROCEDURE. The Bank shall notify the Director's
beneficiary in writing, within ninety (90) days of his or her
written application for benefits, of his or her eligibility or none
eligibility for benefits under this Agreement. If the Bank
determines that the beneficiary is not eligible for benefits or
full benefits, the notice shall set forth (1) the specific reasons
for such denial, (2) a specific reference to the provisions of this
Agreement on which the denial is based, (3) a description of any
additional information or material necessary for the claimant to
perfect his or her claim, and a description of why it is needed,
and (4) an explanation of this Agreement's claims review procedure
and other appropriate information as to the steps to be taken if
the beneficiary wishes to have the claim reviewed. If the Bank
determines that there are special circumstances requiring
additional time to make a decision, the Bank shall notify the
beneficiary of the special circumstances and the date by which a
decision is expected to be made, and may extend the time for up to
an additional ninety (90) day period.
8.2 REVIEW PROCEDURE. If the beneficiary is determined by the
Bank not to be eligible for benefits, or if the beneficiary
believes that he or she is entitled to greater or different
benefits, the beneficiary shall have the opportunity to have such
claim reviewed by the Bank by filing a petition for review with the
Bank within sixty (60) days after receipt of the notice issued by
the Bank. Said petition shall state the specific reasons which the
beneficiary believes entitle him or her to benefits or to greater
or different benefits. Within sixty (60) days after receipt by the
Bank of the petition, the Bank shall afford the beneficiary (and
counsel, if any) an opportunity to present his or her position to
the Bank orally or in writing, and the beneficiary (or counsel)
shall have the right to review the pertinent documents. The Bank
shall notify the beneficiary of its decision in writing within the
sixty (60) day period, stating specifically the basis of its
decision, written in a manner calculated to be understood by the
beneficiary and the specific provisions of the Agreement on which
the decision is based. If, because of the need for a hearing, the
sixty (60) day period is not sufficient, the decision may be
deferred for up to another sixty (60) day period at the election of
the Bank, but notice of this deferral shall be given to the
beneficiary.
<PAGE>
ARTICLE 9
AMENDMENTS AND TERMINATION
9.1 AMENDMENT. The Bank may amend or terminate this
Agreement at any time if, pursuant to legislative, judicial or
regulatory action, continuation of the Agreement would (i) cause
benefits to be taxable to the Director prior to actual receipt,
(ii) result in significant financial penalties or other
significantly detrimental ramifications to the Bank (other than
the financial impact of paying the benefits) or (iii) is
prohibited by law, regulation or order of a banking regulatory
agency. In no event shall this Agreement be terminated without
payment to the Director of the Deferral Account balance
attributable to the Director's deferrals and interest credited on
such amounts pursuant to Section 3.1.2.
ARTICLE 10
10.1 NON-ASSIGNABLE. Neither the Director, his or her
spouse, nor any other beneficiary under this Agreement shall have
any power or right to transfer, assign, anticipate, hypothecate,
mortgage, commute, modify, or otherwise encumber in advance any of
the benefits payable hereunder, nor shall any of said benefits be
subject to seizure for the payment of any debts, judgments,
alimony or separate maintenance, owed by the Director or his or
her beneficiary of any of them, or be transferable by operation of
law in the event of bankruptcy, insolvency or otherwise.
10.2 UNSECURED GENERAL CREDITOR. The Director's rights
are limited to the right to receive payments as provided in this
Agreement and the Director's position with respect thereto is that
of a general unsecured creditor of the Bank.
10.3 REORGANIZATION. The Bank shall not voluntarily
engage in a Change of Control of the Bank unless and until such
succeeding or continuing corporation, bank, firm, entity or person
agrees to assume and discharge the obligations of the Bank under
this Agreement. Upon the occurrence of such event, the term"Bank"
as used in this Agreement shall be deemed to refer to such
successor or survivor corporation, bank, firm or person.
10.4 NOT A GUARANTEE OF ELECTION AS DIRECTOR. This
Agreement shall not be deemed to constitute a contract or
agreement that the Bank shall be required to propose the Director
as a nominee for election to the Board of Directors of the Bank or
to have the Bank's proxy holders vote in favor of the election of
the Director to the Bank's Board of Directors.
<PAGE>
10.5 LIQUIDATED DAMAGES. The parties hereto, before
entering into this Agreement, have been concerned with the fact
that substantial damages will be suffered by Director in he event
that the Bank shall fail to perform according to this Agreement.
In the event of nonperformance by the Bank for a period of thirty
(30) days from the time any such payment was scheduled to be made
pursuant to this Agreement, Director shall immediately be entitled
to liquidated damages equal to one and one-half (1-1/2) times the
remaining payments due Director under this Agreement. This
provision shall not be applicable in the event that such
nonpayment is the result of prohibition of such payment by law,
regulation or order of a banking regulatory agency.
10.6 SUCCESSORS AND ASSIGNS; ASSIGNMENT. The rights
and obligations of this Agreement shall be binding upon and inure
to the benefit of the successors, assigns, heirs and personal
representatives of the parties hereto. Director may not assign
this Agreement of any of Director's rights hereunder except with
the prior written consent of the Bank.
10.7 SEVERABILITY. If any provision of this Agreement,
as applied to either party or to any circumstance, is judged by a
court to be void or unenforceable, in whole or in part, the same
shall in no way affect any other provision of this Agreement, the
application of such provision in any other circumstances, or the
validity or enforce ability of this Agreement.
10.8 APPLICABLE LAW; JURISDICTION AND VENUE. This
Agreement and all matters or issues collateral hereto shall be
governed by the laws of the State of California applicable to
contracts performed entirely therein. Director and Bank each
consent to the jurisdiction of, and any action concerning this
Agreement shall be brought and tried in, the United States
District Court for the Eastern District of California or the
Superior or Municipal court for the County of Merced.
10.9 WAIVER. A waiver by either party of any of the
terms or conditions of this Agreement in any one instance shall
not be deemed or construed to be a waiver of such terms or
conditions for the future, or of any subsequent breach thereof.
All remedies, rights, undertakings, obligations, and agreements
contained in this Agreement shall be cumulative, and none of them
shall be in limitation of any other remedy, right, undertaking,
obligation or agreement of either party.
10.10 ATTORNEY'S FEES. If any legal action or other
proceeding is brought for the enforcement of the Agreement, or
because of an alleged dispute, breach, default, or
misrepresentation in connection with any of the provisions of this
Agreement, the successful or prevailing party or parties shall be
entitled to recover reasonable attorneys' fees and other costs
incurred in that action or proceeding, in addition to any other
relief to which it or they may be entitled.
<PAGE>
10.11 HEADINGS. The headings in this Agreement are for convenience
only and shall not in any manner affect the interpretation or
construction of the Agreement or any of its provision.
10.12 NOTICE. Any notice or other communication to be given under
this Agreement shall be in writing and shall be deemed to have been
duly given on the date of service if personally served, or if mailed,
upon deposit in the United Sates mail, first class postage prepaid,
express or certified, return receipt requested, and properly addressed
to the parties as follows: if to Director at his last address shown in
the Bank's records; if to Bank:
County Bank
505 West Main Street
Merced, California 95340
Attn: Chairman
Either party may designate a new address for purposes of this
Section 10.12 by giving the other notice of the new address as
provided herein.
IN WITNESS WHEREOF, the Bank has caused this Agreement to be
duly executed by its proper officer and the Director has hereunto set
his hand at Merced, California, the day and year first above written.
COUNTY BANK:
By:______________________________
Its:______________________________
DIRECTOR:
--------------------------------
DIRECTOR NAME
<PAGE>
EXHIBIT I
ELECTION FORM
This election form, when properly signed, shall become part of the Deferred
Compensation Agreement dated _________________________ by and between COUNTY
BANK and _________________________ (the "Director").
A. DEFERRAL ELECTION
The undersigned hereby elects to defer $_____________ (_______________)
per month from his/her Director's fees, receivable as a director of
County Bank. If the amount of fees receivable in any one month is less
than the amount to be deferred, the deferral shall be 100% of the fees
receivable.
B. BENEFIT PAYMENT ELECTION
1. In case of a normal termination or death of the undersigned or
a change of control, the benefits are payable as described in
the Deferred Compensation Agreement.
2. In case of early termination or disability as set forth in the
Deferred Compensation Agreement, the undersigned wishes the
distribution of benefits to be as follows:
/ / Lump sum distribution, provided that the total amount of
benefits does not exceed $25,000.00.
/ / $___________ per year (not to exceed $25,000.00 per year)
until all benefits are paid out.
/ / ________% of total benefits per year (not to exceed $25,000.00
per year) until all benefits are paid out.
SIGNED THIS ______________ DAY OF _____________________, 200____.
- ---------------------------------
THE "DIRECTOR"
<PAGE>
EXHIBIT 10.8
EXECUTIVE SALARY CONTINUATION AGREEMENT
THIS EXECUTIVE SALARY CONTINUATION AGREEMENT ("Agreement") is made and
entered into this ________________ day of __________, 1999, by and between
Capital Corporation of the West, a California corporation and County Bank, a
California banking corporation on the one hand (collectively the "Bank"), their
successors or assigns, and ___________________________________ on the other hand
(the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive is employed by the Bank as its
[Position] ; and [Title] ;
- ----------------------------------------------------------------------
WHEREAS, the experience of the Executive, his knowledge of the affairs
of the Bank, and his reputation and contacts in the banking industry are so
valuable that assurance of his continued service is essential for the future
growth and profitability of the Bank and it is in the best interests of the Bank
to arrange terms of continued employment for the Executive so as to reasonably
assure his remaining in the Bank's employment during his lifetime or until the
age of retirement; and
WHEREAS, it is the desire of the Bank that the Executive's services be
retained as herein provided; and
WHEREAS, the Executive is willing to continue in the employ of the Bank
provided the Bank agrees to pay the Executive or his beneficiaries certain
benefits in accordance with the terms and conditions hereinafter set forth;
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NOW, THEREFORE, in consideration of the services to be performed in the
future as well as the mutual promises and covenants herein contained, it is
hereby agreed as follows:
ARTICLE 1.
1.1. BENEFICIARY. The term Beneficiary shall mean the person or persons
whom the Executive shall designate in writing to receive the benefits provided
hereunder.
1.2. DISABILITY. If the Executive is covered by a Bank-sponsored
disability insurance policy, the definition of disability shall be as defined
in such policy without regard to any waiting period. If Executive is not
covered by a Bank-sponsored disability policy, the term disability shall mean
the inability of the Executive to perform the duties and responsibilities of
his position with the Bank in a normal and regular manner, due to mental or
physical illness or injury, for a period of ninety (90) consecutive days, or
for fifty percent (50%) or more of the normal working days during a period of
one hundred eighty (180) consecutive days. Determination of the Executive's
disability shall be made by the Bank's Board of Directors, which
determination shall not be unreasonable or arbitrary and shall be supported
by medical opinion. In the event Executive is also a director of the Bank,
the Executive shall be ineligible to participate in such disability
determination. Executive shall, if requested by the Bank's Board of
Directors, submit to a mental or physical examination to assist the Board of
Directors in making its determination of disability hereunder. The
psychiatrist or physician performing such examination shall be selected by
the Bank and Executive, or the Executive's representative if Executive is not
able to participate in such selection.
1.3 NAMED FIDUCIARY AND PLAN ADMINISTRATOR. The Named Fiduciary and
Plan Administrator of this plan shall be the Bank.
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1.4 CHANGE OF CONTROL. A "Change of Control" shall be deemed to have
occurred if (i) a tender offer shall be made and consummated for the
ownership of 25% or more of the outstanding voting securities of the Bank;
(ii) the Bank shall be merged or consolidated with another bank or
corporation and as a result of such merger or consolidation less than 75% of
the outstanding voting securities of the surviving or resulting bank or
corporation shall be owned in the aggregate by the former shareholders of the
Bank, other than affiliates (within the meaning of the Securities Exchange
Act of 1934) of the party to such merger or consolidation, as the same shall
have existed immediately prior to such merger or consolidation; (iii) the
Bank shall sell substantially all of its assets to another bank or
corporation which is not a wholly owned subsidiary; or (iv) a person, within
the meaning of Section 3(a)(9) or of Section 13(d)(3) (as in effect on the
date hereof) of the Securities Exchange Act of 1934, shall acquire 25% or
more of the outstanding voting securities of the Bank (whether directly,
indirectly, beneficially or of record). For purposes hereof, ownership of
voting securities shall take into account and shall include ownership as
determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on
the date hereof) pursuant to the Securities Exchange Act of 1934.
1.5 CAUSE. The term "Cause" shall mean any act of embezzlement,
fraud, breach of fiduciary duty, dishonesty, deliberate or repeated disregard
of the policies and rules of the Bank as adopted by the Board of Directors or
a Committee thereof, egregious conduct resulting in the violation of any
banking statues or regulations, gross negligence adversely impacting the Bank
or any other willful misconduct relating to the Executive's duties.
ARTICLE 2.
2.1 EMPLOYMENT. The Bank agrees to employ the Executive in such
capacity as the Bank may determine from time to time. The Executive will
continue in the employ of the Bank
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in such capacity and with such duties and responsibilities as may be assigned
to him, and with such compensation as may be determined from time to time by
the Board of Directors of the Bank.
2.2 FULL EFFORTS. Executive shall devote his full business time and
efforts to the business and affairs of the Bank or the successor to the Bank
by which Executive is then employed pursuant to this Agreement; provided,
however, this provision shall not preclude Executive from serving as a
director or member of a committee of any other organization involving no
conflict of interests with the interests of the Bank, from engaging in
charitable and community activities, and from managing his personal
investments, provided that such activities do not materially interfere with
the regular performance of his duties and responsibilities under this
Agreement.
2.3 FRINGE BENEFIT. The salary continuation benefits provided by
this Agreement are granted by the Bank as a fringe benefit to the Executive
and are not part of any salary reduction plan or any arrangement deferring a
bonus or a salary increase. The Executive has no option to take any current
payment or bonus in lieu of these salary continuation benefits.
ARTICLE 3.
3.1 RETIREMENT. If the Executive shall continue in the employment of
the Bank until he attains the age of sixty-eight (68), he may retire from
active daily employment as of the first day of the month next following
attainment of age sixty-eight (68) or upon such later date as may be mutually
agreed upon by the Executive and the Bank ("Retirement Date").
3.2 PAYMENT. The Bank agrees that upon such Retirement Date it will
pay to the Executive the annual sum of Fifty-Thousand Dollars ($50,000),
payable monthly on the first day
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of each month following such Retirement Date for a period of one hundred
twenty (120) months; subject to the conditions and limitations set forth in
this Agreement.
3.3. DEATH AFTER RETIREMENT. The Bank agrees that if the Executive
dies after the Retirement Date but shall die before receiving the full amount
of monthly payments to which he is entitled under this Agreement, the Bank
will continue to make such monthly payments to the Executive's designated
Beneficiary for the remaining period. If a valid Beneficiary Designation is
not in effect, the payments shall be made to the Executive's surviving spouse
or, if none, said payments shall be made to the duly qualified personal
representative, executor or administrator of Executive's estate.
ARTICLE 4.
4.1. DEATH PRIOR TO RETIREMENT. In the event the Executive should
die while employed by the Bank at any time after the date of this Agreement
but prior to his Retirement Date, the Bank shall pay to the Executive's
designated Beneficiary a sum equal to the lesser of (i) the Net Insurance
Coverage for the appropriate Plan Year set forth in Schedule A (Participant
Balance Sheet and Policy Data) or (ii) the vested portion of the retirement
benefits in accordance with the provisions of Section 5.1.a. Said amount
shall be paid to the Executive's designated Beneficiary in a lump sum within
three (3) months of the Executive's date of death. If a valid Beneficiary
Designation is not in effect, the payments shall be made to the Executive's
surviving spouse or, if none, said payments shall be made to the duly
qualified personal representative, executor or administrator of Executive's
estate. Provided, however, that anything hereinabove to the contrary
notwithstanding, no death benefit shall be payable hereunder if it is
determined that the Executive has made any material misstatement of fact on
any application for life insurance purchased by the Bank.
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<PAGE>
4.2. DISABILITY PRIOR TO RETIREMENT. In the event the Executive
should become disabled while actively employed by the Bank at any time after
the date of this Agreement but prior to his Retirement Date, the Executive
shall be vested in the amount to be determined in accordance with Section
5.1.a. Said amount shall be paid to the Executive in a lump sum within three
(3) months of the determination of disability. Said payment shall be in lieu
of any other retirement or death benefit under this Agreement.
ARTICLE 5.
5.1 TERMINATION OF EMPLOYMENT. The Bank reserves the right to
terminate the employment of the Executive at any time prior to his Retirement
Date. In the event that Executive's retirement is terminated for cause, as
defined above, then Executive shall not be entitled to any benefits pursuant
to this Agreement. In the event that the employment of the Executive shall
terminate prior to the Executive's Retirement Date, other than by reasons of
Executive's disability or death, then this Agreement shall terminate upon the
date of such termination of employment. Provided, however, that in the event
of termination prior to the Executive's Retirement Date, other than by
reasons of Executive's disability, death or cause, then Executive shall be
entitled to the benefits described below under the following circumstances.
a. The Executive will be considered to be vested in
40% of the retirement benefit payments described in
Section 3.2 of this Agreement after four (4) years
from the Executive's date of employment. The
Executive shall become vested thereafter in an
additional 30% of said retirement benefit payments
for each full succeeding year thereafter that
Executive remains an employee of the Bank and shall
be fully vested after six (6) continuous
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years from the Executive's date of employment.
If the Executive is employed by the Bank for a
period of less than four (4) continuous years,
the Executive shall not be considered to be
vested in any benefit hereunder and shall be
entitled to no benefits under this Agreement.
If the Executive's employment is terminated
under the provisions of Section 5.1, the Bank
will pay Executive's vested amount upon the
terms and conditions provided in this Agreement
and upon Executive attaining age sixty-eight
(68).
b. Anything hereinabove to the contrary
notwithstanding, if the Executive is not fully
vested in the amount set forth in Schedule A, he
will become fully vested in said amount in the
event of a Change of Control of the Bank and
Executive shall be entitled to the full amount set
forth in Schedule A, upon the terms and conditions
thereof, if termination of employment thereafter
occurs under this Section 5.1.
ARTICLE 6.
6.1 TERMINATION OF AGREEMENT BY REASON OF CHANGE IN LAW. The Bank is
entering into this Agreement upon the assumption that certain existing tax
laws will continue to be effective in substantially their current form. In
the event of any changes in such federal laws, which materially affect this
Agreement, the Bank shall have an option to terminate or modify this
Agreement. Provided, however, that the Executive shall be entitled to at
least the same amount as she would have been entitled to under Section 4.2
relating to disability. The payment of said amount shall be made upon such
terms and conditions and at such time as the Bank shall determine, but in no
event commencing later than the Executive's Retirement Date.
7
<PAGE>
ARTICLE 7.
7.1 NONASSIGNABLE. Neither the Executive, his spouse, nor any other
beneficiary under this Agreement shall have any power or right to transfer,
assign, anticipate, hypothecate, mortgage, commute, modify, or otherwise
encumber in advance any of the benefits payable hereunder, nor shall any of said
benefits be subject to seizure for the payment of any debts, judgments, alimony
or separate maintenance, owed by the Executive or his beneficiary or any of
them, or be transferable by operation of law in the event of bankruptcy,
insolvency or otherwise.
ARTICLE 8.
8.1. CLAIMS PROCEDURE. The Bank shall notify the Executive or
Executive's beneficiary in writing, within sixty (60) days of written
application for benefits, of eligibility or non-eligibility for benefits
under the Agreement. If the Bank determines that the Executive or Executive's
beneficiary is not eligible for benefits or full benefits, a notice shall be
sent setting forth: (1) the specific reasons for such denial; (2) a specific
reference to the provisions of the Agreement on which the denial is based;
(3) a description of any additional information or material necessary for the
claimant to perfect his claim, and a description of why it is needed; and (4)
an explanation of the Agreement's claim review procedure and other
appropriate information as to the steps to be taken if the Executive or
Executive's beneficiary wishes to have the claim reviewed. If the Bank
determines that there are special circumstances requiring additional time to
make a decision, the Bank shall notify the Executive or Executive's
beneficiary of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to one additional period
of up to sixty (60) days.
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8.2 REVIEW PROCEDURE. If Executive or Executive's beneficiary is
determined by the Bank not to be eligible for benefits, or if the Executive
or Executive's beneficiary believes that she is entitled to greater or
different benefits, the Executive or Executive's beneficiary shall have the
opportunity to have such claim reviewed by the Bank by filing a petition for
review with the Bank within sixty (60) days after receipt of the notice
issued by the Bank. Said petition shall state the specific reasons which the
Executive or Executive's beneficiary believes, entitle him to benefits or to
greater or different benefits. Within sixty (60) days after receipt by the
Bank of the petition, the Bank shall afford the Executive or Executive's
beneficiary (and counsel, if any) an opportunity to present her position to
the Bank orally or in writing, and the Executive or Executive's beneficiary
(or counsel) shall have the right to review the pertinent documents. The Bank
shall notify the Executive or Executive's beneficiary of its decision in
writing within the sixty (60) day period, stating specifically the basis of
its decision, written within the sixty (60) day period, stating specifically
the basis of its decision, written in a manner calculated to be understood by
the Executive or Executive's beneficiary and the specific provisions of the
Agreement on which the decision is based. If, because of the need for a
hearing, the sixty (60) day period is not sufficient, the decision may be
deferred for one additional period of up to sixty (60) days at the election
of the Bank, but notice of this deferral shall be given to the Executive or
Executive's beneficiary.
ARTICLE 9.
9.1. UNSECURED GENERAL CREDITOR. The Executive's rights are limited to
the right to receive payments as provided in this Agreement and the Executive's
position with respect thereto is that of a general unsecured creditor of the
Bank.
ARTICLE 10.
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10.1. REORGANIZATION. The Bank shall not voluntarily engage in a
Change of Control of the Bank unless and until such succeeding or continuing
corporation, bank, firm, or person agrees to assume and discharge the
obligations of the Bank under this Agreement. Upon the occurrence of such
event, the term "Bank" as used in this Agreement shall be deemed to refer to
such successor or survivor corporation, bank, firm or person.
ARTICLE 11.
11.1. NOT A CONTRACT OF EMPLOYMENT. This Agreement shall not be
deemed to constitute a contract of employment between the parties hereto, nor
shall any provision hereof restrict the right of the Bank to discharge the
Executive, or restrict the right of the Executive to terminate his employment.
ARTICLE 12.
12.1. LIQUIDATED DAMAGES. The parties hereto, before entering into
this Agreement, have been concerned with the fact that substantial damages
will be suffered by Executive in the event that the Bank shall fail to
perform according to this Agreement. In the event of nonperformance by the
Bank for a period of thirty (30) days or more from the time any such payment
was scheduled to be made pursuant to this Agreement, Executive shall
immediately be entitled to liquidated damages equal to one and one-half
(1-1/2) times the remaining payments due to Executive under this Agreement.
This provision shall not be applicable in the event that such nonpayment is
the result of prohibition of such payment by law, regulation or order of a
banking regulatory agency.
ARTICLE 13.
13.1. SUCCESSORS AND ASSIGNS; ASSIGNMENT. The rights and obligations of
this Agreement shall be binding upon and inure to the benefit of the successors,
assigns, heirs and
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personal representatives of the parties hereto. Executive may not assign this
Agreement or any of Executive's rights hereunder except with the prior
written consent of the Bank.
13.2. SEVERABILITY. If any provision of this Agreement, as applied to
either party or to any circumstance, is judged by a court to be void or
unenforceable, in whole or in part, the same shall in no way affect any other
provision of this Agreement, the application of such provision in any other
circumstances, or the validity or enforceability of this Agreement.
13.3. APPLICABLE LAW; JURISDICTION AND VENUE. This Agreement and all
matters or issues collateral hereto shall be governed by the laws of the State
of California applicable to contracts performed entirely therein. Executive and
Bank each consent to the jurisdiction of, and any action concerning this
Agreement shall be brought and tried in, the United States District Court for
the Eastern District of California or the Superior or Municipal Court for the
County of Merced.
13.4. WAIVER. A waiver by either party of any of the terms or
conditions of this Agreement in any one instance shall not be deemed or
construed to be a waiver of such terms or conditions for the future, or of any
subsequent breach thereof. All remedies, rights, undertakings, obligations, and
agreements contained in this Agreement shall be cumulative, and none of them
shall be in limitation of any other remedy, right, undertaking, obligation or
agreement of either party.
13.5. ATTORNEY'S FEES. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged dispute,
breach, default, or misrepresentation in connection with any of the provisions
of this Agreement, the successful or prevailing party or parties shall be
entitled to recover reasonable attorneys' fees and other costs
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incurred in that action or proceeding, in addition to any other relief to
which it or they may be entitled.
13.6. HEADINGS. The headings in this Agreement are for convenience only
and shall not in any manner affect the interpretation or construction of the
Agreement or any of its provisions.
13.7. NOTICE. Any notice or other communication to be given under this
Agreement shall be in writing and shall be deemed to have been duly given on the
date of service if personally served, or if mailed, upon deposit in the United
States mail, first class postage prepaid, express or certified, return receipt
requested, and properly addressed to the parties as follows: if to Executive at
his last address shown in the Bank's records; if to Bank:
County Bank
550 West Main Street
Merced, California 95340
Attn: Chairman
Either party may designate a new address for purposes of this Section 13.7 by
giving the other notice of the new address as provided herein.
IN WITNESS WHEREOF, the Bank has caused this Agreement to be duly
executed by its proper officer and the Executive has hereunto set his hand at
Merced, California, the day and year first above written.
COUNTY BANK EXECUTIVE
By:
- ------------------------------ ------------------------------
[Name]
Its:
- ------------------------------
12
<PAGE>
<PAGE>
EXH 13
<TABLE>
<CAPTION>
Capital Corp of the West
Selected Financial Data
- ---------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands) 1999 1998 1997 (1) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary income data:
Interest income $ 39,361 $ 34,614 $ 25,912 $ 19,351 $ 15,873
Interest expense 14,040 13,634 10,190 6,865 5,717
Net interest income 25,321 20,980 15,722 12,486 10,156
Provision for loan losses 2,659 3,903 5,825 1,513 228
Noninterest income (loss) 5,089 4,838 3,852 2,935 (1,224)
Noninterest expense 20,538 18,244 13,372 10,736 8,146
Provision (benefit) for income taxes 2,104 930 (26) 1,163 223
Net income $ 5,109 $ 2,741 $ 403 $ 2,009 $ 335
Share Data:
Average common shares outstanding 4,562 4,602 3,467 2,485 2,207
Basic earnings per share $ 1.12 $ 0.60 $ 0.12 $ 0.81 $ 0.15
Diluted earnings per share 1.09 0.58 0.11 0.77 0.15
Cash dividends per share - - - 0.03 -
Book value per share 9.71 9.29 8.74 7.66 6.80
Tangible book value per share $ 8.59 $ 8.02 $ 7.30 $ 6.78 $ 6.80
Balance Sheet Data:
Total assets $ 563,550 $ 499,859 $ 421,394 $ 265,989 $ 209,033
Total securities 147,368 154,867 148,032 43,378 45,302
Total loans 331,268 268,933 217,977 183,247 133,734
Total deposits 494,901 444,210 356,395 283,345 192,601
Stockholders' equity $ 43,677 $ 42,804 $ 40,248 $ 20,974 $ 15,093
Operating Ratios:
Return on average equity 11.86 % 6.48 % 1.46 % 10.24 % 2.30 %
Return on average assets .99 .60 .13 .88 .18
Net interest margin 5.51 5.17 5.64 6.12 6.09
Credit Quality Ratios:
Nonperforming loans to total loans (2) .60 % .54 % 1.26 % 3.71 % 3.04 %
Allowance for loan losses to total loans 1.97 1.78 1.76 1.52 1.27
Allowance for loan losses to nonperforming loans 328.83 310.87 139.79 50.14 35.07
Capital Ratios:
Risk-based tier 1 capital 9.99 % 10.69 % 11.60 % 9.04 % 9.22 %
Total risk-based capital 11.24 11.94 12.78 10.20 10.27
Leverage ratio 7.50 7.58 8.58 7.37 7.43
</TABLE>
(1) Reflects the acquisition of three branches from Bank of America in December,
1997.
(2) Nonperforming loans consist of loans on nonaccrual, loans past due 90 days
or more and restructured loans.
27
<PAGE>
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 Capital Corp of
the West (the "Company"). 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 the Company include its subsidiaries,
County Bank (the "Bank") and Capital West Group ("CWG"). It also includes the
Bank's subsidiary, Merced Area Investment Development, Inc. ("MAID").
In addition to historical information, this discussion and analysis
includes certain forward-looking statements that are subject to risks and
uncertainties and include information about possible or assumed future results
of operations. Many possible events or factors could affect the future financial
results and performance of the Company. This could cause results or performance
to differ materially from those expressed in our forward-looking statements.
Words such as "expects", "anticipates", "believes", "estimates", variations of
such words and other similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in, or implied by, such
forward-looking statements.
Readers of the Company's Form 10-K should not rely solely on forward
looking statements and should consider all uncertainties and risks discussed
throughout this report. These statements are representative only on the date
hereof, and the Company undertakes no obligation to update any forward-looking
statements made. Some possible events or factors that could occur that may cause
differences from expected results include the following: the Company's loan
growth is dependent on economic conditions, as well as various discretionary
factors, such as decisions to sell, or purchase certain loans or loan
portfolios; participations of loans and the management of borrower, industry,
product and geographic concentrations and the mix of the loan portfolio. The
rate of charge-offs and provision expense can be affected by local, regional and
international economic and market conditions, concentrations of borrowers,
industries, products and geographical conditions, the mix of the loan portfolio
and management's judgements regarding the collectibility of loans. Liquidity
requirements may change as a result of fluctuations in assets and liabilities
and off-balance sheet exposures, which will impact the capital and debt
financing needs of the Company and the mix of funding sources. Decisions to
purchase, hold, or sell securities are also dependent on liquidity requirements
and market volatility, as well as on and off-balance sheet positions. Factors
that may impact interest rate risk include local, regional and international
economic conditions, levels, mix, maturities, yields or rates of assets and
liabilities and the wholesale and retail funding sources of the Company. Factors
that may cause actual noninterest expense to differ from estimates include the
ability of third parties with whom the Company has business relationships to
fully accommodate uncertainties related to the Company's efforts to prepare its
technology systems and non-information technology systems for the Year 2000, as
well as uncertainties relating to the ability of third parties with whom the
Company has business relationships to address the Year 2000 issue in an adequate
manner.
The Company is also exposed to the potential of losses arising from adverse
changes in market rates and prices which can adversely impact the value of
financial products, including securities, loans, and deposits. In addition, the
banking industry in general is subject to various monetary and fiscal policies
and regulations, which include those determined by the Federal Reserve Board,
the Federal Deposit Insurance Corporation and state regulators, whose policies
and regulations could affect the Company's results.
Other factors that may cause actual results to differ from the
forward-looking statements include the following: competition with other local
and regional banks, savings and loan associations, credit unions and other
nonbank financial institutions, such as investment banking firms, investment
advisory firms, brokerage firms, mutual funds and insurance companies, as well
as other entities which offer financial services; interest rate, market and
monetary fluctuations; inflation; market volatility; general economic
conditions; introduction and acceptance of new banking-related products,
services and enhancements; fee pricing strategies, mergers and acquisitions and
their integration into the Company and management's ability to manage these and
other risks.
28
<PAGE>
Overview
During 1999, earnings increased $2,368,000 or 86% to $5,109,000 which
compares favorably to the $2,741,000 and $403,000 achieved in 1998 and 1997.
Basic earnings per share were $1.12 in 1999 compared to $.60 and $.12 in 1998
and 1997. The Company's return on average total assets was .99% in 1999 as
compared with .60% and .13% in 1998 and 1997. The earnings improvement in 1999
was the result of strong growth in interest-earning assets, improvements in
noninterest income and a lower provision for loan losses as compared to the
prior two years. In 1998 and 1997 the provision for loan losses was increased
due to the higher level of charge-off activity in these years. Additionally,
during 1998 there was a charge-off of a single commercial relationship totaling
$1,325,000. Increased charge-offs in 1997 were primarily attributable to the
charge-off of one commercial real estate loan within the Bank's loan portfolio,
which had previously been considered a nonperforming asset. The charge-off
related to this loan totaled $3,458,000.
The Company achieved strong growth in 1999, reaching total assets at
December 31, 1999 of $563,550,000, up $63,691,000 or 12.74% from $499,859,000 at
December 31, 1998. Net loans grew to $324,726,000 at December 31, 1999, a 22.93%
increase from the $264,158,000 outstanding at December 31, 1998. Deposits grew
to $494,901,000, an increase of $50,691,000 or 11.41% over the $444,210,000
outstanding as of December 31, 1998. Total equity capital grew to $43,677,000,
an increase of 2.03% over year end 1998 and the Company continues to be well
capitalized by regulatory definitions.
Results of Operations
Capital Corp of the West's earnings were a record $5,109,000 during 1999,
driven primarily by an increase in net interest income. Net interest income
increased by $4,341,000, or 20.69%, to $25,321,000 during 1999 as compared to
$20,980,000 in 1998. The increase in earnings in 1999 as compared to 1998 is
primarily due to an increase in the size of the Bank's loan portfolio and a
reduced amount of provision for loan losses. The improvement in earnings during
1998 compared to 1997 was achieved as a result of growth in interest-earning
assets, improvements in noninterest income and a reduced amount of provision for
loan losses.
The Company's primary source of revenue is net interest income, which is
the difference between interest income and fees derived from earning assets and
interest paid on liabilities obtained to fund those assets. Total interest and
fee income on earning assets increased from $34,614,000 in 1998 to $39,361,000,
a $4,747,000 or 13.71% increase in 1999. During 1998, there was an increase of
$8,702,000 or 34% to $34,614,000 compared to $25,912,000 in 1997. The level of
interest income is affected by changes in the volume and the rates earned on
interest-earning assets. Interest-earning assets consist primarily of loans,
investment securities and federal funds sold. Average interest-earning assets in
1999 were $459,753,000 as compared with $405,546,000 in 1998, an increase of
$54,207,000 or 13.37%.
Interest expense is a function of the volume and rates paid for
interest-bearing liabilities. Interest-bearing liabilities consist primarily of
certain deposits and borrowed funds. Total average interest bearing liabilities
in 1999 were $394,704,000 as compared with $347,975,000 in 1998, an increase of
$46,729,000 or 13.43%. Total interest expense increased $406,000 or 2.99% to
$14,040,000 in 1999 as compared to $13,634,000 and $10,190,000 for 1998 and
1997.
The Company's net interest margin, the ratio of net interest income to
average interest-earning assets for 1999 was 5.51%. This is an increase of 34
basis points compared to the 1998 margin of 5.17%. The increased net interest
margin during 1999 was primarily the result of growth obtained within the loan
portfolio. The net interest margin decline of 47 basis points during 1998 from
the 5.64% achieved in 1997 was primarily due to a change in the asset mix
compared with the previous year. In 1999, loans comprised 68% of
interest-earning assets as compared with 60% and 71% in 1998 and 1997.
Securities comprised 30% of interest-earning in 1999 compared with 34% in 1998.
The Company's net interest income is affected by changes in the amount and
mix of interest-earning assets and interest-bearing liabilities. It is also
affected by changes in yields earned on interest-earning assets and rates paid
on interest-bearing deposits and other borrowed funds. The changes due to both
rate and volume have been allocated to rate and volume in proportion to the
relationship of the absolute dollar amount of the change in each. The effects of
tax-equivalent yields have not been considered because they are not considered
significant.
The increase in total interest income of $4,747,000 in 1999 is comprised of
a $5,632,000 volume increase primarily attributable to an increase in average
interest-earning assets of $54,207,000 or 13.37% between 1999 and 1998 that is
offset by an $885,000 rate decrease during this same period. The increase in
29
<PAGE>
total interest expense of $406,000 in 1999 related to a $46,729,000 or 13.43%
increase in average interest-bearing liabilities between 1999 and 1998 offset by
a $1,065,000 rate decrease during this same period.
The increase in total interest income of $8,702,000 in 1998 is comprised of
a $9,376,000 volume increase associated with the $126,298,000 increase in
average interest-earning assets between 1997 and 1998, and a $674,000 rate
decrease. The increase in total interest expense of $3,444,000 in 1998 related
to a $101,925,000 or 41.42% increase in average interest-bearing liabilities
between 1997 and 1998 offset by a $579,000 rate decrease.
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. The
provision for loan losses is charged against income and increases the allowance
for loan losses. The provision for loan losses for the year ended December 31,
1999 was $2,659,000 compared to $3,903,000 in 1998 and $5,825,000 in 1997. The
decreased level of provision for loan losses in 1999 was primarily the result of
a reduced level of net charge-offs experienced during the year. The level of the
provision for loan losses in 1998 is partially attributable to replenishing the
allowance for loan losses following the charge-off of one commercial loan
relationship totaling $1,325,000. The increase in 1997 is due primarily to
coverage of the charge-off of one real estate loan totaling $3,458,000 that was
determined to be uncollectible in 1997. The methodology used to determine the
level of provision for loan losses that is needed each year includes an analysis
of relevant risk factors within the entire loan portfolio, including
nonperforming loans. The methodology is based, in part, on management's use of a
loan grading and classification system. The Bank's management grades its loans
through internal reviews and periodically subjects loans to external reviews.
These external reviews are presented to and assessed by the Bank's audit
committee. Credit reviews are performed monthly and the quality grading process
occurs on a quarterly basis. The level of provision for loan losses in 1999,
1998, and 1997 also supports the general loan growth of the Company, as gross
loans increased 23% in 1999, and 24% in 1998.
Other Income
The following table summarizes other income for the years ended December 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other Income:
Deposit service charges $ 3,254 $ 2,807 $ 1,709
Income from real estate held for sale or development 260 540 879
Loan service fees 167 172 195
Gain on sale of loans 48 173 153
Retail investment commissions 139 156 218
Earnings on director and officer life insurance 288 201 181
Other 933 789 517
-------- --------- --------
Total other income $ 5,089 $ 4,838 $ 3,852
======== ========= ========
</TABLE>
Total noninterest income increased by $251,000 or 5% to $5,089,000 in 1999,
compared to $4,838,000 and $3,852,000 in 1998 and 1997. Deposit service charges
increased by $447,000 or 16% during 1999. The 1999 increase in deposit service
charges was primarily the result of an increase in demand deposit and NOW
account balances. The increase in 1998 was in large part attributable to the
purchase of the three branches of Bank of America and to the Bank's overall
deposit growth. Other income increased by $144,000 or 18% to $933,000 in 1999,
compared to $789,000 and $517,000 in 1998 and 1997. The 1999 increase is due
primarily to an increase in ancillary product income.
The Company has an investment in residential real estate in Merced County
through its wholly owned subsidiary, MAID, which is now inactive. This
investment was completely written-off in 1995. As of December 31, 1999, the Bank
owned one parcel of land. When this property is sold, any income that may be
generated will be recognized as other income.
30
<PAGE>
Other Expense
Total noninterest expense increased $2,294,000 or 13% to $20,538,000 in
1999 as compared with an increase of $4,872,000 or 36% to $18,244,000 in 1998.
Noninterest expense totaled $13,372,000 in 1997.
Salaries and related benefits increased by $1,741,000 or 22% to $9,699,000
in 1999, compared with an increase of $1,825,000 or 30% to $7,958,000 in 1998.
The salary increases were primarily due to an increase in full-time equivalent
employees as well as normal merit increases and related benefit expenses. The
increase in full time equivalent employees in 1998 was due primarily to the
purchase of three branches of Bank of America and a corresponding increase in
the number of support personnel. Premises and occupancy expenses increased
$254,000 or 19% to $1,579,000 in 1999 compared with an increase of $90,000 or 7%
to $1,325,000 in 1998. The increase in 1999 was caused primarily by increased
spending on branch facility upgrades.
Equipment expenses decreased $11,000, or .05% to $2,144,000 in 1999
compared with an increase of $709,000 or 49.03% in 1998. The decrease during
1999 was the result of a slowdown in spending on technology during the year. The
1998 increase was primarily due to upgraded computer technology, additional
branches and branch relocation expenses and new technology expenditures required
to build the infrastructure necessary to provide check imaging to the Bank's
deposit customers.
The Company's professional fees include legal, consulting, audit and
accounting fees. These expenses decreased by $143,000 or 12% to $1,060,000 in
1999 as compared with an increase of $651,000 or 118% to $1,203,000 in 1998. The
increase in 1998 is attributable, in part, to the outsourcing of internal
audits, increased legal fees due to regulatory matters, consultants used to
update the Bank's sales incentive program and expenditures relating to earnings
enhancement programs and regulatory matters. The decrease in 1999 was due to a
decreased use of outside professionals.
Supplies decreased by $58,000 or 10% to $551,000 in 1999 as compared with
an increase of $71,000 or 13% to $609,000 in 1998. The decrease in 1999 were due
to cost savings programs initiated during 1999. The increases in 1998 were
primarily related to new branch openings.
Marketing expenses increased by $52,000 or 8% to $708,000 in 1999 as
compared with increases of $66,000 or 11% in 1998. Marketing expenses have
continued to increase over the past several years as the Company actively
promoted various deposit and loan products to assist with the general growth of
the Company.
Other increases relate primarily to overall growth of the Company. In 1999,
approximately $300,000 of other expense relates to Y2K expenses. In 1998 and
1997, other expenses totaling $179,000 and $275,000 were related to costs
associated with the Bank of America branch purchases.
Provision for Income Taxes
The Company's provision for income taxes was $2,104,000 in 1999 compared to
a $930,000 income tax provision in 1998, and a tax benefit of $26,000 in 1997.
The effective income tax rates (computed as income taxes as a percentage of
income before income taxes) were 29%, 25% and (7%) for 1999, 1998 and 1997. In
part, the effective tax rate of the Company was reduced in 1999 and 1998 due to
the tax credits earned from the investment of low-income housing partnerships
that qualify for housing tax credits. Total housing tax credits for 1999, 1998
and 1997 were approximately $450,000, $426,000 and $71,000. In addition, during
1999, 1998 and 1997, the Company realized tax benefits of $ 413,000, 239,000 and
$86,000 from nontaxable interest income received from bank qualified municipal
securities.
Financial Condition
Total assets increased 13% to $563,550,000 at December 31, 1999, compared
to $499,859,000 at December 31, 1998. Net loans grew to $324,726,000 at year end
1999, a 23% increase compared to growth of $50,014,000 or 23% in 1998. Deposits
grew by $50,691,000 or 11% in 1999 as compared to an increase of $87,815,000 or
25% in 1998.
31
<PAGE>
Securities
The following table sets forth the carrying amount (fair value) of available for
sale securities at December 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury & U.S. Government agencies $ 16,756 $ 12,711 $ 1,824
State and political subdivisions 23,371 30,192 9,640
Mortgage-backed securities 43,723 56,048 68,808
Collateralized mortgage obligations 20,341 29,264 51,874
Other securities 13,623 13,142 3,111
-------- --------- ---------
Carrying amount and fair value $117,814 $ 141,357 $ 135,257
======== ========= =========
</TABLE>
The following table sets forth the carrying amount (amortized cost) and fair
value of held to maturity securities at December 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury and U.S. Government agencies $ 1,001 $ 2,024 $ 9,442
State and political subdivisions 4,159 - -
Mortgage-backed securities 23,515 11,486 3,333
------- ------- -------
Carrying amount (amortized cost) $29,554 $13,510 $12,775
======= ======= =======
Fair value $28,675 $ 13,584 $12,780
======= ======== =======
</TABLE>
Available for sale securities decreased $23,543,000 or 17% at December 31,
1999 over the same year-end in 1998. This decrease was primarily the result of
an increased level of cash holdings at December 31, 1999. The Company owns a
large amount of mortgage-backed securities which generally have stated
maturities in excess of 10 years but are subject to substantial prepayments
which effectively accelerate actual maturities. At December 1999 the Company did
not hold any structured notes. See Note 1 and 3 to the Company's Consolidated
Financial Statements for further information concerning the securities
portfolio. Available for sale securities increased $6,100,000 or 5% during 1998.
Loans
Total loans increased 23% to $331,268,000 at December 31, 1999, compared to
$268,933,000 at December 31, 1998. The increase in loan volumes in 1999, 1998
were due to the Company's strategic efforts to increase loan production coupled
with the business development efforts by the Company's loan officers.
The Company concentrates its lending activities in five principal areas:
commercial, agricultural, real estate construction, real estate mortgage, and
consumer loans. Interest rates charged for loans made by the Company vary with
the degree of risk, the size and term of the loan, and borrowers' depository
relationships with the Company and prevailing market rates.
As a result of the Company's loan portfolio mix, the future quality of
these assets could be affected by adverse trends in its region or in the broader
community. These trends are beyond the control of the Company.
Credit Risk Management and Asset Quality
The Company closely monitors the markets in which it conducts its lending
operations and adjusts its strategy to control exposure to loans with higher
credit risk. Asset reviews are performed using grading standards and criteria
similar to those employed by bank regulatory agencies. Assets receiving lesser
grades become "classified assets" which includes all nonperforming assets and
potential problem loans, and receive an elevated level of attention to improve
the likelihood of collection. The policy of the Company is to review each loan
in the portfolio to identify problem credits. There are three classifications
for problem loans: "substandard," "doubtful" and "loss." Substandard loans have
one or more defined weaknesses and are characterized by the distinct possibility
that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful loans have the weaknesses of substandard loans with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high possibility of loss. A loan classified loss is considered
uncollectible and its continuance as an asset is not warranted. 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 categorized
as loans past due 90 days or more but still accruing, 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,
are deemed to be in the process of collection. Additionally 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 to 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 are not expected to be collected under
the original contractual loan repayment terms. An impaired loan is charged off
at the time management believes the collection of principal and interest process
has been exhausted. At December 31, 1999 and 1998, 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, 1999 of $1,990,000 as
compared with $1,577,000 at December 31, 1998. The 1999 totals contain no loans
secured by first deeds of trust on real property as compared with $623,000 in
1998. Impaired loans as of December 31, 1999 were $1,990,000, which had specific
allowances for loan loss of $497,000 as compared with impaired loans of
$1,577,000 as of December 31, 1998, which had specific allowance for loan losses
of $114,000. Other forms of collateral, such as inventory, chattel and
equipment, secure the remaining nonperforming loans as of each date.
A single commercial real estate loan which totaled $3,458,000 was
completely written-off in 1997. As a result of this loan write-off, the
allowance was replenished which resulted in a provision for loan losses in 1997
of $5,825,000.
At December 31, 1999 and 1998 the Bank had $247,000 and $60,000 in real
estate acquired through foreclosure.
Allowance for Loan Losses
In determining the adequacy of the allowance for loan losses, management
takes into consideration the growth trend in the portfolio, examinations by
financial institution supervisory authorities, internal and external credit
reviews, prior loan loss experience of the Company, concentrations of credit
risk, delinquency trends, general economic conditions and the interest rate
environment. The allowance for loan losses 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 for loan losses.
The balance in the allowance for loan losses 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 1999 of $2,659,000
as compared to $3,903,000 and $5,825,000 in 1998 and 1997. See "Results of
Operations - Provision for Loan Losses."
32
<PAGE>
The following table summarizes the loan loss experience of the Company for
the years ended December 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of year $ 4,775 $ 3,833 $ 2,792 $ 1,701 $ 1,621
Provision for loan losses 2,659 3,903 5,825 1,513 228
Allowance acquired through merger - - - 148 -
Charge-offs:
Commercial and agricultural 531 2,539 1,121 518 160
Real-estate - construction - - 3,458 - -
Real-estate - mortgage - 4 - - -
Consumer 1,323 983 471 140 63
------- -------- -------- -------- --------
Total charge-offs 1,854 3,526 5,050 658 223
Recoveries:
Commercial and agricultural 715 135 155 27 66
Real-estate - construction - - 1 - -
Real-estate - mortgage - 100 - - -
Consumer 247 330 110 61 9
------- -------- -------- -------- --------
Total recoveries 962 565 266 88 75
------- -------- -------- -------- --------
Net charge-offs 892 2,961 4,784 570 148
------- -------- -------- -------- --------
Balance at end of year $ 6,542 $ 4,775 $ 3,833 $ 2,792 $ 1,701
======== ======== ======== ======== ========
Loan outstanding at year-end $331,268 $268,993 $217,997 $183,247 $133,734
Average loans outstanding $303,463 $242,989 $198,140 $157,098 $120,620
Net charge-offs to average loans 0.29 % 1.22 % 2.41 % 0.36 % 0.12 %
Allowance for loan losses
To total loans 1.97 % 1.78 % 1.76 % 1.52 % 1.27 %
To nonperforming loans 328.74 % 302.79 % 139.79 % 50.14 % 35.07 %
To nonperforming assets 292.45 % 291.69 % 136.80 % 39.69 % 34.74 %
</TABLE>
The Company's charge offs, net of recoveries, were $892,000 in 1999 as
compared with $2,961,000 and $4,784,000 in 1998 and 1997. This represents loan
loss experience ratios of .29%, 1.22% and .41% in those respective years stated
as a percentage of average gross loans outstanding for each year. As of December
31, 1999 the allowance for loan losses was $6,542,000 or 1.97% of total loans
outstanding. This compares with an allowance for loan losses of $4,775,000 or
1.78% in 1998 and $3,833,000 or 1.76% in 1997. The increases in net charge offs
in 1997 and 1998 were due to the complete write-off of a single commercial
relationship and the complete write-off of one commercial real estate loan
respectively as previously discussed.
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, receipts of principal and interest on loans, available for sale
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 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 $168,886,000 and $186,853,000 at December 31, 1999 and 1998 and
are 30% and 37.3% of total assets on those dates. Cash and noninterest-bearing
deposits in other banks increased $15,811,000 or 61% to $41,582,000 in 1999,
compared to $25,771,000 at December 31, 1998. The additional cash position in
1999 was the result of a larger than normal cash inventory maintained in
preparation for any abnormal cash requests by the customers of the Bank due to
potential Y2K problems. Liquidity is also affected by collateral requirements of
its public agency deposits and certain borrowings. Total pledged securities were
$105,008,000 at December 31, 1999 and $46,023,00 at December 31, 1998.
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, the Federal Reserve Bank, and the Federal Home Loan Bank
aggregating $59,392,000 of which $12,600,000 was outstanding as of December 31,
1999. This compares with lines of credit of $16,197,000 of which $5,103,000 was
outstanding as of December 31, 1998.
Market and Interest Rate Risk Management
The Company's success is largely dependent upon its ability to manage
interest rate risk. Interest rate risk can be defined as the exposure of the
Company's net interest income to adverse movements in interest rates. Although
the Company manages other risks, such as credit and liquidity risk in the normal
course of its business, management considers interest rate risk to be its most
significant market risk and could potentially have the largest material effect
on the Company's financial condition and results of operations. Correspondingly,
the overall strategy of the Company is to manage interest rate risk, through
balance sheet structure, to be interest rate neutral. The Company does not
currently engage in trading activities or use derivative instruments to control
interest rate risk. Though such activities may be permitted with the approval of
the Board of Directors, the Company does not intend to engage in such activities
in the immediate future.
The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO), which reports to the Board of
Directors. ALCO establishes policies that monitors and coordinates the Company's
sources, uses and pricing of funds. ALCO is also involved in formulating the
economic projections for the Company's budget and strategic plan. ALCO sets
specific rate sensitivity limits for the Company. ALCO monitors and adjusts the
Company's exposure to changes in interest rates to achieve predetermined risk
targets that it believes are consistent with current and expected market
conditions. Balance sheet management personnel monitor the asset and liability
changes on an ongoing basis and provide report information and recommendations
to the ALCO committee in regards to those changes.
Earnings Sensitivity
The Company's net income is dependent on its net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest- earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net income.
The primary analytical tool used by the Company to gauge interest rate
sensitivity is an analytical model used by many other financial institutions.
Based on the current portfolio mix, this model is used to estimate the effects
of changes in market rates on the Company's net interest income. This model's
estimate of interest rate sensitivity takes into account the differing time
intervals and differing rate change increments of each type of interest
sensitive asset and liquidity. This test measures the impact on net interest
income of change in interest rates in 100 basis point increments over the next
twelve month period.
The estimated impact of immediate changes in interest rates at the
specified levels at December 31, 1999 is presented in the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Percentage
Change in Change in change in
interest rates net interest net interest
(In basis points) income(1) income
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
+200 $ (738,000) (2.68%)
-200 $ 374,000 1.36%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The amount in this column represents the change in net interest income for
12 months in a stable interest rate environment versus the net interest income
in the various rate scenarios.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the
33
<PAGE>
Company's asset-liability structure to obtain the maximum yield-cost spread
on that structure. The Company relies primarily on its asset-liability
structure to control interest rate risk.
Based upon the December 31, 1999 mix of interest sensitive assets and
liabilities, given sustained increase in the federal funds rate of 2%, this
model estimates the Company's cumulative net interest income over the next year
would decrease by $738,000. This compares with a cumulative one year expected
decrease in net interest income of $388,000 as of December 31, 1998. As this
measure of interest rate risk indicates, the Company is not subject to
significant risk of change in its net interest margin as a result of changes in
interest rates.
Capital Resources
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,
1999, that the Company and the Bank meet all capital requirements to which they
are subject. The Company's leverage capital ratio at December 31, 1999 was 7.50%
as compared with 7.58% as of December 31, 1998. The Company's risk-based capital
ratio at December 31, 1999 was 11.24% as compared to 11.94% as of December 31,
1998.
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet the Company's
future needs. All ratios are in excess of the regulatory definitions of "well
capitalized". Management believes that, under the current regulations, the
Company will continue to meet its minimum capital requirements in the
foreseeable future.
The Company has no formal dividend policy, and dividends are issued solely
at the discretion of the Company's Board of Directors, subject to compliance
with regulatory requirements. In order to pay any cash dividend, the Company
must receive payments of dividends or management fees from the Bank. There are
certain regulatory limitations on the payment of cash dividends by banks.
Notwithstanding regulatory restrictions, in order for the Bank to maintain a 10%
risk weighted capital ratio, the Bank has the ability to pay cash dividends at
December 31, 1999 of $2,958,000.
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.
34
<PAGE>
Market for Company's Common Stock and Related Stock Matters
The Company's stock is included for quotation on the NASDAQ National Market
System with a stock quotation symbol of CCOW.
The following table indicates the range of high and low sales prices for
the period shown, based upon information provided by the NASDAQ National Market
System.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1999 High Low
- -------------------------------------------------------------------------
<S> <C> <C>
4th quarter $12.00 $ 8.50
3rd quarter 13.88 12.00
2nd quarter 14.09 9.75
1st quarter $10.75 $ 8.50
1998 High Low
- -------------------------------------------------------------------------
4th quarter $12.00 $9.38
3rd quarter 13.37 9.81
2nd quarter 15.35 12.75
1st quarter $14.28 $11.67
- -------------------------------------------------------------------------
</TABLE>
Generally, the Company has retained earnings to support the growth of the
Company and has not paid regular cash dividends. In 1998 the Company paid a 5%
stock dividend for shareholders of record as of May 7, 1998.
Year 2000
The Company has not experienced any technology problems through January 25,
2000 related to the Year 2000 (Y2K) date change. The company successfully tested
their systems for Y2K compliance, and all Y2K compliance programs were reviewed
by the Company's primary regulators.
Although at this time it is not possible to fully determine the extent of
potentially adverse financial effects with any specificity, the Company has
prepared contingency plans if disruptions occur. The contingency plans allow the
Company to continue operations in the event the Company, or its key suppliers,
customers, or third party service providers experience serious problems related
to year 2000 problems. The plans include, but are not limited to, generating
paper reports, using paper receipts, paper forms, and other required documents
in order to be able to operate manually, without any computer access, if
necessary.
Prospective Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which amends the disclosure
requirements of Statement No. 52, FOREIGN CURRENCY TRANSLATIONS and Statement
No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. SFAS 133
supersedes Statements No.80 ACCOUNTING FOR FUTURE CONTRACTS, No. 105 DISCLOSURE
OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK and No. 119, DISCLOSURE
ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other assets
or liabilities on the balance sheet and measurement of those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment (a fair value
hedge) or (b) a hedge of the exposure to variable cash flows of a forecasted
transaction (a cash flow hedge).
In June 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF SFAS NO.
133. SFAS No. 137 defers the effective date of SFAS No. 133 from all fiscal
quarters of fiscal years beginning after June 15, 1999 to all fiscal quarters of
fiscal years beginning after June 15, 2000.
Independent Auditors' Report
35
<PAGE>
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, 1999 and 1998
and the related consolidated statements of income and comprehensive income, cash
flows, and shareholders' equity for each of the years in the three year period
ended December 31, 1999. 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, 1999 and 1998 and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
- -------------------------------------
Sacramento, California
January 25, 2000
36
<PAGE>
Capital Corp of the West
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of December 31,
---------------------------
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and noninterest-bearing deposits in other
banks $ 41,582 $ 25,771
Federal funds sold 8,640 19,125
Time deposits at other financial institutions 850 600
Investment securities available for sale, at fair value 117,814 141,357
Investment securities held to maturity, at cost 29,554 13,510
Loans, net 324,726 264,158
Interest receivable 3,436 3,272
Premises and equipment, net 13,163 13,319
Goodwill and other intangible assets 5,069 5,865
Other assets 18,716 12,882
--------- ---------
Total assets $ 563,550 $ 499,859
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 87,564 $ 80,290
Negotiable orders of withdrawal 72,788 71,526
Savings 164,158 165,781
Time, under $100,000 101,395 84,011
Time, $100,000 and over 68,996 42,602
--------- ---------
Total deposits 494,901 444,210
Borrowed funds 20,814 10,466
Accrued interest, taxes and other liabilities 4,158 2,379
--------- ---------
Total liabilities 519,873 457,055
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 10,000,000 shares authorized;
none outstanding
Common stock, no par value; 20,000,000 shares authorized;
4,496,201 and 4,607,102 issued and outstanding 35,593 37,142
Retained earnings 10,743 5,634
Accumulated other comprehensive (loss) income (2,659) 28
--------- ---------
Total shareholders' equity 43,677 42,804
--------- ---------
Total liabilities and shareholders' equity $ 563,550 $ 499,859
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
37
<PAGE>
Capital Corp of the West
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 30,255 $ 25,159 $ 20,646
Interest on deposits with other financial
institutions 156 57 53
Interest on investment securities held to
maturity:
Taxable 1,116 1,257 828
Non-taxable 190 - -
Interest on investment securities available for
sale:
Taxable 6,013 6,091 3,810
Non-taxable 1,188 797 231
Interest on federal funds sold 443 1,253 344
------- ------- -------
Total interest income 39,361 34,614 25,912
INTEREST EXPENSE:
Deposits
Negotiable orders of withdrawal 458 503 345
Savings 5,752 5,696 4,770
Time, under $100,000 4,504 4,418 3,174
Time, $100,000 and over 2,570 1,725 809
------- ------- -------
Total interest on deposits 13,284 12,342 9,098
Other borrowings 756 1,292 1,092
------- ------- -------
Total interest expense 14,040 13,634 10,190
Net interest income 25,321 20,980 15,722
Provision for loan losses 2,659 3,903 5,825
------- ------- -------
Net interest income after provision for loan
losses 22,662 17,077 9,897
OTHER INCOME:
Service charges on deposit accounts 3,254 2,807 1,709
Income from sale of real estate 260 540 879
Other 1,575 1,491 1,264
------- ------- -------
Total other income 5,089 4,838 3,852
OTHER EXPENSES:
Salaries and related benefits 9,699 7,958 6,133
Premises and occupancy 1,579 1,325 1,235
Equipment 2,144 2,155 1,446
Professional fees 1,060 1,203 552
Supplies 551 609 538
Marketing 708 656 590
Goodwill and intangible amortization 792 778 111
Other 4,005 3,560 2,767
------- ------- -------
Total other expenses 20,538 18,244 13,372
Income before provision (benefit) for income
taxes 7,213 3,671 377
Provision (benefit) for income taxes 2,104 930 (26)
------- ------- -------
Net income $ 5,109 $ 2,741 $ 403
- ----------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
Unrealized (loss) gain on securities arising
during the period (2,615) (112) 246
Less: reclassification adjustment for (gains)
losses included in net income (72) (55) 18
------- ------- -------
Comprehensive income $ 2,422 $ 2,574 $ 667
======== ======== =======
- ----------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.12 0.60 $ 0.12
Diluted earnings per share $ 1.09 $ 0.58 $ 0.11
</TABLE>
See accompanying notes to consolidated financial statements
38
<PAGE>
Capital Corp of the West
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,109 $ 2,741 $ 403
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 2,659 3,903 5,825
Depreciation, amortization and accretion, net 2,763 3,374 1,661
(Benefit) provision for deferred income taxes (1,090) 310 499
Gain on sale of real estate 260 540 879
Net increase in interest receivable & other assets (3,340) (872) (5,770)
Net decrease in mortgage loans held for sale - - 880
Net (decrease) increase in deferred loan fees (699) (1,085) 167
Net increase (decrease) in accrued interest payable & other
liabilities 1,727 (763) 703
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,389 8,148 5,247
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Investment security purchases - available for sale securities (20,272) (46,213) (23,360)
Investment security purchases - mortgage-backed securities and
collateralized mortgage obligations (27,522) (27,863) (119,734)
Proceeds from maturities of available for sale investment
securities 1,719 3,127 7,433
Proceeds from maturities of held to maturity investment securities 1,000 - 2,013
Proceeds from maturities of mortgage-backed securities and
collateralized mortgage obligations 26,279 35,752 13,861
Proceeds from sales of available for sale investment securities 13,777 9,088 12,833
Proceeds from sales of mortgage-backed securities and
collateralized mortgage obligations 7,574 18,131 2,410
Net (increase) decrease in time deposits in other financial
institutions (250) (1) 2,502
Proceeds from sales of commercial and real estate loans 1,023 6,826 5,972
Origination of loans (227,590) (179,866) (117,726)
Proceeds from repayment of loans 163,982 119,730 72,009
Purchases of premises and equipment (1,585) (2,090) (7,904)
Proceeds from sales of real estate held for sale or development 260 478 1,470
Purchase of intangible assets - - (4,343)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (61,605) (62,901) (152,564)
- -----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in demand, NOW and savings deposits 6,966 60,997 71,856
Net increase in certificates of deposit 43,777 26,818 46,194
Net increase (decrease) in other borrowings 10,348 (11,583) 17,378
Issuance of common stock - - 17,951
Issued shares for benefit plan purchases - - 217
Stock repurchases (1,768) - -
Fractional shares purchased - (6) -
Exercise of stock options, net 219 (12) 439
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 59,542 76,214 154,035
- -----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 5,326 21,461 6,718
Cash and cash equivalents at beginning of year 44,896 23,435 16,717
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 50,222 $ 44,896 $ 23,435
- -----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash investing and financing activities:
Investment securities unrealized (losses) gains, net of taxes $ (2,687) $ (167) $ 264
Interest paid 13,788 13,524 10,073
Income tax payments 2,827 1,564 1,185
Transfer of securities from available for sale to held to maturity 4,499 9,636 11,455
Loans transferred to other real estate owned 187 478 64
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
39
<PAGE>
Capital Corp of the West
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
NUMBER RETAINED COMPREHENSIVE
(Dollars in thousands) OF SHARES AMOUNTS EARNINGS INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 2,591 $ 15,321 $ 5,722 $ (69) $ 20,974
- --------------------------------------------------------------------------------------------------------------------
Exercise of stock options 47 439 - - 439
Issuance of shares pursuant to
401K & ESOP plans 14 217 - - 217
Issuance of shares pursuant to
stock offering 1,725 17,951 - - 17,951
Change in fair value of
investment securities, net of
tax effect of $172 - - - 264 264
Net income - - 403 - 403
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 4,377 $ 33,928 $ 6,125 $ 195 $ 40,248
- --------------------------------------------------------------------------------------------------------------------
5% stock dividend, including
payment for fractional shares 219 3,226 (3,232) - (6)
Exercise of stock options 11 109 - - 109
Net change in fair market value of
investment securities, net of
tax
effect of ($106) - - - (167) (167)
Adjustment - stock option plan - (121) - - (121)
Net income - - 2,741 - 2,741
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 4,607 $ 37,142 $ 5,634 $ 28 $ 42,804
- --------------------------------------------------------------------------------------------------------------------
Exercise of stock options 26 219 - - 219
Stock repurchases (137) (1,768) - - (1,768)
Net change in fair market value of
investment securities net of
tax
effect of ($1,824) - - - (2,687) (2,687)
Net income - - 5,109 - 5,109
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 4,496 $ 35,593 $ 10,743 $ (2,659) $ 43,677
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
40
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Capital Corp of the West (the "Company") is a registered bank holding company,
which provides a full range of banking services to individual and business
customers primarily in the Central San Joaquin Valley, through its subsidiaries.
The following is a description of the more significant policies.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements of Capital
Corp of the West includes its subsidiaries: County Bank (the "Bank") and Capital
West Group ("CWG"). Town and Country Finance and Thrift was acquired in June
1996 and merged into County Bank on November 23, 1999. CWG, a subsidiary formed
in 1996, became inactive in 1997. The Bank also has one active subsidiary,
Merced Area Investment and Development, Inc. ("MAID"). All significant
intercompany balances and transactions are eliminated.
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles and prevailing practices in the financial
services industry. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reported period. Actual results could
differ from those estimates applied in the preparation of the consolidated
financial statements. A material estimate that is particularly susceptible to
possible change in the near term relates to the determination of the allowance
for loan losses. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1999 presentation.
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. Banks are required to
maintain minimum average reserve balances with the Federal Reserve Bank. The
amount of those reserve balances was approximately $22,000 at December 31, 1999.
INVESTMENT SECURITIES: Investment securities consist of U.S. treasury, federal
agencies, state and county municipal securities, corporate bonds,
mortgage-backed securities, collateralized mortgage obligations and equity
securities. Investment securities are classified into one of three categories.
These categories include trading, available for sale, and held to maturity. The
category of each security is determined based on the Company's investment
objectives, operational needs and intent. The Company has not purchased
securities with the intent of actively trading them.
Securities available for sale may be sold prior to maturity and are available
for future liquidity requirements. These securities are carried at fair value.
Unrealized gains and losses on securities available for sale are excluded from
earnings and reported net of tax as a separate component of shareholders' equity
until realized.
Securities held to maturity are classified as such where the Company has the
ability and positive intent to hold them to maturity. These securities are
carried at cost, adjusted for amortization of premiums and accretion of
discounts. Unrealized losses due to fluctuations in fair value of securities
held to maturity or available for sale, are recognized through earnings when it
is determined that a permanent decline in value has occurred.
Premiums and discounts are amortized or accreted over the life of the related
investment security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned. Realized gains
and losses for securities classified as available for sale or held to maturity,
are included in earnings and are derived using the specific identification
method for determining the cost of securities sold.
41
<PAGE>
LOANS: Loans are carried at the principal amount outstanding, net of unearned
income, including deferred loan origination fees and costs. Nonrefundable loan
origination and commitment fees and the direct costs associated with originating
or acquiring the loans are deferred and amortized as an adjustment to interest
income over the life of the related loan using a method that approximates the
level yield method. Deferred loan origination costs totaled $1,878,000 and
$1,058,000 at December 31, 1999 and 1998. Deferred loan origination fees totaled
$1,026,000 and $905,000 at December 31, 1999 and 1998.
Interest income on loans is accrued based on contract interest rates and
principal amounts outstanding. Loans which are more than 90 days delinquent,
with respect to interest or principal, are placed on nonaccrual status, unless
the outstanding principal and interest is adequately secured and, in the opinion
of management, remains collectable. Uncollected accrued interest is reversed
against interest income, and interest is subsequently recognized only as
received until the loan is returned to accrual status. Interest accruals are
resumed when such loans are brought fully current with respect to interest and
principal and when, in the judgment of management, the loans are estimated to be
fully collectable as to both principal and interest.
A loan is considered impaired, if it is probable that the Company will be unable
to collect the scheduled payments of principal and interest when due according
to the contractual terms of the loan agreement. Any allowance for loan losses on
impaired loans 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. In general, these statements are
not applicable to large groups of small balance homogenous loans that are
collectively evaluated for impairment, such as residential mortgage and consumer
installment loans. Income recognition on impaired loans conforms to the method
the Company uses for income recognition on nonaccrual loans. 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 when management believes the remaining principal balance is
fully collectable.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at the
level considered to be adequate for potential loan losses based on management's
assessment of various factors affecting the loan portfolio, which include:
growth trends in the portfolio, historical experience, concentrations of credit
risk, delinquency trends, general economic conditions, and internal and external
credit reviews. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance for loan losses based on their judgment of information available to
them at the time of their examination. Additions to the allowance for loan
losses, in the form of provision for loan losses, are reflected in current
operating results, while charge-offs to the allowance for loan losses are made
when a loss is determined to have occurred. Management uses the best information
available on which to base estimates, however, ultimate losses may vary from
current estimates.
GAIN OR LOSS ON SALE OF LOANS AND SERVICING RIGHTS: The Company services both
sold and retained portions of United States Small Business Administration (SBA)
loans and a portfolio of mortgage loans. The Company applies the provisions of
Statement of Financial Accounting Standards (SFAS) No. 125, ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES.
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. In addition, it requires that servicing
assets and other retained interests in transferred assets be measured by
allocating the previous carrying amount of the transferred assets between the
assets sold, if any, and the retained interests, if any, based on their relative
fair values at the date of transfer. Liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets are to be
initially measured at fair value. Servicing assets and liabilities, which are
carried at the lower of cost or market, are to be subsequently amortized in
proportion to and over the period of, estimated net servicing income or loss and
assessed for asset impairment or increased obligation based on fair value.
42
<PAGE>
The Bank recognizes a gain and a related asset for the fair value of the rights
to service loans for others when loans are sold. In accordance with SFAS No.
125, the fair value of the servicing assets are estimated based upon the present
value of the estimated expected future cash flows. The cash flows are calculated
using a discount rate commensurate with the risk involved and include estimates
of future revenues and expenses, including assumptions about defaults and
prepayments. The Company measures the impairment of the servicing asset based on
the difference between the carrying amount of the servicing asset and its
current fair value. As of December 31, 1999 and 1998, there was no impairment in
mortgage servicing assets.
When servicing rights are sold, a gain or loss is recognized at the closing date
to the extent that the sale proceeds, less costs to complete the sale, exceed or
are less than the carrying value of the servicing rights held.
Real estate mortgage loans held for sale are carried at the lower of cost or
market at the balance sheet date. There were no loans held for sale as of
December 31, 1999 and 1998. Gains or losses are recognized at the time of sale
and are calculated based on the amounts received and the book value of the loans
sold.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
computed on the straight line basis over the estimated useful life of each type
of asset. Estimated useful lives range up to 35 years for buildings, up to the
lease term for leasehold improvements, and 3 to 15 years for furniture and
equipment.
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: Other real estate is comprised of property acquired through
foreclosure proceedings or acceptance of deeds-in-lieu of foreclosure. Losses
recognized at the time of acquiring property in full or partial satisfaction of
debt are charged against the allowance for loan losses. Other real estate is
recorded at the lower of the related loan balance or fair value, less estimated
disposition costs. Fair value of other real estate is generally based on an
independent appraisal of the property. Any subsequent costs or losses are
recognized as noninterest expense when incurred.
INTANGIBLE ASSETS: Goodwill, representing the excess of purchase price paid over
the fair value of net assets acquired in an acquisition, was generated with the
purchase of the Thrift in June 1996. The Thrift's assets, including intangible
assets, were subsequently merged into County Bank in November, 1999, and the
Thrift's charter was eliminated. Goodwill associated with the purchase of the
Thrift is being amortized over 18 years. Core deposit intangibles, representing
the excess of purchase price paid over the fair value of net savings deposits
acquired, were generated by the purchase of the Thrift in June 1996 and the
purchase of three branches from the Bank of America in December, 1997 (as
discussed in Note 2). Core deposit intangibles are being amortized over 10 and 7
years, respectively. Intangible assets are reviewed on a periodic basis for
impairment. If such impairment is indicated, recoverability of the asset is
assessed based upon expected undiscounted net cash flows.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF:
Long-lived assets and certain identifiable intangibles are 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 by which the carrying amount of the assets exceed 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.
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 a deferred compensation plan for
certain members of the Board of Directors. The Company is the owner and
43
<PAGE>
beneficiary of these plans. The cash surrender value of the insurance policies
is recorded in other assets and these values totaled $6,292,000 and $4,111,000
as of December 31, 1999 and 1998. Income from these policies is recorded in
other income and the load, mortality and surrender charges have been recorded in
other expenses. An accrued liability is recorded to reflect the present value of
the expected retirement benefits for the salary continuation plans and the
deferred compensation benefits.
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 analysis 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.
INCOME TAX CREDITS: The Company has investments in limited partnerships which
own low income affordable housing projects that generate tax benefits in the
form of federal and state housing 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 and are evaluated at each reporting period for impairment. The Bank had
investments in these partnerships of $5,800,000 and $4,300,000 as of December
31, 1999 and 1998.
STOCK OPTION PLAN: The Company accounts 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.
EARNINGS PER SHARE: Basic earnings per share (EPS) includes no dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in the earnings
of an entity. The number of shares outstanding have been adjusted to reflect the
5% dividend declared in 1998 and the 3 for 2 stock split that occurred in 1997.
COMPREHENSIVE INCOME: On January 1, 1998, the Company adopted SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and unrealized
gains (losses) on securities and is presented in the consolidated statements of
income and comprehensive income. The statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
SEGMENT REPORTING: On January 1, 1998, the Company adopted SFAS No. 131,
FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. SFAS No. 131 requires
corporations to disclose certain financial information by "industry segment" as
defined by the statement. As of December 31, 1999 the Company does not have
separate reportable segments.
44
<PAGE>
NOTE 2. ACQUISITIONS
On December 11, 1997 the Company acquired, for $5,310,000, deposits and
buildings of three former branches of Bank of America. These branches were
merged into the Bank, and added $60,849,000 in deposits and $967,000 in
buildings and equipment. The transaction was accounted for under the purchase
method of accounting. In connection with the transaction, the Bank recorded a
core deposit intangible of $4,343,000, which is being amortized using the
straight line method over 7 years.
In conjunction with the purchase of the branches, the Company completed a
capital offering which increased common stock shares outstanding by 1,725,000
shares and increased shareholders' equity by $17,951,000. This capital was used
to support the purchase of the branches and for general Company growth.
NOTE 3. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities at
December 31, are summarized below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
(Dollars in thousands) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
1999
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury and U.S. Government agencies $ 17,113 $ - $ 357 $ 16,756
State & political subdivisions 25,421 15 2,065 23,371
Mortgage-backed securities 45,253 42 1,572 43,723
Collateralized mortgage obligations 20,847 - 506 20,341
Corporate debt securities 9,681 67 88 9,660
-------- ------ ------ --------
Total debt securities 118,315 124 4,588 113,851
Equity securities 3,963 - - 3,963
-------- ------ ------ --------
Total available for sale securities 122,278 124 4,588 117,814
-------- ------ ------ --------
HELD TO MATURITY SECURITIES:
U.S. Treasury & U.S. government agencies 1,004 - 3 1,001
State and political subdivisions 4,389 - 230 4,159
Mortgage-backed securities 24,161 - 646 23,515
-------- ------ ------ --------
Total held to maturity securities 29,554 - 879 28,675
-------- ------ ------ --------
Total investment securities $ 151,832 $ 124 $ 5,467 $ 146,489
========= ======= ======== =========
- -------------------------------------------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury & U.S. Government agencies $ 12,631 $ 101 $ 21 $ 12,711
State & political subdivisions 30,177 393 378 30,192
Mortgage-backed securities 56,214 189 355 56,048
Collateralized mortgage obligations 29,305 128 169 29,264
Corporate debt securities 9,718 210 50 9,878
-------- ------ ------ --------
Total debt securities 138,045 1,021 973 138,093
Equity securities 3,264 - - 3,264
-------- ------ ------ --------
Total available for sale securities 141,309 1,021 973 141,357
-------- ------ ------ --------
HELD TO MATURITY SECURITIES:
U.S. Treasury & U.S. government agencies 2,024 12 - 2,036
Mortgage-backed securities 11,486 66 4 11,548
-------- ------ ------ --------
Total held to maturity securities 13,510 78 4 13,584
-------- ------ ------ --------
Total investment securities $ 154,819 $ 1,099 $ 977 $ 154,941
========= ========= ======== =========
</TABLE>
45
<PAGE>
At December 31, 1999 and 1998, investment securities with carrying values of
approximately $105,008,000 and $46,023,000, respectively, were pledged as
collateral for deposits of public funds, government deposits, 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 Reserve Bank and the Federal Home
Loan Bank. The Bank carried balances, stated at cost, of $2,378,000 and
$3,109,000 of Federal Home Loan Bank stock and $1,229,000 and $0 of Federal
Reserve Bank stock as of December 31, 1999 and 1998. The Company recognized
gross gains on the sale of securities of $0, $13,000 and $17,000, in 1999, 1998,
and 1997. Gross losses of $118,000, $16,000 and $46,000 were recognized in 1999,
1998, and 1997.
In August 1998, mortgage-backed securities with a market value of $9,636,000
were transferred from the available for sale portfolio to the held to maturity
portfolio at market value. In February 1999, state and political subdivision
securities with a market value of $4,499,000 were transferred from the available
for sale portfolio to the held to maturity portfolio at market value. The
unrealized holding gain at the date of transfer is reported as a separate
component of shareholders' equity, and is amortized over the remaining life of
the securities as an adjustment of yield in a manner consistent with the
amortization of a premium or discount.
The carrying and estimated fair values of debt securities at December 31, 1999
by contractual maturity, are shown on the following table. Actual maturities may
differ from contractual maturities because issuers generally have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
AMORTIZED ESTIMATED
(Dollars in thousands) COST FAIR VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
AVAILABLE FOR SALE DEBT SECURITIES:
One year or less $ 500 $ 515
One to five years 16,713 16,397
Five to ten years 8,034 7,713
Over ten years 26,968 25,162
Mortgage-backed securities and CMOs 66,100 64,064
---------- -----------
Total available for sale debt securities $ 118,315 $ 113,851
========== ===========
HELD TO MATURITY DEBT SECURITIES:
One year or less $ - $ -
One to five years - -
Five to ten years 1,004 1,001
Over ten years 4,389 4,159
Mortgage-backed securities and CMOs 24,161 23,515
---------- -----------
Total held to maturity debt securities $ 29,554 $ 28,675
========== ==========
</TABLE>
NOTE 4. LOANS
Loans at December 31 consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $ 53,932 $ 37,609
Agricultural 58,247 49,636
Real estate - mortgage 120,978 96,957
Real estate - construction 11,926 13,840
Consumer 86,185 70,891
---------- ----------
Gross loans 331,268 268,933
Less allowance for loan losses 6,542 4,775
---------- ----------
Net loans $ 324,726 $ 264,158
=========== ==========
</TABLE>
46
<PAGE>
Nonaccrual loans totaled $1,984,000 and $1,164,000 at December 31, 1999 and
1998. Foregone interest on nonaccrual loans was approximately $143,000, $91,000
and $189,000 for the years ending December 31, 1999, 1998 and 1997.
Impaired loans are loans for which it is probable that the Company will not be
able to collect all amounts due. At December 31, 1999 and 1998, the recorded
investment in loans for which impairment was recognized totaled $1,990,000 and
$1,577,000 which had a related allowance for loan losses of $497,000 and
$114,000 in 1999 and 1998. The average outstanding balance of impaired loans for
the years ended December 31, 1999, 1998 and 1997 was $2,215,000, $1,876,000, and
$4,715,000, on which $126,000, $134,000 and $471,000, was recognized as interest
income.
At December 31, 1999 and 1998, the collateral value method was used to measure
impairment for all loans classified as impaired. The following table shows the
recorded investment in impaired loans by loan category at December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Commercial $ 635 $ 106
Agricultural 921 668
Consumer and other 428 258
------- -------
$ 1,984 $ 1,032
======= =======
</TABLE>
The following is a summary of changes in the allowance for loan losses during
the years ended December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 4,775 $ 3,833 $ 2,792
Loans charged-off (1,854) (3,526) (5,050)
Recoveries of loans previously charged-off 962 565 266
Provision for loan losses 2,659 3,903 5,825
-------- -------- --------
Balance at end of year $ 6,542 $ 4,775 $ 3,833
======== ======== ========
</TABLE>
In the ordinary course of business, the Company, through its subsidiaries, has
made loans to certain directors and officers and their related businesses. In
management's opinion, these loans are 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.
Activity in loans to, or guaranteed by, directors and executive offices and
their related businesses at December 31, are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 280 $ 415
Loan advances and renewals 328 532
Loans matured or collected (8) (623)
Other changes (38) (44)
------ ------
Balance at end of year $ 562 $ 280
====== ======
</TABLE>
Other changes in 1999 and 1998 represent loans to former directors and executive
officers of the Company who are no longer related parties
47
<PAGE>
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,349 $ 1,349
Buildings 8,339 8,214
Leasehold improvements 1,176 894
Furniture and equipment 10,693 9,534
-------- -------
Subtotal 21,557 19,991
Less accumulated depreciation and amortization 8,394 6,672
-------- -------
Premises and equipment, net $ 13,163 $13,319
======== =======
</TABLE>
Included in the totals above is construction in progress of $154,000 and
$308,000 at December 31, 1999 and 1998 respectively. Depreciation expense
totaled $1,741,000, $1,716,000 and $1,222,000 in 1999, 1998 and 1997.
NOTE 6. BORROWED FUNDS
At December 31, 1999 and 1998 the Company's borrowed funds consisted of the
following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Treasury tax loan, dated December 31, 1999; variable rate of 5%; rate reprices
monthly based on the federal funds rate; payable on January 3, 2000 $ 5,000 -
FHLB loan, dated January 16, 1997; variable rate of 5.75%; rate reprices
monthly based on the 1 month LIBOR; paid in full on January 15, 1999 - $ 5,000
FHLB loan, dated July 15, 1999; fixed rate of 5.75%; payable on
February 15, 2000 5,000 103
FHLB loan, dated September 20, 1999; fixed rate of 5.75%; payable on
March 20, 2000 5,000 -
Securities sold under agreements to repurchase; dated March 25, 1998;
fixed rate of 5.74%; paid in full on March 25, 1999 - 2,100
FHLB loan, dated June 17, 1999; variable rate of 6.36%; rate reprices
monthly
based on the 1 month LIBOR; payable on June 19, 2000 2,600 -
Long-term mortgage note from unaffiliated bank dated December 11, 1997;
fixed rate of 7.80%; principal and interest payable monthly at $15,017;
payments calculated as fully amortizing over 15 years with a 10 year call 3,214 3,263
------- -------
Total borrowed funds $20,814 $10,466
======= =======
</TABLE>
The $2,100,000 repurchase agreement outstanding at December 31, 1998 matured on
March 25, 1999. No new repurchase agreements were entered into during 1999.
Interest expense recorded in 1999, 1998 and 1997 for securities sold under
agreements to repurchase was $28,000, $126,000 and $706,000. Securities pledged
under repurchase agreements are held in the custody of independent securities
brokers.
The Company maintains a secured line of credit with the Federal Home Loan Bank
of San Francisco (FHLB). Based on the FHLB stock requirements at December 31,
1999, this line provided for maximum borrowings of $52,392,000 of which
$12,600,000 was outstanding, leaving $39,792,000 available. At December 31, 1999
this borrowing line is collateralized by securities with a market value of
$55,149,000. At December 31, 1998, the line of credit collateralized by
securities totaled $14,197,000 of which
48
<PAGE>
$5,103,000 was outstanding. Interest expense related to FHLB borrowings
totaled $375,000, $906,000, and $308,000 in 1999, 1998, and 1997. The Company
had additional unused, lines of credit secured my mortgage notes of
$7,000,000 and $2,000,000 at December 31, 1999 and 1998.
The Company incurred interest expense of $273,000, $260,000, and $78,000 in
1999, 1998, and 1997, related to the notes with unaffiliated banks. The
long-term note dated December 11, 1997 is secured by Company land and buildings.
Interest expense related to federal funds purchased was $80,000, $2,000, and $0
in 1999, 1998 and 1997. Compensating balance arrangements are not significant to
the operations of the Company.
Principal payments required to service the Company's borrowings during the next
five years are:
<TABLE>
<CAPTION>
- ------------------------------------------
(Dollars in thousands)
- ------------------------------------------
<S> <C>
2000 $ 17,653
2001 56
2002 61
2003 65
2004 71
Thereafter 2,908
--------
Total borrowed funds $ 20,814
========
</TABLE>
NOTE 7. REAL ESTATE OPERATIONS
As of December 31, 1999, MAID held one real estate project composed of
unimproved land. The Bank has reduced the carrying value of its remaining
project to zero.
Summarized below is condensed financial information of MAID:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS December 31,
- -------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash on deposit with County Bank $ 114 $ 88
Notes receivable and other assets 28 156
-- ---
Total assets $ 142 $ 244
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY:
Accounts payable and other $ 27 $ 244
Shareholder's equity 115 -
------ ------
Total liabilities and shareholder's
equity $ 142 $ 244
====== ======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF OPERATIONS Years ended December 31,
- ---------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 10 $ 354 $ 876
Expenses 66 22 66
------- ------ -----
Income before income taxes $ (56) $ 332 $ 810
====== ====== =====
</TABLE>
49
<PAGE>
NOTE 8. INCOME TAXES
The provision for income taxes for the years ended December 31 is comprised of
the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(Dollars in thousands) FEDERAL STATE TOTAL
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Current $ 2,248 $ 946 $ 3,194
Deferred (772) (318) (1,090)
------- ------ -------
$ 1,476 $ 628 $ 2,104
======= ====== =======
- -----------------------------------------------------------------------------
1998
Current $ 567 $ 53 $ 620
Deferred 223 87 310
------ ------ ------
$ 790 $ 140 $ 930
====== ====== ======
- -----------------------------------------------------------------------------
1997
Current $ (484) $ (41) $ (525)
Deferred 456 43 499
------ ----- -------
$ (28) $ 2 $ (26)
====== ===== =======
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999 and
1998 consists of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Real estate subsidiary $ 939 $ 947
Allowance for loan losses 1,788 940
Nonaccrual interest 125 80
Tax Credits 253 329
Investment securities unrealized loss 1,739 -
Other 792 300
------ ------
Total gross deferred tax assets 5,636 2,596
Less valuation allowance (20) (20)
------ ------
Deferred tax assets $ 5,616 $ 2,576
------- -------
DEFERRED TAX LIABILITIES:
Fixed assets $ 358 $ 169
State franchise taxes 286 178
Investment in partnerships 26 64
Investment securities unrealized gain - 19
Other 106 154
------ ------
Total gross deferred tax liabilities 776 584
------ ------
Net deferred tax assets $ 4,840 $ 1,992
====== =======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31, 1999 and
1998.
50
<PAGE>
A reconciliation of the provision for income taxes to the statutory federal
income tax rate follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory (34%) federal income tax rate due $ 2,452 $ 1,248 $ 128
State franchise tax, net of federal income tax benefit 516 263 14
Tax exempt interest income, net (413) (239) (60)
Housing tax credits (375) (426) (71)
Intangible amortization 43 33 36
Cash surrender value Life Insurance (98) (69) -
State tax benefit lost due to net operating loss
limitations - - 20
Decrease in valuation allowance for deferred tax
assets - - (150)
Other (21) 120 57
------- ------ ------
Provision (benefit) for income taxes $ 2,104 $ 930 $ (26)
======= ====== ======
</TABLE>
NOTE 9. REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered
by 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 judgments by the regulators about components, risk
weighting and other factors.
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, 1999, that the Company and the Bank meet
all capital adequacy requirements to which they are subject, including the ratio
test for a well capitalized bank under the regulatory framework for prompt
corrective action. The most recent notification from the FRB categorized the
Company and the Bank as well capitalized under the FDICIA regulatory framework
for prompt corrective action. Subsequent to this notification, there are no
conditions or events that management believes have changed the risk based
capital category of the Company and the Bank. To be categorized as well
capitalized, the Bank must meet minimum ratios.
The Company has no formal dividend policy, and dividends are issued solely at
the discretion of the Company's Board of Directors subject to compliance with
regulatory requirements. In order to pay any cash dividends, the Company must
receive payments of dividends from the Bank. There are certain regulatory
limitations on the payment of cash dividends by banks.
51
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
following table).
The Company's and Bank's actual capital amounts and ratios as of December 31,
1999 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
(Dollars in thousands) ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- ------------------------------------------------------------------------------------------------------------------
THE COMPANY: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted
assets) $46,448 11.24 % $33,058 8.0 % $41,322 10.0 %
Tier I capital (to risk weighted
assets) 41,266 9.99 16,529 4.0 24,793 6.0
Leverage ratio(1) 41,266 7.50 21,999 4.0 27,498 5.0
- ------------------------------------------------------------------------------------------------------------------
THE BANK:
- ------------------------------------------------------------------------------------------------------------------
Total capital (to risk weighted
assets) 43,714 10.73 32,605 8.0 40,756 10.0
Tier I capital (to risk weighted
assets) 38,602 9.47 16,302 4.0 24,453 6.0
Leverage ratio(1) $38,602 7.09 % $21,785 4.0 % $27,231 5.0 %
</TABLE>
(1) The leverage ratio consists of Tier 1 capital divided by quarterly average
assets. The minimum leverage ratio is 3 percent for banking organizations that
do not anticipate significant growth and that have well-diversified risk,
excellent asset quality and in general, are considered top-rated banks.
The Company's and Bank's actual capital amounts and ratios as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
(Dollars in thousands) ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- ------------------------------------------------------------------------------------------------------------------
THE COMPANY: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted
assets) $41,235 11.94 % $27,635 8.0 % $34,544 10.0 %
Tier I capital (to risk weighted
assets) 36,911 10.69 13,818 4.0 20,726 6.0
Leverage ratio(1) 36,911 7.58 19,450 4.0 27,312 5.0
- ------------------------------------------------------------------------------------------------------------------
THE BANK:
- ------------------------------------------------------------------------------------------------------------------
Total capital (to risk weighted
assets) 33,511 11.11 24,129 8.0 30,162 10.0
Tier I capital (to risk weighted
assets) 29,732 9.86 12,065 4.0 18,097 6.0
Leverage ratio(1) $29,732 6.73 % $19,472 4.0 % $24,340 5.0 %
</TABLE>
(1) The leverage ratio consists of Tier 1 capital divided by quarterly average
assets. The minimum leverage ratio is 3 percent for banking organizations that
do not anticipate significant growth and that have well-diversified risk,
excellent asset quality and in general, are considered top-rated banks.
52
<PAGE>
NOTE 10. COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT
RISK At December 31, 1999, 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
noncancelable lease agreements having terms in excess of one year at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------
(Dollars in thousands)
-------------------------------------------------
<S> <C>
2000 $ 483
2001 489
2002 490
2003 461
2004 388
Thereafter 1,342
-------
Total minimum lease payments $ 3,653
=======
</TABLE>
Rent expense was approximately $477,000, $619,000, and $513,000 for the years
ended December 31, 1999, 1998 and 1997.
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.
<TABLE>
<CAPTION>
Financial instruments whose contractual amount represents risk: AS OF DECEMBER 31
- --------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $101,847 $ 76,984
Standby letters of credit 2,674 2,694
</TABLE>
Commitments to extend credit are agreements to lend to customers. These
commitments have specified interest rates and generally have fixed expiration
dates, but may be terminated by the Company if certain conditions of the
contract are violated. Although currently subject to drawdown, many of these
commitments are expected to expire or terminate without funding. Therefore, the
total commitment amounts do not necessarily represent future cash requirements.
Collateral held relating to these commitments varies, but may include
securities, equipment, inventory and real estate.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of the customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Collateral held for standby letters
of credit is based on an individual evaluation of each customer's credit
worthiness, but may include cash, equipment, inventory and securities.
The Company because of the nature of its business, is subject to various
threatened or filed legal cases. The Company, based on the advice of legal
counsel, does not expect such cases will have a material, adverse effect on its
financial position or results of operations.
53
<PAGE>
NOTE 11. TIME DEPOSITS
At December 31, 1999 the aggregate maturities for time deposits are as follows:
<TABLE>
<CAPTION>
---------------------------------------
(Dollars in thousands)
---------------------------------------
<S> <C>
2000 $ 142,012
2001 26,596
2002 1,296
2003 259
2004 17
Thereafter 211
</TABLE>
NOTE 12. Concentrations of Credit Risk
The Bank's business activity is with customers located primarily in the counties
of Fresno, Madera, Mariposa, Merced, Stanislaus, Tulare and Tuolumne. The Bank
is diversified into retail and wholesale lending. Retail lending represents
approximately 30% of the total loan portfolio and consists of consumer lending,
loans to small businesses, credit cards and the purchase of financing contracts
principally from automobile dealers. Individual loans and lines are made in a
variety of ways. In many cases collateral such as real estate, automobiles and
equipment are used to support the extension of credit. Repayment, however, is
largely dependent upon the borrower's personal cash flow.
Loans to businesses and agricultural communities make up nearly 70% of the
Bank's loan portfolio. Wholesale activities are spread across a wide spectrum
including commercial loans to businesses, construction and permanent real estate
financing, short and long term agricultural loans for production and real estate
purposes and SBA financing. Where appropriate, collateral is taken to secure and
reduce the Bank's credit risk. Each loan is submitted to an individual risk
grading process but the borrowers' ability to repay is dependent, in part, upon
factors affecting the local and national economies.
NOTE 13. EMPLOYEE AND DIRECTOR BENEFIT PLANS
The Company has a noncontributory employee stock ownership plan ("ESOP") and an
employee savings plan covering substantially all employees. During 1999, 1998,
and 1997, the Company contributed approximately $217,000, $193,000, and
$119,000, to the ESOP and $70,000, $70,000, and $71,000, 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, 1999, 1998, and 1997, the ESOP owned
154,305, 130,441, and 158,363 shares of the Company's stock. 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
$10,000 in 1999. The Company matched 25% of the employees elective contribution,
as defined, not to exceed 10% of eligible annual compensation.
The Company maintains a non-qualified salary continuation plan for certain
senior executive officers of the Company and the Bank. Under the plan, the
Company has agreed to pay these executives retirement benefits for a ten to
fifteen year period after their retirement so long as they meet certain length
of service vesting requirements. The plan is informally linked to several single
premium universal life insurance policies that provide life insurance on certain
senior executive officers with the Company named as the owner and beneficiary of
these policies. Salary continuation expense totaled $340,938, $244,482 and
$221,187 in 1999, 1998 and 1997.
The Company also maintains a non-qualified deferred compensation plan for
members of the board of directors of the Company and the Bank. Under the
deferred compensation plan, members of the board of directors have the ability
to defer compensation they receive as directors until they reach retirement age,
so
54
<PAGE>
long as they meet certain length of service vesting requirements. Upon
reaching retirement age, the Company has agreed to pay these directors
retirement benefits over a ten year period. The plan is informally linked to
several single premium universal life insurance policies that provide life
insurance on certain directors with the Company named as the owner and
beneficiary of these policies. Deferred compensation expense totaled $58,000,
$60,000 and $54,000 in 1999, 1998 and 1997
NOTE 14. STOCK OPTION PLAN
In 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 to 450,000.
A summary of the status of the Company's stock options as of December 31, 1999,
1998, and 1997, and changes during the years ended on those dates, follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Weighted Weighted
average Weighted average
Number of exercise Number of average Number of exercise
shares price shares exercise price shares price
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 325,806 $ 7.25 297,370 $ 6.65 289,745 $ 5.84
Granted 68,000 10.45 39,000 13.56 62,000 12.86
Exercised (26,609) 8.09 (11,402) 7.51 (49,257) 7.19
Forfeited (15,624) 12.09 (14,620) 10.96 (5,118) 8.89
Stock dividend declared - 15,458 6.65 - -
------- ------ ------- ------ ------- ------
Outstanding at end of year 351,573 $ 7.59 325,806 $ 7.25 297,370 $ 6.65
======= ======= =======
Options exercisable at end of year 276,170 $ 6.58 267,395 $ 6.16 237,933 $ 5.79
</TABLE>
The following table summarizes information about options outstanding at December
31, 1999:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
- --------------------------------------------------------------------------------------------------------
NUMBER WEIGHTED WEIGHTED WEIGHTED
RANGE OF EXERCISE OF SHARES REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3 - 6 185,988 2.53 Years $ 4.54 185,988 $ 4.54
6 - 9 33,374 6.33 7.68 27,749 7.46
9 - 16 132,211 8.44 11.88 62,433 12.23
-------- --------
$ 3 - 16 351,573 5.11 Years $ 7.59 276,170 $ 6.58
======== ========
</TABLE>
The number of shares and exercise price per share has been adjusted for stock
dividends and stock splits during the period.
The per share weighted average fair value of stock options granted during 1999,
1998 and 1997 was $4.01, $5.20, and $4.76 on the date of grant using the Black
Scholes option pricing model with the following weighted average assumptions:
1999-1997 expected dividend yield 0%; 1999-1997 expected volatility of 30
percent, risk free interest rate of 6.41%, 4.64%, and 5.71%; and, an expected
life of 7 years.
55
<PAGE>
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, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company's net income would have been reduced to the proforma amounts indicated
as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME
As reported $ 5,109 $ 2,741 $ 403
Proforma 5,018 2,504 241
BASIC EARNINGS PER SHARE
As reported 1.12 0.60 0.12
Proforma 1.10 0.54 0.07
DILUTED EARNINGS PER SHARE
As reported 1.09 0.58 0.11
Proforma 1.07 0.52 0.06
</TABLE>
Proforma net income reflects only options granted in 1997 through 1999.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the proforma net income amounts presented
above because compensation cost is reflected over the options' vesting period of
three years and compensation cost for options granted prior to January 1, 1997
is not considered.
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company in estimating its fair value disclosures for financial instruments
used the following methods and assumptions:
FINANCIAL ASSETS:
CASH AND CASH EQUIVALENTS: For these assets, the carrying amount is a reasonable
estimate for fair value.
INVESTMENTS: Fair values for available for sale and held to maturity investment
securities 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 prepayments. The carrying value of loans is net
of the allowance for loan losses and unearned loan fees.
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 Company has not
estimated the fair value of commitments to extend credit and standby letters of
credit. Because of the uncertainty in attempting to assess the likelihood and
timing of a commitment being drawn upon, coupled with the lack of an established
market for these financial instruments, the Company does not believe it is
meaningful or practicable to provide an estimate of fair value.
56
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
- ------------------------------------------------------------------------------
1999 CARRYING AMOUNT FAIR VALUE
- ------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 50,222 $ 50,222
Time deposits at other
Financial institutions 850 850
INVESTMENT SECURITIES:
Available for sale 117,814 117,814
Held to maturity 29,554 28,675
Net loans 324,726 323,851
FINANCIAL LIABILITIES
DEPOSITS:
Noninterest bearing demand 87,564 87,564
Interest bearing demand 72,788 72,788
Savings and money market 164,158 164,158
Time deposits 170,391 170,680
Borrowings $ 20,814 $ 20,704
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------
1998 CARRYING AMOUNT FAIR VALUE
- ------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 44,896 $ 44,896
Time deposits at other
financial institutions 600 600
INVESTMENT SECURITIES:
Available for sale 141,357 141,357
Held to maturity 13,510 13,584
Net loans 264,158 263,551
FINANCIAL LIABILITIES
DEPOSITS:
Noninterest bearing demand 80,290 80,290
Interest bearing demand 71,526 71,526
Savings and money market 165,781 165,781
Time deposits 126,613 126,823
Borrowings $ 10,466 $ 10,470
</TABLE>
NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS
As of December 31, 1999 and 1998 the Company had no derivative financial
instruments.
57
<PAGE>
<TABLE>
<CAPTION>
NOTE 17. RECONCILIATION OF BASIC AND DILUTED NET EARNINGS PER SHARE.
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------------------
INCOME SHARES PER-SHARE
(Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS $ 5,109 4,562 1.12
Income available to common shareholders ====
Effect of dilutive securities:
Stock options - 128
-------- -----
Diluted EPS
Income available to common shareholders plus
Assumed conversions $ 5,109 4,690 1.09
======== ===== ====
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands except per share amounts) INCOME SHARES PER-SHARE
- -----------------------------------------------------------------------------------------------------------
(Numerator) (Denominator) Amount
-------------- ---------------- -------------
<S> <C> <C> <C>
Basic EPS $ 2,741 4,602 0.60
Income available to common shareholders ====
Effect of dilutive securities:
Stock options - 123
------- -------
Diluted EPS
Income available to common shareholders plus
assumed conversions $ 2,741 4,725 0.58
======= ===== ====
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------
INCOME SHARES PER-SHARE
(Numerator) (Denominator) Amount
-------------- ---------------- -------------
<S> <C> <C> <C>
Basic EPS $ 403 3,467 $ 0.12
=======
Income available to common shareholders
Effect of dilutive securities:
Stock options - 136
-------- ---------
Diluted EPS
Income available to common shareholders plus $ 403 3,467 $ 0.11
assumed conversions 403 3,603 0.11
======== ===== =======
</TABLE>
58
<PAGE>
NOTE 18. PARENT COMPANY ONLY FINANCIAL INFORMATION
This information should be read in conjunction with the other notes to the
consolidated financial statements. The following are the condensed balance
sheets of the Company as of December 31, 1999 and 1998 and the condensed
statements of income and cash flows for the years ended December 31, 1999, 1998
and 1997:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS DECEMBER 31,
- ---------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and short-term investments $ 654 $ 1,370
Investment in County Bank 40,960 33,479
Investment in Town and Country - 5,882
Net premises and equipment 6,101 6,301
Other assets 345 246
-------- ---------
Total assets $ 48,060 $ 47,278
======== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Borrowed funds $ 3,214 $ 3,262
Capitalized lease 800 1,014
Other liabilities 369 198
-------- ---------
Total liabilities 4,383 4,474
SHAREHOLDERS' EQUITY
Common stock 35,593 37,142
Accumulated other comprehensive (loss)
income (2,659) 28
Retained earnings 10,743 5,634
-------- ---------
Total shareholders' equity 43,677 42,804
-------- ---------
Total liabilities and shareholders' equity $ 48,060 $ 47,278
======== =========
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries $ 1,243 $ - $ 90
Interest 19 102 52
Lease income 502 503 -
Management fees from subsidiaries 2,101 2,299 1,949
-------- -------- -------
Total income 3,865 2,904 2,091
EXPENSES
Interest on borrowings 273 274 71
Capitalized lease interest 71 42 -
Salaries and related benefits 2,340 1,299 827
Other noninterest expense 1,820 1,469 828
-------- -------- -------
Total other expenses 4,504 3,084 1,726
(Loss) income before taxes and equity in
undistributed earnings (639) (180) 365
Income tax benefit (expense) 219 72 (109)
Equity in undistributed income of subsidiaries 5,529 2,849 147
-------- -------- -------
Net income $ 5,109 $ 2,741 $ 403
======== ========= =======
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,109 $ 2,741 $ 403
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Equity in undistributed earnings of subsidiaries (5,529) (2,849) (147)
Decrease (increase) in other assets 379 446 (305)
Increase (decrease) in other liabilities 171 (312) 281
-------- ------- -------
Net cash provided by operating activities 130 26 232
INVESTING ACTIVITIES:
Capital contribution to subsidiary bank - (600) (14,000)
Purchase of premises and equipment (278) (1,366) (5,245)
Dividends from subsidiaries 1,243 - 90
-------- ------- -------
Net cash provided by (used in) investing
activities 965 (1,966) (19,155)
FINANCING ACTIVITIES:
Proceeds from stock offering - - 17,951
Net (decrease) increase in other borrowings (262) 690 2,795
Issuance of common stock related to exercise of
stock options and employee benefit plans 219 (12) 656
Repurchase of common stock (1,768) - -
Cash dividends and fractional shares - (6) -
-------- ------- -------
Net cash (used in) provided by financing activities (1,811) 672 21,402
(Decrease) increase in cash and cash equivalents (716) (1,268) 2,479
Cash and cash equivalents at beginning of year 1,370 2,638 159
-------- ------- -------
Cash and cash equivalents at end of year $ 654 $ 1,370 $ 2,638
======= ======= ========
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
NOTE 19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
1999 QUARTER ENDED
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands) Dec 31 Sept 30 June 30 Mar 31
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 10,874 $ 10,106 $ 9,438 $ 8,943
Interest expense 4,008 3,558 3,268 3,206
Net interest income 6,866 6,548 6,170 5,737
Provision for loan losses 887 672 593 507
Other income 1,162 1,207 1,224 1,379
Other expenses 5,183 5,295 5,147 4,796
Income before income taxes 1,958 1,788 1,654 1,813
Income taxes 501 492 449 662
Net income $ 1,457 $ 1,296 $ 1,205 $ 1,151
- -----------------------------------------------------------------------------------------------------------
Basic earnings per share (1) $ .32 $ .28 $ .26 $ .25
- -----------------------------------------------------------------------------------------------------------
Diluted earnings per share (1) $ .32 $ .28 $ .25 $ .24
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 QUARTER ENDED
- -----------------------------------------------------------------------------------------------------------
Dec 31 Sept 30 June 30 Mar 31
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 9,139 $ 9,021 $ 8,362 $ 8,092
Interest expense 3,497 3,448 3,386 3,303
Net interest income 5,642 5,573 4,976 4,789
Provision for loan losses 2,213 700 738 252
Other income 1,171 1,220 1,389 1,058
Other expenses 4,692 4,851 4,378 4,323
(Loss) income before income taxes (92) 1,242 1,249 1,272
Income taxes (benefit) (146) 248 393 435
Net income $ 54 $ 994 $ 856 $ 837
- -----------------------------------------------------------------------------------------------------------
Basic earnings per share (1) $ .01 $ .22 $ .19 $ .18
- -----------------------------------------------------------------------------------------------------------
Diluted earnings per share (1) $ .01 $ .21 $ .18 $ .18
</TABLE>
(1) BASIC AND DILUTED EARNINGS PER SHARE CALCULATIONS ARE BASED UPON THE
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING EACH PERIOD. FULL YEAR
WEIGHTED AVERAGE SHARES DIFFER FROM QUARTERLY WEIGHTED AVERAGE SHARES AND,
THEREFORE, ANNUAL EARNINGS PER SHARE MAY NOT EQUAL THE SUM OF THE QUARTERS.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 41,582
<INT-BEARING-DEPOSITS> 850
<FED-FUNDS-SOLD> 8,640
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 117,814
<INVESTMENTS-CARRYING> 29,554
<INVESTMENTS-MARKET> 28,675
<LOANS> 331,268
<ALLOWANCE> 6,542
<TOTAL-ASSETS> 563,550
<DEPOSITS> 494,901
<SHORT-TERM> 17,600
<LIABILITIES-OTHER> 4,158
<LONG-TERM> 3,214
0
0
<COMMON> 35,593
<OTHER-SE> 8,084
<TOTAL-LIABILITIES-AND-EQUITY> 563,550
<INTEREST-LOAN> 30,255
<INTEREST-INVEST> 8,507
<INTEREST-OTHER> 599
<INTEREST-TOTAL> 39,361
<INTEREST-DEPOSIT> 13,284
<INTEREST-EXPENSE> 14,040
<INTEREST-INCOME-NET> 25,321
<LOAN-LOSSES> 2,659
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 20,538
<INCOME-PRETAX> 7,213
<INCOME-PRE-EXTRAORDINARY> 5,109
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,109
<EPS-BASIC> 1.12
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 5.51
<LOANS-NON> 1,984
<LOANS-PAST> 6
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,990
<ALLOWANCE-OPEN> 4,775
<CHARGE-OFFS> 1,854
<RECOVERIES> 962
<ALLOWANCE-CLOSE> 6,542
<ALLOWANCE-DOMESTIC> 6,542
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
