<PAGE>
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission File No. 0-27856
CALIFORNIA COMMUNITY BANCSHARES CORPORATION
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(Name of small business issuer in it charter)
Delaware 68-0366324
- ---------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
555 Mason Street, Suite 280, Vacaville, CA 95688-4612
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(Address of principal executive offices) (ZIP Code)
Issuer's telephone number: (707) 448-1200
Securities registered under Section 12(g) of the Exchange Act:
$.10 Par Value Common Stock
---------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
Total revenue for year ended December 31, 1997, was $16,175,000.
The aggregate market value of the voting stock held by nonaffiliates based on
the average bid and asked prices $30.125 of such stock, was $27,799,410 as of
March 24, 1998.
The number of shares outstanding of Common Stock as of March 24, 1998: 1,114,505
Transitional Small Business Disclosure Format (Check One) YES [ ] NO [ X ]
CONTAINS 0108 SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX APPEARS ON SEQUENTIALLY NUMBERED PAGE 0060
<PAGE>
TABLE OF CONTENTS
Page
PART I
ITEM 1 - Description of Business 1
ITEM 2 - Description of Property 19
ITEM 3 - Legal Proceedings 20
ITEM 4 - Submission of Matters to a Vote of Security Holders 20
PART II
ITEM 5 - Market for Common Equity and Related Stockholder Matters 20
ITEM 6 - Management's Discussion and Analysis or Plan of Operation 21
ITEM 7 - Financial Statements 47
ITEM 8 - Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 47
PART III
ITEM 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 48
ITEM 10 - Executive Compensation 48
ITEM 11 - Security Ownership of Certain Beneficial Owners and Mgmt 53
ITEM 12 - Certain Relationships and Related Transactions 55
ITEM 13 - Exhibits and Reports on Form 8-K 56
Financial Statements 0064
Signatures 0091
<PAGE>
CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-KSB
INCLUDE FORWARD-LOOKING INFORMATION WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND ARE SUBJECT
TO THE "SAFE HARBOR" CREATED BY THOSE SECTIONS. THESE FORWARD-
LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING FACTORS:
COMPETITIVE PRESSURE IN THE BANKING INDUSTRY INCREASES
SIGNIFICANTLY; CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCE
MARGINS; GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR
REGIONALLY, ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG
OTHER THINGS, A DETERIORATION IN CREDIT QUALITY AND AN INCREASE
IN THE PROVISION FOR POSSIBLE LOAN LOSSES; CHANGES IN THE
REGULATORY ENVIRONMENT; CHANGES IN BUSINESS CONDITIONS,
PARTICULARLY IN SOLANO AND CONTRA COSTA COUNTIES; VOLATILITY OF
RATE SENSITIVE DEPOSITS; OPERATIONAL RISKS INCLUDING DATA
PROCESSING SYSTEM FAILURES OR FRAUD; ASSET / LIABILITY MATCHING
RISKS AND LIQUIDITY RISKS; AND CHANGES IN THE SECURITIES MARKETS.
SEE ALSO "CERTAIN ADDITIONAL BUSINESS RISKS", HEREIN AND OTHER
RISK FACTORS DISCUSSED ELSEWHERE IN THIS REPORT.
MOREOVER, WHENEVER PHRASES SUCH AS, OR SIMILAR TO, "IN
MANAGEMENT'S OPINION", "MANAGEMENT BELIEVES", OR "MANAGEMENT
CONSIDERS" ARE USED, SUCH STATEMENTS ARE AS OF, AND BASED UPON
THE KNOWLEDGE OF MANAGEMENT, AT THE TIME MADE AND ARE SUBJECT TO
CHANGE BY THE PASSAGE OF TIME AND OR SUBSEQUENT EVENTS, AND
ACCORDINGLY SUCH STATEMENTS ARE SUBJECT TO THE SAME RISKS AND
UNCERTAINTIES NOTED ABOVE WITH RESPECT TO FORWARD LOOKING
STATEMENTS.
THEREFORE, THE INFORMATION SET FORTH THEREIN SHOULD BE
CAREFULLY CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF
THE CORPORATION AND THE BANK.
<PAGE>
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
BUSINESS OF THE CORPORATION
Continental Pacific Bank (the "Bank") was organized as a
California state banking corporation on May 27, 1983, and
commenced operations on November 14, 1983.
In 1995, the Bank's Board of Directors approved a Bank
holding company formation and corporate reorganization (the
"Reorganization") whereby the Bank would become a wholly-owned
subsidiary of California Community Bancshares Corporation (the
"Company"). The Company was incorporated as a Delaware
Corporation on October 5, 1995. The Bank's shareholders approved
the Reorganization on December 20, 1995. The Reorganization was
consummated as of the close of business on February 29, 1996.
On January 18, 1984, the Bank formed Conpac Development
Corporation ("Conpac") as a wholly-owned subsidiary to take
advantage of the then recently enacted California Financial Code
provision authorizing banks or their subsidiaries to engage in
real property investment and development. The Bank is presently
staffing the activities of Conpac with two regular Bank
employees. As of December 31, 1997, in addition to the Pacific
Plaza project discussed below, Conpac projects and activities
have included investment in a limited partnership real estate
development project; improvement of 44 undeveloped residential
lots; development of an 8,000 square foot commercial office
building adjacent to the Bank's Benicia branch; and other
incidental activities. As of December 31, 1997, all of Conpac's
projects have been sold at a gross profit, except the current
Pacific Plaza project, which is held as Premises. Recent
legislation limits the Bank's and Conpac's ability to engage in
most real estate development and investment activities and,
accordingly, the Bank has filed a divestiture plan with the FDIC,
which has not been objected to, for its real estate developments.
See "Real Estate Development Subsidiary," herein.
DEVELOPMENTS IN THE CORPORATION'S BUSINESS
The principal business of the Company is to act as a holding
company for the Bank. Accordingly, various factors relating to
the Bank impact the business of the Company. Several of these
factors are discussed below. The Bank engages in the general
commercial banking business, in Solano and Contra Costa counties
in the State of California. In addition to its head banking
office located at 141 Parker Street, Vacaville, California the
Bank has six full service branch offices at 1011 Helen Power Drive,
Vacaville, California; 1300 Oliver Road, Fairfield,
California; 1001 First Street, Benicia, California; 303
Sacramento Street, Vallejo, California; 3355 Sonoma Boulevard,
Suite 20, Vallejo, California and the Bank's newest branch at
2151 Salvio Street, Suite H, Concord, California. In 1996 the
1100 Texas Street, branch was converted to an express branch for
deposit services. The Company's business is not seasonal.
The Bank conducts a commercial banking business including
accepting demand, savings and time deposits, including
certificates of deposit, money market deposit accounts, NOW and
Super NOW accounts. The Bank offers commercial, real estate,
personal, home improvement, automobile and other installment term
loans. It also offers installment note collection, issues
cashier's checks and money orders, sells travelers' checks and
provides safe deposit boxes and other customary banking services.
The vast majority of loans are direct loans made to
individuals, professionals, and small to medium sized
businesses. On December 31, 1997, the total loans outstanding
were as follows: commercial loans: $10,348,000; real estate
construction loans: $6,042,000; real estate mortgage loans:
$90,778,000; consumer loans: $13,894,000; and total loans:
$121,062,000.
Deposits are attracted primarily from individuals,
professionals, and small to medium sized businesses. The Bank
also attracts some deposits from municipalities and other
governmental agencies or entities. The Bank is generally
required to pledge securities to secure such deposits (except the
first $100,000 of such deposits, which is insured by the FDIC).
Except as described above, material portions of the deposits
have not been obtained from a single person or a few persons
(including federal, state and local governments and agencies
thereunder) the loss of anyone or more of which would have a
materially adverse effect on the business of the Company;
however, at December 31, 1997, approximately four percent of
total deposits were obtained from a title company. Such deposits
have the potential to increase or decrease rapidly.
Approximately 80% of the loans are real estate loans. The value
of real estate collateral could be affected by adverse changes in
the real estate markets in which the Company operates and this
could significantly adversely impact the value of such collateral
or the Company's earnings.
As of December 31, 1997, the brokerage mortgage loan
department consisted of one loan originator who is paid on a
commission basis and one salaried full-time processor. The
department's purpose is to originate and process single family
residential loan applications in Solano County and adjacent
areas. The loans are underwritten and funded by one of the
twenty wholesale loan sources the Bank has established. For the
year ended December 31, 1997, the Company earned fees of $105,000
on $7,200,000 in loan volume closed. There were no loans held
for sale at December 31, 1997.
The Company does not offer trust services or international
banking services and does not plan to do so in the near future,
but has arranged with its correspondent banks for such services
to be offered to its customers. In December 1993, the Bank began
offering financial investment services (mutual fund and annuity
sales) through a broker relationship with Financial Network
Investment Corporation ("FNIC"). For the year ending December
31, 1997, the Company earned fees of $83,000 on $2,200,000 in
sales.
In 1995, the Bank began offering a new service called
Business Manager. With Business Manager the Bank purchases a
business' accounts receivables and sets up a credit line custom
tailored to the business' needs. The program includes the
administration of the billing and collection function. For the
year ending December 31, 1997, the Company earned fees of
$111,000 for this service.
In 1994, the Small Business Administration established a Low
Doc loan program. This program is intended to reduce the
paperwork requirements and improve approval turnaround time on
certain SBA qualifying commercial loan requests of $100,000 or
less. For the year ended September 30, 1997, the Bank was the
second highest SBA lender in Solano and Napa counties.
Other than as disclosed above, with respect to the Business
Manager Accounts Receivable program and the SBA loan Program, the
Company has not engaged in any material research activities
relating to the development of new services or the improvement of
existing banking services during the last two fiscal years.
During that time, however, the Company's directors, officers and
employees have continually engaged in marketing activities,
including the evaluation and development of new services, in
order to maintain and improve the Company's competitive position
in its primary service area. The cost of these activities cannot
be calculated with any degree of certainty.
The Company holds no patents, trademarks, licenses (other
than licenses required to be obtained from the appropriate Bank
regulatory agencies), franchises or concessions which are of
material importance to its business.
The Company is exploring, subject to the merger discussed
below, the merits and costs of offering home banking, a bill
paying service through the customer's computer, and telephone
banking in 1998. It is estimated these services could require an
investment of $75,000 to $100,000. The Company currently has no
other plans to introduce a new product or line of business which
would require the investment of a significant amount of the
Company's total assets.
As of December 31, 1997, the Company employed a total of 98
employees representing 77 full-time-equivalent employees.
MERGER WITH SIERRAWEST BANCORP
On November 13, 1997, the Company entered into a Plan of
Acquisition and Merger ("Plan") with SierraWest Bancorp
("SierraWest"). Under the terms of the Agreement, SierraWest
will acquire all the outstanding common stock of the Company in
exchange for shares of SierraWest common stock at an exchange
ratio defined by a formula in the Plan. The merger, which is
expected to close early in the second quarter of 1998, is subject
to the approval of each Company's shareholders and state and
federal banking regulatory agencies. On the Effective Date,
each of the Company's outstanding Convertible Subordinated
Debentures Due April 30, 2003, shall by virtue of the merger, be
assumed by SierraWest in accordance with the terms of the related
Indenture Agreement, provided, however, and as required by the
Indenture Agreement the conversion price of such debentures into
SierraWest shares shall be adjusted by dividing the current
conversion price of $12.75 by the exchange ratio on the Effective
Date. The transaction will be accounted for as a pooling of
interest.
On March 10, 1998, SierraWest Bancorp received a letter from
the Federal Deposit Insurance Corporation ("FDIC"), dated March
3, 1998, which approved the application for merger. On March 12,
1998, the Department of Financial Institutions approved the
application for merger. On February 12, 1998, SierraWest Bancorp
received a letter from the Board of Governors of the Federal
Reserve System, dated February 6, 1998, which stated that the
Reserve Bank has reviewed the request within the context of the
policies and, based upon a review of the facts presented, would
not object to consummation of the proposed merger without the
filing of a formal application. On March 16, 1998, the Company's
shareholders approved the Merger. The SierraWest shareholders
meeting is scheduled for March 26, 1998.
REAL ESTATE DEVELOPMENT SUBSIDIARY
The Bank's wholly-owned subsidiary, Conpac, engages in the
real estate development business as authorized under California law.
In July 1988, Conpac purchased and leased unimproved real
property in the vicinity of Mason and Davis streets in downtown
Vacaville. This project is known as Pacific Plaza. In mid-1990
Conpac began to build a two-story building of approximately
32,000 square feet (27,133 rentable square feet) and 140 parking
spaces. This building is located on the lot east of Davis Street
which Conpac currently owns and is referred to as Pacific Plaza
East. In 1990, Conpac also exercised its option to purchase the
lot immediately west of Davis Street for $225,000. This lot and
the adjacent lots previously purchased by Conpac are the proposed
site of Pacific Plaza West.
Pacific Plaza East's occupancy rate was 93% and 100% in 1997
and 1996, respectively, including the 3,796 square feet occupied
by the Bank's Corporate office. As of December 31, 1997, the
average leases were $1.40 per square foot on a triple net basis.
Pacific Plaza East has ample parking, with 140 spaces,
adjacent to the building. Only 84 parking spaces are required by
the City. Prior to 1995, it was the intent of the Company to
sell the additional 56 spaces to the City of Vacaville. In 1995,
the Bank decided the building's long term value would be improved
by retaining these extra spaces. Therefore, the carrying amount
of these spaces was added to the project and transferred to
premises. As of December 31, 1997, Conpac had a carrying amount
of $3,624,000 for Pacific Plaza East (net of $542,000 accumulated
depreciation) and approximately $700,000 for Pacific Plaza West.
At December 31, 1997, with Pacific Plaza East 84% leased, the
estimated return on investment was approximately 7.7%, before
depreciation.
Beginning in December 1992, state banks and their
subsidiaries were prohibited from engaging, as principal, in
activities not permissible to national banks and their
subsidiaries. Any Bank engaged in such activities must divest
itself of these investments by December 1996 and was required to
file a divestiture plan with the FDIC by February 5, 1993,
detailing its plans. Generally, national banks may not engage in
real estate development, although they can own property used or
to be used, in part, as a banking facility. During 1993, the
Bank moved its corporate offices to Pacific Plaza East. The Bank
occupies 3,796 square feet in Pacific Plaza East (14% of the
leaseable office space). Since ownership of banking premises is
permissible for a national Bank subsidiary, a divestiture plan
was not required for Pacific Plaza East. Conpac currently plans
to retain Pacific Plaza East.
On August 1, 1994, at the request of the FDIC, the Bank
filed a new divestiture plan. The new plan indicated the Bank
intended to build a two-story 12,000 square foot commercial
office building, upon 50% preleasing, on the 38,725 square foot
vacant parcel referred to as Pacific Plaza West. The Bank also
indicated its intent to occupy between 15% and 19% of the space
in Pacific Plaza West. The plan requested FDIC approval to
transfer Pacific Plaza West to premises, for regulatory reporting
purposes, upon completion and occupancy of Pacific Plaza West by
the Bank. The plan also reaffirmed the Bank's intent to retain
Pacific Plaza East classifying the property as premises for
regulatory reporting purposes. On August 12, 1994, the Bank
received notification from the FDIC that they raised no
objections to the Bank's plan. However, the FDIC requested to
be notified of the circumstances if the project was not completed
by year end 1995. At December 31, 1997, the Bank had not begun
construction of Pacific Plaza West. At December 31, 1997,
Pacific Plaza West is carried on the books as premises.
On October 15, 1997, Conpac Development Corporation entered
into an agreement with the Vacaville Redevelopment Agency
("Agency") to sell half of Pacific Plaza West (approximately
20,810 square feet) for either $382,500, if parking improvements
were completed by Conpac, or $300,000 if unimproved. In
addition, Conpac will convey a portion of Pacific Plaza East
containing 28 existing parking spaces and existing easements to
the Agency. On January 15, 1998, after receiving approval from
SierraWest as required by the Merger Plan, Conpac notified the
Agency of its election not to construct the parking improvement
and therefore sell the above mentioned property to the Agency for
$300,000. Close of Escrow shall occur on or before October 31,
1998.
The Company is considering various options for the remaining
18,000 square foot corner parcel, including, building a 6,200
square foot office building to relocate the Vacaville Main
office, leasing the building to a nonaffiliated entity or selling
the property, as is. The lease on the building currently
occupied by the Vacaville Main office expires December 31, 1998.
On December 31, 1997, Conpac had total investments of
$4,324,000. Except for Pacific Plaza, Conpac has no other
projects or investments. During 1997, 1996 and 1995,
respectively, Conpac contributed $126,000, $242,000 and $213,000,
respectively, to revenue net of related expenses.
ENVIRONMENTAL MATTERS
Compliance with federal, state and local regulations
regarding the discharge of materials into the environment may
have a substantial effect on the capital expenditure, earnings
and competitive position of the Company in the event of lender
liability or environmental lawsuits. Under federal law,
liability for environmental damage and the cost of the cleanup
may be imposed upon any person or entity who is an "owner" or
"operator" of contaminated property. State law provisions, which
were modeled after federal law, are similar. Congress
established an exemption under Federal law for lenders from
"owner" and/or "operator" liability, which provides that "owner"
and/or "operator" do not include "a person, who, without
participating in the management of a vessel or facility, holds
indicia of ownership primarily to protect his security interests
in the vessel or facility." The wording of this exemption is
subject to conflicting interpretations between the Federal Courts
and has therefore generated uncertainty within the financial and
lending communities, particularly with regard to the extent to
which a secured creditor may undertake activities to oversee the
affairs of the borrower without "participating in the management"
of a facility. Congress is currently addressing lender liability
under environmental laws, and it is expected that the lender
exemption will be clarified. There is no assurance, however,
that such clarification will be made, and, if made, that it will
be favorable to lenders. Thus, the scope of lender liability
under federal and state law remains an open question.
It is the policy of the Company to prohibit officers and
employees from becoming directly involved in the operation or
management of borrowers' businesses. To further minimize the
risk of liability, the Company requires that each borrower
proposing to finance nonresidential property complete an
environmental questionnaire and, in those instances where it is
warranted, requires appropriate independent environmental
assessment studies.
In the event the Bank or Conpac is held liable as owners or
operators of a toxic property, they could be responsible for the
entire cost of environmental damage and cleanup. Such an outcome
could have a serious effect on the Company's consolidated
financial condition depending upon the amount of liability
assessed and the amount of the cleanup required. At March 24,
1998, the Company has no knowledge that any real estate securing
loans in its portfolio are contaminated by hazardous substances.
THE EFFECT OF GOVERNMENT POLICY ON BANKING
The earnings and growth of the Company are affected not only
by local market area factors and general economic conditions, but
also by government monetary and fiscal policies. For example,
the Board of Governors of the Federal Reserve System ("FRB")
influences the supply of money through its open market operations
in U.S. Government securities and adjustments to the discount
rates applicable to borrowings by depository institutions and
others. Such actions influence the growth of loans, investments
and deposits and also affect interest rates charged on loans and
paid on deposits. The nature and impact of future changes in
such policies on the business and earnings of the Company cannot
be predicted.
As a consequence of the extensive regulation of commercial
banking activities in the United States, the business of the
Company is particularly susceptible to being affected by the
enactment of federal and state legislation which may have the
effect of increasing or decreasing the cost of doing business,
modifying permissible activities or enhancing the competitive
position of other financial institutions. Any change in
applicable laws or regulations may have a material adverse effect
on the business and prospects of the Company.
SUPERVISION AND REGULATION
The Company
The Company, as a bank holding company, is subject to
regulation under the Bank Holding Company Act of 1956, as amended
(the "BHC Act") and is registered with and subject to the
supervision of the Board of Governors of the Federal Reserve
System ("Federal Reserve"). It is the policy of the Federal
Reserve that each bank holding company serve as a source of
financial and managerial strength to its subsidiary banks. The
Federal Reserve has the authority to examine the Company and the
Bank.
The BHC Act requires the Company to obtain the prior
approval of the Federal Reserve before acquisition of all or
substantially all of the assets of any bank or ownership or
control of the voting shares of any bank if, after giving effect
to such acquisition, the Company would own or control, directly
or indirectly, more than 5% of the voting shares of such bank.
However, amendments to the BHC Act effected by the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal"), which is discussed further below, expand the
circumstances under which a bank holding company may acquire
control of or all or substantially all of the assets of a bank
located outside the State of California.
The Company may not engage in any business other than
managing or controlling banks or furnishing services to its
subsidiaries, with the exception of certain activities which, in
the opinion of the Federal Reserve, are so closely related to
banking or to managing or controlling banks as to be incidental
to banking. The Company is also generally prohibited from
acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any company unless that company is
engaged in such activities and unless the Federal Reserve
approves the acquisition.
The Company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any
extension of credit, sale or lease of property or provision of
services. For example, with certain exceptions, the Bank may not
condition an extension of credit on a customer obtaining other
services provided by it, the Company or any other subsidiary, or
on a promise by the customer not to obtain other services from a
competitor. In addition, federal law imposes certain
restrictions on transactions between the Bank and its affiliates.
As affiliates, the Bank and the Company are subject, with certain
exceptions, to the provisions of federal law imposing limitations
on and requiring collateral for loans by the Bank to any
affiliate.
The Bank
As a California state-licensed bank, the Bank is subject to
regulation, supervision and periodic examination by the
California Department of Financial Institutions ("DFI") and the
Federal Deposit Insurance Corporation ("FDIC"). The Bank is not
a member of the Federal Reserve System, but is nevertheless
subject to certain regulations of the Federal Reserve. The
Bank's deposits are insured by the FDIC to the maximum amount
permitted by law, which is currently $100,000 per depositor in
most cases.
The regulations of these state and federal bank regulatory
agencies govern most aspects of the Bank's business and
operations, including but not limited to, the scope of its
business, its investments, its reserves against deposits, the
nature and amount of any collateral for loans, the timing of
availability of deposited funds, the issuance of securities, the
payment of dividends, bank expansion and bank activities,
including real estate development and insurance activities, and
the maximum rates of interest allowed on certain deposits. The
Bank is also subject to the requirements and restrictions of
various consumer laws and regulations.
The following description of statutory and regulatory
provisions and proposals is not intended to be a complete
description of these provisions and is qualified in its entirety
by reference to the particular statutory or regulatory provisions
discussed.
Change in Control
The BHC Act and the Change in Bank Control Act of 1978, as
amended (the "Change in Control Act"), together with regulations
of the Federal Reserve, require that, depending on the particular
circumstances, either Federal Reserve approval must be obtained
or notice must be furnished to the Federal Reserve and not
disapproved prior to any person or company acquiring "control" of
a bank holding company, such as the Company, subject to
exemptions for certain transactions. Control is conclusively
presumed to exist if an individual or company acquires 25% or
more of any class of voting securities of the bank holding
company. Control is rebuttably presumed to exist if a person
acquires 10% or more but less than 25% of any class of voting
securities and either the company has securities registered under
Section 12 of the Exchange Act, or no other person will own a
greater percentage of that class of voting securities immediately
after the transaction. The Financial Code also contains approval
requirements for the acquisition of 10% or more of the securities
of a person or entity which controls a California licensed bank.
Capital Adequacy Requirements
The Company is subject to the Federal Reserve's capital
guidelines for bank holding companies and the Bank is subject to
the FDIC's regulations governing capital adequacy for nonmember
banks. Additional capital requirements may be imposed on banks
based on market risk.
The Federal Reserve and FDIC
The Federal Reserve has established risk-based and leverage
capital guidelines for bank holding companies which are similar
to the FDIC's capital adequacy regulations for nonmember banks.
The Federal Reserve guidelines apply on a consolidated basis to
bank holding companies with consolidated assets of $150 million
or more.
The Federal Reserve capital guidelines for bank holding
companies and the FDIC's regulations for nonmember banks set
total capital requirements and define capital in terms of "core
capital elements," or Tier 1 capital<F1> and "supplemental
capital elements," or Tier 2 capital<F2>. At least fifty percent
(50%) of the qualifying total capital base must consist of Tier
1 capital. The maximum amount of Tier 2 capital that may be
recognized for risk-based capital purposes is limited to
one-hundred percent (100%) of Tier 1 capital, net of goodwill.
- ---------
F1 Tier 1 capital is generally defined as the sum of the core
capital elements less goodwill and certain intangibles. The
following items are defined as core capital elements: (i) common
stockholders' equity; (ii) qualifying noncumulative perpetual
preferred stock and related surplus; and (iii) minority interests
in the equity accounts of consolidated subsidiaries.
F2 Supplementary capital elements include: (i) allowance for
loan and lease losses (which cannot exceed 1.25% of an
institution's risk-weighted assets); (ii) perpetual preferred
stock and related surplus not qualifying as core capital; (iii)
hybrid capital instruments, perpetual debt and mandatory
convertible debt securities; and (iv) term subordinated
- ---------
Both bank holding companies and nonmember banks are required
to maintain a minimum ratio of qualifying total capital to risk-
weighted assets of eight percent (8%), at least one-half of which
must be in the form of Tier 1 capital. Risk-based capital ratios
are calculated with reference to risk-weighted assets, including
both on and off-balance sheet exposures, which are multiplied by
certain risk weights assigned by the Federal Reserve and the FDIC
to those assets.
The Federal Reserve and the FDIC have established a minimum
leverage ratio of three percent (3%) Tier 1 capital to total
assets for bank holding companies and nonmember banks that have
received the highest composite regulatory rating and are not
anticipating or experiencing any significant growth. All other
institutions are required to maintain a leverage ratio of at
least 100 to 200 basis points above the 3% minimum for a minimum
of four percent (4%) or five percent (5%).
The following tables present the capital ratios for the
Company and the Bank and respective regulatory capital adequacy
requirements.
<TABLE>
Company:
<CAPTION> For Capital
Actual Adequacy Purposes
--------------------- --------------------
Minimum Minimum
Amount Ratio Amount Ratio
(000) (000)
--------------------- --------------------
<S> <C> <C> <C> <C>
As of December 31, 1997:
Total capital
(to risk weighted assets) $19,084 13.64% $11,195 8.0%
Tier I capital
(to risk weighted assets) $15,374 10.99% $ 5,597 4.0%
Tier I capital
(to average assets) $15,374 7.91% $ 7,772 4.0%
As of December 31, 1996:
Total capital
(to risk weighted assets) $17,895 13.55% $10,564 8.0%
Tier I capital
(to risk weighted assets) $13,104 9.92% $ 5,282 4.0%
Tier I capital
(to average assets) $13,104 7.04% $ 7,444 4.0%
</TABLE>
<TABLE>
Bank:
<CAPTION>
To Be Categorized as
Well Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------- -------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
(000) (000) (000)
--------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital
(to risk weighted assets) $18,431 13.21% $11,160 8.0% $13,950 10.0%
Tier I capital
(to risk weighted assets) $13,521 9.69% $ 5,580 4.0% $ 8,370 6.0%
Tier I capital
(to average assets) $13,521 6.97% $ 7,755 4.0% $ 9,694 5.0%
As of December 31, 1996:
Total capital
(to risk weighted assets) $17,416 13.22% $10,540 8.0% $13,174 10.0%
Tier I capital
(to risk weighted assets) $12,647 9.60% $ 5,270 4.0% $ 7,905 6.0%
Tier I capital
(to average assets) $12,647 6.81% $ 7,407 4.0% $ 9,286 5.0%
</TABLE>
The risk-based capital ratio discussed above focuses
principally on broad categories of credit risk, and may not take
into account many other factors that can affect a bank's
financial condition. These factors include overall interest rate
risk exposure; liquidity, funding and market risks; the quality
and level of earnings; concentrations of credit risk; certain
risks arising from nontraditional activities; the quality of
loans and investments; the effectiveness of loan and investment
policies; and management's overall ability to monitor and control
financial and operating risks, including the risk presented by
concentrations of credit and nontraditional activities. The FDIC
has addressed many of these areas in related rule-making
proposals and under FDICIA (as defined below), some of which are
discussed herein. In addition to evaluating capital ratios, an
overall assessment of capital adequacy must take account of each
of these other factors including, in particular, the level and
severity of problem and adversely classified assets. For this
reason, the final supervisory judgment on a bank's capital
adequacy may differ significantly from the conclusions that might
be drawn solely from the absolute level of the bank's risk-based
capital ratio. In light of the foregoing, the FDIC has stated
that banks generally are expected to operate above the minimum
risk-based capital ratio. Banks contemplating significant
expansion plans, as well as those institutions with high or
inordinate levels of risk, should hold capital commensurate with
the level and nature of the risks to which they are exposed.
Recently adopted regulations by the federal banking agencies
have revised the risk-based capital standards to take adequate account of
concentrations of credit and the risks of non-traditional activities.
Concentrations of credit refers to
situations where a lender has a relatively large proportion of
loans involving one borrower, industry, location, collateral or
loan type. Non-traditional activities are considered those that
have not customarily been part of the banking business but that
start to be conducted as a result of developments in, for
example, technology or financial markets. The regulations
require institutions with high or inordinate levels of risk to
operate with higher minimum capital standards. The federal
banking agencies also are authorized to review an institution's
management of concentrations of credit risk for adequacy and
consistency with safety and soundness standards regarding
internal controls, credit underwriting or other operational and
managerial areas. In addition, the agencies have promulgated
guidelines for institutions to develop and implement programs for
interest rate risk management, monitoring and oversight.
Further, the banking agencies recently have adopted
modifications to the risk-based capital regulations to include
standards for interest rate risk exposures. Interest rate risk
is the exposure of a bank's current and future earnings and
equity capital arising from movements in interest rates. While
interest rate risk is inherent in a bank's role as financial
intermediary, it introduces volatility to bank earnings and to
the economic value of the bank. The banking agencies have
addressed this problem by implementing changes to the capital
standards to include a bank's exposure to declines in the
economic value of its capital due to changes in interest rates as
a factor that the banking agencies will consider in evaluating an
institution's capital adequacy. Bank examiners will consider a
bank's historical financial performance and its earnings exposure
to interest rate movements as well as qualitative factors such as
the adequacy of a bank's internal interest rate risk management.
Finally, institutions with significant trading activities
must measure and hold capital for exposure to general market risk
arising from fluctuations in interest rates, equity prices,
foreign exchange rates and commodity prices and exposure to
specific risk associated with debt and equity positions in the
trading portfolio. General market risk refers to changes in the
market value of on-balance-sheet assets and off-balance-sheet
items resulting from broad market movements. Specific market
risk refers to changes in the market value of individual
positions due to factors other than broad market movements and
includes such risks as the credit risk of an instrument's issuer.
The additional capital requirements apply effective January 1,
1998 to institutions with trading assets and liabilities equal to
10% or more of total assets or trading activity of $1 billion or
more. The federal banking agencies may apply the market risk
regulations on a case by case basis to institutions not meeting
the eligibility criteria if necessary for safety and soundness
reasons.
In connection with the recent regulatory attention to market
risk and interest rate risk, the federal banking agencies will
evaluate an institution in its periodic examination on the degree
to which changes in interest rates, foreign exchange rates,
commodity prices or equity prices can affect a financial
institution's earnings or capital. In addition, the agencies
will focus in the examination on an institution's ability to
monitor and manage its market risk, and will provide management
with a clearer and more focused indication of supervisory
concerns in this area.
In certain circumstances, the FDIC or the Federal Reserve
may determine that the capital ratios for an FDIC-insured bank or
a bank holding company must be maintained at levels which are
higher than the minimum levels required by the guidelines or the
regulations. A bank or bank holding company which does not
achieve and maintain the required capital levels may be issued a
capital directive by the FDIC or the Federal Reserve to ensure
the maintenance of required capital levels.
Payment of Dividends
The shareholders of the Company are entitled to receive
dividends when and as declared by its Board of Directors, out of
funds legally available, subject to the dividends preference, if
any, on preferred shares that may be outstanding and also subject
to the restrictions of the California Corporations Code. At
December 31, 1997 and 1996, the Company had no outstanding shares
of preferred stock.
The principal sources of cash revenue to the Company have
been dividends received from the Bank. The Bank's ability to make
dividend payments to the Company is subject to state and federal
regulatory restrictions.
Dividends payable by the Bank to the Company are restricted
under California law to the lesser of the Bank's retained
earnings, or the Bank's net income for the latest three fiscal
years, less dividends previously declared during that period, or,
with the approval of the DFI, to the greater of the retained
earnings of the Bank, the net income of the Bank for its last
fiscal year or the net income of the Bank for its current fiscal
year.
The FDIC has broad authority to prohibit a bank from
engaging in banking practices which it considers to be unsafe
or unsound. It is possible, depending upon the financial condition
of the bank in question and other factors, that the FDIC may
assert that the payment of dividends or other payments by the
bank is considered an unsafe or unsound banking practice and
therefore, implement corrective action to address such a
practice.
In addition to the regulations concerning minimum uniform
capital adequacy requirements discussed above, the FDIC has
established guidelines regarding the maintenance of an adequate
allowance for loan and lease losses. Therefore, the future
payment of cash dividends by the Bank to the Company will
generally depend, in addition to regulatory constraints, upon the
Bank's earnings during any fiscal period, the assessment of the
respective Boards of Directors of the capital requirements of
such institutions and other factors, including the maintenance of
an adequate allowance for loan and lease losses.
Impact of Federal and California Tax Laws
The following are the more significant federal and
California income tax provisions affecting commercial banks.
Corporate Tax Rates
The federal corporate tax rate is 34% for up to $10 million
of taxable income, and 35% for taxable income over $10 million.
The 1% differential is phased out between $15 million and
approximately $18.3 million so that corporations with over
approximately $18.3 million of taxable income are taxed at a flat
rate of 35%.
Corporate Alternative Minimum Tax
Generally, a corporation will be subject to an alternative
minimum tax ("AMT") to the extent the tentative minimum tax
exceeds the corporation's regular tax liability. The tentative
minimum tax is equal to (a) 20% of the excess of a corporation's
"alternative minimum taxable income" ("AMTI") over an exemption
amount, less (b) the alternative minimum foreign tax credit.
AMTI is defined as taxable income computed with special
adjustments and increased by the amount of tax preference items
for a tax year. An important adjustment is made for "adjusted
current earnings," which generally measures the difference
between corporate earnings and profits (as adjusted) and taxable
income. Finally, a corporation's net operating loss computed for
AMT purposes (if any) only can be utilized to offset up to 90% of
AMTI, with the result that a corporation with current year
taxable income will pay some tax.
Bad debt deduction
A bank with average adjusted bases of all assets exceeding
$500 million (a "large bank") must compute its bad debt deduction
using the specific charge-off method. Under that method, a
deduction is taken at the time the debt becomes partially or
wholly worthless. A bank not meeting the definition of a large
bank may use either the specific charge-off method or the
"experience" reserve method, under which the addition to bad debt
reserve is based on the bank's actual loss experience for the
current year and five preceding years. The U.S. Treasury has
promulgated regulations which permit a bank to elect to establish
a conclusive presumption that a debt is worthless, based on
applying a single set of standards for both regulatory and tax
accounting purposes.
Interest incurred for tax-exempt obligations
Generally, taxpayers are not allowed to deduct interest on
indebtedness incurred to purchase or carry tax-exempt
obligations. This rule applies to a bank, to the extent of its
interest expense that is allocable to tax-exempt obligations
acquired after August 7, 1986. The Taxpayer Relief Act of 1997
(the "1997 Act") made a technical change which expands the
interest potentially disallowed. A special exception applies,
however, to a "qualified tax-exempt obligation," which includes
any tax-exempt obligation that (a) is not a private activity bond
and (b) is issued after August 7, 1986 by an issuer that
reasonably anticipates it will issue not more than $10 million of
tax-exempt obligations (other than certain private activity
bonds) during the calendar year. Interest expense on qualified
tax-exempt obligations is deductible, although it is subject to a
20% disallowance under special rules applicable to financial
institutions.
Net operating losses
The 1997 Act changed the tax treatment of net operating
losses (an "NOL"). Effective for tax years beginning after
August 5, 1997, a bank generally is permitted to carry a NOL back
to the prior two tax years and forward to the succeeding twenty
tax years. For tax years beginning on or before August 5, 1997,
the NOL may be carried back three years and forward fifteen
years. However, if the NOL of a commercial bank is attributable
to a bad debt deduction taken under the specific charge-off
method after December 31, 1986, and before January 1, 1994, such
portion of the NOL may be carried back ten years and carried
forward five years. A commercial bank's bad debt loss is treated
as a separate NOL to be taken into account after the remaining
portion of the NOL for the year.
Amortization of intangible assets including bank
deposit base
Certain intangible property acquired by a taxpayer must be
amortized over a 15-year period. For this purpose, acquired
assets required to be amortized include goodwill and the deposit
base or any similar asset acquired by a financial institution
(such as checking and savings accounts, escrow accounts and
similar items). The 15-year amortization rule generally applies
to property acquired after August 10, 1993.
Mark-to-market rules
The Revenue Reconciliation Act of 1993 introduced certain
"mark-to-market" tax accounting rules for "dealers in
securities." Under these rule, certain "securities" held at the
close of a taxable year must be marked to fair market value, and
the unrealized gain or loss inherent in the security must be
recognized in that year for federal income tax purposes. Under
the definition of a "dealer," a bank or financial institution
that regularly purchases or sells loans may be subject to the new
rules. The rules generally are effective for tax years ending on
or after December 31, 1993.
Certain securities are excepted from the mark-to-market
rules provided the taxpayer timely complies with specified
identification rules. The principal exceptions affecting banks
are for (1) any security held for investment and (2) any note,
bond, or other evidence of indebtedness acquired or originated in
the ordinary course of business and which is not held for sale.
If a taxpayer timely and properly identifies loans and securities
as being excepted from the mark-to-market rules, these loans and
securities will not be subject to these rules. Generally, a
financial institution may make the identification of an excepted
debt obligation in accordance with normal accounting practices,
but no later than 30 days after acquisition.
California tax laws
A commercial bank is subject to the California franchise tax
at a special bank tax rate based on the general corporate (non
financial) rate plus 2%. For calender income year 1997, the bank
tax rate is 10.84% (which reflects a decrease in the general
corporate tax rate to 8.84%). The applicable tax rate is higher
than that applied to general corporations because it includes an
amount "in lieu" of many other state and local taxes and license
fees payable by such corporations but generally not payable by
banks and financial corporations.
California has adopted substantially the federal AMT,
subject to certain modifications. Generally, a bank is subject
to California AMT in an amount equal to the sum of (a) 7% of AMTI
(computed for California purposes) over an exemption amount and
(b) the excess of the bank tax rate over the general corporation
tax rate applied against net income for the taxable year, unless
the bank's regular tax liability is greater. The 7% rate is
lowered to 6.65% for any income year beginning after 1996.
California permits a bank to compute its deduction for bad
debt losses under either the specific charge-off method or
according to the amount of a reasonable addition to a bad debt
reserve.
California has incorporated the federal NOL provisions,
subject to significant modifications for most corporations.
First, NOLs arising in income years beginning before 1987 are
disregarded. Second, no carryback is permitted, and for most
corporations NOLs may be carried forward only five years. Third,
in most cases, only 50% of the NOL for any income year may be
carried forward. Fourth, NOL carryover deductions are suspended
for income years beginning in calendar years 1991 and 1992,
although the carryover period is extended by one year for losses
sustained in income years beginning in 1991 and by two years for
losses sustained in income years beginning before 1991. Finally,
the special federal NOL rules regarding bad debt losses of
commercial banks do not apply for California purposes.
Finally, in 1994, California enacted legislation conforming
to the federal tax treatment of amortization of intangibles and
goodwill, with certain modifications. No deduction is allowed
under this provision for any income year beginning prior to 1994.
The various tax laws discussed herein contain other changes
that could have a significant impact on the banking industry.
The effect of these changes is uncertain and varied, and it is
unclear to what extent any of these changes may influence the
Bank's operations or the banking industry generally.
In addition, there are several tax bills currently pending
before Congress which could have a significant impact on the
banking industry. It is uncertain whether these bills will be
enacted and what impact these bills will have on the Bank.
Impact of Monetary Policies
The earnings and growth of the Bank and the Company are
subject to the influence of domestic and foreign economic
conditions, including inflation, recession and unemployment. The
earnings of the Bank and, therefore, the Company, are affected
not only by general economic conditions but also by the monetary
and fiscal policies of the United States and federal agencies,
particularly the Federal Reserve. The Federal Reserve can and
does implement national monetary policy, such as seeking to curb
inflation and combat recession, by its open market operations in
United States Government securities and by its control of the
discount rates applicable to borrowings by banks from the Federal
Reserve System. The actions of the Federal Reserve in these
areas influence the growth of bank loans, investments and
deposits and affect the interest rates charged on loans and paid
on deposits. As demonstrated recently by the Federal Reserve's
actions regarding interest rates, its policies have had a
significant effect on the operating results of commercial banks
and are expected to continue to do so in the future. The nature
and timing of any future changes in monetary policies are not
predictable.
Recent and Proposed Legislation
Federal and state laws applicable to financial institutions
have undergone significant changes in recent years. The most
significant recent federal legislative enactments are the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal") and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA").
Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994
In September 1994, President Clinton signed Riegle-Neal,
which amends the BHC Act and the Federal Deposit Insurance Act
("FDIA") to provide for interstate banking, branching and
mergers. Subject to the provisions of certain state laws and
other requirements, Riegle-Neal allows a bank holding company
that is adequately capitalized and adequately managed to acquire
a bank located in a state other than the holding company's home
state regardless of whether or not the acquisition is expressly
authorized by state law. Similarly, beginning on June 1, 1997,
the federal banking agencies were permitted to approve interstate
merger transactions, subject to applicable restrictions and state
laws. Further, a state may elect to allow out of state banks to
open de novo branches in that state. However, recently adopted
regulations of the federal banking agencies prohibit interstate
branching primarily for the purpose of deposit production and
provide guidelines to ensure that banks operating interstate
branches are reasonably helping to meet the credit needs of the
communities served by the branches.
Riegle-Neal includes several other provisions which may have
an impact on the Company's and the Bank's business. The
provisions include, among other things, a mandate for review of
regulations to equalize competitive opportunities between U.S. and
foreign banks, evaluation on a bank-wide, state-wide and, if
applicable, metropolitan area basis of the Community Reinvestment
Act compliance of banks with interstate branches, and, in the
event the FDIC is appointed as conservator or receiver of a
financial institution, the revival of otherwise expired causes of
action for fraud and intentional misconduct resulting in unjust
enrichment or substantial loss to an institution.
California has adopted the Caldera, Weggeland, and Killea
California Interstate Banking and Branching Act of 1995 ("IBBA"),
which became effective on October 2, 1995. The IBBA addresses
the supervision of state chartered banks which operate across
state lines, and covers such areas as branching, applications for
new facilities and mergers, consolidations and conversions, among
other things. The IBBA allows a California state bank to have
agency relationships with affiliated and unaffiliated insured
depository institutions and allows a bank subsidiary of a bank
holding company to act as an agent to receive deposits, renew
time deposits, service loans and receive payments for a
depository institution affiliate. In addition, pursuant to the
IBBA, California "opted in early" to the Riegle-Neal provisions
regarding interstate branching, allowing a state bank chartered
in a state other than California to acquire by merger or
purchase, at any time after effectiveness of the IBBA, a
California bank or industrial loan company which is at least five
(5) years old and thereby establish one or more California branch
offices. However, the IBBA prohibits a state bank chartered in a
state other than California from entering California by
purchasing a California branch office of a California bank or
industrial loan company without purchasing the entire entity or
establishing a de novo California branch office.
The changes effected by Riegle-Neal and the IBBA may
increase the competitive environment in which the Company and the
Bank operate in the event that out of state financial
institutions directly or indirectly enter the Bank's market area.
It is expected that Riegle-Neal will accelerate the consolidation
of the banking industry as a number of the largest bank holding
companies expand into different parts of the country that were
previously restricted. However, at this time, it is not possible
to predict what specific impact, if any, Riegle-Neal and the IBBA
will have on the Company and the Bank, the competitive
environment in which the Bank operates, or the impact on the
Company or the Bank of any regulations adopted or proposed under
Riegle-Neal and the IBBA.
Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA")
General
FDICIA primarily addresses the safety and soundness of the
deposit insurance funds, supervision of and accounting by insured
depository institutions and prompt corrective action by the
federal bank regulatory agencies with respect to troubled
institutions. FDICIA gives the FDIC, in its capacity as federal
insurer of deposits, broad authority to promulgate regulations to
assure the viability of the deposit insurance funds, including
regulations concerning safety and soundness standards. FDICIA
also places restrictions on the activities of state-chartered
institutions and on institutions failing to meet minimum capital
standards and provides enhanced enforcement authority for the
federal banking agencies. FDICIA also strengthened Federal
Reserve Act regulations regarding insider transactions.
Prompt Corrective Action
FDICIA amended the FDIA to establish a format for closer
monitoring of insured depository institutions and to enable
prompt corrective action by regulators when an institution begins
to experience difficulty. The general thrust of these provisions
is to impose greater scrutiny and more restrictions on
institutions as they descend the capitalization ladder.
FDICIA establishes five capital categories for insured
depository institutions: (a) Well Capitalized;<F1> (b) Adequately
Capitalized;<F2> (c) Undercapitalized;<F3> (d) Significantly
Undercapitalized;<F4> and (e) Critically Undercapitalized.<F5>
All insured institutions (e.g., the Bank) are barred from making
capital distributions or paying management fees to a controlling
person (e.g., the Company) if to do so would cause the
institution to fall into any of the three undercapitalized
categories.
- ---------
<F1> Well Capitalized means a financial institution with a total
risk-based ratio of 10% or more, a Tier 1 risk-based ratio of
6% or more and a leverage ratio of 5% or more, so long as
the institution is not subject to any written agreement or
order issued by the FDIC.
<F2> Adequately Capitalized means a total risk-based ratio of
8% or more, a Tier 1 risk-based ratio of 4% or more and a
leverage ratio of 4% or more (3% or more if the institution has
received the highest composite rating in its most recent report
of examination) and does not meet the definition of a Well
Capitalized institution.
<F3> Undercapitalized means a total risk-based capital ratio
of less than 8%, a Tier 1 risk-based capital ratio of less than
4% or a leverage ratio of less than 4%.
<F4> Significantly Undercapitalized means a financial
institution with a total risk-based ratio of less than 6%, a Tier
1 risk-based ratio of less than 3% or a leverage ratio of less
than 3%.
<F5> Critically Undercapitalized means a financial
institution with a ratio of tangible equity to total assets that
is equal to or less than 2%.
- ---------
An institution which is undercapitalized, significantly
undercapitalized or critically undercapitalized becomes subject
to mandatory supervisory actions, including: (1) restrictions on
payment of capital distributions, such as dividends; (2)
restrictions on payment of management fees to any person having
control of the institution; (3) close monitoring by the FDIC of
the condition of the institution, compliance with capital
restoration plans, restrictions, and requirements imposed under
Section 38 of the FDIA, and periodic review of the institution's
efforts to restore its capital and comply with restrictions; (4)
submission to the FDIC of a capital restoration plan; (5)
requirement that any company which controls an undercapitalized
institution must guarantee, in an amount equal to the lesser of
5% of the institution's total assets or the amount needed to
bring the institution into full capital compliance, that the
institution will comply with the capital restoration plan until
the institution has been adequately capitalized, on the average,
for four consecutive quarters; (6) restrictions on the
institution's asset growth; and (7) limitations on the
institution's ability to make any acquisition, open any new
branch offices or engage in any new line of business.
Significantly undercapitalized and undercapitalized
institutions that fail to submit and implement adequate capital
restoration plans are subject to the mandatory provisions set
forth above and, in addition, to increasingly stringent operating
restrictions, including an immediate requirement to raise
capital.
Finally, a critically undercapitalized institution must be
placed in conservatorship or receivership within 90 days of
becoming critically undercapitalized, unless the FDIC determines
that other action would better achieve the purposes of the FDIA.
Critically undercapitalized institutions which are not placed in
conservatorship or receivership may be subject to additional
stringent operating restrictions.
Safety and Soundness; Other Provisions of FDICIA
FDICIA required the federal banking agencies to adopt
regulations or guidelines with respect to safety and soundness
standards. The agencies have adopted uniform guidelines which
are used, primarily in connection with examinations, to identify
and address problems at insured depository institutions before
capital becomes impaired. The federal bank regulatory agencies
have adopted asset quality and earnings standards as part of the
safety and soundness guidelines. The asset quality standards
require a depository institution to establish and maintain a
system appropriate to the institution's size and operations to
identify and prevent deterioration in problem assets. With
respect to earnings, the institution should adopt and maintain a
system to evaluate and monitor earnings and ensure that earnings
are sufficient to maintain adequate capital and reserves.
The federal banking agencies recently published a "Policy
Statement on the Internal Audit Function and its Outsourcing,"
which provides guidance on the elements of an effective internal
audit function, including director and senior management
responsibilities, the structure of the internal audit department
and procedures for resolving internal control weaknesses. The
Policy Statement also provides guidance on how outsourcing
arrangements may affect an examiner's internal control
assessment, as well as the independence of an external auditor
who is also providing internal audit services to an institution.
In response to the increasing number of financial
institutions using the Internet, the FDIC recently issued a paper
identifying many of the risks to an institution's information
system security associated with Internet use, together with
several security and risk control measures. The paper is
designed to complement the FDIC's safety and soundness
examination procedures for electronic banking activities. No
Internet Banking Services are offered.
FDICIA restricts the acceptance of brokered deposits by
insured depository institutions that are not well capitalized.
It also places restrictions on the interest rate payable on
brokered deposits and the solicitation of such deposits by such
institutions. An undercapitalized institution will not be
allowed to solicit brokered deposits by offering rates of
interest that are significantly higher than the prevailing rates
of interest on insured deposits in the particular institution's
normal market areas or in the market area in which such deposits
would otherwise be accepted. In addition to these restrictions
on acceptance of brokered deposits, FDICIA provides that no
pass-through deposit insurance will be provided to employee
benefit plan deposits accepted by an institution which is
ineligible to accept brokered deposits under applicable law and
regulations.
Pursuant to FDICIA, the FDIC has established a risk-based
assessment system for depository institutions. This risk-based
system is used to calculate a depository institution's semiannual
deposit insurance assessment based on the probability that the
deposit insurance fund will incur a loss with respect to the
institution. To arrive at a risk-based assessment for each
depository institution, the FDIC has constructed a matrix of nine
risk categories based on capital ratios and relevant supervisory
information. Each institution is assigned to one of three
capital categories: "well capitalized," "adequately capitalized"
or "undercapitalized." Each institution also is assigned to one
of three supervisory groups based on levels of risk. Risk
assessment premiums are based on an institution's assignment
within the matrix and for 1997 ranged from $0.0 to $0.27 per $100
of deposits. The FDIC has stated that the foregoing risk
assessment premiums will be in effect indefinitely.
FDICIA also places restrictions on insured state bank
activities and equity investments, interbank liabilities and
extensions of credit to insiders and transactions with
affiliates.
Other Recent Legislation
On September 23, 1994, President Clinton signed into law the
Riegle Community Development and Regulatory Improvement Act of
1994 (the "Regulatory Improvement Act"). The Regulatory
Improvement Act provides regulatory relief for both large and
small banks by, among other things, reducing the burden of
regulatory examinations, streamlining bank holding company
procedures and establishing a formal regulatory appeals process.
The Regulatory Improvement Act also addresses a variety of other
topics, including, but not limited to, mortgage loan settlement
procedures, call reports, insider lending, money laundering,
currency transaction reports, management interlocks, foreign
accounts, mortgage servicing and credit card receivables.
Although the Regulatory Improvement Act should reduce the
regulatory burden currently imposed on banks, it is not possible
to ascertain the precise effect its various provisions will have
on the Company or the Bank.
Year 2000 Compliance
The Federal Financial Institutions Examination Council
("FFIEC") released interagency statements in May and December,
1997 addressing critical issues for Year 2000 readiness. Year
2000 issues exist because most computer programs use only two
digits to identify a year in the date field (e.g., "98" for
"1998"). Bank information processing systems must be made year
2000 compliant well in advance of December 31, 1999. In addition,
banks face risks from vendors whose programs are not
Year 2000 compliant and must begin testing of programming changes
no later than December 31, 1998. The computer programs of banks'
corporate customers also may pose Year 2000 risks. Failure to
address Year 2000 issues could affect a borrower's
creditworthiness. Accordingly, the FFIEC guidelines require
senior management to provide the board of directors with
quarterly or more frequent reports on efforts to reach Year 2000
goals both internally and by the institution's major vendors.
Each institution must implement its own internal testing or
verification processes for vendor products and services to insure
that its different computer systems function properly together
and should develop processes to periodically assess large
corporate borrower Year 2000 efforts. Finally, institutions
should develop contingency plans for all vendors that service
"mission-critical" applications should the vendor not complete
its conversion efforts on time.
Year 2000 Computer Considerations. Many existing computer
programs use only two digits to identify a year in the date field
(e.g., "98" for "1998"). As a result, the Company, like most
other companies, will face a potentially serious information
systems (computer) problem because many software applications and
operational programs written in the past may not properly
recognize calendar dates beginning in the year 2000. If not
corrected, many computer applications could fail or create
erroneous results by or at the year 2000.
The Company began the process of identifying the changes
required to its software and hardware in 1997, in consultation
with software and hardware providers, a consulting firm and bank
regulators. While the Company believes it is taking all
appropriate steps to assure that its information systems are
prepared for the year 2000, it is dependent on vendor compliance
to some extent. The Company is requiring its systems and
software vendors to represent that the services and products
provided are, or will be, year 2000 compliant, and contemplates a
program of testing compliance to commence in 1998. The Company
estimates that is costs related to year 2000 compliance will be
at least $100,000 and may be significantly more. The "year 2000"
problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two
digit year value to 00. Consequently, no assurance can be given
that year 2000 compliance can be achieved without costs and
uncertainties that might affect future financial results or cause
reported financial information not to be necessarily indicative
of future operating results or future financial condition.
The Company's customers, including its borrowers, are also
faced with potential year 2000 problems. The Company has adopted
procedures to inquire of its borrowers whether they are taking
steps to address the problem. The failure of its borrowers to
resolve the problem could adversely affect their operations and
impair their ability to repay their loans to the Company.
Therefore, even if the Company were to resolve its own direct
year 2000 problems, it could nevertheless be materially and
adversely affected if its borrowers do not also successfully
resolve their year 2000 problem.
Consumer Protection Laws and Regulations
The bank regulatory agencies are focusing greater attention
on compliance with consumer protection laws and their
implementing regulations. Examination and enforcement have
become more intense in nature, and insured institutions have been
advised to monitor carefully compliance with such laws and
regulations. The Bank is subject to many federal consumer
protection statutes and regulations, some of which are discussed
below.
The Community Reinvestment Act ("CRA") is intended to
encourage insured depository institutions, while operating safely
and soundly, to help meet the credit needs of their communities.
The CRA specifically directs the federal regulatory agencies, in
examining insured depository institutions, to assess a bank's
record of helping meet the credit needs of its entire community,
including low- and moderate-income neighborhoods, consistent with
safe and sound banking practices. The CRA further requires the
agencies to take a financial institution's record of meeting its
community credit needs into account when evaluating applications
for, among other things, domestic branches, mergers or
acquisitions, or holding company formations. The agencies use
the CRA assessment factors in order to provide a rating to the
financial institution. The ratings range from a high of
"outstanding" to a low of "substantial noncompliance." The Bank
was examined for CRA compliance by its primary regulator within
the past 12 months and received a "Satisfactory" CRA Assessment
Rating. New evaluation criteria in the examination process for
small institutions (total assets of $250 million or less) were
implemented on January 1, 1996, while new criteria for large
institutions (assets of $250 million or more and, for multiple-
bank holding companies, total bank and thrift assets in excess of
$1 billion) were implemented beginning July 1, 1997.
The Equal Credit Opportunity Act ("ECOA") generally
prohibits discrimination in any credit transaction, whether for
consumer or business purposes, on the basis of race, color,
religion, national origin, sex, marital status, age (except in
limited circumstances), receipt of income from public assistance
programs, or good faith exercise of any rights under the Consumer
Credit Protection Act. The Truth in Lending Act ("TILA") is
designed to ensure that credit terms are disclosed in a
meaningful way so that consumers may compare credit terms more
readily and knowledgeably. As a result of the TILA, all
creditors must use the same credit terminology to express rates
and payments, including the annual percentage rate, the finance
charge, the amount financed, the total of payments and the
payment schedule, among other things.
The Fair Housing Act ("FH Act") regulates many practices,
including making it unlawful for any lender to discriminate in
its housing-related lending activities against any person because
of race, color, religion, national origin, sex, handicap, or
familial status. A number of lending practices have been found
by the courts to be, or may be considered, illegal under the FH
Act, including some that are not specifically mentioned in the FH
Act itself. The Home Mortgage Disclosure Act ("HMDA") grew out
of public concern over credit shortages in certain urban
neighborhoods and provides public information that will help show
whether financial institutions are serving the housing credit
needs of the neighborhoods and communities in which they are
located. The HMDA also includes a "fair lending" aspect that
requires the collection and disclosure of data about applicant
and borrower characteristics as a way of identifying possible
discriminatory lending patterns and enforcing anti-discrimination
statutes.
Finally, the Real Estate Settlement Procedures Act ("RESPA")
requires lenders to provide borrowers with disclosures regarding
the nature and cost of real estate settlements. Also, RESPA
prohibits certain abusive practices, such as kickbacks, and
places limitations on the amount of escrow accounts.
Penalties under the above laws may include fines,
reimbursements and other penalties. Due to heightened regulatory
concern related to compliance with the CRA, TILA, FH Act, ECOA,
HMDA and RESPA generally, the Bank may incur additional
compliance costs or be required to expend additional funds for
investments in its local community.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS No. 130"), which
establishes standards for the reporting and display of
comprehensive income and its components in financial statements.
Comprehensive income represents net income and certain amounts
reported directly in equity, such as the net unrealized gain or
loss on available-for-sale securities. SFAS No. 130 requires an
enterprise to display an amount representing total comprehensive
income for the period. SFAS No. 130 is effective for interim and
annual periods beginning after December 15, 1997.
In June 1997, the FASB also issued Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). Among other
things, SFAS No. 131 requires public companies to report (i)
certain financial and descriptive information about its
reportable operating segments, and (ii) certain enterprise-wide
financial information about products and services, geographic
areas and major customers. The required segment financial
disclosures include a measure of profit or loss, certain specific
revenue and expense items, and total assets. SFAS No. 131 is
effective for fiscal year 1998.
Management of the Company does not anticipate that the
adoption of SFAS Nos. 130 and 131 will have a material impact on
the Company's Financial Statements.
Other
Other legislation which has been or may be proposed to the
United States Congress and the California Legislature and
regulations which may be proposed by the Federal Reserve, the
FDIC and the DFI may affect the business of the Company or the
Bank. It cannot be predicted whether any pending or proposed
legislation or regulations will be adopted or the effect such
legislation or regulations may have upon the business of the
Company or the Bank.
COMPETITION
The Bank's primary market area presently consists of
portions of the Vacaville, Fairfield, Benicia and Vallejo areas
of Solano County and the Concord area of Contra Costa County.
The banking business in California generally, and specifically in
the Bank's primary market area, is highly competitive with
respect to both loans and deposits. A relatively small number of
major banks dominate the business, most of which have many
offices operating over wide geographic areas. Many major
commercial banks offer certain services (such as international,
trust and securities brokerage services) which the Bank does not
offer directly. By virtue of their greater total capitalization,
such banks have much higher lending limits than the Bank and
substantial advertising and promotional budgets.
However, regional and smaller independent financial
institutions also represent a competitive force. To illustrate
the Bank's relative market share, total deposits in banks and savings
and loans in Solano County, California at June 30, 1997
(more recent data is not available) approximated $1,966,000,000.
The Bank's deposits at June 30, 1997 represented approximately 8%
of such figure. As of June 30, 1997, the Bank was the fourth
largest Bank, behind Bank of America, Wells Fargo Bank and
Westamerica Bank, serving all the major cities in Solano County.
In October 1996 the Bank purchased a branch in Concord California
from Tracy Federal Savings Bank. The total deposits in banks and
savings and loans in Contra Costa County, where Concord is
located, at June 30, 1997, were approximately $15,210,000,000.
To compete with major financial institutions in its service
area, the Bank relies upon specialized services, responsive
handling of customer needs, local promotional activities, 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 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.
In the past, an independent Bank's principal competitors for
deposits and loans have been other banks (particularly major
banks), savings and loan associations and credit unions. To a
lesser extent, competition was also provided by thrift and loans,
mortgage brokerage companies and insurance companies. Other
institutions, such as brokerage houses, credit card companies,
and even retail establishments have offered new investment
vehicles, such as money-market funds, which also compete with
banks for deposit business. 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.
The enactment of the Riegle-Neal Act as well as the
California Interstate Banking and Branching Act of 1995 will
likely increase competition within California. Regulatory
reform, as well as other changes in federal and California law
will also affect competition. While the impact of these changes,
and of other proposed changes, cannot be predicted with
certainty, it is clear that the business of banking in California
will remain highly competitive.
SUMMARY
It is impossible to predict with any degree of accuracy the
competitive impact these laws will have on commercial banking
overall and the business of the Bank in particular or whether any of
the proposed legislation and regulations will be adopted. 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. As a result of these trends, it is
anticipated that banks will experience increased competition for
deposits and loans and, possibly, further increases in their cost
of doing business.
ITEM 2 - DESCRIPTION OF PROPERTY
The Vacaville main office is located in a modern, one-story
building of 7,700 square feet at 141 Parker Street, Vacaville,
California. This office has liberal off-street parking
accommodations. The Branch's annual rental payment for 1997 was
$74,260. Its rent for 1998 will be $75,012. The lease term
expires in December 1998, with two successive five-year renewal
options. The Bank also has a right of first refusal to purchase
the premises. The Bank intends to relocate its main office to
Pacific Plaza West or Pacific Plaza East and therefore does not
intend to renew the existing lease.
The second Vacaville branch is located in the factory stores
area of Vacaville, California. This 3,600 square foot stand alone
office has ample parking on the site. The Bank signed a 20-year
ground lease in May 1994 with rent increases scheduled every five
years. The annual rent is $31,250 plus common area maintenance
(cam) expenses. In 1997, rent and cam expenses totaled $40,989.
The Fairfield branch office is located in freestanding
building at 1100 Texas Street, Fairfield, California, and
comprises 5,760 square feet. This office has parking for
approximately 42 cars. The lease term expired in 1993, with a
single five-year renewal option. The Bank exercised it's option
to renew the lease for five years and in January 1996 negotiated
an extension of the lease to December 2002 in exchange for a
reduction in rent of approximately $2,000 a month. The annual
rental payments during 1997 totaled $58,402. In November 1996 the
Bank began interior reconstruction of the office in an effort to
provide larger office space for the Bank's Central/Data
Operations departments. At December 31, 1996, these departments
were in the rear of the Vacaville main office. In January 1997,
with the reconstruction completed, the departments were moved to
the Fairfield Texas Street Office. As a result, the space
occupied by the Branch was greatly reduced and the Branch became
an express branch for deposit services only.
A second Fairfield office, located at 1300 Oliver Road,
Fairfield, California has been in operation since 1993. The
office occupies approximately 3,819 rental square feet in a
60,000 square foot commercial office building. The office has
ample parking. The lease began in August 1993 and has a term of
15 years. Rental and cam expenses in 1997 totalled $90,151. Rent
is adjusted annually in August to reflect changes in the CPI.
The Bank has occupied its facility at 1001 First Street,
Benicia, California, since June 1987. This two-story, 2,600
square foot building was constructed to the Bank's specifications
at a cost of approximately $435,000. There is off-street parking
for approximately 10 cars. The Bank purchased the property in
early 1986 from an unaffiliated party for approximately $125,000.
On May 28, 1988, the Bank sold this property to an unaffiliated
party for $625,000. After deducting $25,000 for real estate
commissions, the sale and lease back of the property resulted in
a $40,000 profit which will be deferred over the life of the
lease. The lease, which was effective on May 1, 1988, has a
fifteen year term and has two successive five-year renewal
options. The annual rental in 1997 was $72,930.
The Bank maintains two offices in the city of Vallejo,
California. The first office opened in June 1987 and is located
at 303 Sacramento Street. The premises are leased for a monthly
base rental of $5,900, adjusted to reflect changes in the CPI
(minimum of 4% to a maximum of 6%) on an annual basis. Those
terms are effective from January 1, 1988 to December 31, 1997.
From January 1, 1998 to December 31, 2007, there will be a new
base rental of $5,500 adjusted to reflect changes in the CPI on
an annual basis. The accumulated change in the CPI will be
adjusted back for the period beginning January 1, 1988 and ending
January 1, 1998. The annual rental in 1997 was $103,122.
The second Vallejo office, which opened in March 1992, is
located in the Park Place shopping center at 4300 Sonoma
Boulevard, Suite 300. The rent for the building, which is a
modern 3,900 square foot, one-story stand alone building, is
$70,056 per year plus common area maintenance. The lease term
expires in January 1997 with three five-year renewal options. In
December 1996, the Bank exercised the first five-year option and
negotiated the base rent downward to $63,180 per year plus cam
expenses. This new rent is effective beginning with the February
1, 1997 payment. Each subsequent year the rent will increase by
$2,340 per year. Total rental and cam payments during 1997
totaled $78,104.
The Bank opened it's first office in Contra Costa County on
October 12, 1996 in the City of Concord, California at 2151
Salvio Street, Suite H. The office occupies approximately 2,866
square feet in an approximately 120,000 square foot commercial
office building. The lease has a term of 3 years and has a single
five-year renewal option. The annual rent is $42,990 plus cam
expenses until October 1, 1997, at which time the rent increases
to $44,710 per year through the remaining term of the lease. The
rental payments in 1997 totaled $49,615.
Conpac owns two parcels of land, one of approximately 84,500
square feet which is located east of Davis Street in Vacaville,
California, and one of approximately 38,500 square feet located
west of Davis Street in Vacaville, California. Both lots are part
of the Pacific Plaza project. The eastern lot, known as Pacific
Plaza East, was purchased in July 1988 at a cost of $612,500. The
western lot, Pacific Plaza West, consisted of three parcels and
was purchased in stages. Two of the parcels were purchased for
approximately $225,000 in July 1988. The third lot was leased at
$1,100 per month from July 1988 to June 1990, at which time it
was purchased by Conpac for $225,000. See, "Description of
Business - Real Estate Development Subsidiary", herein.
In September 1993, the Bank moved its corporate offices to
Pacific Plaza East, where it now occupies 3,796 square feet. Rent
of $90,780 was paid to Conpac in 1997, which amount is eliminated
upon consolidation with the Company. The Company does not occupy
any space other than that shared with the Corporate offices on
the Bank.
ITEM 3 - LEGAL PROCEEDINGS
None of the Company, the Bank or Conpac is a party to or the
subject of, or is any of their property the subject of, any
material pending legal proceedings, other than ordinary routine
litigation incidental to the business of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders,
through the solicitation of proxies or otherwise, during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Prior to the Reorganization on February 29, 1996, the Bank's
Common Stock was traded over-the-counter and privately and the
Bank was it's own transfer agent, handling all stock related
functions. As of the date of Reorganization, each outstanding
share of common stock was converted into one share of common
stock of the Company . As a result of the Reorganization, the
Bank's stock ceased trading on February 29, 1996. On March 14,
1996, the Company's stock was added to the Nasdaq National Market
under the symbol "CCBC". This listing allows easy electronic
access to trading prices and volume through brokers and the
Internet alike. On April 1, 1996, United States Trust Company of
California became the Company's transfer agent.
The following table indicates the historical range of high
and low sales prices for the Company's common stock, excluding
brokers' commissions, for the periods shown based upon
information provided by Nasdaq.
<TABLE>
<CAPTION>
Bid Price of Approximate Cash
Common Stock Trading Dividends
Quarter Ended: High Low Volume Declared/Paid
------------------- ----------- ---------------
<S> <C> <C> <C> <C>
1996
First Quarter $16.000 $14.000 31,381 0.125
Second Quarter $14.500 $13.250 48,311 0.150
Third Quarter $15.750 $13.750 45,616 0.150
Fourth Quarter $16.500 $15.750 32,266 0.150
1997
First Quarter $18.250 $16.000 42,271 0.150
Second Quarter $17.750 $16.000 125,532 0.150
Third Quarter $26.000 $17.000 125,385 0.150
Fourth Quarter $28.500 $24.000 207,754 0.150
</TABLE>
The last known trade in the Company's Common Stock occurred
on March 20, 1998 for 2,000 shares at $29.875 per share. As of
March 24, 1998, the approximate number of holders of record of
the Company's Common Stock was 620. Management believes the
Company's Common Stock is held by approximately 917 beneficial
owners.
AUTOMATIC DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLAN
In July 1996, the Company adopted its Automatic Dividend
Reinvestment and Common Stock Purchase Plan (the "Dividend
Reinvestment Plan"). The Dividend Reinvestment Plan allows
eligible shareholders of the Company (those holding of record 100
or more shares of the Company's Common Stock) to automatically
acquire additional shares of the Company's Common Stock through
the reinvestment of cash dividends or through the purchase of
additional shares of Common Stock with supplemental cash
investments without the payment of any brokerage commission or
service charge. The Dividend Reinvestment Plan includes certain
dollar limitations on additional cash payments and is
administered by U.S. Trust Company, N.A. pursuant to an agency
agreement with the Company. Shares acquired through the Dividend
Reinvestment Plan are purchased in the open market or in
negotiated transactions. The Company will not issue new shares of
Common Stock to participants under the Dividend Reinvestment
Plan.
For information related to stockholder and dividend matters,
including limitations on dividends, see Item 1, Description of
Business-Regulation and Supervision of Bank Holding Company and-
Restrictions on Dividends and Other Distributions.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Certain matters discussed or incorporated by reference in
this Annual Report on Form 10-KSB are forward-looking statements
that are subject to risks and uncertainties that could cause
actual results to differ materially from those projected in the
forward-looking statements. Such risks and uncertainties
include, but are not limited to, those described in ITEM 6. -
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Therefore, the information set forth therein should be carefully
considered when evaluating the business prospects of the Company
and the Bank.
FINANCIAL REVIEW
California Community Bancshares Corporation (the "Company")
became the holding company for Continental Pacific Bank (the
"Bank"), a California state-chartered non-member Bank, as of
February 29, 1996. The following discussion of the Company's
financial condition and results of operations is designed to
provide a better understanding of the changes and trends related
to the Company's financial condition, liquidity and capital
resources. The discussion should be read in conjunction with all
other information herein, including the Consolidated Financial
Statements of the Company and the Notes thereto. The Company has
not commenced any business operations independent of the Bank,
therefore the following discussion pertains primarily to the
Bank. Average balances are generally comprised of daily
balances.
OVERVIEW
The Company's net income in 1997 was $1,439,000, an 8%
decrease from the $1,559,000 reported in 1996. Diluted earnings
per share were $1.15 in 1997 as compared to $1.32 in 1996 and
$1.22 in 1995. Assets ended the year at $197.0 million, an
increase of $5.2 million over the $191.8 million at December 31,
1996. Assets averaged $191.1 million during 1997 versus $169.0
million in 1996, for a $22.1 million (13.1%) increase. The 8%
decrease in earnings and the 13.1% increase in average assets
resulted in a Return on Average Assets (ROA) of .75% for 1997.
This was 18.5% lower than 1996's ROA of .92%. Return on Average
Equity in 1997 was 9.93% compared to 12.25% in 1996. The factors
influencing income, as discussed more fully below, were merger
related expenses, declining interest margin, a slight decrease in
noninterest income and an increase in noninterest expenses.
On November 13, 1997, the Company entered into a Plan of
Acquisition and Merger ("Plan") with SierraWest Bancorp
("SierraWest"). Under the terms of the Agreement, SierraWest
will acquire all the outstanding common stock of the Company in
exchange for shares of SierraWest common stock at an exchange
ratio defined by a formula in the Plan. The merger, which is
expected to close early in the second quarter of 1998, has been
approved by company's shareholders and state and federal banking
regulatory agencies. On the Effective Date, each of the
Company's outstanding Convertible Subordinated Debentures Due
April 30, 2003, shall by virtue of the merger, be assumed by
SierraWest in accordance with the terms of the related Indenture
Agreement, provided, however, and as required by the Indenture
Agreement the conversion price of such debentures into SierraWest
shares shall be adjusted by dividing the current conversion price
of $12.75 by the exchange ratio on the Effective Date. The
merger will be accounted for as a pooling of interest. See
"Description of Business - Merger with SierraWest Bancorp".
Capital, a key measure of a Company's safety and soundness,
increased in 1997 as Tier 1 Capital increased from $13,104,000 at
December 31, 1996 to $15,374,000 at December 31, 1997 (17.3%).
The detailed changes in the nature and sources of income and
expense for the years shown are highlighted in the following
table of consolidated statements of operations.
<TABLE>
<CAPTION>
--------------------------------------------------------
Year Ended December 31
--------------------------------------------------------
1997 VS.1996 1996 VS. 1995 1995 VS.1994
Amount Percent Amount Percent Amount Percent
Incr. / (Decr) Incr. / (Decr) Incr. / (Decr)
--------------------------------------------------------
(Dollars in thousands)
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income $1,153 9% $ 792 6% $1,357 12%
Interest Expense 657 12 ( 16) 0 1,385 34
Net Interest Income 496 6 808 12 ( 28) 0
Provision for Loan Losses ( 92) (22) 87 27 68 27
Net Interest Income
After Provision for Loan Losses 588 8 721 11 ( 96) ( 1)
Noninterest Income Excluding
Securities Transactions ( 71) ( 4) 252 15 44 3
Noninterest Expense 548 8 151 2 152 2
Earnings Before Income Taxes and
Securities Transactions ( 31) ( 2) 822 52 ( 204) ( 11)
Securities Transactions ( 41) (49) ( 398) ( 83) 472 5,244
Provisions for Income Taxes 48 5 270 42 84 15
----- --- ------ ----- ---- -----
Net Income ( 120) ( 8) 154 11 184 15
===== === ====== ===== ==== =====
</TABLE>
NET INTEREST INCOME
Average interest earning assets increased $19.6 million to
$171.0 million in 1997, from $151.4 million in 1996. Average net
loans, the highest yielding earning asset category contributed
$5.7 million of this growth, while significantly lower yielding
average investments increased $13.9 million. This growth
distribution along with lower yields resulted in an overall
decline in the yield earned on average earning assets. In 1997,
the average yield earned on earning assets declined to 8.33% from
an average yield of 8.65% in 1996. The combined effect of
significantly increased volume offset by modestly lower yields
improved interest income by $1,153,000 to $14,255,000 in 1997
from $13,102,000 in 1996.
In 1997, average equity increased by $1.8 million and
average noninterest bearing deposits increased by $2.1 million.
Average interest-bearing liabilities increased $17.7 million in
1997 to $148.9 million from $131.2 million. The growth in
deposits included a $9.4 million increase resulting from the
Concord Branch purchase completed in the fourth quarter of 1996.
The remaining increase was derived from internal deposit growth
and borrowed funds. Lower interest cost, average interest-bearing
NOW accounts and average savings deposits contributed
$8.6 million of this growth, while higher interest cost, average
time deposits and security repurchase agreements increased $9.1
million.
This growth mix along with the varying degrees and
directions of rate changes paid on these liabilities resulted in
a slight decline in the average rate paid on interest bearing
liabilities. In 1997, the average rate paid on interest bearing
liabilities declined to 4.11% from an average rate paid of 4.17%
in 1996. The net result of slightly lower average rates paid and
the significantly increased volume was a $657,000 increase in
interest expense.
The result of the $1,153,000 increase in interest income and
the $657,000 increase in interest expense increased net interest
income by $496,000 to $8,133,000 in 1997 from $7,637,000 recorded
in 1996. Net interest income in 1996 was, in turn, $808,000
higher than the $6,829,000 reported in 1995.
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY; INTEREST RATES AND DIFFERENTIALS
The following table presents, for the periods indicated,
condensed average balance sheet information for the Company,
together with average interest rates earned and paid on the
various sources and uses of its funds, the amount of interest
income or interest expense, the net interest margin, and net
interest spread. The table is arranged to group the elements of
interest-earning assets and interest-bearing liabilities, these
items being the major sources of income and expense. Nonaccruing
loans are included in the table for computational purposes, but
the nonaccrued interest thereon is excluded. Tax exempt income
is not shown on a tax equivalent basis.
<TABLE>
<CAPTION>
Year Ending December 31,
1997 1996 1995
---------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance<F1> Paid Rate Balance<F1> Paid Rate Balance<F1> Paid Rate
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST EARNING ASSETS
Federal Funds Sold $ 3,182 $ 165 5.19% $ 3,469 $ 183 5.28% $ 2,040 $ 116 5.69%
Investment Securities:
Taxable <F2> 46,501 2,826 6.08 30,457 1,869 6.14 17,773 1,126 6.34
Exempt From Federal
Taxes<F3> 4,622 238 5.15 6,477 346 5.34 12,121 698 5.76
Loans, Net <F4>, <F5> 116,726 11,026 9.45 111,052 10,704 9.64 109,372 10,370 9.48
-------- ------- -------- ------- -------- -------
Total Interest Earning Assets $171,031 $14,255 8.33 $151,455 $13,102 8.65 $141,306 $12,310 8.71
Cash and Due From Banks 9,911 8,692 7,522
Premises and Equipment, NET 2,233 2,185 2,242
Invest. in Development Ventures 4,441 4,545 4,661
Accrued Interest Receivable
and Other Assets 3,485 2,101 2,368
-------- -------- --------
TOTAL AVERAGE ASSETS $191,101 $168,978 $158,099
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Interest-Bearing NOW accounts $ 23,603 $ 294 1.25% $ 18,470 $ 257 1.39% $ 18,111 $ 229 1.26%
Savings Deposits and MMDA 59,129 2,224 3.76 55,679 2,105 3.78 56,193 2,333 4.15
Time Deposits 38,203 1,966 5.15 30,499 1,546 5.07 30,292 1,628 5.37
Time Deposits over $100,000 21,679 1,154 5.32 19,647 1,049 5.34 15,853 873 5.51
Federal Funds Purchased 182 11 5.77 80 4 5.00 439 28 6.38
Security Repurchase Agreements 396 20 5.18 1,000 50 5.00 816 44 5.39
Other Borrowed Funds 2,650 230 8.68 1,885 146 7.75
Subordinated Debentures 3,017 223 7.39 3,910 308 7.88 4,025 346 8.60
-------- ------- -------- ------- -------- -------
Total Average Interest -
Bearing Liabilities $148,859 $ 6,122 4.11% $131,170 $ 5,465 4.17% $125,729 $ 5,481 4.36%
------- ---- ------- ---- ------- ----
Noninterest-Bearing DDA's 26,918 24,817 20,794
Accrued Interest Payable
and Other Liabilities 828 261 162
-------- -------- --------
Total Average Liabilities $176,605 $156,248 $146,685
Total Equity 14,496 12,730 11,414
-------- -------- --------
Total Average Liabilities
and Shareholders' Equity $191,101 $168,978 $158,099
======== ======== ========
Net Interest Spread <F6> 4.22% 4.48% 4.35%
==== ==== ====
Net Interest Income $ 8,133 $ 7,637 $ 6,829
======= ======= =======
Net Interest Margin <F7> 4.76% 5.04% 4.83%
======= ======= =======
- -------------------------------------------------
<FN>
<F1> Average balances are computed principally on the basis of
daily balances.
<F2> The taxable securities yield is computed by dividing
interest income (annualized on an actual day basis) by average
historical cost.
<F3> The tax equivalent yield on exempt from federal taxes
investment securities (tax exempt investments) was 7.48%, 7.78%
and 8.39% in 1997, 1996 and 1995. The tax equivalent yield is
calculated by dividing the adjusted yield by one minus the
Federal Tax rate. The adjusted yield is determined by subtracting
the Tefra penalty from the unadjusted tax exempt investment
yield. The unadjusted tax exempt investment yield is computed by
dividing tax exempt interest income by their average historical
cost. The Tefra penalty is computed by dividing total interest
expense (annualized) by average assets and multiplying the result
by 20% (Tefra disallowance) and 34% (Federal Tax rate).
<F4> Allowance for loan losses and deferred loans are netted
from loans receivable which includes nonaccrual loan balances.
<F5> Interest income on loans includes fees on loans of
$428,000, $441,000 and $486,000 in 1997, 1996 and 1995.
<F6> Net interest spread represents the average yield earned on
interest-earning assets less the average rate paid on
interest-bearing liabilities.
<F7> Net interest margin is computed by dividing net interest
income by total average interest earning assets.
</FN>
</TABLE>
RATE AND VOLUME VARIANCES
The following tables set forth, for the periods indicated, a
summary of the changes in interest income and interest expense
resulting from changes in average asset and liability balances
(volume) and changes in average yield / interest rate (rate).
The change in interest due to both rate and volume has been
allocated to change due to rate and volume in proportion to the
relationship of absolute dollar amounts in each. Nonaccrual
loans are included in total loans outstanding, while nonaccrued
interest thereon is excluded from the computation of rates
earned. Tax exempt income is not shown on a tax equivalent
basis.
The following tables below illustrate the effect that
declining interest rates and volume increases had on net interest
income.
<TABLE>
<CAPTION>
1997 Compared to 1996
-------------------------------
Net
Volume Rate Change
-------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Increase (Decrease) in Interest Income:
Federal Funds Sold ( 15) ( 3) ( 18)
Taxable Investment Securities $ 975 $( 18) $ 957
Exempt from Federal Taxes
Investment Securities ( 96) ( 12) ( 108)
Loans, Net <F1> 536 ( 214) 322
----- ------ ------
Total Interest Income $1,400 $( 247) $1,153
===== ====== ======
Increase (Decrease) in Interest Expense:
Interest-bearing NOW Accounts $ 64 $( 27) $ 37
Savings Deposits and MMDA 130 ( 11) 119
Time Deposits 396 24 420
Time Deposits over $100,000 108 ( 3) 105
----- ------ ------
Total Interest Expense on Deposits 698 ( 17) 681
Federal Funds Purchased 6 1 7
Security Repurchase Agreements ( 32) 2 ( 30)
Other Borrowings 66 18 84
Subordinated Debentures ( 66) ( 19) ( 85)
----- ------ ------
Total Interest Expense 672 ( 15) 657
----- ------ ------
Net Interest Income $ 728 ($ 232) $ 496
===== ====== ======
- --------------------------------------
<FN>
<F1> Loan fees have been included in the interest income
computation. Loan fees for 1997 and 1996 were $428,000 and
$441,000, respectively.
</FN>
</TABLE>
<TABLE>
<CAPTION>
1996 Compared to 1995
-------------------------------
Net
Volume Rate Change
-------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Increase (Decrease) in Interest Income:
Federal Funds Sold $ 75 ($ 8) $ 67
Taxable Investment Securities 778 ( 35) 743
Exempt from Federal Taxes
Investment Securities ( 302) ( 50) ( 352)
Loans, Net <F1> 162 172 334
---- ---- ----
Total Interest Income $713 $ 79 $792
==== ==== ====
Increase (Decrease) in Interest Expense:
Interest-bearing Now Accounts $ 5 $ 23 $ 28
Savings Deposits and MMDA ( 19) ( 209) ( 228)
Time Deposits 10 ( 92) ( 82)
Time Deposits over $100,000 203 ( 27) 176
---- ---- ----
Total Interest Expense on Deposits 199 ( 305) ( 106)
Federal Funds Purchased ( 18) ( 6) ( 24)
Security Repurchase Agreements 9 ( 3) 6
Other Borrowings 146 0 146
Subordinated Debentures ( 9) ( 29) ( 38)
---- ---- ----
Total Interest Expense 327 ( 343) ( 16)
---- ---- ----
Net Interest Income $386 $422 $808
==== ==== ====
- --------------------------------------
<FN>
<F1> Loan fees have been included in the interest income
computation. Loan fees for 1996 and 1995 were $441,000 and
$486,000, respectively.
</FN>
</TABLE>
INTEREST INCOME ON EARNING ASSETS
Average assets and liabilities grew significantly in 1997.
As mentioned above, average interest earning assets grew by $19.6
million in 1997 or 12.9%, compared to a $10.1 million increase in
1996. Average interest-bearing liabilities increased by $17.7
million or 13.5% in 1997 versus growth of $5.4 million in 1996.
Although average net loans increased by $5.7 million in
1997, the ratio of average net loans to average interest earning
assets declined to 68.2% in 1997 from 73.3% in 1996. The other
$13.9 million growth in interest earning assets consisted
entirely of taxable investment securities, which increased by
$16.1 million in 1997. Decreases in average Federal Funds Sold
and average investments exempt from federal taxes offset this
increase by $.3 million and $1.9 million, respectively. These
changes were a function of additional funds invested as well as a
change in the portfolio mix from long term fixed investments to
short term fixed securities or variable rate securities.
In late 1995 and early 1996 the Federal Reserve lowered the
key short term rate known as Federal Funds. In early 1997 they
increased this rate by .25%. Other interest rates follow this
rate with varying degrees of magnitude (multiplier) and timing
(lag). For example, the Prime rate usually changes immediately
and by the same degree (multiplier of 1.0) as the Federal Funds
rate, while the Cost of Funds Index (COFI) may change by a
smaller amount, and this change may occur over a period of six to
twelve months. This delay in rate change is known as lag.
The Federal Funds rate and the Prime rate began 1995 at
5.50% and 8.50%, respectively. On February 1, 1995, the Federal
Reserve raised the Federal Funds rate by .50% to 6.0%. Prime
immediately increased to 9.0% and remained at that level until
early July, when the Federal Reserve began to lower rates. This
was the first rate reduction by the Federal Reserve since July
1992 and it was only a .25% reduction. The next and final rate
reduction of 1995 occurred on December 20, 1995. At this time,
the Federal Funds rate was reduced by another .25% to 5.5%.
Prime rate also fell by .25% to 8.5% at this time. In 1996, the
Federal Reserve again lowered rates by .25% on February 1, 1996,
where they remained until March 26, 1997, when the Federal
Reserve increased rates by .25% to 5.50%. Prime rate followed
these rate changes and ending 1996 and 1997 Prime rate was 8.25%
and 8.50%, respectively. The timing and the degree of the rate
decreases in late 1995 and early 1996 and the subsequent minor
increase in early 1997 resulted in lower average interest rates
in 1997 versus 1996 for financial products tied to lagging or
slow moving indexes whereas the average interest rate on
financial products tied to more responsive indexes increased
slightly. The degree and timing of these changes for each
interest rate index utilized by the Company and the Bank and the
amount and timing of volume changes for each type of interest
earning asset and interest-bearing liability determined the
change in interest income and expense in 1997 and 1996.
At December 31, 1997, approximately 23.2% of the loans were
tied to non-lagging, high multiplier indexes such as Prime rate
($18.2 million) and 1 year treasury indexes ($9.9 million), while
24.8% ($30.1 million) were tied to the lagging certificate of
deposit (CD) index and 25.2% ($30.5 million) were tied to the
longer lagging COFI index. The remaining 26.8% ($32.4 million)
of the loans had either fixed rates or rate adjustments every
five years and therefore were not subject to rate changes.
In 1997, Prime rate and the one year treasury index averaged
.17% and .09% higher than they averaged in 1996, while the CD
index, the COFI index, and fixed rate loans averaged .19%, .28%
and .26% lower than they averaged in 1996. The yield on COFI and
CD indexed loans were lower in 1997, due to the repricing timing,
which occurs every six months based on the index available two
months prior to adjustment date. Another reason the yield on the
loan portfolio is lower than expected, given the higher federal
funds rates in 1997, is the fact that in 1997 the Bank's average
impaired loans which include nonaccrual loans and restructured
loans increased to $2.64 million from $1.22 million in 1996. In
1997, if interest on nonaccrual loans had been accrued, such
income would have been approximately $74,000 verses $7,000 in
1996. Loan fees, which are included in loan interest income and
effect the loan yield, totalled $428,000 in 1997, compared to
$441,000 in 1996.
The aggregate effect of these influences was a 19 basis
point decrease in net loan yield to 9.45% in 1997 from 9.64% in
1996. The result of the $5.7 million increase in average loan
volume and the 19 basis point decrease in yield resulted in the
$322,000 increase in interest and fee income from loans.
As mentioned earlier, total average investments increased by
$13.9 million in 1997. Although the yield earned on each
investment category declined the combined yield increased due to
the significant shift to the higher yielding taxable securities.
The overall yield on investments increased by 1 basis points to
5.95% in 1997 from 5.94% in 1996. Consequently, in 1997 the
increase in interest income from investments of $831,000 was a
function of increased volume offset slightly by the decrease in
yields. The increased volume accounted for $864,000, while the
decrease in yields reduced income by $33,000. The $322,000
increase in interest and fee income from loans and the $831,000
increase in interest from investments resulted in the $1,153,000
increase in total interest income from 1996 to 1997.
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Interest expense also increased in 1997 as higher average
volumes more than offset slightly lower rates paid. As mentioned
above, average interest-bearing liabilities increased $17.7
million in 1997 over the average balance in 1996. In 1997,
average time deposits under $100,000 showed the most growth,
increasing by $7.7 million to $38.2 million in 1997 from $30.5
million in 1996. The rate paid on these deposits increased to
5.15% in 1997 from 5.07% in 1996. The increased volume increased
interest expense by $396,000 while the higher rate paid increased
expense by $24,000 for a total increase of $420,000. Interest
expense in 1997 on savings and money market demand accounts
increased by $119,000 from the previous year. In 1997 the average
balance in this category increased by $3.4 million while the
average rate paid decreased by 2 basis points (.02%) to 3.76% in
1997 from 3.78% in 1996. Interest expense in 1997 on time
deposits over $100,000 increased $105,000 from 1996 totals. In 1997,
the average balance in time deposits over $100,000 was $2.0
million higher than the average balance in 1996, while the
average rate paid was 2 basis points (.02%) lower than the 5.34%
average rate paid in 1996. Average interest-bearing NOW accounts
increased $5.1 million in 1997 over 1996 average balances, while
the average rate paid declined by 14 basis points (.14%) for a
net increase in interest expense of $37,000. Average security
repurchase agreements decreased by $.6 million reducing interest
expense by $30,000. Increased average balances and average rates
paid on Federal funds purchased and other borrowed money were
offset by decreased average balances and lower rates paid on
subordinated debentures.
The net effect of the above mentioned volume changes and
average rates paid was a $657,000 increase in interest expense,
to $6,122,000 in 1997 from $5,465,000 in 1996. The combined
effect of the $657,000 increase in interest expense and the $17.7
million increase in volume was a 6 basis points (.06%) decline in
the average rate paid on average interest bearing liabilities to
4.11% in 1997 from 4.17% in 1996.
In summary, from 1996 to 1997, interest income decreased by
$247,000 as a result of decreases in interest rates while
interest expense decreased by $15,000, resulting in a $232,000
decrease in net interest income due to changes in interest rates.
Interest income attributed to an increase in volume improved by
$1,400,000, while interest expense attributed to increased volume
rose by $672,000, for a increase in net interest income
attributed to volume of $728,000. This increase and the $232,000
decrease in net interest income due to interest rate changes
resulted in the $496,000 increase in net interest income. Net
interest income was $8,133,000 in 1997 versus $7,637,000 in 1996
and $6,829,000 in 1995.
NONINTEREST INCOME AND EXPENSE
Noninterest income was $1,920,000 (1.00% of average assets)
in 1997 compared to $2,032,000 in 1996, a $112,000 (5.5%)
decrease. Service charges on deposit accounts increased by
$65,000 in 1997 over 1996 and $24,000 in 1996 over 1995. Other
fees and charges decreased by $97,000 in 1997 after increasing by
$167,000 in 1996. In 1997, the Company recognized $4,000 in fee
income from the sale of SBA guaranteed loans compared to
$157,000 in 1996 from the sale of $1.8 million in SBA guaranteed
loans. This accounted for 158% of the decrease in other fees and
charges or, in other words, other fees and charges excluding SBA
fee income increased by $56,000 in 1997. In 1995 the Bank did
not recognize any fee income from the sale of SBA guaranteed
loans.
Income from real estate development ventures decreased by
$39,000 to $503,000 in 1997 from $542,000 in 1996 and $481,000 in
1995. The sole real estate development venture in 1997, 1996 and
1995 was Pacific Plaza East, a 32,000 square foot commercial
office building in Vacaville, California. Income from this
property declined in 1997 due to a reduction in the occupancy
rate from 100% in 1996 to 93% in 1997. At December 31, 1997, the
building was 84% occupied. Management is negotiating with a
potential tenant, which if successful, would increase occupancy
to 90%. The Company is also considering utilizing the remaining
2,625 square feet for the relocation of its Main Vacaville
Branch. Gains from the sale of securities decreased by $41,000
to $42,000 in 1997 from $83,000 in 1996.
The table below depicts the changes in noninterest income
from period to period.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996 Incr. / 1996 1995 Incr./
(Decr.) (Decr.)
---------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest Income:
Service Charges on Deposit $ 908 $ 843 $ 65 $ 843 $ 819 $ 24
Other Fees and Charges 467 564 ( 97) 564 397 167
------ ------ ---- ------ ------ ----
Subtotal 1,375 1,407 ( 32) 1,407 1,216 191
Income From Real Estate
Development 503 542 ( 39) 542 481 61
------ ------ ---- ------ ------ ----
Subtotal 1,878 1,949 ( 71) 1,949 1,697 252
Net Gain on the
Sale of Securities 42 83 ( 41) 83 481 ( 398)
------ ------ ---- ------ ------ ----
Total $1,920 $2,032 ($112) $2,032 $2,178 ($146)
====== ====== ==== ====== ====== ====
- ----------------------------------
</TABLE>
In 1997, noninterest expense totalled $7,329,000, an
increase of $548,000 over 1996's total of $6,781,000, which was
$151,000 more than the $6,630,000 reported in 1995. One measure
of efficiency is the ratio of noninterest expense to average
assets. This ratio has improved the last three years, from 4.19%
in 1995 to 4.01% in 1996 and finally to 3.83% in 1997.
In 1997, salaries and benefits increased by $134,000 to
$3,476,000 in 1997 from $3,342,000 in 1996. In 1996 salaries and
benefits increased by $205,000 from 1995's figure. Salary
expense in the new Concord branch along with increased bonuses
accounted for 110% of the increase. Other salary and benefits
categories actually declined by $13,000.
Occupancy expense increased by $107,000 (7.8%) in 1997 from
1996's total, which was $8,000 lower than the 1995 figure. In
January 1997, the Bank completed tenant improvements in its
Fairfield Branch to accommodate the relocation of the Bank's Data
Processing department. The depreciation of this improvement in
1997 along with the increased occupancy expense associated with
the new Concord Branch accounted for 105% of this increase.
Other noninterest expense increased by 13.0% or $230,000 in
1997 over the figure reported in 1996, after declining by
$78,000 (4.2%) in 1996 from the 1995 figure. In 1997,
nonrecurring expense related to the proposed merger with
SierraWest totalled $247,000, while other expenses related to the
new Concord Branch increased $42,000. All other expenses as a
group decreased by $59,000. In total, other noninterest expense
declined by $230,000 to $2,003,000 in 1997 from $1,773,000 in
1996. In 1997, expense from Real Estate Development increased
$77,000 to $377,000 from $300,000 in 1996. During 1997, the
Company wrote down the Pacific Plaza West property by $59,000 to
more accurately reflect the market value. In addition, the
Company paid $17,000 in lease commissions in 1997 verses no
commissions paid in 1996.
The major components of noninterest expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
Net Income Net Income
1997 1996 Incr. / 1996 1995 Incr. /
(Decr.) (Decr.)
--------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest Expenses:
Salary and Benefits $3,476 $3,342 $134 $3,342 $3,137 $ 205
Occupancy, Furniture,
Fixtures and Equipment 1,473 1,366 107 1,366 1,374 ( 8)
Other Noninterest Exp. 2,003 1,773 230 1,773 1,851 ( 78)
Expenses from
Real Estate Development 377 300 77 300 268 32
------ ------ ---- ------ ------ ----
Total
Noninterest Expenses $7,329 $6,781 $548 $6,781 $6,630 $ 151
====== ====== ==== ====== ====== ====
- -------------------------------------------
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $319,000 in 1997 compared
to $411,000 in 1996 and $324,000 in 1995. The Bank experienced
net charge-offs of $178,000 in 1997, or .15% of average loans,
compared to $468,000, or .42% of average loans, in 1996 and
$274,000, or .25% of average loans, in 1995.
The $319,000 provision, when deducted from the net interest
income figure of $8,133,000, resulted in net interest income
after provision for loan losses of $7,814,000 for 1997. This
amount, which is $588,000 higher than the $7,226,000 reported in
1996, represents a return on average assets of 4.09% in 1997. In
1996 and 1995, this ratio was 4.27% and 4.11%, respectively.
INCOME BEFORE PROVISION FOR INCOME TAXES
The result of a 4.09% ratio of adjusted net interest income
to average assets, a 1.00% noninterest income ratio and a 3.83%
noninterest expense ratio, resulted in a ratio of Income before
Provision for Income Taxes to average assets of 1.26%. This is a
decline of .20% from 1.46% in 1996 which in turn was a .16%
improvement over the 1.30% reported in 1995.
The $588,000 increase in net interest income after provision
for loan losses, the $112,000 decrease in noninterest income and
the $548,000 increase in noninterest expenses reduced income
before provision for income taxes by $72,000 to $2,405,000 in
1997 from $2,477,000 in 1996. This 1996 figure was $424,000
higher than the $2,053,000 reported in 1995.
PROVISION FOR INCOME TAXES / NET INCOME
The Company recorded $966,000 in provision for income taxes
in 1997 versus $918,000 in 1996 and $648,000 in 1995. The tax
provisions reduced income to $1,439,000, $1,559,000 and
$1,405,000 for 1997, 1996 and 1995, respectively. Provision for
income taxes and the related effective tax rate in 1997 was
higher than the 1996 amount and effective tax rate even though
pre-tax in 1997 was $72,000 less than the 1996 figure. This
anomaly resulted from approximately $200,000 of the merger
related expenses being non-tax deductible.
The before tax Return on Average Assets (ROA) was 1.26% in
1997. After deducting the provision for income taxes, .51% of
average assets, ROA in 1997 was .75%, down from an ROA of .92% in
1996 and .89% in 1995.
Management is not aware of any trends, events or
uncertainties that have had or that are reasonably expected to
have a material impact on liquidity, capital resources, or
revenues or income from continuing operations. The company is
also not aware of any current recommendations by any regulatory
authority which, if they were implemented, would have such an
effect.
LOAN PORTFOLIO
The Association of Bay Area Governments (ABAG) projects
Solano County to have the largest percentage increase in
population growth between 1995 and 2015 of all the Bay Area
counties. They further estimate that Solano's population will be
531,700 by the year 2015, which is an increase of 40%. Job growth
in Solano County is projected to increase by 68% during this same
time period.
Contra Costa County is also slated for substantial growth
over the next 15 years. Contra Costa's population is projected
to grow from 882,700 in 1995 to 1,169,400 by 2015, representing a
32% increase. A 50% increase in jobs and a 3% increase in the
mean household income, bringing it to $95,800, is projected by
the year 2015.
The economic climate of Solano and Contra Costa counties
remains strong due to its prime locale between San Francisco and
Sacramento, a plentiful supply of natural resources, an extensive
transportation network, and the enviable quality of life which
exist due to the availability of affordable homes, clean and safe
communities, a comfortable climate all within easy reach of many
recreational and cultural activities.
The following table shows the composition of the loan
portfolio by major category of loan as of the dates indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
Loan Categories: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real Estate Mortgage:
Commercial $ 72,672 $ 64,634 $ 61,942 $ 60,206 $ 56,401
Residential 18,106 17,612 15,456 19,272 18,063
-------- -------- -------- -------- --------
Total Real Estate Mortgage 90,778 82,246 77,398 79,478 74,464
Commercial 10,348 8,926 9,908 9,348 10,269
Real Estate Construction 6,042 6,408 9,553 9,433 9,723
Consumer 13,894 16,045 14,265 12,937 13,252
-------- -------- -------- -------- --------
Total Loans 121,062 113,625 111,124 111,196 107,708
Less
Allowance for Loan Losses 1,242 1,101 1,158 1,108 1,090
Deferred Loan Fees 498 599 732 940 892
-------- -------- -------- -------- --------
Net Loans $119,322 $111,925 $109,234 $109,148 $105,726
======== ======== ======== ======== ========
- ---------------------------------------
</TABLE>
The loan portfolio consists of: (1) commercial loans; (2)
real estate construction loans; (3) consumer loans (loans to
individuals for household, family and other personal
expenditures, including revolving equity loans); and (4) real
estate mortgage loans. These categories accounted for
approximately 9%, 5%, 11% and 75%, respectively, of the total
loan portfolio at December 31, 1997. Loans are generally made to
persons or businesses with whom it has an existing relationship
or anticipates developing such a relationship.
Because loans are the highest yielding assets, maximizing
the loan-to-deposit ratio increases interest income, however, in
order to prudently manage its liquidity, the loan policy calls
for it to maintain a loan-to-deposit ratio target is between 70%
and 85%. The loan-to-deposit ratio was 69% and 67% at December
31, 1997 and 1996, respectively. The ratio is below target at
year end 1997 and 1996 due to the addition of approximately $15.5
million in deposits purchased from Tracy Federal Savings Bank
(Concord Branch) without corresponding loan balances in the
fourth quarter of 1996.
With certain exceptions, the Bank is permitted under
applicable law to make loans which are unsecured to single
borrowers in aggregate amounts of up to 15% of the sum of the
Bank's total capital, including subordinated debt, and allowance
for possible loan losses for unsecured loans (as defined for
regulatory purposes), and up to 25% of such sum in the aggregate
for unsecured and secured loans (as defined for regulatory
purposes). As of December 31, 1997, these lending limits were
approximately $2,933,000 for unsecured loans and $4,889,000 for
unsecured and secured loans. The Bank sells participations in
its loans where necessary to stay within its lending limits.
However, the unsecured limit is used as a guideline for the
maximum amount it will lend to any one borrower on a secured
basis.
REAL ESTATE MORTGAGE LOANS
Real estate mortgage loans consist primarily of loans
secured by commercial real property and by first liens on single-
family residential properties.
As of December 31, 1997, outstanding commercial mortgage
loans totalled $72,672,000, or 60% of total loans. This
represents an increase in outstanding balances of $8,038,000
since year end 1996. Of these loans, $62.1 million were
adjustable rate loans while $10.6 million had fixed rates. These
loans are secured by first or second deeds of trust on both owner
occupied and nonowner occupied commercial properties, and
generally have 5 to 15 year maturities with 15 to 25 year
amortizations (miniperms). The Bank generally conducts market
rent surveys and requires all borrowers to meet minimum debt
service ratios. The Bank also makes loans in conjunction with
Small Business Administration ("SBA") sponsored programs. With
the SBA 504 program, the Bank takes a first deed of trust on the
property generally at a loan to value ratio of 50%. The SBA then
makes an additional loan in second position of up to 40% of
value. With the SBA 7A program, the Bank makes commercial loans
for the purchase of inventory, equipment, or real estate or to
fund working capital, and the SBA provides a guaranty up to 80%
of the loan amount.
As of December 31, 1997, residential mortgage loans totalled
$18,106,000, or 15% of total loans. This loan category increased
$494,000 over the $17,612,000 outstanding at December 31, 1996.
These loans were secured by first or second deeds of trust
predominately by property in Solano County. Of these loans, $2.0
million or 11% were fixed rate mortgage loans having original
terms ranging from one to 30 years, with the majority having
remaining terms of less than 5 years. The other $16.1 million or
89% were held as adjustable rate mortgages which are adjusted
either semiannually or annually based on either the COFI Index or
the CD Index (the secondary market monthly average interest rate
or yield for large negotiable certificates of deposit ($100,000
or more with maturity of one month)). The above loans consist of
1-4 family residential loans, multi-family loans, second mortgage
loans, and loans on improved single family lots. The majority of
the residential mortgage loans have been underwritten for the
portfolio, and such loans do not necessarily meet standard
underwriting criteria for sale in the secondary market. The Bank
uses certain of the credit underwriting criteria applicable to
loans for sale in the secondary market, but chooses not to use
certain other underwriting criteria which in the opinion of
management do not materially affect credit quality. The loan to
appraised value ratio is generally 80% or less when originated.
The Bank does not generally make residential real estate loans on
a negative amortization basis.
COMMERCIAL LOANS
Commercial loans consist primarily of financing for
businesses and professionals in Solano County. At December 31,
1997, these loans totalled $10,348,000, or 9% of total loans.
This figure is $1,422,000 higher than the figure reported
December 31, 1996. The commercial loans are diversified as to
industries and type of businesses with no material industry
concentration. Commercial borrowers generally have deposit
relationships with the Bank. Commercial loans are made for the
purposes of providing working capital, financing the purchase of
equipment or inventory and for other business purposes. Such
loans include loans with maturities ranging from thirty days to
twelve months and "term loans" which are loans with maturities
normally ranging from one to seven years. Short-term business
loans are generally used to finance current transactions and
typically provide for periodic interest payments, with principal
being payable monthly, quarterly or at maturity. Term loans
normally provide for floating interest rates, with monthly
payments of both principal and interest. In 1996, the Bank began
offering an additional service to its commercial customers called
Business Manager. Under this program account receivables are
purchased from its customer for a discount fee. At December 31,
1997, Business Manager loans totalled $1,198,000.
In commercial lending, the amount of losses as a percentage
of outstanding loans can vary widely from period to period and is
particularly sensitive to the fluctuations caused by changing
economic conditions. Charged off commercial loans totalled
$88,000 and $217,000 in 1997 and 1996, respectively.
REAL ESTATE CONSTRUCTION LOANS
Real estate construction loans are made to finance the
construction of commercial and single-family residential property
and, typically, have short maturities. Construction lending
involves certain risks not inherent in other forms of real estate
financing. The Bank does not require construction loan borrowers
to obtain commitments for permanent takeout financing from other
lenders. As a result, the Bank may be required to grant
permanent financing or extend its construction loans beyond
anticipated maturity periods in times of rising interest rates
or reduced availability of permanent financing from other lenders.
At December 31, 1997 there were ten such permanent financing
loans totaling approximately $1,146,000. Management does not
believe that the extension of these loans results in substantial
additional credit risk to the Bank.
Currently there are 47 construction loans with an average
balance of approximately $129,000. As of December 31, 1997,
these loans totalled $6,042,000, or 5% of the loan portfolio.
This is $366,000 lower than the figure reported as of December
31, 1996.
Construction loans are funded on a line-item, percentage of
completion basis. As the builder completes various line items
(foundation, framing, electrical, etc.) of the project, or
portions of those line items, the work is reviewed by an officer
of the Bank. Upon approval from the officer, the Bank funds the
draw request according to the percentage completion of the line
items that have been approved. Actual funding checks must be
signed by an officer of the Bank. Charged off real estate
construction loans totalled $10,000 and $181,000 in 1997 and
1996, respectively.
CONSUMER LOANS
Consumer loans are made for the purpose of financing the
purchase of various types of consumer goods, home improvement
loans, and other personal loans. Consumer installment loans
generally provide for the monthly payment of principal and
interest. Most of the consumer installment loans are secured by
the personal property being purchased or a second deed of trust
on the borrower's residence. As of December 31, 1997, consumer
loans totalled $13,894,000, or 11% of the portfolio, a decrease
of $2,151,000 from the figure reported December 31, 1996.
LOAN COMMITMENTS
In the normal course of business, there are various
commitments outstanding to extend credit that are not reflected
in the financial statements. As of December 31, 1997,
outstanding undisbursed loan commitments totalled approximately
$18.2 million. In the opinion of management, annual review of
the commercial credit lines and ongoing monitoring of outstanding
balances reduces the risk of loss associated with these
commitments. The undisbursed loan commitments include $3.9
million (38% of the outstanding balance) of commercial loans,
$3.8 million (63% of the outstanding balance) of real estate
construction loans, and $10.5 million (76% of outstanding
balance) of consumer loans. Undisbursed commercial loan
commitments represent primarily business lines of credit.
Undisbursed construction commitments represent undisbursed
funding on construction projects in process. The consumer loan
commitments represent approved, secured (equity) lines of credit,
and unsecured personal lines of credit.
The Company had standby letters of credit outstanding
aggregating $504,000 and $649,000 at December 31, 1997 and 1996,
respectively.
ASSET QUALITY
The risk of nonpayment of loans is inherent in commercial
banking. To a large extent, the degree of perceived risk is
taken into account in establishing the loan structure, the
interest rate and security for specific loans and various types
of loans. The Bank also attempts to minimize its credit risk
exposure by use of thorough loan application, approval and review
procedures.
The primary risk elements considered by management with
respect to each installment and conventional real estate loan are
the lack of timely payments and the value of the collateral.
Management has a reporting system that monitors past due loans
and has adopted policies to pursue its creditor's rights in order
to preserve the Bank's position. As the majority of the loan
portfolio is held in real estate related loans, particular
attention is given to factors affecting the real estate markets.
The primary risk elements considered by management with respect
to real estate construction loans are fluctuations in real estate
values in the Company's market areas, fluctuations in interest
rates, the availability of conventional financing, the demand for
housing in the Company's market areas, and general economic
conditions. The primary risk elements with respect to commercial
loans are the financial condition of the borrower, general
economic conditions in the Company's market area, the sufficiency
of collateral, the timeliness of payment, and, with respect to
adjustable rate loans, interest rate fluctuations.
Because the Bank lends primarily within its market area, the
real property collateral for its loans is similarly concentrated,
rather than diversified over a broader geographic area. The
Company could, therefore, be adversely affected by a decline in
real estate values in Solano County, even if real estate values
elsewhere in Northern California or California generally remained
stable or increased. Management has a policy of requesting and
reviewing annual financial statements from its commercial loan
customers and periodically reviews the existence of collateral
and its value.
The Bank places an asset on nonaccrual status when one of
the following events occur: any installment of principal or
interest is 90 days or more past due (unless in management's
opinion the loan is well secured and in the process of
collection), management determines the ultimate collection of
principal or interest on a loan to be unlikely, it takes
possession of the collateral (in the case of real estate
collateral, referred to as "OREO"), or the terms of a loan have
been renegotiated to less than market rates due to a serious
weakening of the borrower's financial condition.
With respect to the policy of placing loans 90 days or more
past due on nonaccrual status unless the loan is well secured and
in the process of collection, a loan is considered to be in the
process of collection if, based on a probable specific event, it
is expected that the loan will be repaid or brought current.
Generally, this collection period would not exceed 30 days. When
a loan is placed on nonaccrual status, the general policy is to
reverse and charge against current income previously accrued but
unpaid interest. Interest income on such loans is subsequently
recognized only to the extent that cash is received and future
collection of principal is deemed by management to be probable.
Where the collectibility of the principal or interest on a loan
is considered to be doubtful by management, it is placed on
nonaccrual status prior to becoming 90 days delinquent. For
loans where the collateral has been repossessed, the property is
classified as OREO or, if the collateral is personal property,
the loan is classified as other assets on the Company's financial
statements.
The following table sets forth the amount of the
nonperforming assets as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------
(Dollars in thousands)
Nonperforming Assets:
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans $966 $ 70 $1,049 $1,258 $179
Accruing Loans Past
Due 90 Days or More 194 67 78 496 127
---- ------ ------ ------ -----
Total Nonperforming Loans 1,160 137 1,127 1,754 306
Other Real Estate Owned 96 150 182 374 389
---- ------ ------ ------ -----
Total Nonperforming Assets 1,256 $287 $1,309 $2,128 $695
---- ------ ------ ------ -----
Performing Restructured Loans 1,262 $ 974 $ 470 $ 0 $946
Allowance for Loan Losses
to Nonperforming Loans 107% 804% 103% 63% 356%
Allowance for Loan Losses
to Nonperforming Assets 99% 384% 88% 52% 157%
Allowance for Loan Losses
to Nonperforming Assets
and Performing
Restructured Loans 49% 87% 65% 52% 66%
Nonperforming Loans
to Total Assets .59% .07% .70% 1.12% .21%
Nonperforming Assets
to Total Assets .64% .15% .82% 1.36% .47%
Nonperforming Assets and
Performing Restructured
Loans to Total Assets 1.28% .66% 1.11% 1.36% 1.10%
- -----------------------------
</TABLE>
At December 31, 1997 and 1996, the recorded investment in
loans for which impairment has been recognized in accordance with
SFAS No. 114 was approximately $2,454,000 and $2,648,000. The
total allowance for loan losses related to these loans was
$443,000 and $278,000 at December 31, 1997 and 1996. For the
years ended December 31, 1997 and 1996, the average recorded
investment in loans for which impairment has been recognized was
approximately $2,642,000 and $1,218,000. During the portion of
the year that the loans were impaired, the Company recognized
interest income of approximately $104,000 and $28,000 for cash
payments received in 1997 and 1996.
Interest income on nonaccrual loans which would have been
recognized if all such loans had been current in accordance with
their terms totalled $74,000, $7,000 and $203,000 in 1997, 1996
and 1995, respectively. Nonperforming assets increased to
$1,256,000 or .64% of total assets, at December 31, 1997, from
$287,000 or .15% of total assets, at December 31, 1996.
Included in the impaired loans above were three nonaccrual
loans to two borrowers totalling $70,000 at December 31, 1996. In
1997, the Bank charged off these three loans totalling $70,000.
At December 31, 1997 there were three nonaccrual loans to three
borrowers totalling $966,000. Two loans totalling $1,198,000 are
secured by a commercial office/warehouse building in Suisun,
California. In early 1997, management became aware that this
29,000 square foot building was 44% vacant. At that time both
loans were restructured. One loan with an outstanding balance of
$917,000 at December 31, 1997 was placed on nonaccrual status and
the other loan with an outstanding balance of $280,000 at
December 31, 1997, was categorized as a performing restructured
loan. Although no interest was realized on the nonaccrual loan
in 1997, the borrower/building was able to generate sufficient
cash flow to reduce the principal by $18,000. The other loan has
performed under the terms of the restructure agreement. The
building currently has a 70% occupancy rate. Under the terms of
the restructure agreement, the reduction in interest is deferred
and remains an obligation of the borrower. The Bank believes the
borrower will be able to fully service the loan under the
original terms at the time the building becomes approximately 90%
occupied. The Bank has an allowance for loan loss allocation of
$180,000 on these two loans. Two other loans to two other
borrowers with outstanding balances of $26,000 and $23,000 were
also placed on nonaccrual status in 1997. In January 1998, the
$26,000 nonaccrual loan was paid off by the SBA.
At December 31, 1996, OREO consisted of one foreclosed real
estate property with a carrying value of $150,000. This
commercial property in Vallejo, California was sold in 1997 for
$135,000, resulting in a $15,000 loss from the sale of OREO. In
1997, the Bank acquired, four residential properties totalling
$437,000 through foreclosure and subsequently sold three of these
properties resulting in a net loss of $10,000. At December 31,
1997, OREO consisted of the remaining residential property in
Fairfield, California with a carrying value of $96,000.
At December 31, 1996, there was two performing restructured
loans for $974,000. One loan with an outstanding balance of
$412,000 at December 31, 1996 was removed from performing
restructured status in 1997 as the borrower became able and
willing to perform under the original terms of the loan. The
other loan with an outstanding balance of $562,000 at December
31, 1996 is secured by a 7,500 square foot commercial office
building. This loan, which was restructured on a month to month
basis to receive principal based on the original amortization
schedule, while the interest rate was reduced to approximately
6.80%, continues to perform under the restructured terms. In
1997, the Bank realized $37,000 in interest income on this loan,
while the outstanding principal was reduced to $548,000.
In February 1997, two loans totalling $444,000 secured by
the two remaining suites in an eight unit medical condominium
office building in Vacaville, California were restructured. The
borrower has leased one of the units and the Bank has financed
the tenant improvement costs. These loans were restructured for
six months at approximately 2% to allow the borrower time to
lease or sell the final unit. The borrower reported in November
1997 that they had two potential purchasers but as of the date of
this report, no transaction has occurred. At December 31, 1997,
the outstanding balance on these two loans was $434,000.
At December 31, 1997, performing restructured loans
consisted of the above mentioned four loans to three borrowers
for a total of $1,262,000 ($280,000, $548,000 and $434,000).
Potential increase in the volume of nonperforming assets
will depend, upon other events and upon the economic environment.
The Bank has identified loans, totalling $577,000, where known
information about the possible credit problems of the borrowers
cause management to have serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms and
which may become nonperforming in the future. This total
consists of eight loans to seven borrowers. Four loans totalling
$249,000 to four borrowers are secured by either a First or a
Second Deed of Trust on single family residences. Notices of
default were filed on these properties in February 1998 and March
1998. Due to loan to value and marketability of these properties
minimal loss is expected. The Bank has an unsecured loan for
$15,000 and a real estate secured loan for $78,000 to one
borrower. Based on the borrower's financial condition the
unsecured loan may result in a loss and the secured loan may
result in a minimal loss. The other two loans to two borrowers
totalling $247,000 are commercial loans. One loan for $92,000
with a 80% SBA guarantee was placed on nonaccrual in early 1998
due to the borrowing filing Chapter 13 bankruptcy. Upon
liquidation of collateral, a small loss is anticipated. The
other loan for $155,000 is an unsecured line of credit to a Real
Estate Developer. Due to the soft real estate market, which has
delayed development projects, this Developer has been unable to
pay off this line. Payments are being made as agreed, but this
loan may become nonperforming or a loss in the future.
Changes in general or local economic conditions or specific
industry segments, rising interest rates, declines in real estate
values and acts of nature could have an adverse effect on the
ability of borrowers to repay outstanding loans and the value of
real estate and other collateral securing such loans.
Other than the loans discussed above, management is not
aware of any loans that represent or result from trends or
uncertainties which management reasonably expects will materially
impact future operating results, liquidity or capital resources;
or represent material credits about which management is aware of
information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment
terms.
LOAN CONCENTRATIONS
As of December 31, 1997, the only concentration of loans to
any individual, business, or industry exceeding 10% of total
loans was Real Estate loans secured by commercial office
properties, which represented 29.0% of total loans.
SUMMARY OF THE ALLOWANCE FOR LOAN LOSSES
The Bank maintains an allowance for estimated losses
inherent in existing loans and commitments. Additions to the
allowance are made by charges to operating expense in the form of
a provision for possible loan losses. Where a loss is considered
probable, loans are charged against the allowance while any
recoveries are credited to the allowance. The allowance for loan
losses is maintained at a level determined by management to be
adequate, based on the performance of loans in the portfolio,
with particular attention to credit risks associated with any
loans past due thirty days or more, evaluation of collateral for
such loans, historical loan loss experience, examination reports
prepared by regulatory agencies, the prospects or net worth of
the borrowers or guarantors, anticipated growth in the portfolio,
prevailing economic conditions and such other factors which, in
the Bank's judgment, deserve consideration in the estimation of
possible loan losses.
The following table provides certain information with
respect to the allowance for loan losses as well as charge-offs,
recoveries and certain related ratios:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
(Dollars in thousands)
Allowance for loan Losses:
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Period $ 1,101 $ 1,158 $ 1,108 $ 1,090 $ 933
Charge Offs:
Commercial 88 217 104 44 142
Real Estate Construction 10 181 72 146 0
Real Estate Mortgage 20 83 31 0 41
Consumer Loans 106 15 75 49 4
----------------------------------------------------
Total Charge Offs 224 496 282 239 187
Recoveries:
Commercial 24 1 2 1 75
Real Estate Construction 0 25 0 0 0
Real Estate Mortgage 13 1 0 0 0
Consumer Loans 9 1 6 0 0
----------------------------------------------------
Total Recoveries 46 28 8 1 75
Net Charge Offs 178 468 274 238 112
Provision for Loan Losses 319 411 324 256 269
----------------------------------------------------
Balance at End of Period $ 1,242 $ 1,101 $ 1,158 $ 1,108 $ 1,090
====================================================
Loans:
Average Loans Outstanding
During Period (Net) $116,726 $111,052 $109,372 $106,408 $105,868
Total Loans at End of Period $121,062 $113,625 $111,124 $111,196 $107,708
Ratios:
Net Loans Charged Off to
Average Loans .15% .42% .25% .22% .11%
Net Loans Charged Off to
Total Loans at End of Period .15% .41% .25% .21% .10%
Net Loans Charged Off to
Allowance for Loan Losses 14.3% 42.5% 23.7% 21.5% 10.3%
Net Loans Charged Off to
Provision for Loan Losses 55.8% 113.8% 84.6% 93.0% 41.6%
Allowance for Loan Losses to
Average Loans 1.06% .99% 1.06% 1.04% 1.03%
Allowance for Loan Losses to
Total Loans at End of Period 1.03% .97% 1.04% 1.00% 1.01%
Allowance for Loan Losses to
Nonperforming Loans 107% 804% 103% 63% 356%
Allowance for Loan Losses to
Nonperforming Assets 99% 384% 88% 52% 157%
Allowance for Loan Losses to
Nonperforming Assets and
Performing Restructured Loans 49% 87% 65% 52% 66%
- ------------------------------------
</TABLE>
The provision for loan losses represents management's
determination of the amount necessary to be added to the
allowance for loan losses to bring it to a level which is
considered adequate in relation to the risk of future losses
inherent in the loan portfolio. While it is the policy to charge
off in the current period those loans where a loss is considered
probable, there also exists the risk of future losses which
cannot be precisely quantified or attributed to particular loans
or classes of loans. Because this risk is continually changing in
response to factors beyond the control of the Company, such as
the state of the economy, management's judgment as to the
adequacy of the allowance for loan losses is necessarily an
approximate one. Management believes that the allowance for loan
losses of $1,242,000 at December 31, 1997, which constituted
1.03% of total loans, is adequate as an allowance against
foreseeable loan losses as of December 31, 1997.
The following table shows the allocation of the allowance
for loan losses and the percent of loans in each category to
total loans as of the periods indicated.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-----------------------------------------------------------------
Allowance for % of Loans Allowance for % of Loans
Loan Losses in each Loan Losses in each
Category Category
to Total Loans to Total Loans
-----------------------------------------------------------------
Loan Categories: (Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate Mortgage:
Residential $ 46 4% $ 192 15%
Commercial 617 50 469 57
-----------------------------------------------------------------
Total Real Estate Mortgage 663 54 661 72
Commercial 233 19 214 8
Real Estate Construction 152 12 91 6
Consumer (Inc. ELOC) 180 14 52 14
Unallocated 14 1 83 ---
-----------------------------------------------------------------
Total $ 1,242 100% $ 1,101 100%
- -------------------------------------
</TABLE>
The adequacy of the allowance for loan losses is based upon
the potential for loss related to specific loans and formula
allocations based upon the potential for loss in various
categories. Specific allocations are increased or decreased
through management's reevaluation of the status of particular
problem loans. Provisions for losses which have not been made on
a specific basis are based on a formula. Management applies a
percentage factor based on loss ratios of the Bank's peers,
history of loss, underlying collateral, type of loan and general
economic conditions, to the loan categories.
INVESTMENT SECURITIES
In order to provide investment income and collateral to
secure borrowings to meet liquidity and loan requirements, from
time to time the Bank purchases United States Treasury securities
and obligations of federal agencies as well as obligations of
states and their political subdivisions and other securities.
Purchases of such securities, as well as sales of Federal funds
(short-term loans to other banks) and placement of funds in
certificates of deposit with other financial institutions, are
also made as alternative investments pending utilization of funds
for loans or other purposes.
Under the investment policy, investment securities may be
placed in two categories: "available for sale" and "held to
maturity." Securities available for sale provide flexibility to
the asset/liability management strategy and may be sold in
response to changes in interest rates and to meet liquidity
needs.
The Company accounts for securities investments in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities. In November 1995, as permitted by additional
implementation guidance regarding the previously issued SFAS No.
115, the entire held to maturity portfolio was transferred to
available for sale.
At December 31, 1997, the net unrealized loss on securities
available for sale was $215,000, resulting in a reduction in
stockholders' equity of $125,000 and a $90,000 increase in
deferred tax assets. At December 31, 1997, the amortized cost of
available for sale securities totalled $48,680,000, consisting of
$8,083,000 variable rate (COFI) U. S. Government Agency Bonds,
$17,112,000 in fixed rate short term (less than 5 years) U.S.
Treasury and U.S. Government Agency Securities, $17,303,000 in
variable rate (Prime rate and 1 year CMT) U. S. Government Agency
Bonds, $4,590,000 in fixed rate municipal bonds, $1,000,000 in
fixed rate long term (greater than 5 years) U.S. Government
Agency Bonds and $592,000 in Federal Home Loan Bank (FHLB) stock.
The $4,364,000 decrease in investments which was used to fund
loan growth was distributed as follows, a $1,062,000 decline in
lagging COFI Indexed U.S. Agency Bonds, an $851,000 reduction in
fixed rate short term U.S. Treasury and Agency Bonds, a
$1,970,000 reduction in variable rate U.S. Agency Bonds and a
$506,000 reduction in fixed rate long term U.S. Agency bonds.
At December 31, 1996 the total reduction in the carrying
value of investment securities available for sale was $475,000,
along with a reduction to stockholders' equity of $276,000 and a
$199,000 increase in deferred tax assets. At December 31, 1996,
the amortized cost of available for sale securities totalled
$53,044,000, consisting of $9,145,000 in variable rate (COFI) U.
S. Government Agency Bonds, $17,963,000 in fixed rate short term
(less than 5 years) U.S. Treasury and U.S. Government Agency
Securities, $19,273,000 in variable rate (Prime rate and 1-year
CMT) U. S. Government Agency Bonds, $4,667,000 in fixed rate
municipal bonds, $1,506,000 in fixed rate long term (greater than
5 years) U.S. Government Agency Bonds and $490,000 in Federal
Home Loan Bank (FHLB) stock. As detailed above, holdings in both
fixed rate short term U.S. agency bonds and variable rate U.S.
agency bonds tied to prime and the 1-year CMT index were
significantly increased. It also reduced holdings in U.S.
Government Agency bonds tied to the lagging COFI index and long
term fixed rate municipal bonds.
At December 31, 1997 and 1996, the Company did not have any
investment securities designated as held to maturity or
considered to be held for trading under the provisions of SFAS
No. 115.
In 1997, $6,015,000 available for sale securities were sold
for liquidity purposes, to reduce interest rate risk or in
response to changes in interest rates. The Bank also had pay
downs on its U.S. Agency bonds (SBA or mortgage backed
securities) of $6,434,000. The above-mentioned transactions
resulted in a pretax profit of $42,000. In addition, $4,060,000
in municipal and U. S. Agency bonds either matured or were
called.
The Company has entered into interest rate swap agreements
with the Federal Home Loan Bank as described below. The effect
of the $10,000,000 notional amount agreement was to shorten the
lag time in interest rate fluctuations from the 11th District
Cost of Funds Index (COFI) to the treasury bill to enable the
Company to better match the timing of the repricing of certain
liabilities. The effect of the $900,000 notional amount
agreement was to lock in an interest rate spread on a fixed
interest rate loan of a similar amount and term.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1997 1996
Net Net
Original Interest Interest
Notional Issue Original Company Company Expense Expense
Amount Date Term Pays Receives Recognized Recognized
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$10,000,000 5-24-96 5-years COFI 3-mo $40,000 $19,000
plus .65% treasury
(floating bill
rate) (floating
rate)
$ 900,000 1-24-97 7-years 6.74% 1-yr $10,000
(fixed constant
rate) maturity
treasury
index
(floating
rate)
</TABLE>
Interest-rate swap agreements involve not only the risk of
dealing with counter parties and their ability to meet the terms
of the contracts but also the interest-rate risk associated with
unmatched positions. Notional principal amounts are often used
to express the volume of these transactions, but the amounts
potentially subject to credit risk are much smaller.
At December 31,1997, the Company did not have any investment
securities issued by a single issuer, which the aggregate book
value of such securities exceeded ten percent of stockholders'
equity other than those issued by the U.S. Government and U. S.
Government agencies and corporations.
The following table shows the carrying amounts and
approximate fair values of investment securities available for
sale at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------
Amortized Carrying Amortized Carrying
Cost Amount Cost Amount
(Fair Value) (Fair Value)
-----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury Securities and
Securities of other U.S.
Government Agencies
and Corporations $43,498 $43,190 $47,887 $47,395
Obligations of States of the
U.S. and Political Subdivisions 4,590 4,683 4,667 4,684
Other Securities 592 592 490 490
-----------------------------------------------------
Total $48,680 $48,465 $53,044 $52,569
=====================================================
- -------------------------------------------
</TABLE>
At December 31, 1997 and 1996, investment securities having
carrying amounts of approximately $11,155,000 and $10,171,000,
respectively, were pledged to secure public deposits and short-term
borrowings and for other purposes required or permitted by
law.
The following table sets forth the maturity distribution and
weighted average yield of available for sale securities (other
than FHLB stock with a carrying value of approximately $592,000),
categorized by type of security, including securities issued by
U.S. Government agencies, states and political subdivisions as of
December 31, 1997:
<TABLE>
<CAPTION>
Available for Sale
- ---------------------------------------------------------------------------------------
Fair Weighted
December 31, 1997 Value Average Yield<F1>
- ---------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
U.S. Treasury Securities and
Securities of Government Agencies and Corporations
Due within one year $ 6,032 5.70%
Due after one year but within five years 11,568 6.17
Due after five years but within ten years 839 7.06
Due after ten years 24,751 6.11
------- ----
$43,190 6.09%
======= ====
Obligations of States of the
U.S. and Political Subdivisions(F1)
Due within one year $ 259 5.96%
Due after one year but within five years 1,289 4.33
Due after five years but within ten years 2,703 5.06
Due after ten years 432 5.58
------- ----
$ 4,683 4.95%
------- ----
$47,873 5.98%
======= ====
- ------------------------------
<FN>
<F1> The yields shown above for Obligations of States of the
U.S. and Political Subdivisions are not shown on a tax
equivalent basis.
</FN>
</TABLE>
DEPOSITS
Deposits are the primary source of funds. The Bank
presently prices its deposit rates to be slightly higher than
those offered by the major banks in its market area but
competitive with those rates offered by other independent
financial institutions with offices in the Company's service
areas, based upon a weekly survey of such rates.
The deposit distribution, in terms of maturity and
applicable interest rates, is a primary determinant of the
Company's cost of funds and the relative stability of its supply
of funds. Deposits are, for the most part, no longer subject to
interest rate limitations, and interest rates on such deposits
tend to reflect current market rates of interest available to
depositors on alternative investments at the time of deposit. At
December 31, 1997, the aggregate amount of time, savings and
interest-bearing demand deposits was 82% of total deposits. As
of December 31, 1997, the Company did not have any foreign
deposits, nor, except as noted below, did it have any material
concentrations of deposits in any one industry or business.
However, the Bank's escrow deposits from a local title company,
which are demand deposits, are volatile and occasionally exceeded
5% of total deposits. Such escrow deposits averaged $3,681,000
and $2,876,000 in 1997 and 1996, respectively, and accounted for
about 14% and 12% of average demand deposits and 2% of average
total deposits during 1997 and 1996. The loss of these escrow
deposits would likely require the Bank to replace some or all of
such funds with more costly interest-bearing deposits which would
likely increase the Company's cost of funds and decrease
earnings. At year end 1997, the Bank has had an ongoing deposit
relationship with the title company for almost eight years. The
Bank does not experience substantial seasonal fluctuations in
deposit levels.
The average rate paid on total deposits for 1997, 1996 and
1995, was 3.33%, 3.32% and 3.58%, respectively.
The following table, sets forth by time remaining to
maturity, domestic time deposits in amounts of $100,000 or more
at December 31, 1997:
<TABLE>
<CAPTION>
(Dollars
Remaining Maturity: in thousands)
--------------------------- --------------
<S> <C>
Three Months or Less $ 12,803
Over Three Months through Six Months 4,099
Over Six Months through Twelve Months 4,186
Over One Year 1,142
--------
Total $ 21,088
========
- -------------------------
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
Management regularly reviews general economic and financial
conditions, both external and internal, and determines its
position with respect to liquidity and interest rate sensitivity.
Liquidity is defined as the ability to provide funds on an
ongoing basis to meet fluctuations in deposit levels as well as
the credit needs of its customers without affecting net income.
Both assets and liabilities contribute to the liquidity ratio.
Assets such as unpledged investment securities, cash and due from
banks, time deposits in other banks, Federal Funds sold, loan
sales, and loan repayments contribute to liquidity. Cash flows
generated are mainly used to fund loans, while investment
securities are both a use and a source of funds.
Of equal significance are the diverse sources comprising the
funding base. These include demand deposits, interest-bearing
transaction accounts, savings and time deposits, Federal Funds
purchased and security repurchase agreements, and borrowings from
the Federal Home Loan Bank (FHLB). Additionally, equity and debt
provide sources of funds. Capital markets can be utilized by
management as a potential funding source.
Liquidity is measured by various ratios, the most common
being the liquidity ratio of cash, time deposits in other banks,
Federal Funds sold, and investment securities as compared to
total assets. At December 31, 1995 this ratio was 26%. In 1996 and
1997, as loan growth was nominal and securities increased,
this ratio increased to 36% and 34%, respectively. Another
relevant measure of liquidity is the ratio of total loans to
total deposits. This ratio also changed in 1996 and 1997, due to
the slow loan growth, dropping from 78% at year end 1995 to 67%
and 69% at December 31, 1996 and 1997, respectively. This large
drop in the loan to deposit ratio in 1996 was also a function of
the Concord branch purchase which added about $15.5 million in
deposits and only $.14 million in loans at year end 1996. As of
December 31, 1997, the Company through the Bank could borrow up
to $8,500,000 from its correspondent banks under informal
arrangements should its liquidity needs so mandate. The Bank has
made arrangements with the Federal Reserve to borrow funds at the
discount window. In addition, the Bank is a member of the FHLB
where it can borrow approximately $6,500,000. Outstanding
borrowings from the FHLB were $2,650,000 at December 31, 1997.
In the area of interest rate sensitivity management focuses
on reducing the impact movements in interest rates would have on
interest income and the economic value of the Company. The
Company believes that keeping overall risks at a low level
achieves optimal performance. The objective is to control risks
and produce consistent, high quality earnings independent of
fluctuating interest rates. The Board of Directors and the Board
Asset / Liability Committee ("ALCO") oversees the establishment
of appropriate internal controls which are designed to ensure
that implementation of the Asset / Liability strategies remain
consistent with Asset / Liability Management Policy objectives.
The ALCO consists of all Senior Management and is charged with
implementing these strategies.
A major tool used by this Committee and the Board ALCO is
the ALX Asset / Liability computer model (ALX). This model, which
is run quarterly, measures a number of risks, including liquidity
risk, capital adequacy risk, interest rate risk and market risk.
The model analyzes the mix and repricing characteristics of
interest rate sensitive assets and liabilities using multipliers
(the degree interest rates change when federal funds change) and
lags (the time it takes rates to change after federal funds rate
change). The model simulates the effects of net interest income
and market risk when federal funds change. The ALCO committee
then uses this information, in conjunction with, current and
projected economic conditions and the outlook for interest rates
to set loan strategies, investment strategies and funding
strategies, which include loan and deposit pricing, volume and
mix of each asset and liability category and proposed changes to
the maturity distribution of assets and liabilities. The Asset /
Liability policy states that the Bank will monitor and limit
interest rate risk as follows:
For a 1% change in the federal funds rate, net interest
income (NII) should not change by more than 5% and for a 2%
change in the federal funds rate, NII should not change by more
than 10%. The policy further states that the Bank will monitor
and limit market risk (in a market where interest rates have
risen 3%) to 25% of equity capital while maintaining "well
capitalized" leverage and risk based capital ratios.
At December 31, 1997, the ALX model showed the Bank was
liability sensitive with a decrease in NII of $66,000 or 0.8% for
a 1% increase in the federal funds rate and a $462,000 or 5.7%
decrease in NII for a 2% increase in the federal funds rate. In
contrast, for a 1% and 2% decrease in the federal funds rate, the
model showed the Bank's NII would increase $31,000 or .4% and
$343,000 or 4.2%, respectively. All of these figures are within
policy.
At December 31, 1997 market risk, as measured by the model,
for a 3% increase in market rates, was 9.7% of equity capital,
well within policy, and the market risk adjusted leverage and
risk based capital ratios were 6.3% and 12.3%, respectively, also
well within policy.
When the Bank is liability sensitive, as it was at December
31, 1997, management will discontinue or limit the use of longer
lagging indexes such as the 11th District Cost of Funds (COFI)
for loan pricing and switch to more market sensitive indexes. In
the security portfolio, the Bank will switch from fixed rate
investments, as well as investments tied to lagging indexes, to
short term securities and/or to securities tied to more market
sensitive indexes. The Bank will also use interest rate swaps,
when appropriate, to reposition the Bank's interest rate risk.
The following table shows the interest sensitive assets and
liabilities gap, which is the measure of interest sensitive
assets over interest bearing liabilities, for each individual
repricing period on a cumulative basis:
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY GAP
1997
----------------------------------------------------------------
After
Three After
Next Day Months One
Assets and Liabilities Through But Through After
Which Mature or Reprice: Three Within Five Five
Immediately<F1> Months One Year Years Years Total
----------------------------------------------------------------
Dollars in Thousands
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold $ 8,775 $ -- $ -- $ -- $ -- $ 8,775
Investment Securities -- 29,637 2,250 12,447 4,131 48,465
Total Loans 27,357 11,697 50,942 20,363 10,703 121,062
Total Interest
Earning Assets 36,132 41,334 53,192 32,810 14,834 178,302
======= ======== ======== ======== ======== ========
Cumulative Interest
Earning Assets 36,132 77,466 130,658 163,468 178,302 178,302
Interest Bearing
Transaction Accounts 23,907 -- -- -- -- 23,907
Savings Accounts 59,163 -- -- -- -- 59,163
Time Deposits 0 28,221 26,805 4,516 0 59,542
Repurchase Agreements -- 359 229 -- -- 588
Other Borrowed Funds 2,650 2,650
Subordinated Debentures -- -- 2,468 -- -- 2,468
Total Interest
Bearing Liabilities 83,070 28,580 29,502 4,516 2,650 148,318
======= ======== ======== ======== ======== ========
Cumulative Interest
Bearing Liabilities 83,070 111,650 141,152 145,668 148,318 148,318
Interest Rate
Sensitivity Gap (46,938) 12,754 23,690 28,294 12,184 29,984
Cumulative Interest
Rate Sensitivity Gap (46,938) (34,184) (10,494) 17,800 29,984 29,984
Interest Rate
Sensitivity Gap Ratio <F2> 44% 145% 180% 727% 100% 120%
Cumulative Interest Rate
Sensitivity Gap Ratio <F3> 44% 69% 93% 112% 120% 120%
- -----------------------------------------
<FN>
<F1> Includes $10,524,000 in regular savings accounts which are
subject to interest rate changes.
<F2> The interest rate sensitivity Gap Ratio for each time
period presented is calculated by dividing the respective total
interest earning assets by total interest bearing liabilities.
<F3> The cumulative interest rate sensitivity Gap ratio, for
each time period presented, is calculated by dividing the
respective cumulative interest earning assets by cumulative
interest bearing liabilities.
</FN>
</TABLE>
Both the traditional GAP analysis and the asset liability
simulation model indicated, in the twelve-month period ending
December 31, 1997, the Company and the Bank were liability
sensitive. In 1996, average interest rates, as measured by the
average Federal Funds rate, were .50% lower than they were in
1995, 5.80% in 1995 verses 5.30% in 1996. In 1997, average
Federal Funds interest rates rose slightly to 5.44%. The
Company's liability sensitive posture had a negative impact on
net interest margins as predicted by the asset liability
simulation model. Although net interest income increased by
$496,000 in 1997 over 1996 results, a $728,000 improvement in
net interest income due to higher volumes was offset by a
$232,000 decline in interest income due to changes in interest
rates. Changes in interest income on loans attributed to
interest rates accounted for $214,000 of this decline. Lower
loan fees, higher unrealized interest on nonaccrual loans and
lower loan rates on loans tied to slow and lagging loan indexes
such as the 11th District Cost of Funds, were the factors causing
this reduction. Interest rate sensitivity measured by the gap
method does not consider the impact of different multipliers and
lags. Neither method of measuring interest rate sensitivity takes
into account actions that management could take to modify
the effect to net interest income if interest rates were to rise
or fall, or the behavior of consumers in response to changes in
interest rates.
At year end 1997, the Company had $130,658,000 in assets and
$141,152,000 in liabilities repricing within one year, resulting
in a cumulative gap ratio of 93%. Stated differently, 7% of
interest-rate sensitive liabilities are unmatched through one
year. The Company could experience a decrease in its net
interest margin if the general level of interest rates were to
rise. At year end 1997, the Company had $30,004,000 more in
interest rate sensitive assets than it did in interest rate
sensitive liabilities. The principal funding source of these
assets is $32,120,000 in noninterest bearing deposits which are
by definition not sensitive to interest rate changes since they
do not earn interest.
MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF LOANS
The following table shows the maturity of commercial loan
and real estate construction loans outstanding as of December 31,
1997. Also provided are the amounts due after one year
classified according to the sensitivity to changes in interest
rates. Nonperforming loans are included in this table based on
nominal maturities, even though the Company may be unable to
collect such loans or compel repricing of such loans at the
maturity date. Included in the totals are unearned income on
such loans, such as deferred loan fees.
<TABLE>
<CAPTION>
Maturing
-----------------------------------------------
After One
Within through After
One Year Five Years Five Years Total
-----------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial, $ 4,333 $ 4,244 $ 1,771 $10,348
Real Estate - Construction 4,342 1,189 511 6,042
------- ------- ------- -------
$ 8,675 $ 5,433 $ 2,282 $16,390
======= ======= ======= =======
Loans maturing after one year with:
Fixed interest rates $ 5,200 $ 1,738 $ 575 $ 7,513
Variable interest rates 3,475 3,695 1,707 8,877
------- ------- ------- -------
$ 8,675 $ 5,433 $ 2,282 $16,390
======= ======= ======= =======
- -------------------------------------------------------
</TABLE>
CAPITAL RESOURCES
Capital planning by the Company and the Bank considers
current capital needs as well as anticipated future growth and
dividend payouts. A determination of whether a Bank is "well
capitalized," "adequately capitalized" or "under capitalized" is
used by Bank regulators to determine which aspects of federal
regulations are applicable to the Bank. For example, FDIC
premium rates are now based upon capital levels as well as the
Bank's safety and soundness rating.
The Company raised capital of $1,426,000 and $321,000 in
1997 and 1996, respectively, through issuance of common stock
pursuant to the exercise of employee stock options and the
conversion of debentures.
The Company and the Bank are subject to minimum capital
guidelines issued by the Federal Reserve and the FDIC,
respectively, which require a minimum leverage ratio of Tier 1
capital to quarterly average total assets less goodwill of 3% to
5% (the "leverage ratio"). The Company and the Bank are also
required to meet a minimum risk based capital ratio of qualifying
total capital to risk weighted assets of 8%, of which at least 4%
must be in the form of core (Tier 1) capital-common stock less
goodwill. The unrealized loss in Available for Sale Securities
is excluded when calculating capital ratios. For the Company and
the Bank, supplementary (Tier 2) capital consists only of the
allowance for loan losses and the debentures (Company) and
subordinated notes (Bank). As of December 31, 1997, the
Company's and the Bank's leverage ratios were 7.91% and 6.97%,
both higher than the respective 7.04% and 6.81% reported at
December 31, 1996. The Company's and the Bank's total risk-based
capital ratios were 13.64% and 13.21% at December 31, 1997
compared to 13.56% and 13.22% at December 31, 1996.
The Company and the Bank must also maintain a 4% ratio of
Tier 1 capital to risk weighted assets. As of December 31, 1997,
this ratio was 10.99% and 9.69%, respectively, compared to 9.92%
and 9.60% in the prior year, both well above the minimum. In
October 1992, the FDIC adopted the final rules for implementing
the risk-related premium system, where a Bank's safety and
soundness rating by a Bank supervisory body and the Bank's
capitalization determines which of nine risk classifications is
appropriate for an institution. Although the Bank meets all the
minimum requirements of each capital ratio, these standards are
now the minimum ratios to be considered "adequately capitalized."
The following tables present the capital ratios for the
Company and the Bank and respective regulatory capital adequacy
requirements, at December 31, 1997:
<TABLE>
<CAPTION>
Company: For Capital
Actual Adequacy Purposes
--------------------- --------------------
Minimum Minimum
Amount Ratio Amount Ratio
(000) (000)
--------------------- --------------------
<S> <C> <C> <C> <C>
As of December 31, 1997:
Total capital
(to risk weighted assets) $19,084 13.64% $11,195 8.0%
Tier I capital
(to risk weighted assets) $15,374 10.99% $ 5,597 4.0%
Tier I capital
(to average assets) $15,374 7.91% $ 7,772 4.0%
</TABLE>
<TABLE>
<CAPTION>
Bank:
To Be Categorized as
Well Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------- -------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
(000) (000) (000)
--------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital
(to risk weighted assets) $18,431 13.21% $11,160 8.0% $13,950 10.0%
Tier I capital
(to risk weighted assets) $13,521 9.69% $ 5,580 4.0% $ 8,370 6.0%
Tier I capital
(to average assets) $13,521 6.97% $ 7,755 4.0% $ 9,694 5.0%
- ---------------------------------------
</TABLE>
SELECTED FINANCIAL RATIOS
The following table sets forth certain financial ratios for
the periods indicated (averages are computed using daily
figures):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996
--------------------------
<S> <C> <C>
Net earnings to:
Average interest earning assets .84 % 1.03 %
Average total assets .75 .92
Average stockholders' equity 9.93 12.25
Cash dividend payment to:
Net earnings 43.92 36.05
Average stockholders' equity 4.36 4.41
Tier 1 capital to:
Quarterly average total assets (less goodwill) 7.91 7.04
Average earning assets to:
Average total assets 89.50 89.63
Average total deposits 100.88 101.57
Percent of total deposits:
Net loans 68.29 65.71
Noninterest-bearing deposits 18.38 15.78
Interest-bearing deposits 81.62 84.22
Total interest expense to:
Total gross interest income 42.95 41.71
Total risk-based capital to:
Risk-based assets 13.64 13.55
Tier 1 capital to:
Risk based assets 10.99 9.92
Average stockholders' equity to:
Average total assets 7.59 7.53
- ------------------------------------------------
</TABLE>
SHORT-TERM BORROWINGS
The Company had no short term borrowings at December 31,
1997 or 1996.
IMPACT OF INFLATION
The impact of inflation on a financial institution differs
significantly from that exerted on an industrial concern,
primarily because a financial institution's assets and
liabilities consist largely of monetary items. The relatively
low proportion of the Company's net fixed assets (less than 4% at
December 31, 1997) reduces both the potential of inflated
earnings resulting from understated depreciation and the
potential understatement of absolute asset values.
ITEM 7 - FINANCIAL STATEMENTS
The Financial Statements Required by this Item are set
forth following Item 13 hereof, and are incorporated herein by
reference.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as
amended, (the "Act"), as administered by the Securities and
Exchange Commission (the "SEC"), requires the Bank's directors
and executive officers and persons who own more than ten percent
of a registered class of the Bank's equity securities to file
with the SEC initial reports of ownership and reports of changes
in ownership of Common Stock of the Company. Officers, directors
and greater than ten percent stockholders are required by the SEC
to furnish the Bank with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based upon a review of the
copies of such reports furnished to the Company and written
representations that no other reports were required, during the
fiscal year ended December 31, 1997, all such filing requirements
applicable to its officers, directors and ten percent
shareholders were complied with pursuant to Section 16(a) of the
Act.
ITEM 10 - EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to,
earned by or paid for services rendered in all capacities to the
Company and its subsidiaries by its Chief Executive Officer and
the other officers of the Company and its subsidiaries whose
salary and bonus for 1997 exceeded $100,000 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------
Name and Other All Other
Principal Position Year Salary Bonus Annual<F1> Comp.
- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Walter O. Sunderman 1997 $155,288 $34,320 $ 0 $338,667(F2)
President, CEO 1996 $147,888 $30,130 $ 0 $322,917(F2)
and Director 1995 $140,838 $28,003 $ 0 $308,664(F2)
- ---------------------------------------------------------------
Andrew S. Popovich 1997 $101,270 $22,382 $174,795 $219,651(F3)
EVP and CAO 1996 $ 96,446 $19,649 $ 15,798 $209,438(F3)
1995 $ 91,854 $18,264 $ 0 $198,071(F3)
- ---------------------------------------------------------------
Ronald A. Alfstad 1997 $ 98,400 $21,747 $ 0 $215,164(F4)
EVP and CCO 1996 $ 92,856 $19,092 $ 0 $204,238(F4)
1995 $ 87,576 $17,413 $ 0 $190,557(F4)
- ----------------------
<FN>
<F1> Consisted of the value realized upon the exercise of
stock options.
<F2> Reflects (for 1995, 1996 and 1997, respectively) $288,546,
$303,000 and 318,150 Mr. Sunderman would be entitled to receive
(2x then current annual base salary) in the event of a merger or
change in control of the Company, resulting in his terminated.
This payment hereunder includes the change of control payment
described below. In the event of change of control but neither
Mr. Sunderman nor his agreement is terminated, Mr. Sunderman
would be entitled to receive a lump sum payment equal to one time
his then current annual base salary ("change of control
payment"). Mr. Sunderman may be entitled to other payments as a
result of a merger or change of control of the Company under
certain other circumstances. See "Employment Agreements and
Supplemental Retirement Plan" herein. Also includes (for 1995,
1996 and 1997, respectively) $10,917 in Medical and Life
insurance payments and $9,000, $9,000 and $9,600 in Profit
Sharing Contributions made by the Bank on behalf of Mr.
Sunderman.
<F3> Reflects (for 1995, 1996 and 1997, respectively)
$188,196, $197,600 and 207,480 Mr. Popovich would be entitled to
receive (2x then current annual base salary) in the event of a
merger or change in control of the Company, resulting in his
terminated. This payment hereunder includes the change of
control payment described below. In the event of change of
control but neither Mr. Popovich nor his agreement is terminated,
Mr. Popovich would be entitled to receive a lump sum payment
equal to six months his then current annual base salary ("change
of control payment"). Mr. Popovich may be entitled to other
payments as a result of a merger or change of control of the
Company under certain other circumstances. See "Employment
Agreements and Supplemental Retirement Plan" herein. Also
includes (for 1995, 1996 and 1997, respectively) $3,814, $4,347
and $4,347 in Life insurance payments and $6,061, $7,491 and
$7,824 in Profit Sharing Contributions made by the Bank on behalf
of Mr. Popovich.
<F4> Reflects (for 1995, 1996 and 1997, respectively) $179,426,
$192,000 and $201,600 Mr. Alfstad would be entitled to receive
(2x then current annual base salary) in the event of a merger or
change in control of the Company, resulting in his terminated.
This payment hereunder includes the change of control payment
described below. In the event of change of control but neither
Mr. Alfstad nor his agreement is terminated, Mr. Alfstad would be
entitled to receive a lump sum payment equal to six months his
then current annual base salary ("change of control payment").
Mr. Alfstad may be entitled to other payments as a result of a
merger or change of control of the Company under certain other
circumstances. See "Employment Agreements and Supplemental
Retirement Plan" herein. Also includes (for 1995, 1996 and 1997,
respectively) $5,642, $5,868 and $5,868 in Life insurance
payments and $5,489, $6,368 and 7,695 in Profit Sharing
Contributions made by the Bank on behalf of Mr. Alfstad.
- -------------------
</FN>
</TABLE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF
CONTROL ARRANGEMENTS
On November 1, 1989, Continental Pacific Bank (the "Bank")
entered into two-year employment agreements ("Agreements") with
Messrs. Alfstad, Popovich and Sunderman in recognition of their
past contributions to the Bank and in order to provide an
incentive to retain and motivate them in connection with their
continued employment with the Bank. The Agreements are
automatically extended for successive additional one-year terms
unless certain events occur or the Bank gives notice that an
agreement will not be extended.
Under the Agreements, commencing with the 1990 fiscal year,
the Bank agreed to allocate to a bonus pool an amount equal to a
specified percentage of Bank profits which exceed a specified
return on the Banks average equity. The bonus pool is then
distributed to the above-named individuals in proportion to the
ratio of that individual's current base salary to the sum of the
three base salaries.
In the event of the termination of any of the Agreements or
any Executive Officer, without cause, within either six (6)
months prior to or twelve (12) months after a merger,
acquisition, or other change of control of the Company, as
defined in the Agreements (a "Change of Control"), each Executive
Officer so terminated would be entitled to receive a lump sum
payment equal to two times his then current current base salary;
provided, however, that the change of control payment and the
termination payment, defined below, shall first be deducted from
the lump sum payment hereunder.
In the event a Change of Control occurs but neither the
Executive Officer nor his Agreement is terminated, Mr. Sunderman
would be entitled to receive a lump sum payment equal to one time
his then current annual base salary, and Messrs. Alfstad and
Popovich would each be entitled to receive a lump sum payment
equal to one half of his then current annual base salary ("change
of control payment").
If a Change of Control is consummated for a total purchase
or investment price or value of more than 1.75 times the book
value of the Company's stock as of the month prior to the
announcement of the Change of Control, calculated in accordance
with the FDIC's regulatory capital requirements, but on a fully
diluted basis, then Messrs. Sunderman and Popovich each will be
entitled to receive an additional incentive payment calculated
based upon a percentage of the purchase price over the 1.75
threshold dependent upon the ratio of the purchase price to fully
diluted book value of the Company's stock. However, in no event
shall the incentive payment exceed twice the Company's Executive
Officer's annual base salary. Based on the market value of
SierraWest Bancorp common stock at January 29, 1998, which was
$31.00, the amounts payable under these provisions to Messrs.
Sunderman and Popovich would be $318,150 and $207,480,
respectively.
The Agreements further provide for severance payments for
Mr. Sunderman in the amount of one times his then current annual
base salary and for Messrs. Alfstad and Popovich in the amount of
one-half times their respective then current annual base
salaries, plus certain other expenses if the named individuals
are otherwise terminated without cause ("termination payment").
Pursuant to the certain performance targets specified in the
Agreement, Mr. Sunderman received, options to purchase 1,000
shares in 1990 and 1,000 shares in 1992 (currently he has options
to purchase 1,331 shares and 1,210 shares, respectively, due to
subsequent stock dividends) of the Bank's Common Stock at its
then current market value and Messrs. Alfstad and Popovich each
received options to purchase 650 shares in 1990 and 650 shares in
1992, (currently, Mr. Alfstad has options to purchase 865 shares
and 787 shares, respectively, due to subsequent stock dividends,
Mr. Popovich exercised these options in 1997) shares of the
Bank's Common Stock. These options are subject to adjustment for
subsequent stock dividends.
COMPENSATION OF DIRECTORS
During 1997, Directors of the Company and the Bank were paid
$650 per Board Meeting attended and $250 per Committee meeting
attended, except that if the Director was a member of the Board
of Directors of both the Company and the Bank, and both Boards
met on the same day, the Director only received a single $650 fee
for attending both meetings. Directors of Conpac Development
Corporation were paid $300 per Board Meeting attended and $150
per Committee meeting attended. Mr. Sunderman does not receive
Director's fees. The aggregate Directors fees paid in 1997 was
$62,400. Directors electing coverage under the group health
insurance plan available to employees of the Company have been
required to pay 100% of their premiums.
The Company's 1993 Stock Option Plan provides for annual
automatic Stock Option grants to non-employee Directors.
STOCK OPTION PLANS
The Bank adopted a Stock Option Plan in 1983 which
terminated on November 8, 1993 ("the "1990 Plan"). The Bank
adopted a new stock option plan in 1993 (the "1993 Plan"), which
was approved by stockholders in 1993 and amended in 1994 and
1996. Both the 1990 Plan and the 1993 Plan became stock option
plans of the Company following the reorganization. As a result
of the reorganization, options to purchase the Banks Common Stock
were converted into options to purchase the same number of shares
of the Company's Common Stock.
Pursuant to the 1990 Plan, both nonqualified and incentive
stock options were issued. As of the date the 1990 Plan
terminated, nonemployee directors had been granted options to
purchase 44,722 shares of the Company's Common Stock.
Pursuant to the 1993 Plan, both nonqualified and incentive
stock options may be issued. The 1993 Plan allows for the
issuance of options to purchase up to 200,000 shares of the
Company's Common Stock. As of March 24, 1998, 22,846 shares have
been issued pursuant to the exercise of options under the 1993
Plan. 68,089 shares were subject to outstanding options and
109,065 shares were available for future grant.
The 1993 Plan provides that all options be granted at an
exercise price of not less than 100% of fair market value on the
date of grant to key, full-time salaried employees and officers
of the Company and the Bank. Options are exercisable in
installments as provided in individual stock option agreements.
The selection of individual participants is determined by the
Stock Option Committee, or in the absence of such committee, by
the full Board of Directors; however, vesting provisions for non-
employee directors may not be modified from those set forth in
the 1993 Plan. The 1993 Plan provides that each nonemployee
Director, who first joins the Board after May 13, 1993, shall
receive a nonstatutory stock option ("NSO") covering 1,000 shares
of the Company's Common Stock on the first business day after his
or her initial election or appointment to the Board.
Additionally, on the first business day following the conclusion
of each regular annual meeting of the Company's stockholders after
the year 1993, each nonemployee Director who continues
serving as a member of the Board thereafter is entitled to
receive an NSO covering 250 shares of Company's Common Stock.
Each option granted under the 1993 Plan is transferable only
by will or the laws of descent and distribution and is
exercisable during each optionee's lifetime only by the optionee.
The Board of Directors has the complete power and authority to
terminate or amend the 1993 Plan; provided, however, that the
Board of Directors may not amend the 1993 Plan without, where
required by law, the approval of stockholders; provided further,
that the Board may not amend the 1993 Plan provisions relating to
the amount, price and timing of option grants to nonemployee
directors more than once in any six-month period without
stockholder approval.
There were no options granted to Messrs. Alfstad, Popovich
and Sunderman in 1997.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year
End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of
Shares Unexercised Options In-the-Money Options
Acquired at Fiscal Year End at Fiscal Year End
on Value ------------------------- ------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable(F1) Unexercisable
- --------- -------- -------- ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Walter O.
Sunderman n/a n/a 18,541 0 $332,425.41 0
Andrew S.
Popovich 10,961 174,794.75 1,126 0 $ 19,986.50 0
Ronald A.
Alfstad n/a n/a 11,601 0 $208,077.90 0
- ---------------------------
<FN>
<F1> Based upon fair market value of 28.500 at December 31, 1997.
</FN>
</TABLE>
SUPPLEMENTAL RETIREMENT PLAN
Additionally, Messrs. Sunderman, Popovich, Alfstad and
Fletcher are each party to a Supplemental Retirement Plan each
dated as of August 1, 1993 (the "Supplemental Plans"). Under the
supplemental Plans, vested retirement benefits shall be paid over
a 15 year term beginning on the later of the participant's 62nd
birthday or his termination of employment. The benefits of each
Executive Officer vest 100% after 15 years of service.
Additionally, with respect to Messrs. Popovich and Fletcher, in
the case of a Change in Control, each such Executive Officer is
entitled to receive fully vested retirement benefits on the
January 1st next following termination of employment following
the Change in control, determined on the date of termination as
though the Executive Officer were age 62, and may elect to be
paid in a single lump sum cash payment or that payments commence
following a certain term, e.g., 10 years after the Change in
Control. No interest shall be credited on any deferred payments.
The annual retirement benefit to be received shall be equal to 2%
of the participant's average annual compensation for the 36
months preceding his retirement multiplied by the participant's
years of employment with the Bank (rounded up or down to the
nearest complete year and not to exceed 25 years), minus the
annual amount that could be provided by the participant's Profit
Sharing Plan vested account balance upon the participant's
retirement (converted to an annual benefit of 15 installments
commencing on the date benefits begin).
The Supplemental Plan also provides for death benefits. If
a participant dies after benefits commence or following
termination of employment, any installment payments that would
have been made to the participant had he lived will be made to
his beneficiary. If a participant dies while still employed by
the Company, the participant's beneficiary shall receive the
following lump sum death benefit in lieu of any retirement
benefits: Mr. Alfstad, $400,000; Mr. Fletcher, $475,000; Mr.
Popovich, $600,000; Mr. Sunderman, $700,000. The pre-retirement
death benefits provided under the Supplemental Plan are funded
with life insurance policies.
The Supplemental Plan is not currently funded. The Company
must contribute to the trust to fund the retirement benefits
under the Supplemental Plan in the event of a change of control.
The following table is furnished in connection with the
Supplemental Plan. The table sets forth the estimated annual
payment which would be made each year for 15 years to
participants in the specified compensation and years of service
classifications (although there may be no participants in these
classifications). However, the annual payment actually received
by any participant is reduced by the actuarial equivalent of his
benefit under the profit sharing plan.
During 1997, the cash compensation of Messrs. Sunderman,
Popovich, Alfstad and Fletcher (including bonuses) were $189,608,
$123,652, $120,147 and $98,935, respectively. Years of service
credit for the Bank's Executive Officers as of the March 24, 1998
were as follows: Alfstad, 15 years; Fletcher, 13 years;
Popovich, 15 years; Sunderman, 15 years.
<TABLE>
<CAPTION>
PENSION TABLE
Estimated Annual Retirement Income
YEARS OF SERVICE
-----------------------------------
Remuneration 10 yrs 15 yrs 20 yrs 25+ yrs
<S> <C> <C> <C> <C>
$ 75,000 $15,000 $22,500 $30,000 $ 37,500
$100,000 $20,000 $30,500 $40,000 $ 50,000
$125,000 $25,000 $37,500 $50,000 $ 62,500
$150,000 $30,000 $45,000 $60,000 $ 75,000
$175,000 $35,000 $52,500 $70,000 $ 87,500
$200,000 $40,000 $60,000 $80,000 $100,000
</TABLE>
PROFIT SHARING PLAN
On January 29, 1989, the Board of Directors of the Bank
adopted a profit sharing plan (the "Plan"). The Profit Sharing
Plan is intended to provide the Company's employees with
additional financial security at retirement. With the exception
of employees who are paid by the hour and employees who have not
attained age 21, all employees of the Company who have completed
one year of service are eligible to participate in the Plan.
For each year in which the Plan is in effect, the Board of
Directors may, in its sole discretion, decide whether to make a
contribution to the Plan and the amount of that contribution, if
any. Employees may not make contributions to the Plan. Employees
who participate in the Plan and who are still employed on
December 31 of that year receive a pro rata share (based on the
participant's compensation) of any contribution made by the Board
of Directors. In the event the Plan becomes "top heavy", i.e.,
more than sixty percent (60%) of the Plan benefits are held for
"key-employees," a special minimum contribution may be made for
non-key employees.
Contributions to an individual employee's account become one
hundred percent (100%) vested after five or more years of
service, although vesting may occur on an expedited basis in the
event the Plan becomes top heavy. In 1997, contributions for
Messrs. Sunderman, Popovich and Alfstad were $9,600, $7,824 and
$7,695, respectively.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of March 24, 1998, no individual or group was known by
the Company to own beneficially more than five percent (5%) of
the outstanding shares of the Company's Common Stock, except as
follows:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Beneficial Owner<F1> Beneficial Ownership<F2> of Class
<S> <C> <C>
John Hancock Advisers, Inc. 60,000 5.4%
- ----------------
<FN>
<F1> The principal business office is located at 101 Huntington
Avenue, Boston MA 02199.
<F2> John Hancock Advisers, Inc. has direct beneficial
ownership of 60,000 shares of common stock through their
parent-subsidiary relationship to John Hancock Advisers, Inc, John
Hancock Mutual Life Insurance Company, John Hancock Subsidiaries,
Inc., and The Berkeley Financial Group have indirect beneficial
ownership of these same shares. 60,000 shares are held by the
John Hancock Regional Bank Fund an open-end diversified
management company, registered under 8 of the Investment Company
Act. John Hancock Advisers, Inc. has sole power to vote or
direct the vote of the 60,000 shares of Common Stock under the
Advisory Agreement with John Hancock Regional Bank Fund.
</FN>
</TABLE>
The following table sets forth information as of March 24,
1998, with respect to each Director and each executive officer
named in the Summary Compensation Table in Item 10 above, as well
as for all Directors and executive officers as a group.
The table should be read with the understanding that more
than one person may be the beneficial owner or possess certain
attributes of beneficial ownership with respect to the same
securities. Therefore, careful attention should be given to the
footnote references set forth in the column "Amount and Nature of
Beneficial Ownership." In addition, shares issuable pursuant to
options to purchase Common Stock which may be exercised within 60
days of the Record Date are deemed to be issued and outstanding
and have been utilized in calculating the percentage ownership of
those individuals possessing such interest, but not for any other
individuals. Thus, the total number of shares considered to be
outstanding for the purposes of this table may vary depending
upon the individual's particular circumstance.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Beneficial Owner<F1> Beneficial Ownership<F2> of Class<F2>
<S> <C> <C>
Ronald A. Alfstad 26,137<F3> 2.3 %
Dorce L. Daniel 18,710<F4> 1.7 %
William J. Hennig 33,788<F4><F5> 3.0 %
Bernard E. Moore 9,238<F4> 0.8 %
Melvin M. Norman 31,774<F4><F6> 2.8 %
Andrew S. Popovich 11,513<F7> 1.0 %
Stephen R. Schwimer 37,450<F4> 3.3 %
Donald E. Sheahan 31,308<F8> 2.8 %
Dr. Gary E. Stein 23,748<F4>(F9> 2.1 %
Walter O. Sunderman 40,073<F10> 3.5 %
John C. Usnick 28,429<F4><F11> 2.5 %
All directors and officers
as a group (11 in number) 292,169<F12><F13> 24.1 %
- ------------------------
<FN>
<F1> The address for all persons is c/o California Community
Bancshares Company, 555 Mason Street, Suite 280,
Vacaville, California 95688-4612.
<F2> Includes shares beneficially owned, directly and indirectly,
together with associates. Subject to applicable community
property laws and shared voting and investment power with a
spouse, the persons listed have sole voting and investment
power with respect to such shares unless otherwise noted.
<F3> Includes options to acquire 11,601 shares which are
exercisable within 60 days of the Record Date. Also,
includes 2,077 held in an individual retirement account.
Also includes conversion rights, pursuant to the
Company's Convertible Subordinated Debentures due 2003,
to acquire 2,353 shares.
<F4> Includes options to acquire 8,653 shares which are
exercisable within 60 days of the Record Date.
<F5> Includes 25,135 shares held by the Bill and Joan Hennig
Family Trust, of which Mr. Hennig and his wife, Joan, are
trustees.
<F6> Includes 23,121 shares held by Melvin M. Norman
Construction, Inc. Profit Sharing Plan, over which Mr.
Norman has sole voting and investment power.
<F7> Includes options to acquire 1,126 shares which are
exercisable within 60 days of the Record Date. Also,
includes 1,940 shares held by Mr. Popovich as custodian for
his daughter, Sara Kate; and 958 shares held by Mr. Popovich
as custodian for his daughter, Amy Beth. Also, includes
2,028 held in an individual retirement account and 150 held
in an individual retirement account for his wife. Also
includes conversion rights, pursuant to the Company's
Convertible Subordinated Debentures due 2003, to acquire
549 shares.
<F8> Includes 20,430 shares held by the Donald and Patricia
Sheahan Family Trust, of which Mr. Sheahan and his wife,
Patricia, are trustees. Includes options to acquire 5,725
shares which are exercisable within 60 days of the
Record Date. Also, includes 5,145 shares held in
an individual retirement account.
<F9> Includes 2,059 shares owned by Dr. Stein's wife, Dr. Jana
Boyce-Stein, as to which shares Dr. Stein disclaims
beneficial ownership. Also, includes 2,072 held in an
individual retirement account.
<F10> Includes options to acquire 18,541 shares which are
exercisable within 60 days of the Record Date. Also,
includes 2,016 shares held in an individual retirement
account for Mr. Sunderman and includes 880 shares held in
an individual retirement account for his wife Mary I.
Sunderman. Also, includes 261 shares held by Mr. Sunderman
as custodian for his son, Paul David.
<F11> Includes 1,398 shares held by Mr. Usnick as custodian for
his daughter, Adrian; and 2,183 shares held by Mr. Usnick as
custodian for his daughter, Alexis. Also, includes 355
shares held in an individual retirement account.
<F12> Includes options with respect to 31,268 shares held by Mr.
Sunderman and the executive officers of the Company as a
group and options with respect to 66,296 shares held by
nonemployee directors subject to options exercisable within
60 days which are deemed outstanding, and these options have
been added to the shares which are outstanding for the
purpose of determining the percent of the class held by the
group.
<F13> Includes conversion rights, pursuant to the Company's
Convertible Subordinated Debentures due 2003, to acquire
2,902 shares as a group.
- -------------------------
</FN>
</TABLE>
The principal occupations of the Directors and executive
officers of the Company, for the previous five years are as
follows:
Ronald A. Alfstad (age 60), has been Executive Vice
President of the Company since July 1, 1996 and Senior Vice
President of the Company from October 1995 thru July 1, 1996 and
has been Executive Vice President of the Bank since July 1, 1996
and Senior Vice President and Chief Credit Officer from January
1986 thru July 1996.
Dorce L. Daniel (age 61), a Director of the Company since
1995 and a Director of the Bank since 1988, is the owner of
Daniel Properties, a real estate development company; and
President of Danjon, Inc., a land development company.
William J. Hennig (age 66), a Director of the Company since
1995 and a Director of the Bank since 1983, is the President of
the Hennig Company, Ltd., a property management company.
Bernard E. Moore (age 68), the Chairman of the Board of
Directors of the Company since 1995 and the Chairman of the Board
of Directors of the Bank since 1986 and Director of the Bank
since 1983, is President of Bernard Moore, Inc., d.b.a. Moore
Tractor, Inc., which sells farm implements.
Melvin M. Norman (age 59), a Director of the Company since
1995 and a Director of the Bank since 1983, is the President of
Melvin M. Norman Construction, Inc., a construction company and he
is the owner of Dry Clean USA, a dry-cleaning company.
Andrew S. Popovich (age 47), has been Executive Vice
President of the Company since 1995 and has been Executive Vice
President of the Bank since 1991 and Chief Administrative Officer
since 1990.
Stephen R. Schwimer (age 56), a Director of the Company
since 1995 and a Director of the Bank since 1983, is the
President of Cavalier Services Inc., a master franchiser of
Coverall of North America Inc., a commercial cleaning business,
since 1991.
Donald E. Sheahan (age 69), the Vice Chairman of the Board
of Directors of the Company since 1995 and the Vice Chairman of
the Board of Directors of the Bank since 1986 and Director of the
Bank since 1983, is the President of California-Hawaii
Corporation, a property management company.
Dr. Gary E. Stein (age 52), a Director of the Company since
1995 and a Director of the Bank since 1983, is a Physician in
Vacaville, the Associate Medical Director of the University of
California, Davis Medical Group, Vacaville.
Walter O. Sunderman (age 57), has been Director, President
and Chief Executive Officer of the Company since 1995 and has
been Director, President and Chief Executive Officer of the Bank
and its subsidiaries since 1983.
John C. Usnick (age 51), a Director and the Secretary of the
Board of Directors of the Company since 1995 and the Secretary
and Director of the Board of Directors of the Bank since 1983, is
an Attorney at Debevec, Usnick & Long, Inc., a law firm in
Vacaville.
Each of the above Directors have been a Director of the
Bank's subsidiary Conpac Development Corporation (Conpac) since
1984, except Dan Daniel who became a Director of Conpac in 1988.
None of the Company's Directors is a director of any other
reporting company. There are no family relationships between any
of the Directors and executive officers of the Company. There
are no arrangements or understandings pursuant to which any of
the Directors was or is to be selected as a Director or nominee.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Through its banking subsidiary, the Company has had and
expects in the future to have banking transactions in the
ordinary course of its business with many of the Company's
Directors, executive officers, holders of five percent of the
Company's Common Stock and members of the immediate family of the
foregoing persons, including transactions with Companies of which
such persons are directors, officers or controlling stockholders,
on substantially the same terms (including interest rates and
collateral) as those prevailing at the time for comparable
transactions with others, except that all employees (other than
executive officers or Directors of the Company or its
subsidiaries) are granted rate concessions on installment loans
and are not charged origination fees on residential real estate
loans. Management believes that in 1997 such loan transactions
did not involve more than the normal risk of collectability or
present other unfavorable features.
John C. Usnick, Secretary of the Board and Director, is an
attorney and stockholder of the law firm of Debevec, Usnick and
Long, Inc. which provided legal services to the Company and the
Bank during 1997, and expects to provide professional legal
services to them in the future. The fees during 1997 did not
exceed $60,000.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
See Index to Exhibits at page 60 of this Annual Report on
Form 10-KSB, which is incorporated herein by reference.
B) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
last quarter of 1997, except a Form 8K filed with the SEC on
November 19, 1997, reporting under Item 5, the execution of a
Plan and Acquisition of Merger by and between the Company and
SierraWest Bancorp as of November 13, 1997.
C) The following is a list of all exhibits filed as part
of the Annual Report on Form 10-KSB.
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit Exhibit Page
No.
<S> <C> <C>
2.1 Plan of Reorganization and Merger Agreement,
dated February 22, 1996 is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
2.2 Plan of Acquisition and Merger By and Between
SierraWest Bancorp, SierraWest Bank, CCBC and Continental
Pacific Bank dated as of November 13, 1997, is
incorporated by reference from the Current Report on
Form 8-K filed on November 19, 1997. *
3.1 Certificate of Incorporation of Registrant, dated
October 5, 1995 is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
3.2 By-laws of Registrant is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
4.1 Indenture, dated as of April 16, 1993, between Continental
Pacific Bank and U.S. Trust Company of California,
N.A. is incorporated by reference from the Company's
1995 Annual Report on Form 10-KSB filed on March 29, 1996. *
4.2 First Supplemental Indenture, dated as of October 20, 1995,
Amending Indenture dated as of April 16, 1993, between
Continental Pacific Bank and U.S. Trust Company
of California, N.A. is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
4.3 Second Supplemental Indenture, dated as of February 29, 1996,
Amending Indenture dated as of April 16, 1993, between
Continental Pacific Bank, California Community Bancshares
Corporation and U.S. Trust Company of California, N.A. is
incorporated by reference from the Company's 1995 Annual
Report on Form 10-KSB filed on March 29, 1996. *
10.1 Deferred Compensation Arrangement, as amended is
incorporated by reference from the Company's 1995 Annual
Report on Form 10-KSB filed on March 29, 1996. *
10.2 Amended and Restated Employment Agreement between
Walter O. Sunderman and Continental Pacific Bank, dated
August 1, 1993 is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.3 Amended and Restated Employment Agreement between
Andrew S. Popovich and Continental Pacific Bank, dated
August 1, 1993 is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.4 Amended and Restated Agreement Employment Agreement
between Ronald A. Alfstad and Continental Pacific Bank,
dated August 1, 1994 is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.5 Employment Agreement between Larry Q. Fletcher and
Continental Pacific Bank, dated August 1, 1993 is
incorporated by reference from the Company's 1995
Annual Report on Form 10-KSB filed on March 29, 1996. *
10.6 Continental Pacific Bank Supplemental Retirement Plan,
effective August 1, 1993 is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.7 1990 Amended Stock Option Plan is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.8 1993 Stock Option Plan is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.9 Lease Agreement, dated July 15, 1993, between
Conpac Development Corporation and Continental Pacific
Bank for the Administrative Offices is incorporated by
reference from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.10 Lease Agreement and Addendum, dated May 31, 1983,
between Ibrahim Dib and Continental Pacific Bank for the
Vacaville Branch is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.11 Lease Agreement and Amendment, dated August 11, 1983,
between Leon Schiller, Joseph Friend, Ida Friend, Beulah
Schiller and Bruch J. Friend and Continental Pacific Bank
for the Fairfield Branch is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.12 Modification of Lease Agreement, dated December 31, 1987,
between Dante A. Madnani, Ernest N. Kettenhofen and Maxine
M. Campbell and Continental Pacific Bank for the Vallejo
Branch is incorporated by reference from the Company's 1995
Annual Report on Form 10-KSB filed on March 29, 1996. *
10.13 Lease Agreement, dated May 3, 1988, between Albert Morgan
Family Trust and Continental Pacific Bank for the Benicia
Branch is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.14 Ground Lease Agreement and Amendment, dated April 4, 1993,
between Jepson Parkway Associates L.P. and Continental
Pacific Bank for the Power Plaza Branch is incorporated
by reference from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.15 Lease Agreement and First Amendment to Lease, dated January
15, 1993, between BTV Crown Equities, Inc. and Continental
Pacific Bank for the Oliver Road Branch is incorporated by
reference from the Company's 1995 Annual Report on
Form 10-KSB filed on March 29, 1996. *
10.16 Lease Agreement, dated July 8, 1991, between Vallejo C & R
Associates and Continental Pacific Bank for the Park Place
Branch is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.17 Purchase and Assumption Agreement between Tracy
Federal Bank, F.S.B., and Continental Pacific Bank,
dated as of May 14, 1996 is incorporated by reference
from the Company's Current Report on Form
8-K filed on May 24, 1996. *
10.18 Terms and Conditions of Authorization for Automatic
Dividend Reinvestment and Common Stock Purchase
Plan for Shareholders of California Community
Bancshares Corporation is incorporated by reference
from the Company's Current Report on Form
8-K filed on July 15, 1996. *
10.19 Form of Automatic Dividend Reinvestment and
Common Stock Purchase Plan Agency Agreement
is incorporated by reference from the Company's
Current Report on Form 8-K filed on July 15, 1996. *
10.20 Amendment to Purchase and Assumption Agreement
between Tracy Federal Bank, F.S.B., and Continental
Pacific Bank, dated as of October 8, 1996
is incorporated by reference from the Company's
Current Report on Form 8-K filed on May 24, 1996. *
10.21 Lease Agreement, dated August 22, 1996, between
Salvio Pacheco Square Investors / IRM
Corporation and Continental Pacific Bank for the
Concord Branch *
10.22 First Amendment to the Sunderman Employment
Agreement amended May 20, 1997 0094
10.23 First Amendment to the Popovich Employment
Agreement amended May 20, 1997 0096
10.24 First Amendment to the Alfstad Employment
Agreement amended May 20, 1997 0098
10.25 Form of Directors Indemnification Agreement
with Amendment dated as of November 11, 1997 0100
10.26 Form of Officers Indemnification Agreement
with Amendment dated as of November 11, 1997 0104
21.1 The Company's only subsidiary is Continental Pacific Bank,
a California banking Corporation
21.2 The Bank's only subsidiary is Conpac Development Corporation,
a real estate development business as authorized under
California law.
23 Independent Auditors' Consent by Deloitte & Touche LLP 0108
27 Financial Date Schedule under Article 9 0109
- --------------
* Asterisk denotes documents which have been incorporated by reference.
</TABLE>
<PAGE>
CALIFORNIA COMMUNITY BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Financial Statements as of December 31, 1997 and
1996 and for each of the Three Years in the Period Ended December
31, 1997 and Independent Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
California Community Bancshares Corporation
Vacaville, California
We have audited the accompanying consolidated balance sheets of
California Community Bancshares Corporation and subsidiary
(Company) as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, on November
13, 1997 the Company entered into a Plan of Acquisition and
Merger with SierraWest Bancorp.
/S/ DELOITTE & TOUCHE LLP
- --------------------------
February 20, 1998
Sacramento, California
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA COMMUNITY BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- ----------------------------------------------------------------
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 10,289,000 $ 10,825,000
Federal funds sold 8,775,000 6,115,000
------------ ------------
Total cash and cash equivalents 19,064,000 16,940,000
Securities available for sale,
at fair value 48,465,000 52,569,000
Loans receivable 121,062,000 113,625,000
Less: Allowance for loan losses 1,242,000 1,101,000
Deferred loan fees 498,000 599,000
------------ ------------
Net loans receivable 119,322,000 111,925,000
------------ ------------
Premises and equipment,
net of accumulated depreciation 2,049,000 2,284,000
Investment in real estate
development 4,324,000 4,483,000
Other real estate owned 96,000 150,000
Goodwill 504,000 540,000
Accrued interest receivable
and other assets 3,167,000 2,938,000
------------ ------------
TOTAL ASSETS $196,991,000 $191,829,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 32,120,000 $ 26,882,000
Interest-bearing 142,612,000 143,461,000
------------ ------------
Total deposits 174,732,000 170,343,000
Securities sold under
repurchase agreements 588,000 992,000
Accrued interest payable
and other liabilities 800,000 785,000
Other borrowed funds 2,650,000 2,650,000
Convertible subordinated debentures 2,468,000 3,690,000
------------ ------------
Total liabilities 181,238,000 178,460,000
SHAREHOLDERS' EQUITY:
Preferred stock, no par value,
Series A, authorized 1,000,000
shares; none outstanding
Common stock, $.10 par value;
authorized 2,000,000 shares;
outstanding, 1,110,036 and
994,519 in 1997 and 1996 12,561,000 11,135,000
Retained earnings 3,317,000 2,510,000
Net unrealized loss on
securities available for sale,
net of tax effect (125,000) (276,000)
------------ ------------
Total shareholders' equity 15,753,000 13,369,000
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $196,991,000 $191,829,000
============ ============
See notes to consolidated financial statements
- ---------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA COMMUNITY BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ---------------------------------------------------------------
1997 1996 1995
INTEREST INCOME:
<S> <C> <C> <C>
Loans and loan fees $11,026,000 $10,704,000 $10,370,000
Securities:
Taxable 2,826,000 1,869,000 1,126,000
Exempt from federal taxes 238,000 346,000 698,000
Federal funds sold and securities
purchased under
repurchase agreements 165,000 183,000 116,000
----------- ----------- -----------
Total interest income 14,255,000 13,102,000 12,310,000
INTEREST EXPENSE:
Deposits 5,638,000 4,957,000 5,063,000
Federal funds and repurchase
agreements purchased 31,000 54,000 72,000
Convertible subordinated debentures 223,000 308,000 346,000
Other borrowed funds 230,000 146,000
----------- ----------- -----------
Total interest expense 6,122,000 5,465,000 5,481,000
----------- ----------- -----------
NET INTEREST INCOME 8,133,000 7,637,000 6,829,000
PROVISION FOR LOAN LOSSES 319,000 411,000 324,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,814,000 7,226,000 6,505,000
----------- ----------- -----------
NONINTEREST INCOME:
Service charges on deposit accounts 908,000 843,000 819,000
Net gain on sale of securities
available for sale 42,000 83,000 481,000
Other fees and charges 467,000 564,000 397,000
Income from real estate development 503,000 542,000 481,000
----------- ----------- -----------
Total noninterest income 1,920,000 2,032,000 2,178,000
----------- ----------- -----------
NONINTEREST EXPENSES:
Salaries and employee benefits 3,476,000 3,342,000 3,137,000
Occupancy 1,473,000 1,366,000 1,374,000
Business development 139,000 176,000 137,000
Data processing 131,000 118,000 106,000
Expenses from real estate development 377,000 300,000 268,000
Other 1,733,000 1,479,000 1,608,000
----------- ----------- -----------
Total noninterest expenses 7,329,000 6,781,000 6,630,000
----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,405,000 2,477,000 2,053,000
PROVISION FOR INCOME TAXES 966,000 918,000 648,000
----------- ----------- -----------
NET INCOME $1,439,000 $1,559,000 $1,405,000
=========== =========== ===========
EARNINGS PER SHARE:
Basic $1.36 $1.59 $1.46
=========== =========== ===========
Diluted $1.15 $1.32 $1.22
=========== =========== ===========
See notes to consolidated financial statements.
- ---------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA COMMUNITY BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ---------------------------------------------------------------
Net
Unrealized
Common Stock Loss on
------------------------ Securities
Number Available
of Shares Retained for Sale, Shareholders'
Outstanding Amount Earnings Net of Taxes Equity
--------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 955,467 $10,700,000 $ 588,000 $(562,000) $10,726,000
Stock options exercised 10,686 114,000 114,000
Cash dividend on common stock (480,000) (480,000)
Net change in net unrealized
loss on securities
available for sale,
net of taxes 497,000 497,000
Net income 1,405,000 1,405,000
--------- ----------- ----------- ---------- -----------
Balance at December 31, 1995 966,153 10,814,000 1,513,000 (65,000) 12,262,000
Stock options exercised 2,094 14,000 14,000
Common stock issued on
conversion of debentures 26,272 307,000 307,000
Cash dividend on common stock (562,000) (562,000)
Net change in net unrealized
loss on securities
available for sale, net of taxes (211,000) (211,000)
Net income 1,559,000 1,559,000
--------- ----------- ----------- ---------- -----------
Balance at December 31, 1996 994,519 11,135,000 2,510,000 (276,000) 13,369,000
Stock options exercised 19,678 294,000 294,000
Common stock issued on
conversion of debentures 95,839 1,132,000 1,132,000
Cash dividend on common stock (632,000) (632,000)
Net change in net unrealized
loss on securities
available for sale, net of taxes 151,000 151,000
Net income 1,439,000 1,439,000
--------- ----------- ----------- ---------- -----------
Balance at December 31, 1997 1,110,036 $12,561,000 $ 3,317,000 $(125,000) $15,753,000
========= =========== =========== ========== ===========
See notes to consolidated financial statements.
- ---------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA COMMUNITY BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ---------------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,439,000 $1,559,000 $1,405,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 689,000 523,000 516,000
Provision for loan losses 319,000 411,000 324,000
Provision for deferred income taxes (68,000) 132,000 (268,000)
Net gain on sale of available
for sale securities (42,000) (83,000) (481,000)
Net loss (gain) on sale of
other real estate owned 24,000 17,000 (8,000)
Gain on sale of premises and
equipment (6,000)
Effect of changes in:
Interest receivable and
other assets (234,000) (541,000) (294,000)
Interest payable and
other liabilities 15,000 (112,000) 390,000
----------- ----------- -----------
Net cash provided by operating
activities 2,136,000 1,906,000 1,584,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for
sale securities (12,328,000) (34,275,000) (23,721,000)
Proceeds from sales of available
for sale securities 6,015,000 6,635,000 18,468,000
Proceeds from maturities, calls
or repayments of available
for sale securities 10,494,000 4,416,000 6,558,000
Purchases of held to maturity
securities (1,493,000)
Proceeds from maturities or
calls of held to maturity securities 1,735,000
Net change in loans receivable (7,716,000) (3,192,000) (710,000)
Proceeds from sales of other real
estate owned 30,000 105,000 500,000
Purchases of premises and equipment (244,000) (592,000) (194,000)
Proceeds from sales of premises
and equipment 21,000 14,000 17,000
Change in investment in real
estate development 159,000 124,000 111,000
----------- ----------- -----------
Net cash (used by) provided by
investing activities (3,569,000) (26,765,000) 1,271,000
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits:
Noninterest bearing 5,238,000 4,982,000 475,000
Interest bearing (849,000) 23,127,000 1,032,000
Net change in securities sold
under repurchase agreements (404,000) 327,000 (82,000)
Net change in other borrowed funds 2,650,000
Cash dividends paid (632,000) (562,000) (480,000)
Cash proceeds from stock options
exercised 204,000 14,000 114,000
----------- ----------- -----------
Net cash provided by financing
activities 3,557,000 30,538,000 1,059,000
----------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 2,124,000 5,679,000 3,914,000
CASH AND CASH EQUIVALENTS:
Beginning of year 16,940,000 11,261,000 7,347,000
----------- ----------- -----------
End of year $19,064,000 $16,940,000 $11,261,000
----------- ----------- -----------
See notes to consolidated financial statements.
(Continued)
- ---------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA COMMUNITY BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Concluded)
- ---------------------------------------------------------------
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
ADDITIONAL INFORMATION:
Common stock issued on conversion
of debentures net of debenture
offering costs of $90,000 and $28,000
in 1997 and 1996, respectively $1,132,000 $ 307,000
========== ==========
Transfer of securities from held
to maturity to available for sale $12,087,000
===========
Transfer of foreclosed loans
from loans receivable
to other real estate owned $ 437,000 $ 100,000 $ 341,000
========== ========== ===========
Cash Payments:
Income tax payments $1,228,000 $ 738,000 $ 896,000
========== ========== ===========
Interest payments $6,121,000 $5,443,000 $ 5,465,000
========== ========== ===========
See notes to consolidated financial statements.
- ---------------------------------------------------------------
</TABLE>
<PAGE>
CALIFORNIA COMMUNITY BANCSHARES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
- ---------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - California Community Bancshares
Corporation (Company) was incorporated in Delaware on October 5,
1995 for the purpose of becoming a bank holding company
registered under the Bank Holding Company Act of 1956. On
February 29, 1996, pursuant to a plan of reorganization and
agreement of merger, resulting in Continental Pacific Bank (Bank)
becoming the wholly-owned subsidiary of the Company, the Company
issued 967,902 shares of its common stock for all of the
outstanding common stock of the Bank. The Bank commenced banking
operations on November 14, 1983. The merger has been accounted
for as a reorganization of entities under common control (similar
to a pooling-of-interests). Additionally, during 1996, the Bank
purchased from another bank approximately $15,500,000 in
deposits and certain leasehold improvements and equipment and
assumed the building lease of a branch located in Concord,
California, for approximately $820,000. The leasehold
improvements and equipment were recorded at fair value and the
excess of the amounts paid over the fair value was recorded as
goodwill. The Company operates eight branches in Solano and
Contra Costa Counties in Northern California. The Company's
primary source of revenue is through providing loans to
customers, who are predominately small and middle market
businesses and middle income individuals.
General - The accounting and reporting policies of the
Company conform to generally accepted accounting principles and
to prevailing practices within the banking industry.
Use of Estimates in the Preparation of Financial Statements
- - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The more significant accounting and reporting policies are
discussed below.
Consolidation - The consolidated financial statements
include California Community Bancshares Corporation and its
wholly-owned subsidiary, Continental Pacific Bank and its
wholly-owned subsidiary, Conpac Development Corporation. All
material intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents - For purposes of the statements
of cash flows, cash and cash equivalents have been defined as
cash, demand deposits with correspondent banks, cash items in
transit and federal funds sold. Generally, federal funds are
sold for one-day periods. Cash equivalents have remaining terms
to maturity of three months or less from the date of acquisition.
Securities - The Company accounts for securities in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The Company's policy with regard to
investments is as follows:
Securities Available for Sale are carried at fair value.
Unrealized gains and losses resulting from changes in fair value
are recorded, net of tax, as a separate component of
shareholders' equity. Gains or losses on disposition are
recorded in other operating income based on the net proceeds
received and the carrying amount of the securities sold, using
the specific identification method.
The Company does not have any investment securities
considered to be held to maturity or held for trading under the
provisions of SFAS 115.
Interest Rate Swap Agreements - The Company enters into
interest rate swap agreements with the Federal Home Loan Bank
(FHLB) as part of its asset/liability management activities to
reduce its exposure to certain lags and fluctuations in interest
rates. The Company accounts for these activities as matched
swaps in accordance with settlement accounting. An interest rate
swap is considered to be a matched swap if it is linked through
designation with an asset or liability, or both, that is on the
balance sheet, provided that it is has the opposite interest
characteristics of such balance sheet items. Under settlement
accounting, periodic net cash settlements under the swap
agreements are recognized as interest income or expense of the
related asset or liability over the lives of the agreements.
Loans Receivable - Loans are reported at the principal
amount outstanding adjusted for any specific charge-offs.
Interest on loans is calculated by using the simple interest
method on the daily balance of the principal amount outstanding.
Loan fees and certain related direct costs to originate loans
are deferred and amortized to income by a method that
approximates a level yield over the contractual life of the
underlying loans.
The accrual of interest on loans is discontinued when
reasonable doubt exists as to the full and timely collection of
interest and principal, or when a loan becomes contractually past
due by 90 days or more with respect to interest or principal
(unless the loan is well secured and in the process of
collection) and such loans are designated as nonaccrual loans.
When a loan is placed on nonaccrual status, all accrued but
unpaid interest revenue is reversed by a charge to earnings.
Income on such loans is then recognized only to the extent that
cash is received and where the future collection of principal is
determined by management to be probable. Interest accruals are
resumed on such loans when, in the judgment of management, the
loans are estimated to be fully collectible as to both principal
and interest.
Allowance for Loan Losses - The allowance for loan losses is
established through a provision for loan losses charged to
operations. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb losses inherent in
existing loans and commitments to extend credit based on
evaluations of the collectibility and prior loss experience of
loans and commitments to extend credit. In evaluating the
probability of collection, management is required to make
estimates and assumptions that affect the reported amounts of
loans, allowance for loan losses and the provision for loan
losses charged to operations. Actual results could differ
significantly from those estimates. The evaluations take into
consideration such factors as changes in the nature and volume of
the portfolio, overall portfolio quality, loan concentrations,
specific problem loans, commitments, and current and anticipated
economic conditions that may affect the borrowers' ability to
pay.
A loan is considered impaired if, based on current
information and events, it is probable that the Company will be
unable to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based
on the fair value of the collateral, for all collateral dependent
loans, or the present value of expected future cash flows
discounted at the historical effective interest rate.
Premises and Equipment - Premises and equipment are carried
at cost less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over the
estimated useful lives of the respective assets, generally 5 to
10 years for furniture and fixtures and 3 to 7 years for
equipment. Leasehold improvements are amortized on the
straight-line method over the shorter of the estimated useful
lives of the improvements or the terms of the respective leases.
Expenditures for major renewals and betterments of premises and
equipment are capitalized and those for maintenance and repairs
are charged to operations as incurred.
Investments in Real Estate Development - The investment in
real estate development represents the investment in the Pacific
Plaza project by the Bank's wholly-owned consolidated subsidiary,
Conpac Development Corporation. The investment in the land and
building is carried at cost, net of accumulated depreciation
which is computed on the straight-line basis over 31.5 years.
(see Note 6).
Other Real Estate Owned - Real estate properties acquired
through, or in lieu of, foreclosure are expected to be sold and
are recorded at the date of foreclosure at the lower of the
recorded investment in the property or its fair value less
estimated selling costs (fair value) establishing a new cost
basis through a charge to allowance for loan losses, if
necessary. After foreclosure, valuations are periodically
performed by management with any subsequent write-downs recorded
as a valuation allowance and charged against operating expenses.
Operating expenses of such properties, net of related income, are
included in other expenses and gains and losses on their
disposition are included in other income and other expenses.
Goodwill - Goodwill consists of the unamortized excess of
the purchase price over the fair value of the assets acquired in
the 1996 purchase of a branch located in Concord, California.
Goodwill recorded was $550,000 and is being amortized on a
straight-line basis over 15 years.
Income Taxes - The Company applies an asset and liability
method in accounting for deferred income taxes. Deferred tax
assets and liabilities are calculated by applying applicable tax
laws to the differences between the financial statement basis and
the tax basis of assets and liabilities. The effect on deferred
taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
Stock-Based Compensation - The Company accounts for
stock-based awards to employees using the intrinsic value method
in accordance with Accounting Principles Board (APB) No. 25,
Accounting for Stock Issued to Employees. Under the intrinsic
value method, no compensation cost has been recognized for its
stock option grants. SFAS No. 123, Accounting for Stock-Based
Compensation requires disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method
as of the beginning of 1995.
Earnings per Share - The Company has adopted the provisions
of SFAS No. 128, Earnings per Share. This statement replaces
previous standards for reporting earnings per share with basic
and diluted earnings per share. All earnings per share
information has been restated to give effect to the new
standards. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by
the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in
the earnings of the entity.
The following table reconciles the numerator and denominator
used in computing both basic earnings per share and diluted
earnings per share for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Calculation of Basic Earnings Per Share
Numerator - net income $1,439,000 $1,559,000 $1,405,000
Denominator - weighted average
common shares outstanding 1,054,457 981,528 962,016
Basic Earnings Per Share $1.36 $1.59 $1.46
========== ========== ==========
Calculation of Diluted Earnings Per Share
Numerator:
Net income $1,439,000 $1,559,000 $1,405,000
Interest expense on convertible
subordinated debentures, net of tax 129,000 178,000 200,000
---------- ---------- ----------
1,568,000 1,737,000 1,605,000
---------- ---------- ----------
Denominator:
Weighted average common shares
outstanding 1,054,457 981,528 962,016
Effect of outstanding stock options 93,161 37,207 37,382
Effect of Convertible Subordinated
Debentures 211,170 302,255 315,686
---------- ---------- ----------
1,358,788 1,320,990 1,315,084
---------- ---------- ----------
Diluted Earnings Per Share $1.15 $1.32 $1.22
========== ========== ==========
- ------------------------------------------
</TABLE>
New Accounting Pronouncements - In June 1997, the Financial
Accounting Standards Board adopted Statements of Financial
Accounting Standards No. 130, Reporting Comprehensive Income,
which requires that an enterprise report, by major components and
as a single total, the change in its net assets during the period
from nonowner sources, and No. 131, Disclosures about Segments of
an Enterprise and Related Information, which establishes annual
and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services,
geographic areas, and major customers. Adoption of these
statements will not impact the Company's consolidated financial
position, results of operations or cash flows. Both statements
are effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
2. PLAN OF ACQUISITION AND MERGER
On November 13, 1997, the Company entered into a Plan of
Acquisition and Merger (Plan) with SierraWest Bancorp
(SierraWest). Under the terms of the agreement SierraWest will
acquire all the outstanding common stock of the Company in
exchange for shares of SierraWest's common stock at an exchange
ratio defined by a formula in the Plan. The merger, which is
expected to close early in the second quarter of 1998, is subject
to the approval of each company's shareholders and various
regulatory agencies. The transaction is expected to be accounted
for as a pooling of interest.
3. RESTRICTED CASH BALANCES
Aggregate reserves of $616,000 and $750,000 in the form of
deposits with the Federal Reserve Bank were maintained to satisfy
Federal Reserve requirements at December 31, 1997 and 1996.
4. SECURITIES
At December 31, the amortized cost of securities available
for sale and their approximate fair value were as follows:
<TABLE>
<CAPTION>
Carrying
Gross Gross Amount
Amortized Unrealized Unrealized (Approximate
Cost Gains Losses Fair Value)
December 31, 1997:
<S> <C> <C> <C> <C>
Securities of U.S. government
agencies and corporations $43,498,000 $ 67,000 $375,000 $43,190,000
FHLB stock 592,000 592,000
Obligations of states and
political subdivisions 4,590,000 126,000 33,000 4,683,000
----------- -------- -------- -----------
$48,680,000 $193,000 $408,000 $48,465,000
=========== ======== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Carrying
Gross Gross Amount
Amortized Unrealized Unrealized (Approximate
Cost Gains Losses Fair Value)
December 31, 1996:
<S> <C> <C> <C> <C>
Securities of U.S. government
agencies and corporations $47,887,000 $ 27,000 $519,000 $47,395,000
FHLB stock 490,000 490,000
Obligations of states and
political Subdivisions 4,667,000 65,000 48,000 4,684,000
----------- -------- -------- -----------
$53,044,000 $ 92,000 $567,000 $52,569,000
=========== ======== ======== ===========
</TABLE>
Gross realized gains on sales of securities available for
sale were approximately $42,000 in 1997 and $88,000 in 1996.
Gross realized losses on sales of available for sale securities
were approximately $5,000 in 1996. There were no gross realized
losses on sales of available for sale securities in 1997.
In November 1995, the FASB issued additional implementation
guidance regarding the previously issued SFAS No. 115. In
accordance with this guidance and prior to December 31, 1995,
companies were allowed a one-time reassessment of their
classification of securities and were required to account for any
resulting transfers at fair value. Transfers from the held to
maturity category that result from this one-time reassessment
will not call into question the intent to hold other securities
to maturity in the future. The Company transferred approximately
$12,087,000 of securities from held to maturity to available for
sale to allow the Company greater flexibility in managing its
interest rate risk and liquidity. Available for sale securities
were adjusted to fair value and stockholders' equity was
increased by $274,000 net of income taxes of $198,000.
Scheduled maturities of securities available for sale (other
than FHLB stock with a carrying value of approximately $592,000)
at December 31, 1997, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the
right to prepay with or without penalty.
<TABLE>
<CAPTION>
Available for sale securities
-------------------------------
Approximate
Fair Value
Amortized (Carrying
Cost Amount)
<S> <C> <C>
Due in one year or less $ 6,286,000 $ 6,291,000
Due after one year through five years 12,793,000 12,857,000
Due after five years through 10 years 3,495,000 3,542,000
Due after 10 years 25,514,000 25,183,000
----------- -----------
$48,088,000 $47,873,000
=========== ===========
</TABLE>
At December 31, 1997 and 1996, securities having carrying
amounts of approximately $11,155,000 and $10,171,000 were pledged
to secure public deposits and short-term borrowings and for other
purposes required by law or contract.
5. LOANS RECEIVABLE, IMPAIRED LOANS AND ALLOWANCE FOR LOAN
LOSSES
The Company's loan customers are located primarily in Solano
County and neighboring communities. At December 31, 1997, 75% of
the Company's loan portfolio was for real estate, of which 80%
was for commercial projects and 20% was for residential
properties. Real estate construction loans comprise 5% of the
loan portfolio with consumer and other, and commercial loans
accounting for the remaining 11% and 9%, respectively. The real
estate portfolio consists of approximately 86% variable rate
loans and approximately 14% fixed rate loans. Substantially all
loans are collateralized. Generally, real estate loans are
secured by real property. Commercial and other loans are secured
by bank deposits or business or personal assets. The Company's
policy for requiring collateral reflects the Company's analysis
of the borrower, the borrower's industry and the economic
environment in which the loan would be granted. The loans are
expected to be repaid from cash flows or proceeds from the sale
of selected assets of the borrower.
The major classifications of loans at December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Commercial $ 10,348,000 $ 8,926,000
Real estate construction 6,042,000 6,408,000
Real estate 90,778,000 82,246,000
Consumer and other 13,894,000 16,045,000
------------ ------------
121,062,000 113,625,000
Less:
Allowance for loan losses 1,242,000 1,101,000
Deferred loan fees 498,000 599,000
------------ ------------
Net loans receivable $119,322,000 $111,925,000
============ ============
</TABLE>
Changes in the allowance for loan losses for the years ended
December 31 are summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $1,101,000 $1,158,000 $1,108,000
Provision for loan losses 319,000 411,000 324,000
Loans charged off (224,000) (496,000) (282,000)
Recoveries 46,000 28,000 8,000
---------- ---------- ----------
Balance at end of year $1,242,000 $1,101,000 $1,158,000
========== ========== ==========
</TABLE>
At December 31, 1997 and 1996, the recorded investment in
loans for which impairment has been recognized was $2,454,000 and
$2,648,000. The total allowance for loan losses related to these
loans was $443,000 and $278,000 at December 31, 1997 and 1996.
For the years ended December 31, 1997 and 1996, the average
recorded investment in loans for which impairment has been
recognized was approximately $2,642,000 and $1,218,000. During
the portion of the year that the loans were impaired, the Company
recognized interest income of approximately $104,000 and $28,000
for cash payments received in 1997 and 1996.
Included in the impaired loans are nonperforming loans at
December 31 as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Nonaccrual loans $ 966,000 $ 70,000
Loans 90 days past due but
still accruing interest 194,000 67,000
---------- --------
Total nonaccrual and 90 days
past due loans $1,160,000 $137,000
========== ========
</TABLE>
If interest on nonaccrual loans had been accrued, such
income would have been approximately $74,000, $7,000, and
$203,000 in 1997, 1996 and 1995. At December 31, 1997, there
were no commitments to lend additional funds to borrowers whose
loans were classified as nonaccrual or whose loans have been
modified.
6. PREMISES AND EQUIPMENT
The major classifications of premises and equipment at
December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Bank premises $ 132,000 $ 132,000
Furniture, fixtures and equipment 2,318,000 2,222,000
Leasehold improvements 2,872,000 2,752,000
---------- ----------
5,322,000 5,106,000
Less accumulated depreciation
and amortization 3,273,000 2,822,000
---------- ----------
$2,049,000 $2,284,000
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1997,
1996 and 1995 amounted to $464,000, $431,000 and $422,000,
respectively.
7. INVESTMENT IN REAL ESTATE DEVELOPMENT
In 1984, the Bank formed a wholly-owned subsidiary, Conpac
Development Corporation (Conpac), to engage in real estate
development activities.
Conpac's current project consists of one commercial property
development, Pacific Plaza, located in Vacaville, California.
The Pacific Plaza East portion of the project, consisting of a
32,000 square-foot office building, was completed and commenced
operations in 1992. The Pacific Plaza West portion is being
considered for development. At December 31, 1997, the Company
occupied approximately 14% of the Pacific Plaza East project for
use as its corporate offices. All significant intercompany
transactions, including rental income for the Company's corporate
offices, are eliminated in consolidation and excluded from the
schedule of future minimum rentals.
A summary of certain financial information for Conpac, after
consolidation, is as follows:
<TABLE>
<CAPTION>
1997 1996 1997 1996 1995
<S> <C> <C> <S> <C> <C> <C>
Investment in Pacific Plaza:
Land $1,314,000 $1,366,000 Rental income - net $503,000 $542,000 $481,000
Building and improvements 3,459,000 3,459,000
Less accumulated Operating expenses 262,000 185,000 168,000
depreciation (542,000) (426,000) Depreciation
---------- ---------- expense 115,000 115,000 100,000
Total investment in Pacific -------- -------- --------
Plaza 4,231,000 4,399,000
Other 93,000 84,000 Total expenses 377,000 300,000 268,000
---------- ---------- -------- -------- --------
Total investment in real estate Income from real
development $4,324,000 $4,483,000 estate development $126,000 $242,000 $213,000
========== ========== ======== ======== ========
</TABLE>
The future minimum rental income under long-term
noncancelable leases for the Pacific Plaza East project are as
follows:
<TABLE>
<S> <C>
1998 $ 241,000
1999 117,000
2000 88,000
2001 88,000
2002 67,000
-----------------
Total $ 601,000
=================
</TABLE>
No interest costs were capitalized in 1997 or 1996 in
connection with the Bank's development activities.
A provision of the Federal Deposit Insurance Corporation
Improvement Act (FDICIA) has impacted the Bank's ability to
continue to engage in certain real estate development activities.
Beginning in December 1992, state banks and their subsidiaries
may not engage, as principal, in activities not permissible to
national banks and their subsidiaries. Any bank engaged in such
activities must divest itself of these investments by December
1996, and was required to file a divestiture plan with the FDIC
by February 5, 1993. Generally national banks may not engage in
real estate development, although they can own property used or
to be used, in part, as a banking facility. During 1993, the
Bank moved its corporate offices to Pacific Plaza East which is
owned by Conpac. The Bank occupies approximately 14% of the
leasable office space. Since ownership of banking premises is
permissible for a national bank subsidiary, a divestiture plan is
not required for Pacific Plaza East. The Bank, through Conpac,
currently plans to retain its ownership of Pacific Plaza East.
The Bank's divestiture plan, which was not objected to by
the FDIC, states that the Bank and Conpac plan to develop and
retain ownership of Pacific Plaza West.
8. OTHER REAL ESTATE OWNED
Other real estate owned at December 31, consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Real estate acquired through
foreclosure and held for sale $96,000 $219,000
Less - allowance for other
real estate owned losses (69,000)
------- --------
Other real estate owned - net $96,000 $150,000
======= ========
</TABLE>
A summary of the activity in the allowance for other real
estate owned losses is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Balance at beginning of year $69,000 $161,000
Charge-offs (69,000) (92,000)
------- --------
Balance at end of year $ $ 69,000
======= ========
</TABLE>
9. DEPOSITS
The aggregate amount of time certificates of deposit in
denominations of $100,000 or more was $22,230,000 and $20,881,000
at December 31, 1997 and 1996. Interest expense incurred on
certificates of deposit of $100,000 or more was approximately
$1,154,000, $1,049,000, and $873,000, for the years ended
December 31, 1997, 1996 and 1995.
At December 31, 1997, the scheduled maturities of
certificates of deposit are as follows:
<TABLE>
<S> <C>
1998 $ 55,320,000
1999 1,685,000
2000 89,000
2001 851,000
2002 and thereafter 1,894,000
------------
Total $ 59,839,000
============
</TABLE>
10. OTHER BORROWED FUNDS
Other borrowed funds at December 31, 1997 and 1996 represent
amounts borrowed from the FHLB. Borrowings require monthly
interest payments with the principal payable at maturity.
Amounts consist of the following:
<TABLE>
<S> <C>
Borrowing from the FHLB, matures March 26, 2001,
interest at 6.44% $ 750,000
Borrowing from the FHLB, matures April 23, 2003,
interest at 6.92% 1,900,000
----------
Total $2,650,000
==========
</TABLE>
11. CONVERTIBLE SUBORDINATED DEBENTURES
During 1993, the Bank sold $4,025,000 of convertible
subordinated variable rate debentures due April 30, 2003, with an
initial and minimum interest rate of 8%. During 1996, as part of
the plan of reorganization and merger of the Company and the Bank,
the convertible subordinated debentures were assumed by the
Company under the same terms and provisions as previously entered
into by the Bank. Interest is payable, as to the six months
beginning on any interest rate payment date, on each April 1 and
October 1 based on a variable rate of 1.5% over the average yield
on the 10-year U.S. Treasury bond (rounded down to the nearest
1/8%) for the month ending two months prior to the month of the
interest payment, subject to a ceiling of 10%. The debentures
are convertible, at any time prior to maturity, into shares of
the $.10 par value common stock of the Company at a conversion
prices of $12.75 per share (subject to adjustment). During 1997,
$1,132,000 (net of $90,000 in debt issuance costs) of the debt
was converted to 95,839 shares of common stock at $12.75 per
share. The debentures are currently redeemable at the Company's
option, in whole or from time to time in part, at a rate of 104%
of principal value until March 31, 1998 and at a rate of 100% of
principal value thereafter. The payment of principal and
interest on the debentures is subordinated in right of payment in
full to senior indebtedness of the Company which includes
obligations of the Company to its depositors and general
creditors.
12. INCOME TAXES
The provision for income taxes for the years ended December
31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Currently payable:
Federal $ 730,000 $529,000 $667,000
State 304,000 257,000 249,000
---------- -------- --------
Total 1,034,000 786,000 916,000
---------- -------- --------
Deferred:
Federal (49,000) 98,000 (259,000)
State (19,000) 34,000 (9,000)
---------- -------- --------
Total (68,000) 132,000 (268,000)
---------- -------- --------
Provision for income taxes $ 966,000 $918,000 $648,000
========== ======== ========
</TABLE>
A reconciliation of the federal statutory tax rate to the
effective tax rate on income is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal statutory tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 7.8 7.7 7.4
Effect of tax exempt income (2.9) (4.2) (10.5)
Merger-related costs 1.5
Other (1.2) (1.4) (0.3)
----- ----- -----
40.2% 37.1% 31.6%
===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax reporting purposes. The significant components of
the Bank's net deferred tax asset (included in other assets) at
December 31, were as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Unrealized loss on securities
available for sale $ 91,000 $199,000
Allowance for loan losses 393,000 349,000
State taxes 55,000 59,000
Depreciation (12,000) 70,000
Deferred compensation 67,000 42,000
Securities and loans marked
to market for tax purposes (83,000) (179,000)
Other 4,000 15,000
-------- --------
$515,000 $555,000
======== ========
</TABLE>
13. STOCK BASED COMPENSATION
During 1996, as part of the plan of reorganization and
merger of the Company and the Bank, the two stock option plans of
the Bank were assumed by the Company under the same terms and
provisions as previously adopted by the Bank. Under the plans,
options are exercisable at prices equal to the fair market value
as determined in good faith by the Company's board of directors
at the date of the grant. The Company has reserved 200,000
shares of common stock for the 1993 stock option plan. No
additional grants may be made under the 1990 plan, however,
options for 47,486 shares remain outstanding. Options become
exercisable in approximately one-third increments during each
year subsequent to the date of grant. Options held by executives
and directors must be fully exercised by the end of the tenth
year, while all remaining options must be exercised by the end of
the fifth year. A summary of stock options follows:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise Price
<S> <C> <C>
Outstanding, January 1, 1995 140,367 10.17
Granted 3,500 14.50
Exercised (10,686) 10.65
Expired or canceled (333) 10.45
-------
Outstanding, December 31, 1995 132,848 10.49
Granted 4,000 14.81
Exercised (2,094) 6.53
Expired or canceled (500) 16.00
-------
Outstanding December 31, 1996 134,254 10.67
Granted 4,500 16.71
Exercised (19,679) 10.40
Expired or canceled (1,000) 16.00
-------
Outstanding, December 31, 1997 118,075 10.90
=======
</TABLE>
Information about stock options outstanding at December 31,
1997 is summarized as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Average Exercise Exercise
Range of Remaining Price of Price of
Exercise Options Contractual Options Options Options
Prices Outstanding Life (Years) Outstanding Exercisable Exercisable
<S> <C> <C> <C> <C> <C>
$8.88-$9.50 24,691 2.20 $8.98 24,691 $8.98
$10.45-$11.50 81,219 4.70 $10.84 81,219 $10.84
$13.75-$14.50 6,665 7.05 $14.02 4,667 $13.99
$16.00-$17.13 5,500 5.89 $16.58 1,500 $16.13
</TABLE>
As discussed in Note 1, the Company continues to
account for its stock-based awards using the intrinsic value
method in accordance with APB No. 25, Accounting for Stock Issued
to Employees and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial
statements for employee stock arrangements. The required pro
forma disclosures of the effect of stock-based compensation on
net income and earnings per share using the fair value method in
accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, are not presented as the differences are not
material.
14. PROFIT SHARING PLAN
The Company has a profit sharing plan (Plan) for the
employees of the Company under which annual contributions are at
the discretion of the Board of Directors. Substantially all of
the Company's employees are participants in the Plan. The total
contribution made to the Plan by the Company in 1997, 1996 and
1995 was approximately $143,000, $132,000, and $117,000.
15. SALARY CONTINUATION PLAN
The Company has a Salary Continuation Plan covering certain
of its senior officers. Under this plan, the officers or their
beneficiaries will receive monthly payments after retirement or
if earlier, death. The Company has accrued $55,000, $41,000 and
$32,000 as compensation expense in 1997, 1996 and 1995,
respectively, under this plan. To protect the Company in the
event of death prior to retirement, the Company has secured life
insurance on the lives of the covered officers.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters
of credit, and interest rate swaps. Those instruments involve,
to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the statement of financial
position. The contract or notional amounts of those instruments
reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for
on-balance-sheet instruments. For swap transactions, notional
principal amounts often are used to express the volume of these
transactions, but the amounts subject to credit risk are much
smaller because the Company enters into matched swap agreements
that are settled periodically on a net cash basis. The Company
controls the credit risk of its interest rate swap agreements
through credit approvals, limits, and monitoring procedures.
The following table discloses the contract or notional
amount of off-balance sheet financial instruments at December 31,
1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Financial instruments whose
contract amounts represent credit risk:
Commitments to extend credit $18,191,000 $14,370,000
Standby letters of credit 532,000 649,000
Financial instruments whose notional
or contract amounts exceed the amount
of credit risk:
Interest rate swap agreements 10,900,000 10,000,000
</TABLE>
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by
the Company upon extension of credit is based on management's
credit evaluation of each customer. Collateral held varies but
may include real property, bank deposits, debt securities, equity
securities, or business assets.
Standby letters of credit are conditional commitments issued
by the Company to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support
inventory purchases by the Company's commercial and technology
division customers, and such guarantees are typically short-term.
The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan
facilities to customers and the Company accordingly uses
evaluation and collateral requirements similar to those for loan
commitments.
The Company has entered into interest rate swap agreements
with the FHLB as described below. The effect of the $10,000,000
notional amount agreement was to shorten the lag time in interest
rate fluctuations from the 11th District Cost of Funds Index
(COFI) to the treasury bill to enable the Company to better match
the timing of the repricing of certain liabilities. The effect
of the $900,000 notional amount agreement was to lock in an
interest rate spread on a fixed interest rate loan of a similar
amount and term.
<TABLE>
<CAPTION>
Original
Notional Issue Original Company Company
Amount Date Term Pays Receives
<S> <C> <C> <C> <C>
$10,000,000 5-24-1996 Five years COFI plus .65% Three month
(variable rate) treasury bill
(variable rate)
$900,000 1-24-1997 Seven years 6.74% (fixed One year constant
rate) maturity treasury
index (variable
rate)
</TABLE>
Cash requirements under the swap agreements have not been
material to the Company's financial position or results of
operations. The credit risk on the swap agreements is estimated
to be the replacement cost for those agreements in a gain
position in the event of nonperformance by the FHLB. At December
31, 1997 and 1996, there was no credit risk associated with these
agreements.
17. COMMITMENTS AND CONTINGENCIES
Branch facilities and certain equipment are rented under
long-term operating leases which provide for future minimum
rental payments as follows:
<TABLE>
<CAPTION>
Year Ended December 31 Amount
<S> <C>
1998 $ 572,000
1999 498,000
2000 473,000
2001 482,000
2002 412,000
Thereafter 1,889,000
-------------
$ 4,326,000
=============
</TABLE>
Renewal privileges exist on certain leases. Total rent
expense amounted to $576,000, $536,000, and $534,000, for the
years ended December 31, 1997, 1996, and 1995.
The Company is involved in a number of legal actions arising
from normal business activities. Management, upon the advice of
legal counsel, believes that the ultimate resolution of these
actions will not have a material adverse effect on the financial
statements.
18. RELATED PARTY TRANSACTIONS
The Bank has made loans to directors and executive officers
and companies with which they are affiliated. These loans were
made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable
transactions with unrelated parties. A summary of the activity
for the years ended December 31, 1997 and 1996 is as follows
(renewals are not reflected as either new loans or repayments):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Balance at beginning of year $3,410,000 $3,376,000
Borrowings 246,000 433,000
Principal repayments (322,000) (399,000)
---------- ----------
Balance at end of year $3,334,000 $3,410,000
========== ==========
</TABLE>
19. REGULATORY MATTERS AND DIVIDENDS
The Company and the Bank are subject to various regulatory
capital requirements administered by federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory - and, possibly, additional discretionary - actions by
regulators that, if undertaken, could have a direct material
effect on the Company's consolidated financial statements. Under
capital adequacy guidelines, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off-
balance sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and the
Bank's prompt corrective action classification are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios (set forth in the table below) of
total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as
defined) to average assets (as defined). Management believes, as
of December 31, 1997, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.
The most recent notifications from the Federal Deposit
Insurance Corporation for the Bank as of December 31, 1997 and
1996, categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum
Total risk-based, Tier I risk-based and Tier I leverage ratios as
set forth in the table. There are no conditions or events since
that notification that management believes have changed the
Bank's category.
The Company and the Bank's actual capital amounts and ratios
are also presented, respectively, in the following tables.
<TABLE>
<CAPTION>
Company: For Capital
Actual Adequacy Purposes
--------------------- ----------------------
Minimum Minimum
Amount Ratio Amount Ratio
As of December 31, 1997:
<S> <C> <C> <C> <C>
Total capital
(to risk weighted assets) $19,084,000 13.64% $11,195,000 8.00%
Tier I capital
(to risk weighted assets) $15,374,000 10.99% $ 5,597,000 4.00%
Tier I capital
(to average assets) $15,374,000 7.91% $ 7,772,000 4.00%
</TABLE>
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
--------------------- ----------------------
Minimum Minimum
Amount Ratio Amount Ratio
As of December 31, 1996:
<S> <C> <C> <C> <C>
Total capital
(to risk weighted assets) $17,895,000 13.55% $10,564,000 8.0%
Tier I capital
(to risk weighted assets) $13,104,000 9.92% $ 5,282,000 4.0%
Tier I capital
(to average assets) $13,104,000 7.04% $ 7,444,000 4.0%
</TABLE>
<TABLE>
<CAPTION>
Bank: To Be
Categorized as Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- --------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital
(to risk weighted assets) $18,431,000 13.21% $11,160,000 8.00% $13,950,000 10.00%
Tier I capital
(to risk weighted assets) $13,521,000 9.69% $ 5,580,000 4.00% $ 8,370,000 6.00%
Tier I capital
(to average assets) $13,521,000 6.97% $ 7,755,000 4.00% $ 9,694,000 5.00%
As of December 31, 1996:
Total capital
(to risk weighted assets) $17,416,000 13.22% $10,540,000 8.0% $13,174,000 10.0%
Tier I capital
(to risk weighted assets) $12,647,000 9.60% $ 5,270,000 4.0% $ 7,905,000 6.0%
Tier I capital
(to average assets) $12,647,000 6.81% $ 7,407,000 4.0% $ 9,286,000 5.0%
</TABLE>
Under federal and California state banking laws, dividends
paid by the Bank to the Company in any calendar year may not
exceed certain limitations without the prior written approval of
the appropriate bank regulatory agency. At December 31, 1997,
the amount available for such dividends without prior written
approval was approximately $3,317,000. Similar restrictions
apply to the amounts and terms of loans, advances and other
transfers of funds from the Bank to the Company.
Dividends subsequent to year-end - On January 20, 1998, the
Board of Directors declared a $.15 per share cash dividend
payable February 17, 1998 to shareholders of record on February
3, 1998.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments requires certain disclosures regarding the estimated
fair value of financial instruments for which it is practicable
to estimate. Although management uses its best judgment in
assessing fair value, there are inherent weaknesses in any
estimating technique that may be reflected in the fair values
disclosed. The fair value estimates are made at a discrete point
in time based on relevant market data, information about the
financial instruments, and other factors. Estimates of fair
value of instruments without quoted market prices are subjective
in nature and involve various assumptions and estimates that are
matters of judgment. Changes in the assumptions used could
significantly affect these estimates. Fair value has not been
adjusted to reflect changes in market conditions subsequent to
December 31, 1997, therefore, estimates presented herein are not
necessarily indicative of amounts which could be realized in a
current transaction.
The following estimates and assumptions were used as of
December 31, 1997 and 1996 to estimate the fair value of each
class of financial instruments for which it is practicable to
estimate that value.
(a) Cash and Cash Equivalents - The carrying amount
represents a reasonable estimate of fair value.
(b) Securities - Available for sale securities are carried
at market based on quoted market prices, if available. If a
quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
(c) Loans Receivable - Commercial loans, residential
mortgages, and construction loans, are segmented by fixed and
adjustable rate interest terms, by maturity, and by performing
and nonperforming categories.
The fair value of performing loans is estimated by
discounting contractual cash flows using the current interest
rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Assumptions regarding credit risk, cash flow, and discount rates
are judgmentally determined using available market information.
The fair value of nonperforming loans and loans
delinquent more than 30 days is estimated by discounting
estimated future cash flows using current interest rates with an
additional risk adjustment reflecting the individual
characteristics of the loans.
(d) Deposit Liabilities - Noninterest bearing and interest
bearing demand deposits and savings accounts are payable on
demand and are assumed to be at fair value. Time deposits are
based on the discounted value of contractual cash flows. The
discount rate is based on rates currently offered for deposits of
similar size and remaining maturities.
(e) Other Borrowed Funds - The fair value of other borrowed
funds is estimated by discounting the contractual cash flows
using the current interest rate at which similar borrowings for
the same remaining maturities could be made.
(f) Convertible Subordinated Debentures - The carrying
amount represents a reasonable estimate of fair value.
(g) Commitments to Fund Loans/Standby Letters of Credit -
The fair values of commitments are estimated using the fees
currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. The differences between
the carrying value of commitments to fund loans or stand by
letters of credit and their fair value is not significant and
therefore not included in the following table.
(h) Interest Rate Swap Agreements - The fair value of the
interest rate swap agreements is estimated by discounting the
contractual cash flows using the interest rates in effect at year
end over the remaining maturity.
The estimated fair values of the Company's financial
instruments as of December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 19,064,000 $ 19,064,000 $ 16,940,000 $ 16,940,000
Available for sale securities 48,465,000 48,465,000 52,569,000 52,569,000
Loans receivable 121,062,000 118,884,000 113,625,000 112,499,000
FINANCIAL LIABILITIES:
Deposits 174,732,000 174,683,000 170,343,000 170,271,000
Other borrowed funds 2,650,000 2,533,000 2,650,000 2,606,000
Convertible subordinated debentures 2,468,000 2,468,000 3,690,000 3,690,000
Credit Fair Credit Fair
Risk Value Risk Value
OFF BALANCE SHEET ITEMS:
Interest rate swap agreements:
Pay variable/receive variable - $(106,000) - $(68,000)
Pay fixed/receive variable - (31,000) - -
</TABLE>
21. CONDENSED FINANCIAL INFORMATION OF CALIFORNIA COMMUNITY
BANCSHARES CORPORATION
The condensed financial statements of California Community
Bancshares Corporation are presented below:
<TABLE>
<CAPTION>
CALIFORNIA COMMUNITY BANCSHARES CORPORATION
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------------
1997 1996
<S> <C> <C>
Assets:
Cash and cash equivalents $ 168,000 $ 94,000
Investments in subsidiary 13,993,000 12,913,000
Note receivable from Bank 3,669,000 3,669,000
Other assets 455,000 478,000
----------- -----------
Total $18,285,000 $17,154,000
=========== ===========
Liabilities and shareholders' equity:
Other liabilities $ 64,000 $ 95,000
Convertible subordinated debentures 2,468,000 3,690,000
Shareholders' equity:
Common stock, no par value: authorized,
2,000,000 shares; outstanding,
1,110,036 and 994,519 as of
December 31, 1997 and 1996 12,561,000 11,135,000
Retained earnings 3,317,000 2,510,000
Net unrealized loss on securities
available for sale, net of tax effect (125,000) (276,000)
----------- -----------
Total $18,285,000 $17,154,000
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 29, 1996
(DATE OF MERGER WITH BANK) TO DECEMBER 31, 1996
- -----------------------------------------------------------
1997 1996
<S> <C> <C>
INCOME:
Dividends from subsidiary $ 750,000 $ 710,000
Interest income on note
receivable from Bank 295,000 251,000
---------- ----------
Total income 1,045,000 961,000
EXPENSE:
Convertible subordinated
debenture interest expense 223,000 254,000
Other 314,000 120,000
---------- ----------
Total expense 537,000 374,000
Income before equity in
undistributed income of subsidiary 508,000 587,000
Equity in undistributed
income of subsidiaries 931,000 972,000
---------- ----------
Net income $1,439,000 $1,559,000
========== ==========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM FEBRUARY 29, 1996
(DATE OF MERGER WITH BANK) TO DECEMBER 31, 1996
- -----------------------------------------------------------
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,439,000 $1,559,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed income
of subsidiary (931,000) (972,000)
Effect of changes in:
Other assets 25,000 (478,000)
Other liabilities (31,000) 95,000
---------- ----------
Net cash provided by operating
activities 502,000 204,000
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (632,000) (442,000)
Cash proceeds from stock
options exercised 204,000
Increase in note receivable from Bank (3,669,000)
Convertible subordinated debentures 4,025,000
Other (24,000)
---------- ----------
Net cash used in financing activities (428,000) (110,000)
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 74,000 94,000
CASH AND CASH EQUIVALENTS:
Beginning of year 94,000 -
---------- ----------
End of year $ 168,000 $ 94,000
---------- ----------
ADDITIONAL INFORMATION:
Common stock issued on conversion
of debentures net of debenture
offering costs of $90,000 and
$28,000 in 1997 and 1996,
respectively $1,132,000 $ 307,000
---------- ----------
Cash payments for interest
paid on convertible
subordinated debentures $ 248,000 $ 180,000
---------- ----------
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CALIFORNIA COMMUNITY BANCSHARES CORPORATION
- --------------------------------------------
Registrant
By:/s/ Walter O. Sunderman
- ----------------------------------------
Walter O. Sunderman
President and Chief Executive Officer
(Principal Executive Officer)
By:/s/ Andrew S. Popovich
- ----------------------------------------
Andrew S. Popovich
Executive Vice President and Chief Administrative Officer
(Principal Financial and Accounting Officer)
Dated: March 17, 1998
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.
NAME AND SIGNATURE: TITLE DATE
- ------------------------- -------- --------------
/s/ Dorce Daniel Director March 17, 1998
- -------------------------
DORCE DANIEL
/s/ William J. Hennig Director March 17, 1998
- -------------------------
WILLIAM J. HENNIG
/s/ Bernard E. Moore Director March 17, 1998
- -------------------------
BERNARD E. MOORE
/s/ Melvin M. Norman Director March 17, 1998
- -------------------------
MELVIN M. NORMAN
/s/ Stephen R. Schwimer Director March 17, 1998
- -------------------------
STEPHEN R. SCHWIMER
/s/ Donald E. Sheahan Director March 17, 1998
- -------------------------
DONALD E. SHEAHAN
/s/ Gary E. Stein Director March 17, 1998
- -------------------------
GARY E. STEIN
/s/ Walter O. Sunderman Director March 17, 1998
- -------------------------
WALTER O. SUNDERMAN
/s/ John C. Usnick Director March 17, 1998
- -------------------------
JOHN C. USNICK
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
Exhibits
to
FORM 10 - KSB
ANNUAL REPORT
UNDER
SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------------
CALIFORNIA COMMUNITY BANCSHARES CORPORATION
<PAGE>
EXHIBIT 10.22 - FIRST AMENDMENT TO THE SUNDERMAN EMPLOYMENT
AGREEMENT AMENDED MAY 20, 1997
First Amendment To The Sunderman Employment Agreement
This First Amendment to the Employment Agreement amended and
restated effective August 1, 1993, between Continental Pacific
Bank ("Employer") and Walter O. Sunderman ("Employee"),
WITNESSETH:
WHEREAS, Employer and Employee desire to amend and to
clarify said Employment Agreement; and
WHEREAS, at the May 20, 1997 meeting of Employer's Board of
Directors, the Board approved certain amendments to said
Employment Agreement;
NOW, THEREFORE, Employer and Employee hereby agree to amend
said Employment Agreement effective May 20, 1997 as follows:
1. Section 6(b) - the first paragraph shall be revised
to read as follows:
"In the event this Agreement or Employee's employment
is terminated by Employer within either six (6) months prior to
or twelve (12) months after the occurrence of a Change of Control
(unless pursuant to paragraph 7(a)(i) through 7(a)(iv)), then
Employer or any assignee or successor in interest shall pay
Employee (in accordance with Section 6(e)) a benefit equal to two
(2) times Employee's then current or last set annual base salary
under Section 4(a) of this Agreement; provided, however, that any
benefits under Section 6(c) shall reduce the benefit hereunder.
The benefit under this Section 6(b) shall begin thirty (30) days
following the later of Employee's termination of employment or
the consummation of the Change of Control and shall be reduced by
any payment of the additional one (1) year of salary that is made
under Section 7(b)."
2. Section 6(c) shall be amended to read as follows:
"In the event a Change of Control occurs but neither
Employee's employment nor this Agreement is terminated within six
(6) months before consummation of the Change in Control as set
forth above, Employer or any assignee or successor in interest
shall pay Employee (in accordance with Section 6(e)) a benefit
equal to one (1) year of Employee's then current annual base
salary. The benefit under this Section 6(c) shall begin thirty
(30) days following the consummation of the Change of Control."
3. Section 6(d) shall be amended to read as follows:
"In the event a Change of Control of Employer is
consummated for a total purchase or investment price or value of
more than 1.75 times Employer's book value as of the end of the
month prior to announcement of the transaction calculated in
accordance with the FDIC's regulatory capital requirements but on
a fully diluted basis, Employer or any assignee or successor in
interest shall pay Employee (in accordance with Section 6(e)) an
additional incentive benefit calculated pursuant to the
provisions of Schedule 2 of this Agreement, fully incorporated by
this reference. The benefit under this Section 6(d) shall begin
thirty (30) days following the consummation of the Change of
Control."
4. Section 6(e) shall be renumbered as 6(f) and a new
section 6(e) shall be added to read as follows:
"(e) Any benefits payable under Sections 6(b), (c) and
(d) are intended to be an unfunded promise to pay such benefits
for purposes of the Internal Revenue Code of 1986, as amended.
When Employee accrues rights to any such benefits, Employer shall
establish a trust and contribute assets to such trust in an
amount equal to Employee's accrued benefits. Such trust shall be
a "grantor trust", of which Employer is the grantor, within the
meaning of subpart E, part I, subchapter J, chapter 1, subtitle A
of the Internal Revenue Code of 1986, as amended. The trustee
shall be mutually acceptable to Employer and Employee. The
principal of the trust, and any earnings thereon shall be held
separate and apart from other funds of Employer and shall be used
exclusively for the uses and purposes of Employee and general
creditors as herein set forth. Any assets held by the trust will
be subject to the claims of Employer's general creditors under
federal and state law in the event of insolvency as defined under
the trust. Employee and his beneficiaries shall have no
preferred claim on, or any beneficial ownership interest in, any
assets of the Trust. Any rights created under Sections 6(b),
(c), and (d) shall be unsecured contractual rights of Employee
and his beneficiaries against Employer.
Benefits payable under Sections 6(b), (c) and (d) plus
interest shall be paid in monthly installments of $6,000.00
over a period of at least thirty-six (36) months and
until all amounts held on behalf of Employee are paid (i.e.,
benefits plus interest). The trustee shall invest any amounts
held in certificates of deposit offered by insured institutions
or U.S. government securities or similar securities of other
institutions. In making such investments, the trustee shall
maximize the earnings of the trust taking into account its
liquidity needs."
5. Section 6(f) as renumbered shall be revised by
replacing the period of the last sentence with:
", and (iii) Employee shall have the right to elect, if
permitted under section 280G of the Code, which payments included
as Total Payments shall be reduced in order to comply with the
limit imposed by section 280G of the Code."
IN WITNESS WHEREOF, this First Amendment is executed as of
June 17, 1997.
Continental Pacific Bank Employee
By: /s/ Bernard E. Moore /s/ Walter O. Sunderman
Its: Chairman
<PAGE>
EXHIBIT 10.23 - FIRST AMENDMENT TO THE POPOVICH EMPLOYMENT
AGREEMENT AMENDED MAY 20, 1997
First Amendment To The Popovich Employment Agreement
This First Amendment to the Employment Agreement amended and
restated effective August 1, 1993, between Continental Pacific
Bank ("Employer") and Andrew S. Popovich ("Employee"),
WITNESSETH:
WHEREAS, Employer and Employee desire to amend and to
clarify said Employment Agreement; and
WHEREAS, at the May 20, 1997 meeting of Employer's Board of
Directors, the Board approved certain amendments to said
Employment Agreement;
NOW, THEREFORE, Employer and Employee hereby agree to amend
said Employment Agreement effective May 20, 1997 as follows:
1. Section 6(b) - the first paragraph shall be revised
to read as follows:
"In the event this Agreement or Employee's employment
is terminated by Employer within either six (6) months prior to
or twelve (12) months after the occurrence of a Change of Control
(unless pursuant to paragraph 7(a)(i) through 7(a)(iv)), then
Employer or any assignee or successor in interest shall pay
Employee (in accordance with Section 6(e)) a benefit equal to two
(2) times Employee's then current or last set annual base salary
under Section 4(a) of this Agreement; provided, however, that any
benefits under Section 6(c) shall reduce the benefit hereunder.
The benefit under this Section 6(b) shall begin thirty (30) days
following the later of Employee's termination of employment or
the consummation of the Change of Control and shall be reduced by
any payment of the additional six (6) months salary that is made
under Section 7(b)."
2. Section 6(c) shall be amended to read as follows:
"In the event a Change of Control occurs but neither
Employee's employment nor this Agreement is terminated within six
(6) months before consummation of the Change in Control as set
forth above, Employer or any assignee or successor in interest
shall pay Employee (in accordance with Section 6(e)) a benefit
equal to six (6) months of Employee's then current annual base
salary. The benefit under this Section 6(c) shall begin thirty
(30) days following the consummation of the Change of Control."
3. Section 6(d) shall be amended to read as follows:
"In the event a Change of Control of Employer is
consummated for a total purchase or investment price or value of
more than 1.75 times Employer's book value as of the end of the
month prior to announcement of the transaction calculated in
accordance with the FDIC's regulatory capital requirements but on
a fully diluted basis, Employer or any assignee or successor in
interest shall pay Employee (in accordance with Section 6(e)) an
additional incentive benefit calculated pursuant to the
provisions of Schedule 2 of this Agreement, fully incorporated by
this reference. The benefit under this Section 6(d) shall begin
thirty (30) days following the consummation of the Change of
Control."
4. Section 6(e) shall be renumbered as 6(f) and a new
section 6(e) shall be added to read as follows:
"(e) Any benefits payable under Sections 6(b), (c) and
(d) are intended to be an unfunded promise to pay such benefits
for purposes of the Internal Revenue Code of 1986, as amended.
When Employee accrues rights to any such benefits, Employer shall
establish a trust and contribute assets to such trust in an
amount equal to Employee's accrued benefits. Such trust shall be
a "grantor trust", of which Employer is the grantor, within the
meaning of subpart E, part I, subchapter J, chapter 1, subtitle A
of the Internal Revenue Code of 1986, as amended. The trustee
shall be mutually acceptable to Employer and Employee. The
principal of the trust, and any earnings thereon shall be held
separate and apart from other funds of Employer and shall be used
exclusively for the uses and purposes of Employee and general
creditors as herein set forth. Any assets held by the trust will
be subject to the claims of Employer's general creditors under
federal and state law in the event of insolvency as defined under
the trust. Employee and his beneficiaries shall have no
preferred claim on, or any beneficial ownership interest in, any
assets of the Trust. Any rights created under Sections 6(b),
(c), and (d) shall be unsecured contractual rights of Employee
and his beneficiaries against Employer.
Benefits payable under Sections 6(b), (c) and (d) plus
interest shall be paid in monthly installments of $8,000.00 over
a period of at least thirty-six (36) months and until all amounts
held on behalf of Employee are paid (i.e., benefits plus
interest). The trustee shall invest any amounts held in
certificates of deposit offered by insured institutions or U.S.
government securities or similar securities of other
institutions. In making such investments, the trustee shall
maximize the earnings of the trust taking into account its
liquidity needs."
5. Section 6(f) as renumbered shall be revised by
replacing the period of the last sentence with:
", and (iii) Employee shall have the right to elect, if
permitted under section 280G of the Code, which payments included
as Total Payments shall be reduced in order to comply with the
limit imposed by section 280G of the Code."
IN WITNESS WHEREOF, this First Amendment is executed as of
June 17, 1997.
Continental Pacific Bank Employee
By: /s/ Bernard E. Moore /s/ Andrew S. Popovich
Its: Chairman
<PAGE>
EXHIBIT 10.24 - FIRST AMENDMENT TO THE ALFSTAD EMPLOYMENT
AGREEMENT AMENDED MAY 20, 1997
First Amendment To The Alfstad Employment Agreement
This First Amendment to the Employment Agreement amended and
restated effective August 1, 1993, between Continental Pacific
Bank ("Employer") and Ronald A. Alfstad ("Employee"),
WITNESSETH:
WHEREAS, Employer and Employee desire to amend and to
clarify said Employment Agreement; and
WHEREAS, at the May 20, 1997 meeting of Employer's Board of
Directors, the Board approved certain amendments to said
Employment Agreement;
NOW, THEREFORE, Employer and Employee hereby agree to amend
said Employment Agreement effective May 20, 1997 as follows:
1. Section 6(b) - the first paragraph shall be revised
to read as follows:
"In the event this Agreement or Employee's employment
is terminated by Employer within either six (6) months prior to
or twelve (12) months after the occurrence of a Change of Control
(unless pursuant to paragraph 7(a)(i) through 7(a)(iv)), then
Employer or any assignee or successor in interest shall pay
Employee (in accordance with Section 6(e)) a benefit equal to two
(2) times Employee's then current or last set annual base salary
under Section 4(a) of this Agreement; provided, however, that any
benefits under Section 6(c) shall reduce the benefit hereunder.
The benefit under this Section 6(b) shall begin thirty (30) days
following the later of Employee's termination of employment or
the consummation of the Change of Control and shall be reduced by
any payment of the additional six (6) months salary that is made
under Section 7(b)."
2. Section 6(c) shall be amended to read as follows:
"In the event a Change of Control occurs but neither
Employee's employment nor this Agreement is terminated within six
(6) months before consummation of the Change in Control as set
forth above, Employer or any assignee or successor in interest
shall pay Employee (in accordance with Section 6(e)) a benefit
equal to six (6) months of Employee's then current annual base
salary. The benefit under this Section 6(c) shall begin thirty
(30) days following the consummation of the Change of Control."
3. Section 6(d) shall be renumbered as 6(e) and a new
section 6(d) shall be added to read as follows:
"(d) Any benefits payable under Sections 6(b) and (c)
are intended to be an unfunded promise to pay such benefits for
purposes of the Internal Revenue Code of 1986, as amended. When
Employee accrues rights to any such benefits, Employer shall
establish a trust and contribute assets to such trust in an
amount equal to Employee's accrued benefits. Such trust shall be
a "grantor trust", of which Employer is the grantor, within the
meaning of subpart E, part I, subchapter J, chapter 1, subtitle A
of the Internal Revenue Code of 1986, as amended. The trustee
shall be mutually acceptable to Employer and Employee. The
principal of the trust, and any earnings thereon shall be held
separate and apart from other funds of Employer and shall be used
exclusively for the uses and purposes of Employee and general
creditors as herein set forth. Any assets held by the trust will
be subject to the claims of Employer's general creditors under
federal and state law in the event of insolvency as defined under
the trust. Employee and his beneficiaries shall have no
preferred claim on, or any beneficial ownership interest in, any
assets of the Trust. Any rights created under Sections 6(b) and
(c) shall be unsecured contractual rights of Employee and his
beneficiaries against Employer.
Benefits payable under Sections 6(b) and (c) plus
interest shall be paid in monthly installments of $2,500.00 over
a period of at least thirty-six (36) months and until all amounts
held on behalf of Employee are paid (i.e., benefits plus
interest). The trustee shall invest any amounts held in
certificates of deposit offered by insured institutions or U.S.
government securities or similar securities of other
institutions. In making such investments, the trustee shall
maximize the earnings of the trust taking into account its
liquidity needs."
4. Section 6(e) as renumbered shall be revised by
replacing the period of the last sentence with:
", and (iii) Employee shall have the right to elect, if
permitted under section 280G of the Code, which payments included
as Total Payments shall be reduced in order to comply with the
limit imposed by section 280G of the Code."
IN WITNESS WHEREOF, this First Amendment is executed as of
June 17, 1997.
Continental Pacific Bank Employee
By: /s/ Bernard E. Moore /s/ Ronald A. Alfstad
Its: Chairman
<PAGE>
EXHIBIT 10.25 - FORM OF DIRECTORS INDEMNIFICATION AGREEMENT WITH
AMENDMENT DATED AS OF NOVEMBER 11, 1997
INDEMNIFICATION AGREEMENT
THIS AGREEMENT dated as of November 11, 1997 by and between
California Community Bancshares Corporation, a Delaware corporation
("CCBC") and ____________ ("Director").
W I T N E S S E T H:
WHEREAS, Director has served and continues to serve as a
director of CCBC;
WHEREAS, CCBC recognizes that service as a director of a
Delaware corporation involves certain economic risks: and
WHEREAS, CCBC wishes to indemnify Director against such risks
to the fullest extent permitted by applicable law.
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the parties hereby agree as follows:
1. Service as a Director. Director has heretofore served
as a director of CCBC and hereby agrees to serve as a director of
CCBC until such time as he resigns from such directorship or fails
to be renominated or reelected thereto.
2. Indemnification.
(a) CCBC hereby agrees to indemnify Director and hold him
harmless with respect to any liabilities, damages, expenses,
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any threatened or
actual claim, action, suit, proceeding or investigation brought
against Director by reason of the fact that he is or was a director
of CCBC or is or was serving at the request of CCBC as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, including, without
limitation, any subsidiary of CCBC, to the fullest extent now or
hereafter permitted by applicable law. With regard to any such
matter, it shall be presumed that Director was acting in good faith
within the scope of his employment or authority as he could
reasonably have perceived it under the circumstances and for a
purpose he could reasonably have believed under the circumstances
was in the best interests of CCBC, unless a judicial finding is
made to the contrary that is not reversed on appeal. Termination
of any proceeding by judgment, order, settlement or conviction or
upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that Director did not act in good
faith and in a manner which complied with the above standard.
(b) To the extent that Director is successful on the
merits or otherwise in defense of any proceeding referred to above,
or in defense of any claim, issue or matter therein, Director shall
be indemnified against expenses (including, but not limited to,
attorneys' fees at both trial and appellate levels) actually and
reasonably incurred by him in connection therewith, without the
necessity of an independent determination that Director met any
appropriate standard of conduct. CCBC agrees to pay all expenses
incurred by Director in defending a civil or criminal proceeding in
advance of the final disposition of such proceeding upon receipt of
an undertaking by or on behalf of Director to repay such amount if
he is ultimately found not to be entitled to indemnification
pursuant to the terms contained herein.
(c) If CCBC fails to provide indemnification or
advancement of expenses, or both, to Director and it is determined
by the court conducting any proceeding, or another court of
competent jurisdiction, that Director is entitled to
indemnification as required herein or is fairly and reasonably
entitled to indemnification or advancement of expenses, or both, in
view of all relevant circumstances, regardless of whether such
person met the standard of conduct set forth above, CCBC shall pay
to Director all expenses actually incurred, including attorneys'
fees, in obtaining court ordered indemnification or advancement of
expenses.
(d) Neither CCBC on the one hand nor Director on the other
hand may settle or compromise any claim covered by the
indemnification set forth herein without the prior written consent
of the other party hereto, provided that consent to such settlement
or compromise shall not be unreasonably withheld by either party.
(e) If any action or proceeding shall be brought or
asserted against Director in respect of which indemnification may
be sought hereunder, Director shall promptly notify CCBC in
writing, and CCBC shall have the right to assume the defense
thereof, including the employment of counsel reasonably
satisfactory to Director and the payment of all expenses. Director
shall have the right to employ separate counsel in any such action
and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of Director unless
(i) CCBC agrees to pay such fees and expenses, (ii) CCBC shall have
failed promptly to assume the defense of such action or proceeding
and employ counsel reasonably satisfactory to Director in any such
action or proceeding, or (iii) the named parties to any such action
or proceeding include both Director and CCBC and Director has
reasonably concluded based upon the advice of counsel that there
may be one or more legal defenses available to him which are
different from or additional to those available to CCBC, in which
case, if Director notifies CCBC in writing that he elects to employ
separate counsel at the expense of CCBC, CCBC shall not have the
right to assume the defense of such action or proceeding on behalf
of Director and shall pay all expenses including attorneys' fees
incurred by Director in such defense.
(f) Notwithstanding any other provision of this Agreement
to the contrary, CCBC shall not make any "prohibited
indemnification payment " or "reasonable payment," as such terms
are defined or used in Part 359 of the regulations of the Federal
Deposit Insurance Corporation, except in compliance with the
provisions of such part or any successor regulations thereto.
3. Applicable Law. As stated above, it is the
intention of CCBC that the indemnification provided herein be to
the fullest extent now or hereafter permitted by law. The
indemnification obligations of CCBC shall be governed by the laws
of the State of Delaware without regard to principles of conflicts
of laws thereof. In the event that any provision hereof is found
to be invalid under applicable law, then the scope of such
provision shall be narrowed so that it provides Director with
indemnification to the fullest extent permissible under applicable
law.
4. Notices. All notices or other communications that are
required or permitted hereunder shall be in writing and sufficient
if delivered personally or sent by overnight delivery, telegram or
telex or other facsimile transmission addressed as follows:
If to CCBC, to: California Community Bancshares
555 Mason Street, Suite 280
Vacaville, CA 95688-3985
Attn. Walter O. Sunderman
President & CEO
With a required copy to: Lillick & Charles LLP
2 Embarcadero Center, 27th Floor
San Francisco, CA 94111
Attn. Ronald W. Bachli
If to Director, to: __________________
__________________
__________________
Any notice hereunder shall be deemed delivered when actually
received at the address of such party set forth herein. Each party
shall have the right to change either the persons or addresses to
which notices and other communications shall be sent with respect
to such party by a notice to the other party in accordance with
this Section 4.
5. Miscellaneous. This Agreement constitutes the
entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements, understandings
or arrangements between them relating thereto; provided, that the
rights of the Director hereunder shall be in addition to all
rights of the Director under Article VII of the Bylaws of CCBC and
nothing contained herein shall be deemed to restrict any rights of
the Director under Article VII of the Bylaws of CCBC. This
Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors, distributees
and assigns. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document. Any
term or provision of this Agreement may be waived in writing at any
time by the party that is entitled to the benefits thereof and any
term or provision of this Agreement may be amended or supplemented
at any time by a written instrument signed by each party hereto.
IN WITNESS WHEREOF, the undersigned have executed this
Indemnification Agreement as of the date and year first written
above.
CALIFORNIA COMMUNITY
BANCSHARES CORPORATION
_______________________________
_______________________________
by:
Its:
<PAGE>
AMENDMENT TO INDEMNIFICATION AGREEMENT
WHEREAS, the undersigned has entered into an Indemnification
Agreement (the "Agreement") dated as November 11, 1997 with
California Community Bancshares ("CCBC"); and
WHEREAS, CCBC has entered into a Plan of Acquisition and Merger
dated as of November 13, 1997 with SierraWest Bancorp ("Sierra")
(the"Plan") pursuant to which CCBC will be merged with and into
Sierra, with Sierra as the surviving corporation (the "Merger");
and
WHEREAS, pursuant to Section 3.3(d) of the Plan Sierra agrees to
indemnify the Directors and Officers of CCBC, as defined therein,
, which indemnification continues for a period of four (4) years
from the Effective Date of the Merger; and
WHEREAS, in order to facilitate consummation of the Merger, the
undersigned desires to amend the Agreement, conditioned upon
consummation of the Merger, to provide that the Agreement,
consistent with Section 3.3(d) of the Plan, shall expire four years
from the Effective Date of the Merger.
NOW THEREFORE, the undersigned hereby agrees that, subject to
consummation of the Merger, the Agreement consistent with Section
3.3(d) of the Plan, shall expire four years from the Effective Date
of the Merger.
Other than specifically set forth herein, the Agreement
remains in full force and effect and this amendment will have no
effect if the Merger is not consummated
IN WITNESS WHEREOF, the undersigned have executed this Amendment to
Indemnification Agreement this 13 day of November, 1997.
CALIFORNIA COMMUNITY
BANCSHARES CORPORATION
_______________________________
_______________________________
by:
Its:
<PAGE>
EXHIBIT 10.26 - FORM OF OFFICERS INDEMNIFICATION AGREEMENT WITH
AMENDMENT DATED AS OF NOVEMBER 11, 1997
INDEMNIFICATION AGREEMENT
THIS AGREEMENT dated as of November 11, 1997 by and
between California Community Bancshares Corporation, a Delaware
corporation ("CCBC") and ______________ ("Officer").
W I T N E S S E T H:
WHEREAS, Officer has served and continues to serve as a
officer of CCBC;
WHEREAS, CCBC recognizes that service as a officer of a
Delaware corporation involves certain economic risks: and
WHEREAS, CCBC wishes to indemnify Officer against such risks
to the fullest extent permitted by applicable law.
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the parties hereby agree as follows:
1. Service as a Officer. Officer has heretofore served as
an Officer of CCBC and hereby agrees to serve as an Officer of CCBC
until such time as he resigns from such Office or fails to be
renominated or reelected thereto.
2. Indemnification.
(a) CCBC hereby agrees to indemnify Officer and hold him
harmless with respect to any liabilities, damages, expenses,
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any threatened or
actual claim, action, suit, proceeding or investigation brought
against Officer by reason of the fact that he is or was an Officer
of CCBC or is or was serving at the request of CCBC as an Officer,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, including, without
limitation, any subsidiary of CCBC, to the fullest extent now or
hereafter permitted by applicable law. With regard to any such
matter, it shall be presumed that Officer was acting in good faith
within the scope of his employment or authority as he could
reasonably have perceived it under the circumstances and for a
purpose he could reasonably have believed under the circumstances
was in the best interests of CCBC, unless a judicial finding is
made to the contrary that is not reversed on appeal. Termination
of any proceeding by judgment, order, settlement or conviction or
upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that Officer did not act in good faith
and in a manner which complied with the above standard.
(b) To the extent that Officer is successful on the
merits or otherwise in defense of any proceeding referred to above,
or in defense of any claim, issue or matter therein, Officer shall
be indemnified against expenses (including, but not limited to,
attorneys' fees at both trial and appellate levels) actually and
reasonably incurred by him in connection therewith, without the
necessity of an independent determination that Officer met any
appropriate standard of conduct. CCBC agrees to pay all expenses
incurred by Officer in defending a civil or criminal proceeding in
advance of the final disposition of such proceeding upon receipt of
an undertaking by or on behalf of Officer to repay such amount if
he is ultimately found not to be entitled to indemnification
pursuant to the terms contained herein.
(c) If CCBC fails to provide indemnification or
advancement of expenses, or both, to Officer and it is determined
by the court conducting any proceeding, or another court of
competent jurisdiction, that Officer is entitled to indemnification
as required herein or is fairly and reasonably entitled to
indemnification or advancement of expenses, or both, in view of all
relevant circumstances, regardless of whether such person met the
standard of conduct set forth above, CCBC shall pay to Officer all
expenses actually incurred, including attorneys' fees, in obtaining
court ordered indemnification or advancement of expenses.
(d) Neither CCBC on the one hand nor Officer on the other
hand may settle or compromise any claim covered by the
indemnification set forth herein without the prior written consent
of the other party hereto, provided that consent to such settlement
or compromise shall not be unreasonably withheld by either party.
(e) If any action or proceeding shall be brought or
asserted against Officer in respect of which indemnification may be
sought hereunder, Officer shall promptly notify CCBC in writing,
and CCBC shall have the right to assume the defense thereof,
including the employment of counsel reasonably satisfactory to
Officer and the payment of all expenses. Officer shall have the
right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of
such counsel shall be at the expense of Officer unless (i) CCBC
agrees to pay such fees and expenses, (ii) CCBC shall have failed
promptly to assume the defense of such action or proceeding and
employ counsel reasonably satisfactory to Officer in any such
action or proceeding, or (iii) the named parties to any such action
or proceeding include both Officer and CCBC and Officer has
reasonably concluded based upon the advice of counsel that there
may be one or more legal defenses available to him which are
different from or additional to those available to CCBC, in which
case, if Officer notifies CCBC in writing that he elects to employ
separate counsel at the expense of CCBC, CCBC shall not have the
right to assume the defense of such action or proceeding on behalf
of Officer and shall pay all expenses including attorneys' fees
incurred by Officer in such defense.
(f) Notwithstanding any other provision of this Agreement
to the contrary, CCBC shall not make any "prohibited
indemnification payment " or "reasonable payment," as such terms
are defined or used in Part 359 of the regulations of the Federal
Deposit Insurance Corporation, except in compliance with the
provisions of such part or any successor regulations thereto.
3. Applicable Law. As stated above, it is the
intention of CCBC that the indemnification provided herein be to
the fullest extent now or hereafter permitted by law. The
indemnification obligations of CCBC shall be governed by the laws
of the State of Delaware without regard to principles of conflicts
of laws thereof. In the event that any provision hereof is found
to be invalid under applicable law, then the scope of such
provision shall be narrowed so that it provides Officer with
indemnification to the fullest extent permissible under applicable
law.
4. Notices. All notices or other communications that are
required or permitted hereunder shall be in writing and sufficient
if delivered personally or sent by overnight delivery, telegram or
telex or other facsimile transmission addressed as follows:
If to CCBC, to: California Community Bancshares
555 Mason Street, Suite 280
Vacaville, CA 95688-3985
Attn. Walter O. Sunderman
President & CEO
With a required copy to: Lillick & Charles LLP
2 Embarcadero Center, 27th Floor
San Francisco, CA 94111
Attn. Ronald W. Bachli
If to Officer, to: _____________________
_____________________
_____________________
Any notice hereunder shall be deemed delivered when actually
received at the address of such party set forth herein. Each party
shall have the right to change either the persons or addresses to
which notices and other communications shall be sent with respect
to such party by a notice to the other party in accordance with
this Section 4.
5. Miscellaneous. This Agreement constitutes the
entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements, understandings
or arrangements between them relating thereto; provided, that the
rights of the Officer hereunder shall be in addition to all
rights of the Officer under Article VII of the Bylaws of CCBC and
nothing contained herein shall be deemed to restrict any rights of
the Officer under Article VII of the Bylaws of CCBC. This
Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors, distributees
and assigns. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document. Any
term or provision of this Agreement may be waived in writing at any
time by the party that is entitled to the benefits thereof and any
term or provision of this Agreement may be amended or supplemented
at any time by a written instrument signed by each party hereto.
IN WITNESS WHEREOF, the undersigned have executed this
Indemnification Agreement as of the date and year first written
above.
CALIFORNIA COMMUNITY
BANCSHARES CORPORATION
_______________________________
_______________________________
by:
Its:
<PAGE>
AMENDMENT TO INDEMNIFICATION AGREEMENT
WHEREAS, the undersigned has entered into an Indemnification
Agreement (the "Agreement") dated as November 11, 1997 with
California Community Bancshares ("CCBC"); and
WHEREAS, CCBC has entered into a Plan of Acquisition and Merger
dated as of November 13, 1997 with SierraWest Bancorp ("Sierra")
(the"Plan") pursuant to which CCBC will be merged with and into
Sierra, with Sierra as the surviving corporation (the "Merger");
and
WHEREAS, pursuant to Section 3.3(d) of the Plan Sierra agrees to
indemnify the Directors and Officers of CCBC, as defined therein,
, which indemnification continues for a period of four (4) years
from the Effective Date of the Merger; and
WHEREAS, in order to facilitate consummation of the Merger, the
undersigned desires to amend the Agreement, conditioned upon
consummation of the Merger, to provide that the Agreement,
consistent with Section 3.3(d) of the Plan, shall expire four years
from the Effective Date of the Merger.
NOW THEREFORE, the undersigned hereby agrees that, subject to
consummation of the Merger, the Agreement consistent with Section
3.3(d) of the Plan, shall expire four years from the Effective Date
of the Merger.
Other than specifically set forth herein, the Agreement
remains in full force and effect and this amendment will have no
effect if the Merger is not consummated
IN WITNESS WHEREOF, the undersigned have executed this Amendment to
Indemnification Agreement this 13 day of November, 1997.
CALIFORNIA COMMUNITY
BANCSHARES CORPORATION
____________________________
____________________________
by:
Its:
<PAGE>
EXHIBIT 23 - INDEPENDENT AUDITORS' CONSENT
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-3166 of California Community Bancshares Corporation on Form S-8 of our
report dated February 20, 1998 appearing in the Annual Report on Form 10-KSB of
California Community Bancshares Corporation for the year December 31, 1997.
/S/ DELOITTE & TOUCHE
- ----------------------
Sacramento, California
March 30, 1998
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