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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended DECEMBER 31, 1995
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 2-78293-LA
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SOUTH VALLEY BANCORPORATION
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(Exact name of registrant as specified in its charter)
STATE OF CALIFORNIA 94-2818095
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Tennant Station, Morgan Hill, California 95037
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (408) 778-1510
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Common Stock (no par value) None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 15, 1996 was $17,412,699. As of March 15, 1996, the
registrant had 1,314,166 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K: (1)
Portions of the definitive Proxy Statement for the 1996 annual meeting of
shareholders into Part III.
The Index to Exhibits is located at page 60.
Page 1 of 124
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS.
South Valley Bancorporation (the "Company") is a California
corporation organized in 1982 to act as the bank holding company of South
Valley National Bank, a national bank (the "Bank") with headquarters in Morgan
Hill and branch offices in Gilroy, Hollister and San Juan Bautista. In 1983,
the Company purchased all of the outstanding common stock of the Bank. Other
than holding the shares of the Bank, the Company conducts no significant
activities, although it is authorized, with the prior approval of the Board of
Governors of the Federal Reserve System (the "FRB"), the Company's principal
regulator, to engage in a variety of activities which are deemed closely
related to the business of banking.
The Bank engages in general commercial banking in southern Santa Clara
County and in San Benito County, offering traditional commercial banking
services to the business, professional and consumer communities, with emphasis
on larger consumer accounts, small and mid-size business accounts and
professional accounts. To the fullest extent possible, loans are written on a
variable rate basis. Commercial, real estate, and consumer loans are offered
and are tailored to the individual needs of the borrower. The Bank's marketing
efforts focus on local customers, both in selling the Bank's services and
attracting deposits. The Bank accepts noninterest-bearing and interest-bearing
demand accounts, as well as traditional savings accounts and time certificates
of deposit with competitively priced interest rates.
Regular bank hours are from 9:00 A.M. to 5:00 P.M., Monday through
Thursday, and from 9:00 A.M. to 6:00 P.M. on Friday. The Gilroy and Hollister
offices are also open from 9:00 A.M. to 12:00 P.M. on Saturday. In the San
Juan Bautista office, regular bank hours are from 9:00 A.M. to 6:00 P.M. Monday
through Friday. The main offices of the Bank and the Company are located at 500
Tennant Station in Morgan Hill, California, telephone number (408) 778-1510;
the Bank's Gilroy office is located at 8000 Santa Teresa Blvd., telephone
number (408) 848-2161; the Bank's Hollister office is located at 1730 Airline
Highway, telephone number (408) 636-5581; and the Bank's San Juan Bautista
office is located at 301 Third Street, telephone number (408) 623-4509.
The Bank's commercial lending is focused on providing short term loans
and lines of credit to professional service firms and local businesses with
revenues of less than $15 million. Commercial clients include small retail
businesses, light industry manufacturing companies and various professional
service firms. Emphasis is placed on the borrower's earnings history,
capitalization, secondary sources of repayment (such as accounts receivable)
and, in many instances, tertiary sources of repayment (such as personal
guarantees or personal assets). Through community involvement in Chambers of
Commerce, Rotary Clubs, civic organizations and redevelopment activities,
officers of the Bank stay in close contact with the leaders and decision makers
within the communities.
In addition, the Bank offers construction loans, generally for
single-family residences and multi-unit projects. Real estate and construction
loans are typically secured by first deeds of trust and guarantees from
principals of the borrower. The economic viability of the project and the
borrower's credit worthiness are primary considerations in the loan
underwriting decision. The Bank uses independent local appraisers,
conservative loan-to-value ratios (e.g., generally not to exceed 75% of the
appraised value of the property) and close monitoring of the projects during
construction phases,
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and, in the absence of rapid declines in real estate values, ultimate
collectibility of these secured loans is considered by the Bank's management to
be better than the average mix of commercial loans. The Bank does not make
long term fixed rate real estate loans and, therefore, material sustained
increases or decreases in general interest rate levels have only a short-term
effect on the Bank's net yield on real estate loans.
The Bank engages in consumer lending in the form of home equity loans
and lines of credit, loans to individuals for household, family and other
personal expenditures and unsecured personal loans. The Bank also issues credit
cards to consumers and businesses.
As of December 31, 1995, commercial loans and lines of credit
represented approximately 36.3% of the Company's total loan portfolio, real
estate loans approximately 31.7% of the total loan portfolio, and consumer
loans approximately 15.0% of the total loan portfolio. Real estate construction
loans at December 31, 1995 comprised approximately 17.0% of the loan portfolio.
The Bank's deposits are principally obtained from individuals, small
and medium-size businesses and professional firms. As of December 31, 1995,
the Bank had approximately 5,488 accounts, totaling approximately $43,873,000
of noninterest bearing demand deposits, with an average balance of
approximately $7,994 and approximately 13,415 accounts totaling $113,996,000 in
interest bearing demand, time and savings deposits with an average balance of
approximately $8,498. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation (the "FDIC") up to the legal limit thereon, which is
currently $100,000 per depositor.
The Bank had eighty-three (83) full-time employees on December 31, 1995 and the
Company had no employees other than unsalaried officers.
SUPERVISION AND REGULATION
The common stock of the Company is subject to the registration
requirements of the Securities Act of 1933, as amended, and the qualification
requirements of the California Corporate Securities Law of 1968, as amended.
The Bank's common stock, however, is exempt from such requirements. The
Company is also subject to the periodic reporting requirements of Section 15(d)
of the Securities Exchange Act of 1934, as amended, which include, but are not
limited to, annual, quarterly and other current reports with the Securities and
Exchange Commission.
The Bank is licensed by the Office of the Comptroller of the Currency
(the "OCC"), its deposits are insured by the FDIC, and it is a member of the
Federal Reserve System. The Bank has no subsidiaries. Consequently, the Bank
is subject to the supervision of, and is regularly examined by, the OCC, the
FDIC and the FRB. Such supervision and regulation includes comprehensive
reviews of all major aspects of the Bank's business and condition, including
its capital ratios, allowance for possible loan losses and other factors.
However, no inference should be drawn that such authorities have approved any
such factors. The Company and the Bank are required to file reports with the
OCC, the FDIC and the FRB and provide such additional information as the
Superintendent, FDIC and the FRB may require.
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and
is registered as such with, and subject to the supervision of, the FRB. The
Company is required to obtain the approval
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of the FRB before it may acquire 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 of shares, the Company would own or control more
than 5% of the voting shares of such bank. The Bank Holding Company Act
prohibits the Company from acquiring any voting shares of, or interest in, all
or substantially all of the assets of, a bank located outside the State of
California unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. Any such interstate acquisition is
also subject to the provisions of the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 discussed below.
The Company, and any subsidiaries which it may acquire or organize,
are deemed to be "affiliates" of the Bank within the meaning of that term as
defined in the Federal Reserve Act. This means, for example, that there are
limitations (a) on loans by the Bank to affiliates, and (b) on investments by
the Bank in affiliates' stock as collateral for loans to any borrower. The
Company and its subsidiary are also subject to certain restrictions with
respect to engaging in the underwriting, public sale and distribution of
securities.
In addition, regulations of the FRB promulgated under the Federal
Reserve Act require that reserves be maintained by the Bank in conjunction with
any liability of the Company under any obligation (promissory note,
acknowledgement of advance, banker's acceptance or similar obligation) with a
weighted average maturity of less than seven (7) years to the extent that the
proceeds of such obligations are used for the purpose of supplying funds to the
Bank for use in its banking business, or to maintain the availability of such
funds.
The Company and the Bank are prohibited from engaging in certain
tie-in arrangements in connection with an extension of credit, sale or lease of
property or furnishing of services. Section 106(b) of the Bank Holding Company
Act Amendments of 1970 generally prohibits a bank from tying a product or
service to another product or service offered by the bank, or by any of its
affiliates. A prohibited tie-in arrangement would exist where a bank varies
the consideration for a product or service on the condition that the customer
obtain some additional product or service from the bank or from any of its
affiliates, or where as a condition for providing a customer a product or
service, the bank requires the customer to purchase another product or service
from the bank or from any of its affiliates. These anti-tying restrictions
also apply to bank holding companies and their non-bank subsidiaries as if they
were banks. Section 106 contains a "traditional bank product" exception
permitting a bank to tie a product to a traditional bank product offered by the
bank itself, but not by any affiliated bank or non-bank. For example, a bank
may offer a discount on a loan on the condition that a customer maintain a
deposit account at that bank, however, the bank may not offer a discount on a
loan on the condition that a customer maintain a deposit account at an
affiliated bank. Effective September 2, 1994, the FRB adopted a rule
permitting a bank or a bank holding company to offer a discount on a
traditional bank product, or on securities brokerage services to a customer on
condition that the customer obtain a traditional bank product from an
affiliate. Effective January 23, 1995, the FRB adopted a rule permitting a
bank holding company or its non-bank subsidiary to offer a discount on its
product or service on condition that a customer obtain any other product or
service from that holding company or from any of its non-bank affiliates. The
rule permits bank holding companies and their non-bank subsidiaries to offer
discounts on packaged products when no affiliated bank is involved in the
arrangement (both the tying and tied products are offered by bank holding
companies or their non-bank subsidiaries only), and both the tying and tied
products are separately available for purchase at competitive prices.
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The FRB and the FDIC have adopted risk-based capital guidelines for
evaluating the capital adequacy of bank holding companies and banks. The
guidelines are designed to make capital requirements sensitive to differences
in risk profiles among banking organizations, to take into account off-balance
sheet exposures and to aid in making the definition of bank capital uniform
internationally. Under the guidelines, the Company and the Bank are required
to maintain capital equal to at least 8.0% of its assets and commitments to
extend credit, weighted by risk, of which at least 4.0% must consist primarily
of common equity (including retained earnings) and the remainder may consist of
subordinated debt, cumulative preferred stock, or a limited amount of reserves
for credit losses.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present less
risk than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of such loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of such loans.
The guidelines establish two categories of qualifying capital: Tier 1
capital comprised of core capital elements, and Tier 2 comprised of
supplementary capital requirements. At least one-half of the required capital
must be maintained in the form of Tier 1 capital. Tier 1 capital includes
common shareholders' equity and qualifying perpetual preferred stock. However,
no more than 25% of the Company's total Tier 1 capital may consist of perpetual
preferred stock. The definition of Tier 1 capital for the Bank is the same,
except that perpetual preferred stock may be included only if it is
noncumulative. Tier 2 capital includes, among other items, limited life (and
in the case of banks, cumulative) preferred stock, mandatory convertible
securities, subordinated debt and a limited amount of reserve for credit
losses.
The FRB, the OCC and the FDIC also adopted minimum leverage ratios for
banking organizations as a supplement to the risk-based capital guidelines.
The leverage ratio is generally calculated using Tier 1 capital (as defined
under risk-based capital guidelines) divided by quarterly average net total
assets (excluding intangible assets and certain other adjustments). The
leverage ratio establishes a limit on the ability of banking organizations,
including the Company and the Bank, to increase assets and liabilities without
increasing capital proportionately.
The FRB and the OCC emphasized that the leverage ratio constitutes a
minimum requirement for well-run banking organizations having diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and a composite rating of 1 under the regulatory
rating system for banks and 1 under the regulatory rating system for bank
holding companies. Banking organizations experiencing or anticipating
significant growth, as well as those organizations which do not exhibit the
characteristics of a strong, well-run banking organization described above,
will be required to maintain minimum capital ranging generally from 100 to 200
basis points in excess of the leverage ratio. The FDIC adopted a substantially
similar leverage ratio for state non-member banks which established (i) a 3
percent Tier 1 minimum capital leverage ratio for highly-rated banks (those
with a composite regulatory rating of 1 and not experiencing or anticipating
significant growth); and (ii) a 4 percent Tier 1 minimum capital leverage ratio
for all other banks, as a supplement to the risk-based capital guidelines.
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At December 31, 1995, the Bank and the Company are in compliance with
the risk-based capital and leverage ratios described above. See Item 7 below
for a listing of the Company's risk-based capital ratios at December 31, 1995
and 1994.
The Company's ability to pay cash dividends is subject to restrictions
set forth under Federal law regulating national banks. Funds for payment of any
cash dividends by the Company would be obtained from its investments as well as
dividends and/or management fees from the Bank. The payment of cash dividends
and/or management fees by the Bank is subject to restrictions set forth by the
OCC, as well as restrictions established by the the FDIC. See Item 5 below for
further information regarding the payment of cash dividends by the Company and
the Bank.
COMPETITION
At December 31, 1995, each of the major banking institutions had one
or more offices in the Bank's service area. Additionally, the Bank competes
with other independent community banks, savings and loan associations and, to a
lesser extent, thrifts and loan companies, credit unions, finance and mortgage
banking companies and other miscellaneous financial service providers for
deposit and loan customers.
Larger banks may have a competitive advantage because of higher
lending limits and major advertising and marketing campaigns. They also
perform services, such as trust services, international banking, discount
brokerage and insurance services which the Bank is not authorized or prepared
to offer currently. The Bank has made arrangements with its correspondent banks
and with others to provide such services for its customers. For borrowers
requiring loans in excess of the Bank's legal lending limits, the Bank has
offered, and intends to offer in the future, such loans on a participating
basis with its correspondent banks and with other independent banks, retaining
the portion of such loans which is within its lending limits. Based on the
Bank's unimpaired capital and unimpaired surplus of $16,267,000 at December 31,
1995, the Bank's legal lending limit to a single borrower and such borrower's
related parties was $2,440,000, plus an additional $1,627,000 provided that it
was secured by readily marketable collateral having a market value, as
determined by reliable and continuously available price quotations, in excess
of the funds outstanding.
The Company's primary service area is Southern Santa Clara County and
San Benito County, which includes the cities of Morgan Hill, Gilroy, Hollister
and San Juan Bautista. Based upon data as of the post practicable date, June
30, 1995, there were 30 FDIC insured financial institutions with $976.3 million
in deposits servicing this area. The Bank's market share at June 30, 1995 was
as follows(1):
<TABLE>
<CAPTION>
South Valley
National Bank South Valley
Total Deposits Deposits National Bank
Service Area (in thousands) (in thousands) Market Share
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<S> <C> <C> <C>
Morgan Hill $301,016 $ 59,996 19.9%
Gilroy 333,267 51,853 15.6%
Hollister 331,543 20,329 6.1%
San Juan Bautista 10,461 8,498 81.2%
----------------------------------------------------------------------------------------
Total $976,287 $140,676 14.4%
========================================================================================
</TABLE>
__________________________________
1 Bancpen, June 30, 1995, Sheshunoff(TM) Information Service
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In order to compete with the major financial institutions in its
primary service area, the Bank uses to the fullest extent possible the
flexibility which is accorded by its independent status. This includes an
emphasis on specialized services, local promotional activity, and personal
contacts by the Bank's officers, directors and employees. The Bank also seeks
to provide special services and programs for individuals in its primary service
area who are employed in the agricultural, professional and business fields,
such as loans for equipment, furniture, tools of the trade or expansion of
practices or businesses.
Banking is a business which depends on interest rate differentials.
In general, the difference between the interest rate paid by the Bank to obtain
its deposits and its other borrowings and the interest rate received by the
Bank on loans extended to its customers and on securities held in the Bank's
portfolio comprise the major portion of the Bank's earnings.
Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For
instance, yields on corporate and government debt securities and other
commercial paper affect the ability of commercial banks to attract and hold
deposits. Commercial banks also compete for loans with savings and loan
associations, credit unions, consumer finance companies, mortgage companies and
other lending institutions.
The interest rate differentials of the Bank, and therefore its
earnings, are affected not only by general economic conditions, both domestic
and foreign, but also by the monetary and fiscal policies of the United States
as set by statutes and as implemented by federal agencies, particularly the
FRB. This agency 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, adjustments in the amount of interest
free reserves that banks and other financial institutions are required to
maintain, and adjustments to the discount rates applicable to borrowing by
banks from the Federal Reserve Board. These activities influence the growth of
bank loans, investments and deposits and also affect interest rates charged on
loans and paid on deposits. The nature and timing of any future changes in
monetary policies and their impact on the Bank are not predictable.
National banks (whether a holding company subsidiary or not) are
limited under applicable provisions of the National Bank Act to acting as an
agent for fire, life or other insurance only in locations with a population of
5,000 or less. In recent years, banks and bank holding companies have
increasingly sought authorization to expand their product base to include
insurance activities. The Federal Deposit Insurance Corporation Improvement
Act of 1991 discussed below, generally restricts an insured state bank from
engaging as a principal in any activity that is impermissible for a national
bank. On January 18, 1995, the United States Supreme Court unanimously upheld
a ruling by the OCC that permitted sale of fixed and variable annuities by a
national bank and confirmed the authority of the OCC to interpret the powers of
national banks under the National Bank Act. The OCC determined that annuities
are not insurance products, but rather a type of investment instrument and that
the sale of annuities is incidental to the business of banking. It is not
certain what impact the decision will have upon the continuing effort of banks
and bank holding companies to engage in insurance related activities.
California law and regulations of the OCC authorize California
licensed banks, subject to applicable limitations and approvals of the OCC to
(1) provide real estate appraisal services,
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management consulting and advice services, and electronic data processing
services; (2) engage directly in real property investment or acquire and hold
voting stock of one or more corporations, the primary activities of which are
engaging in real property investment; (3) organize, sponsor, operate or render
investment advice to an investment company or to underwrite, distribute or sell
securities in California; and (4) invest in the capital stock, obligations or
other securities of corporations not acting as insurance companies, insurance
agents or insurance brokers. In November 1988, Proposition 103 was adopted by
California voters. The OCC has established certain procedures to be followed
by banks desiring to engage in insurance activities which include filing a
report describing (1) a proposed business plan and information regarding the
types of insurance products intended to be offered; (2) insurance companies
with which the banks intend to conduct business; (3) organization plans; (4)
locations at which activities will be conducted; and (5) proposed operational
and compliance procedures and policies. The California Department of Insurance
regulates application processing, licensing and supervision of insurance
activities.
The Caldera, Weggeland and Killea California Interstate Banking and
Branching Act of 1995, effective October 2, 1995, amends the California
Financial Code to, among other matters, regulate the operations of state banks
to eliminate conflicts with and to implement the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 discussed below. The Caldera Act includes
(1) an election to permit early interstate merger transactions; (2) a
prohibition against interstate branching through the acquisition of a branch
business unit located in California without acquisition of the whole business
unit of the California bank; and (3) a prohibition against interstate branching
through de novo establishment of California branch offices. The Caldera Act
mandates that initial entry into California by an out-of-state institution be
accomplished by acquisition of or merger with an existing whole bank which has
been in existence for at least five years.
The State Bank Parity Act, effective January 1, 1996, eliminates
certain existing disparities between California state chartered banks and
federally chartered national banks by authorizing the OCC to address such
disparities through a streamlined rulemaking process. The OCC has taken action
pursuant to the Parity Act to, among other matters, authorize previously
impermissible share repurchases by state banks, subject to the prior approval
of the OCC.
The Competitive Equality Banking Act of 1987 (the "1987 Banking Act")
also has affected the balance of competition among banks and other non-bank
financial institutions. Among other things, the 1987 Banking Act has
restricted the growth and formation of so-called "limited service" or
"non-bank" banks (institutions which accept deposits or make commercial loans,
but do not do both). Other key provisions of the 1987 Banking Act included:
(1) the expansion of the FDIC's authority in arranging supervisory interstate
acquisitions and acquisitions of failing banks; (2) the renewal of emergency
acquisition authorities; (3) the exemption of assessment income of federal
banking agencies from budget restrictions imposed by the Office of Management
and Budget and from the budget balancing requirements of the
Gramm-Rudman-Hollings Act; (4) a moratorium (which ended on March 1, 1988),
prohibiting commercial banks from engaging in insurance or securities
activities not approved prior to March 5, 1987; (5) the application of the
Glass-Steagall Act to state-chartered banks, prohibiting affiliations with
companies principally engaged in securities activities; and (6) new check hold
schedules which were implemented on September 1, 1990.
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On August 9, 1989, President Bush signed into law the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"). The
FIRREA contains provisions which among other things: (1) established two
separate financial industry insurance funds, both administered by the FDIC -
the Bank Insurance Fund and the Savings Association Insurance Fund; (2)
abolished the Federal Home Loan Bank Board and the Federal Savings and Loan
Insurance Corporation and established the Office of Thrift Supervision as an
office of the Treasury Department, with responsibility for examination and
supervision of all savings and loan associations; (3) increased the premiums
paid by FDIC-insured institutions; (4) permitted bank holding companies to
acquire healthy savings and loan associations; (5) enhanced federal banking
agencies' enforcement authority over the operations of all insured depository
institutions and increased the civil and criminal penalties that may be imposed
in connection with violations of laws and regulations; (6) curtailed
investments and certain other activities of state-chartered savings and loan
associations; and (7) increased the capital requirements of savings and loan
associations.
On December 19, 1991, President Bush signed the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). The FDICIA
substantially revises banking regulations, certain aspects of the Federal
Deposit Insurance Act and establishes a framework for determination of capital
adequacy of financial institutions, among other matters. Under the FDICIA,
financial institutions are placed into five capital adequacy categories as
follows: (1) well capitalized, (2) adequately capitalized, (3)
undercapitalized, (4) significantly undercapitalized, and (5) critically
undercapitalized. The FDICIA authorized the FRB, the OCC and the FDIC to
establish limits below which financial institutions will be deemed critically
undercapitalized, provided that such limits can not be less than two percent
(2%) of the ratio of tangible equity to total assets or sixty-five percent
(65%) of the minimum leverage ratio established by regulation. Financial
institutions classified as undercapitalized or below are subject to limitations
including restrictions related to (i) growth of assets, (ii) payment of
interest on subordinated indebtedness, (iii) capital distributions, and (iv)
payment of management fees to a parent holding company.
The FDICIA requires the FRB and the FDIC to initiate corrective action
regarding financial institutions which fail to meet minimum capital
requirements. Such action may result in orders to augment capital such as
through sale of voting stock, reduction in total assets, and restrictions
related to correspondent bank deposits. Critically undercapitalized financial
institutions may also be subject to appointment of a receiver or conservator
unless the financial institution submits an adequate capitalization plan.
The FDIC adopted a regulation pursuant to Section 302(a) of the FDICIA,
effective on November 2, 1992, amending its regulations on insurance assessments
to, among other matters, adopt a recapitalization schedule for the Bank
Insurance Fund and establish a transitional risk-based insurance assessment
system to replace the uniform assessment rate system previously applicable to
insured financial institution members of the Bank Insurance Fund. The regulation
requires that each insured institution be assigned to one of three capital
groups and one of three supervisory subgroups within each capital group, based
upon financial data reported by each institution in it's Report of Income and
Condition, as well as supervisory evaluations by the institution's primary
federal regulatory agency. The three capital groups have the following
characteristics: (1) "Well capitalized" - consisting of institutions having a
total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater; (2)
"Adequately capitalized" - consisting of institutions that are not "well
capitalized," but have a total risk-based capital ratio of 8% or greater, a Tier
1 risk-based capital
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ratio of 4% or greater, and a Tier 1 leverage ratio of 4% or greater; and (3)
"Undercapitalized" -consisting of institutions that do not qualify as either
"well capitalized" or "adequately capitalized". The three supervisory subgroups
have the following characteristics: (A) Subgroup "A" - consisting of
financially sound institutions with only a few minor weaknesses; (B) Subgroup
"B" - consisting of institutions that demonstrate deterioration of the
institution and increased risk of loss to the Bank Insurance Fund; and (C)
Subgroup "C" - consisting of institutions that pose a substantial probability of
loss to the Bank Insurance Fund unless effective corrective action is taken.
The annual assessment rate for each insured institution continued at
the rate of $0.23 per $100 of deposits through year-end December 31, 1992.
Commencing January 1, 1993, the assessment rate was based upon a risk
assessment schedule with rates ranging from $0.23 to $0.31 per $100 of deposits
utilizing the capital group and supervisory subgroup analysis. On June 25,
1993, the FDIC adopted a permanent risk-based insurance assessment system which
retained the transitional system without substantial modification. In late
1994 and early 1995, the FDIC proposed two significant changes to the deposit
insurance assessment system to (1) redefine the deposit assessment base which
has been defined to equal an institution's total domestic deposits, plus or
minus certain adjustments, but without significantly impacting total
industry-wide assessments (although significant changes in assessments of
individual institutions may occur); and (2) establish a new assessment rate
schedule, using the present group and subgroup categories, but with assessment
rates varying from $0.04 to $0.31 per $100 of deposits, resulting in a spread
between the minimum and maximum rates of $0.27 rather than $0.08. On August 8,
1995, the FDIC voted to reduce the deposit insurance assessment rates to a
range from $0.04 to $0.31 per $100 of deposits and subsequently, on November
14, 1995, the FDIC voted again to further reduce the assessment rates to a
range from $0 to $0.27 per $100 of deposits, subject to a minimum $2,000 annual
assessment for all institutions regardless of classification within the capital
group and supervisory subgroup as follows:
<TABLE>
<CAPTION>
Supervisory Subgroup
---------------------------------------------
Capital Group A B C
-------------
<S> <C> <C> <C>
1 $ 0.00 $ 0.03 $ 0.17
2 0.03 0.10 0.24
3 0.10 0.24 0.27
</TABLE>
The above assessment rates are effective for the first semiannual
assessment period of 1996. Based upon the above risk- based assessment rate
schedule, the Company's and Bank's current capital ratios, the Bank's current
level of deposits, and assuming no change in the assessment rate applicable to
the Bank during 1996, the Company estimates that its annual noninterest expense
attributed to assessments will decrease by approximately $130,000 during 1996.
The FRB and the FDIC adopted regulations effective December 19, 1992,
implementing a system of prompt corrective action pursuant to Section 38 of the
Federal Deposit Insurance Act and Section 131 of the FDICIA. The regulations
establish five capital categories with the following characteristics: (1) "Well
capitalized" - consisting of institutions with a total risk-based capital ratio
of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a
leverage ratio of 5% or greater, and the institution is not subject to an
order, written agreement, capital directive or prompt corrective action
directive; (2) "Adequately capitalized" - consisting of
10
<PAGE> 11
institutions with a total risk-based capital ratio of 8% or greater, a Tier 1
risk-based capital ratio of 4% or greater and a leverage ratio of 4% or
greater, and the institution does not meet the definition of a "well
capitalized" institution; (3) "Undercapitalized" - consisting of institutions
with a total risk-based capital ratio less than 8%, a Tier 1 risk-based capital
ratio of less than 4%, or a leverage ratio of less than 4%; (4) "Significantly
undercapitalized" - consisting of institutions with a total risk-based capital
ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a
leverage ratio of less than 3%; (5) "Critically undercapitalized" - consisting
of an institution with a ratio of tangible equity to total assets that is equal
to or less than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are classified
in one of the three "undercapitalized" categories are subject to certain
mandatory and discretionary supervisory actions. Mandatory supervisory actions
include (1) increased monitoring and review by the appropriate federal banking
agency; (2) implementation of a capital restoration plan; (3) total asset
growth restrictions; and (4) limitation upon acquisitions, branch expansion,
and new business activities without prior approval of the appropriate federal
banking agency. Discretionary supervisory actions may include (1) requirements
to augment capital; (2) restrictions upon affiliate transactions; (3)
restrictions upon deposit gathering activities and interest rates paid; (4)
replacement of senior executive officers and directors; (5) restrictions upon
activities of the institution and its affiliates; (6) requiring divestiture or
sale of the institution; and (7) any other supervisory action that the
appropriate federal banking agency determines is necessary to further the
purposes of the regulations. Further, the federal banking agencies may not
accept a capital restoration plan without determining, among other things, that
the plan is based on realistic assumptions and is likely to succeed in
restoring the depository institution's capital. In addition, for a capital
restoration plan to be acceptable, the depository institution's parent holding
company must guarantee that the institution will comply with such capital
restoration plan. The aggregate liability of the parent holding company under
the guaranty is limited to the lesser of (i) an amount equal to 5 percent of
the depository institution's total assets at the time it became
undercapitalized, and (ii) the amount that is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards
applicable with respect to such institution as of the time it fails to comply
with the plan. If a depository institution fails to submit an acceptable plan,
it is treated as if it were "significantly undercapitalized." The FDICIA also
restricts the solicitation and acceptance of, and interest rates payable on,
brokered deposits by insured depository institutions that are not "well
capitalized." An "undercapitalized" institution is not allowed to solicit
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 areas in which such deposits
would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other course
of action would better serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making (but not
accruing) any payment of principal or interest on subordinated debt without the
prior approval of the FDIC and
11
<PAGE> 12
the FDIC must prohibit a critically undercapitalized institution from taking
certain other actions without its prior approval, including (1) entering into
any material transaction other than in the usual course of business, including
investment expansion, acquisition, sale of assets or other similar actions; (2)
extending credit for any highly leveraged transaction; (3) amending articles or
bylaws unless required to do so to comply with any law, regulation or order;
(4) making any material change in accounting methods; (5) engaging in certain
affiliate transactions; (6) paying excessive compensation or bonuses; and (7)
paying interest on new or renewed liabilities at rates which would increase the
weighted average costs of funds beyond prevailing rates in the institution's
normal market areas.
The capital ratio requirements for the "adequately capitalized"
category generally are the same as the existing minimum risk-based capital
ratios applicable to the Company and the Bank. It is not possible to predict
what effect the prompt corrective action regulation will have upon the Company
and the Bank or the banking industry taken as a whole in the foreseeable
future.
Under the FDICIA, the federal financial institution agencies have
adopted regulations which require institutions to establish and maintain
comprehensive written real estate policies which address certain lending
considerations, including loan-to-value limits, loan administrative policies,
portfolio diversification standards, and documentation, approval and reporting
requirements. The FDICIA further generally prohibits an insured national bank
from engaging as a principal in any activity which would pose a significant
risk to the Bank Insurance Fund or that might impact the bank's ability to
continue to be within applicable capital standards. Similar restrictions apply
to subsidiaries of insured banks. The Company does not currently intend to
engage in any activities which would be restricted or prohibited under the
FDICIA.
As required by the FDICIA, the federal financial institution agencies
solicited comments in September 1993 on a method of incorporating an interest
rate risk component into the current risk-based capital guidelines, with the
goal of ensuring that institutions with high levels of interest rate risk have
sufficient capital to cover their exposures. Interest rate risk is the risk
that changes in market interest rates might adversely affect a bank's financial
condition. Under the proposal, interest rate risk exposures would be
quantified by weighing assets, liabilities and off-balance sheet items by risk
factors which approximate sensitivity to interest rate fluctuations. As
proposed, institutions identified as having an interest rate risk exposure
greater than a defined threshold would be required to allocate additional
capital to support this higher risk. Higher individual capital allocations
could be required by the bank regulators based on supervisory concerns. The
agencies adopted a final rule effective September 1, 1995 which is
substantially similar to the proposed rule, except that the final rule does not
establish (1) a measurement framework for assessing the level of a bank's
interest rate exposure; nor (2) a minimum level of exposure above which a bank
will be required to hold additional capital for interest rate risk if it has a
significant exposure or a weak interest rate risk management process. The
agencies also solicited comments on and are continuing their analysis of a
proposed policy statement which would establish a framework to measure and
monitor interest rate exposure.
The federal financial institution agencies published a final rule on
July 10, 1995 to be effective on August 9, 1995, implementing safety and
soundness standards. The FDICIA added a new Section 39 to the Federal Deposit
Insurance Act which required the agencies to establish safety and soundness
standards for insured financial institutions covering (1) internal controls,
information systems and internal audit systems; (2) loan documentation; (3)
credit underwriting; (4) interest rate exposure; (5) asset growth; (6)
compensation, fees and benefits; (7) asset quality,
12
<PAGE> 13
earnings and stock valuation; and (8) excessive compensation for executive
officers, directors or principal shareholders which could lead to material
financial loss. The agencies issued the final rule in the form of guidelines
only for operational, managerial and compensation standards and reissued for
comment proposed standards related to asset quality and earnings which are less
restrictive than the earlier proposal in November 1993. Unlike the earlier
proposal, the guidelines under the final rule do not apply to depository
institution holding companies and the stock valuation standard was eliminated.
If an agency determines that an institution fails to meet any standard
established by the guidelines, the agency may require the financial institution
to submit to the agency an acceptable plan to achieve compliance with the
standard. If the agency requires submission of a compliance plan and the
institution fails to timely submit an acceptable plan or to implement an
accepted plan, the agency must require the institution to correct the
deficiency. Under the final rule, an institution must file a compliance plan
within 30 days of a request to do so from the institution's primary federal
regulatory agency. The agencies may elect to initiate enforcement action in
certain cases rather than rely on an existing plan particularly where failure
to meet one or more of the standards could threaten the safe and sound
operation of the institution.
The FRB issued final amendments to its risk-based capital guidelines
to be effective December 31, 1994, requiring that net unrealized holding gains
and losses on securities available for sale determined in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
are not to be included in the Tier 1 capital component consisting of common
stockholders' equity. Net unrealized losses on marketable equity securities
(equity securities with a readily determinable fair value), however, will
continue to be deducted from Tier 1 capital. This rule has the general effect
of valuing available for sale securities at amortized cost (based on historical
cost) rather than at fair value (generally at market value) for purposes of
calculating the risk-based and leverage capital ratios.
On December 13, 1994, the FRB issued amendments to its risk-based
capital guidelines regarding concentration of credit risk and risks of
nontraditional activities, which were effective January 17, 1995. As amended,
the risk-based capital guidelines identify concentrations of credit risk and
evaluate an institution's ability to manage such risks and the risk posed by
non-traditional activities as important factors in assessing an institution's
overall capital adequacy.
Since 1986, California has permitted California banks and bank holding
companies to be acquired by banking organizations based in other states on a
"reciprocal" basis (i.e., provided the other state's laws permit California
banking organizations to acquire banking organizations in that state on
substantially the same terms and conditions applicable to local banking
organizations). Some increase in merger and acquisition activity among
California and out-of-state banking organizations has occurred as a result of
this law, as well as increased competition for loans and deposits.
President Clinton signed the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking Act") on September
29, 1994. The Interstate Banking Act authorizes the FRB to approve interstate
acquisitions of banks or bank branch offices, generally without regard to
conflicting requirements of state law, by adequately capitalized and managed
bank holding companies, after September 29, 1995, and authorizes other federal
banking agencies to approve similar acquisitions by banks after June 1, 1997,
unless prior to that date states enact laws prohibiting such acquisitions.
Such so-called "opt out" measures are pending or have been
13
<PAGE> 14
passed in a number of states. States also may "opt in" to this authority at an
earlier date if they enact laws specifically permitting such acquisitions.
After March 29, 1996, the Interstate Banking Act authorizes the appropriate
federal agency to approve the consolidation of banks located in different
states but operated by the same bank holding company.
The Interstate Banking Act imposes several limitations on the FRB'
general authority to approve such acquisitions including (1) preservation of
state laws requiring acquisition target banks to have been chartered for
minimum time periods not in excess of five years; (2) precluding acquisitions
which would result in a concentration of deposits greater than 10% of total
United States deposits, or 30% of total deposits in the state in which the
acquired bank or branch office is located, subject to a state's right to either
increase or decrease the 30% threshold and, in the absence of legislation, the
right of a state banking regulatory agency to approve a transaction under
certain circumstances; (3) FRB' assessment of compliance with antitrust and
community reinvestment laws, including a separate community reinvestment act
analysis for each state in which a multi-state banking operation approved under
the Interstate Banking Act exists; and (4) maintenance of state contingency
laws requiring a bank acquisition target to maintain assets available for call
by state-sponsored housing entities established under state law, provided (i)
the state law does not discriminate against out-of-state banks, holding
companies or their subsidiaries, (ii) the state law was in effect at the
enactment date of the Interstate Banking Act, (iii) the FDIC has not determined
that compliance with the state law would result in an unacceptable risk to the
deposit insurance fund, and (iv) compliance with the state law would not place
the bank in an unsafe or unsound condition.
Federal banking agencies are required to adopt regulations effective
June 1, 1997 which prohibit any out-of-state bank from using the interstate
branching authority primarily for the purpose of deposit production. Such
regulations will require the appropriate federal agency of an out-of-state bank
or bank holding company to review such bank's operations in the host state in
order to determine whether it is meeting the credit needs of the host state
communities in which it operates, whenever it determines that such bank's ratio
of loans to deposits in the host state is less than one-half the average of the
total loans to total deposits for banks domiciled in the host state. If the
agency reaches a negative conclusion, it is authorized to restrict the opening
of new branch offices and to order the closure of the host state branch offices
of the out-of-state bank. Before an agency may exercise authority to close
such a branch office or offices, the Interstate Banking Act requires that it
notify the bank and schedule a hearing. Banks which determine to close
branches located in low or moderate income areas acquired under the Interstate
Banking Act must notify their customers how to contact the appropriate federal
agency to complain about the closing. If the agency determines that any such
complaint is not frivolous, it must convene a meeting of concerned
organizations and individuals to explore the feasibility of adequate
alternative sources of banking services for the affected communities.
In October 1994, the federal financial institution regulatory agencies
jointly proposed a comprehensive revision of their regulations implementing the
Community Reinvestment Act ("CRA"), enacted in 1977 to promote lending by
financial institutions to individuals and businesses located in low and
moderate income areas. In May 1995, the proposed CRA regulations were
published in final form effective as of July 1, 1995. The revised regulations
included transitional phase-in provisions which generally reguire mandatory
compliance not later than July 1, 1997, although earlier voluntary compliance
is permissible.
14
<PAGE> 15
Under the former CRA regulations, compliance was evaluated by an
assessment of the institution's methods for determining, and efforts to meet,
the credit needs of such borrowers. This system was highly criticized by
depository institutions and their trade groups as subjective, inconsistent and
burdensome, and by consumer representatives for its alleged failure to
aggressively penalize poor CRA performance by financial institutions. The
revised CRA regulations emphasize an assessment of actual performance rather
than of the procedures followed by a bank, to evaluate compliance with the CRA.
Overall CRA compliance continues to be rated across a four-point scale from
"outstanding" to "substantial noncompliance," and continues to be a factor in
review of applications to merge, establish new branches or form bank holding
companies. In addition, any bank rated in "substantial noncompliance" with the
revised CRA regulations may be subject to enforcement proceedings.
The regulations provide that "small banks," which are defined to
include any independent bank with total assets of less than $250 million, are
to be evaluated by means of a so-called "streamlined assessment method" unless
such a bank elects to be evaluated by one of the other methods provided in the
regulations. The differences between the evaluation methods may be summarized
as follows:
(1) The "streamlined assessment method" presumptively
applicable to small banks requires that a bank's CRA compliance be evaluated
pursuant to five "assessment criteria," including its (i) loan-to-deposit ratio
(as adjusted for seasonal variations and other lending-related activities, such
as sales to the secondary market or community development lending); (ii)
percentage of loans and other lending-related activities in the bank's service
area(s); (iii) distribution of loans and other lending-related activities among
borrowers of different income levels, given the demographic characteristics of
its service area(s); (iv) geographic distribution of loans and other
lending-related activities within its service area(s); and (v) record of
response to written complaints, if any, about its CRA performance.
(2) The "lending, investments and service tests method" is
applicable to all banks larger than $250 million which are not wholesale or
limited purpose banks and do not elect to be evaluated by the "strategic plan
assessment method." Central to this method is the requirement that such banks
collect and report to their primary federal banking regulators detailed
information regarding home mortgage, small business and farm and community
development loans which is then used to evaluate CRA compliance. At the bank's
option, data regarding consumer loans and any other loan distribution it may
choose to provide also may be collected and reported.
Using such data, a bank will be evaluated regarding its (i) lending
performance according to the geographic distribution of its loans, the
characteristics of its borrowers, the number and complexity of its community
development loans, the innovativeness or flexibility of its lending practices
to meet low and moderate income credit needs and, at the bank's election,
lending by affiliates or through consortia or third-parties in which the bank
has an investment interest; (ii) investment performance by measure of the
bank's "qualified investments," that is, the extent to which the bank's
investments, deposits, membership shares in a credit union, or grants primarily
benefit low or moderate income individuals and small businesses and farms,
address affordable housing or other needs not met by the private market, or
assist any minority or women-owned depository institution by donating, selling
on favorable terms or providing on a rent-free basis any branch of the bank
located in a predominantly minority neighborhood; and (iii) service performance
by evaluating the demographic distribution of the bank's branches and ATMs, its
record of opening and closing them, the availability of alternative retail
delivery systems (such as
15
<PAGE> 16
telephone banking, banking by mail or at work, and mobile facilities) in low
and moderate income geographies and to low and moderate income individuals, and
(given the characteristics of the bank's service areas and its capacity and
constraints) the extent to which the bank provides "community development
services" (services which primarily benefit low and moderate income individuals
or small farms and businesses or address affordable housing needs not met by
the private market) and their innovativeness and responsiveness.
(3) Wholesale or limited purpose banks which do not make home
mortgage, small farm or business or consumer loans to retail customers may
elect, subject to agency approval of their status, to be evaluated by the
"community development test method," which assesses the number and amount of
the bank's community development loans, qualified investments and community
development services and their innovativeness and complexity.
(4) Any bank may request to be evaluated by the "strategic
plan assessment method" by submitting a strategic plan for review and approval.
Such a plan must involve public participation in its preparation, and contain
measurable goals for meeting low and moderate income credit needs through
lending, investments and provision of services. Such plans generally will be
evaluated by measuring strategic plan goals against standards similar to those
which will be applied in evaluating a bank according to the "lending,
investments and service tests method."
The federal financial institution regulatory agencies jointly issued a
final rule effective January 1, 1996 to make certain technical corrections to
the revised CRA regulations. Among other matters, the rule clarifies the
transition from the former CRA regulations to the revised CRA regulations by
confirming that when an institution either voluntarily or mandatorily becomes
subject to the performance tests and standards of the revised regulations, the
institution must comply with all of the requirements of the revised regulations
and is no longer subject to the provisions of the former CRA regulations.
The Bank has a current rating of "outstanding" CRA compliance, and
believes that it would not have received any lower rating if the regulations
had been in effect when the Bank was last examined for CRA compliance on August
29, 1994.
The United States Congress has periodically considered legislation
which could result in further deregulation of banks and other financial
institutions. Such legislation could result in further relaxation or
elimination of geographic restrictions on banks and bank holding companies and
increase the level of direct competition with other financial institutions,
including mutual funds, securities brokerage firms, investment banking firms
and other entities. The effect of such legislation on the Company and the Bank
cannot be determined at this time.
ACCOUNTING PRONOUNCEMENTS
In December 1991, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"),
"Disclosures about Fair Value of Financial Instruments." SFAS No. 107 requires
entities such as the Company to disclose, either in the body of its financial
statements or in accompanying notes, the "fair value" of financial instruments
for which it is "practicable to estimate that value." Most deposit and loan
instruments issued by financial institutions are subject to SFAS No. 107, which
requires the Company to disclose, in addition to their carrying value, the fair
value of most of the assets and liabilities of the
16
<PAGE> 17
Company. These disclosures apply to off-balance sheet financial instruments as
well as those recorded on the balance sheet. Excluded from the disclosure
requirement, among other types of instruments, are most employee benefit plan
obligations, insurance contracts, leases, warranties, minority and equity
interests in consolidated subsidiaries, and other investments accounted for
under the equity method. The provisions of SFAS No. 107 are effective for the
Company as of December 31, 1995.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan." This standard was further modified by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." SFAS No. 114 and 118 are effective for the Company as of January
1, 1995. They require the Bank to measure impaired loans based upon the
present value of expected future cash flows discounted at the loan's effective
interest rate, except that as a practical expedient, a creditor may measure
impairment based on a loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when, based
upon current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Application of the provisions of these statements will not have
a significant effect on the Company's financial position.
In October 1994, the FASB issued SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments." The
Company adopted SFAS No. 119 as of December 31, 1994. SFAS No. 119 requires
disclosures about derivative financial instruments-futures, forward, swap, and
option contracts, and other financial instruments with similar characteristics.
It requires disclosures about amounts, nature, and terms of derivative
financial instruments that are not subject to SFAS No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk", because they do not
result in off-balance-sheet risk of accounting loss. This statement requires
disaggregation of information about financial instruments with
off-balance-sheet risk of accounting loss by class, business activity, risk, or
other category that is consistent with the management of those instruments. It
also requires that fair value information be presented without combining,
aggregating, or netting the fair value of derivative financial instruments with
the fair value of nonderivative financial instruments. As of December 31,
1995, the Bank has no derivative financial instruments that would be subject to
such disclosures.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes accounting and disclosure
requirements using a fair value method of accounting for stock based employee
compensation plans. Under SFAS No. 123, the Company may either adopt the new
fair value based accounting method or continue the intrinsic value based method
and provide proforma disclosures of net income and earnings per share as if the
new fair value based method had been adopted. The Company plans to adopt only
the disclosure requirements of SFAS No. 123 and such adoption will have no
effect on the Company's consolidated net earnings or cash flows.
ITEM 2. PROPERTIES
The Company and the Bank operate from two offices in Santa Clara
County and two offices in San Benito County. The headquarters of the Company is
located at 500 Tennant Station in Morgan Hill, California. The facility is a
free standing building of approximately 10,300 square feet located in a
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<PAGE> 18
regional shopping center. The property was leased by the Company in 1990 for
ten years, with two five year renewal options. The property also serves as the
Morgan Hill office of the Bank.
In November 1990, the Company sold and leased back its headquarters in
exchange for 5.5 acres in Gilroy, California, which was to be held for future
expansion. In November 1994, the Bank completed development of a 20,000 square
foot free standing building on a portion of the property acquired in the
exchange. The Bank's Gilroy office presently occupies approximately 17,300
square feet of the building and approximately 2,700 square feet is leased to a
tenant. The property is unencumbered.
Approximately 2.8 acres of the property acquired in the exchange
remains undeveloped and is presently listed for sale. The property is
unencumbered.
In April 1995, the Hollister office of the Bank was relocated to a
5,040 square foot free standing building in a regional shopping center in
Hollister, California. The building is located on a parcel of approximately
10,000 square feet which is leased for twenty years under a ground lease
expiring in 2014 with two options to extend for an additional seven years each.
In February 1995, the San Juan Bautista office of the Bank was
purchased from Bank of America. Real property acquired in the purchase
transaction included land of approximately 15,500 square feet with a free
standing bank building of approximately 2,840 square feet. The property is
unencumbered.
ITEM 3. LEGAL PROCEEDINGS
There are no material proceedings adverse to the Company or the Bank
to which any director, officer, affiliate of the Company or 5% shareholder of
the Company or the Bank, or any associate of any such director, officer,
affiliate or 5% shareholder of the Company or Bank is a party, and none of the
above persons has a material interest adverse to the Company or the Bank.
Neither the Company nor the Bank is a party to any pending legal or
administrative proceedings (other than ordinary routine litigation incidental
to the Company's or the Bank's business) and no such proceedings are known to
be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information
There is limited trading in and no established public trading market
for the Company's Common Stock. The Company's Common Stock is not listed on
any exchange nor is it quoted by the NASDAQ Stock Market. Kidder Peabody &
Co., Hoefer & Arnett and Prudential Securities facilitate
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<PAGE> 19
trades in the Company's Common Stock. Based on information provided to the
Company from Hoefer & Arnett, the range of high and low bids for the Common
Stock for the two most recent fiscal years, is as follows:
<TABLE>
<CAPTION>
Calendar Year Low High
-------------- --- ----
<S> <C> <C>
1995
----
First Quarter $11.59 $12.73
Second Quarter 12.27 12.27
Third Quarter 13.18 13.53
Fourth Quarter 13.63 13.63
1994
----
First Quarter $ 9.54 $10.00
Second Quarter 10.45 11.36
Third Quarter 10.91 11.82
Fourth Quarter 11.82 12.73
</TABLE>
The bid price for the Company's Common Stock was $13.75 as of March 6,
1996. All bid prices have been adjusted to reflect the 10% stock dividend for
shareholders of record as of February 16, 1996.
(b) Holders
As of March 6, 1995, there were approximately 473 holders of the
Common Stock of the Company. There are no other classes of common equity
outstanding.
(c) Dividends
The Company's shareholders are entitled to receive dividends when and
as declared by its Board of Directors, out of funds legally available therefor,
subject to the restrictions set forth in the California General Corporation Law
(the "Corporation Law"). The Corporation Law provides that a corporation may
make a distribution to its shareholders if the corporation's retained earnings
equal at least the amount of the proposed distribution. The Corporation Law
further provides that, in the event that sufficient retained earnings are not
available for the proposed distribution, a corporation may nevertheless make a
distribution to its shareholders if it meets two conditions, which generally
stated are as follows: (1) the corporation's assets equal at least 1-1/4 times
its liabilities; and (2) the corporation's current assets equal at least its
current liabilities or, if the average of the corporation's earnings before
taxes on income and before interest expenses for the two preceding fiscal years
was less than the average of the corporation's interest expenses for such
fiscal years, then the corporation's current assets must equal at least 1- 1/4
times its current liabilities. Funds for payment of any cash dividends by the
Company would be obtained from its investments as well as dividends and/or
management fees from the Bank. The payment of cash dividends by the Bank is
subject to the approval of the OCC, as well as restrictions established by
federal banking law, the FRB and the FDIC.
Approval of the OCC is required if the total of all dividends declared
by the Bank's Board of Directors in any calendar year will exceed the Bank's
net profits for that year combined with its retained net profits for the
preceding two years, less any required transfers to surplus or to a fund for
the retirement of preferred stock. The OCC adopted amendments to its rules
regarding dividend
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<PAGE> 20
payments by national banks effective December 13, 1990 to be implemented not
later than January 1, 1991. The amendments, among other matters, generally
prohibit national banks from adding the allowance for credit losses to its
undivided profits then on hand when calculating the amount of dividends which
may be paid. Additionally, while the FRB and the OCC have no general
restriction with respect to the payment of cash dividends by an adequately
capitalized bank to its parent holding company, the FRB, the OCC and/or the
FDIC might, under certain circumstances, place restrictions on the ability of a
particular bank to pay dividends based upon peer group averages and the
performance and maturity of the particular bank, or object to management fees
on the basis that such fees cannot be supported by the value of the services
rendered or are not the result of an arm's length transaction.
The OCC and/or the FDIC may also restrict the payment of dividends if
such payment would be deemed unsafe or unsound or if after the payment of such
dividends, the Bank would be included in one of the "undercapitalized"
categories for capital adequacy purposes pursuant to the Federal Deposit
Insurance Corporation Act of 1991.
Under the formulas discussed above, at December 31, 1995,
approximately $4,273,000 of the Bank's retained earnings were available for
distribution as dividends without the necessity of any prior governmental
approvals.
The Company declared and paid four quarterly dividends of $0.08 per
common share during 1995 and two quarterly dividends of $0.08 per common share
in 1994, the first year in which the Company paid a cash dividend. In total,
the Company paid $382,000 in dividends to common shareholders during 1995
compared to $191,000 in dividends in 1994.
ITEM 6. SELECTED FINANCIAL DATA
Financial information concerning the business of the Company and the
Bank is presented in Management's Discussion and Analysis of the Financial
Condition and Results of Operations and the Consolidated Financial Statements
and notes thereto included in the Company's 1995 Annual Report to Shareholders
and is hereby incorporated by reference.
I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differential
A. Average balance sheets and the interest rate differential for
each of the three years in the period ended December 31, 1995 are included in
Table I of Management's Discussion and Analysis of the Financial Condition and
Results of Operations and are hereby incorporated by reference.
B. An analysis of net interest earnings, including the average
amount outstanding for each period and the interest earned or paid on such
amount, the average yield for each major category of interest bearing asset and
liability, the average yield or rate paid for total interest bearing assets and
liabilities and the net yield on interest earning assets is included in Table I
of Management's Discussion and Analysis of the Financial Condition and Results
of Operations and are hereby incorporated by reference.
20
<PAGE> 21
C. The following table sets forth the dollar amount of change in
interest income and income expense due to rate and volume changes.
VOLUME/RATE ANALYSIS
<TABLE>
<CAPTION>
1995 over 1994 (in thousands)
Increase (decrease) due to change in:
Volume Rate Net Change
<S> <C> <C> <C>
-------------------------------------
Interest earning assets:
Loans(1)(2) $ 250 $ 678 $ 928
Investment securities(3) 111 339 450
Federal funds sold 482 75 557
------------------------------------
Total 843 1,092 1,935
------------------------------------
Interest bearing liabilities:
Demand deposits 147 100 247
Savings deposits 119 143 262
Time deposits 255 327 582
Borrowed funds (54) 16 (38)
------------------------------------
Total $ 467 $ 586 $ 1,053
------------------------------------
------------------------------------
Interest differential $ 376 $ 506 $ 882
====================================
</TABLE>
<TABLE>
<CAPTION>
1994 over 1993 (in thousands)
Volume Rate Net Change
<S> <C> <C> <C>
-------------------------------------
Interest earning assets:
Loans(1)(2) $ 518 $ 790 $ 1,308
Investment securities(3) 324 (94) 230
Federal funds sold 144 113 257
------------------------------------
Total $ 986 $ 809 $ 1,795
------------------------------------
Interest bearing liabilities:
Demand deposits (2) (20) (22)
Savings deposits 67 35 102
Time deposits 199 37 236
Borrowed funds 12 (27) (15)
------------------------------------
Total $ 276 $ 25 $ 301
------------------------------------
------------------------------------
Interest differential $ 710 $ 784 $ 1,494
====================================
</TABLE>
(1) The average balance of nonaccruing loans is immaterial as a percentage
of total loans and, as such, has been included in loans.
(2) Loan fees of $961,000 and $1,031,000 in 1995 and 1994, respectively,
have been included in interest income.
(3) The net change includes the adjustment of tax exempt interest to a
fully taxable equivalent basis using the Federal statutory rate of
34%.
II. Investment portfolio
A. The book value of investment securities for each reported
period, categorized by issuer, is included in Note 4 to the Consolidated
Financial Statements and is hereby incorporated by reference.
B. The amount of each investment category by maturity is included
in Note 4 to the Consolidated Financial Statements and hereby incorporated by
reference.
C. As of December 31, 1995, the Company does not have any
securities of any issuer other than the U.S. Government or U.S. Government
agencies or corporations which exceeds ten percent (10%) of shareholders'
equity.
21
<PAGE> 22
III. Loan Portfolio
A. The amount of loans by category for each reported period is
presented in the Consolidated Balance Sheets of the Consolidated Financial
Statements and hereby incorporated by reference.
B. Maturities and sensitivities of loans to changes in interest
rates are presented in Table IX of Management's Discussion and Analysis of the
Financial Condition and Results of Operations and are hereby incorporated by
reference.
C. Nonaccrual, past due and restructured loans, potential problem
loans, foreign loans and loan concentrations are discussed in the Risk Elements
section of Management's Discussion and Analysis of the Financial Condition and
Results of Operations and are hereby incorporated by reference.
IV. Summary of Loan Loss Experience
A. The following table presents an analysis of loan loss
experience for December 31, 1995 and 1994.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
In thousands 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 1,331 $ 1,246
Provision charged to expense 392 379
Loans charged-off:
Commercial (355) (165)
Real estate-other (110) (40)
Installment (64) (156)
--------------------------------------------------------------------------------
Total (529) (361)
Recoveries:
Commercial 40 1
Real estate 75 7
Installment 4 59
--------------------------------------------------------------------------------
119 67
Balance, end of year $ 1,313 $ 1,331
--------------------------------------------------------------------------------
Average Loans Outstanding $ 88,905 $ 86,542
Ratio of net charge-offs to
</TABLE>
B. Additional analysis of the allowance for loan losses is
included in the Risk Elements section of Management's Discussion and Analysis
of the Financial Condition and Results of Operations and Note 5 to the
Consolidated Financial Statements hereby incorporated by reference.
V. Deposits
An analysis of deposits for each reported period is presented in the
Funding Sources section of Management's Discussion and Analysis of the
Financial Condition and Results of Operations and in the Consolidated Balance
Sheets of the Consolidated Financial Statements hereby incorporated by
reference.
22
<PAGE> 23
VI. Return on Equity and Assets
Return on assets, return on equity, the dividend payout ratio and
equity to assets ratio for each reported period is included in Table XI of
Management's Discussion and Analysis of the Financial Condition and Results of
Operations hereby incorporated by reference.
VII. Short term borrowings
For each reported period, average short term borrowings were less than
15% of shareholders' equity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS ORGANIZATION
South Valley Bancorporation (the "Company") is a California corporation
organized in 1982 to act as the holding company for South Valley National Bank
(the "Bank"), a national bank with headquarters in Morgan Hill and branch
offices in Gilroy, Hollister and San Juan Bautista. In 1983, upon commencement
of the Bank's operations, the Company purchased all of the outstanding common
stock of the Bank. Other than its investment in the Bank, the Company
currently conducts no other significant business activities, although it is
authorized to engage in a variety of activities which are deemed closely
related to the business of banking upon prior approval of the Board of
Governors of the Federal Reserve System (the "FRB"), the Company's principal
regulators.
The Bank engages in basic consumer and commercial banking, offering a diverse
range of traditional banking products and services to the business,
professional and consumer markets, with emphasis on larger consumer accounts,
and small and mid-size business and professional accounts. The Bank focuses the
delivery of these products within a defined service area consisting of southern
Santa Clara and San Benito Counties.
The following analysis is designed to enhance the reader's understanding of the
Company's financial condition and the results of its operations as reported in
the Consolidated Financial Statements included in this Annual Report.
Reference should be made to those statements and the Selected Financial Data
presented elsewhere in this report for additional detailed information.
OVERVIEW
The Company earned net income of $1,577,000 for the year ended December 31,
1995, representing a decrease of $309,000, or 16.4%, compared to 1994 net
income of $1,886,000. Net income for 1994 represented an increase of $560,000,
or 42.2%, over 1993 net income of $1,326,000. On a per common and equivalent
share basis, net income for 1995 was $1.20 compared to $1.43 and $1.01 per
share for the preceding two years. The decline in net income for 1995 was
primarily due to increases in operating expenses, partially offset by growth in
net interest income. Each of these factors is discussed in more detail later
in this analysis.
Common shareholders' equity increased by $1,305,000 during 1995 to $17,557,000
at December 31, 1995, primarily through retention of the year's earnings. In
1994 and 1993, common shareholders' equity increased by $1,645,000 and
$1,326,000, respectively, primarily through
23
<PAGE> 24
retention of earnings. The Company declared and paid four quarterly dividends
of $0.08 per common share during 1995 and two quarterly dividends of $0.08 per
common share in 1994, the first year in which the Company paid a cash dividend.
In total, the Company paid $382,000 in dividends to common shareholders during
1995 compared to $191,000 in dividends in 1994. The Company declared a cash
dividend of $0.08 per common share to shareholders of record on February 15,
1996, payable February 23, 1996. In addition, the Company declared a 10% stock
dividend to shareholders of record on February 16, 1996, also payable on
February 23, 1996. It is the objective of management to maintain adequate
capital for future growth through retention of earnings. The Company's ratio
of common shareholders' equity to total assets was 9.9% at December 31, 1995,
down from 11.3% at December 31, 1994, primarily as a result of significant
asset growth in 1995 which included the purchase of deposit accounts in Gilroy
from Comerica Bank-California and San Juan Bautista from Bank of America,
NT&SA.
EARNINGS SUMMARY
NET INTEREST INCOME -Net interest income refers to the difference between the
interest paid on deposits and borrowings, and the interest earned on loans and
investments. It is the primary component of the net earnings of a financial
institution. Factors to consider in analyzing net interest income are the
composition and volume of earning assets and interest bearing liabilities, the
amount of noninterest bearing liabilities and nonaccrual loans, and changes in
market interest rates.
Net interest income for 1995 was $8,891,000, or 6.6% of average earning assets,
an increase of $906,000, or 11.4%, over $7,985,000, or 6.6% of average earning
assets, in 1994. Net interest income in 1994 represented an increase of
$1,484,000, or 22.8%, from $6,501,000 in 1993. The increase in net interest
income in 1995 primarily reflects an increase in the volume of average earning
assets partially offset by an increase in the volume of interest bearing
liabilities.
Interest income for 1995 was $12,833,000 compared to $10,874,000 and $9,089,000
for 1994 and 1993, respectively. The increase in interest income in 1995 is
primarily due to growth in average earning assets and increased yields. Average
earning assets were $135,014,000 in 1995 representing an increase of
$13,827,000, or 11.4%, over $121,187,000 in 1994. Loan yields averaged 11.3% in
1995 compared to 10.5% in 1994 and generally reflect increased market interest
rates during the year. A majority of the Bank's loans have variable interest
rates indexed to the prime rate. The Bank's average prime rate was 8.75%,
7.16% and 6.00% in 1995, 1994 and 1993, respectively.
The increase in interest income of $1,959,000 in 1995 was partially offset by
an increase in interest expense of $1,053,000. The increase in interest expense
was primarily due to an increase in the volume of interest bearing core
deposits and an increase in the average interest rates paid on those deposits.
The increase in interest income of $1,785,000 in 1994 was partially offset by
an increase in interest expense of $301,000. During 1995, the average rate paid
on interest bearing deposits was 3.6% compared to 3.0% in 1994 and 3.0% in
1993, primarily due to increases in market interest rates over the same period.
Table I sets forth average balance sheet information, interest income and
expense, average yields and rates, and net interest income and margin for the
years ended December 31, 1995, 1994 and 1993. Interest income and average
rates on nontaxable investment securities have been adjusted to reflect tax
equivalent income and yield for comparison purposes.
24
<PAGE> 25
TABLE I. COMPONENTS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
1995 1994
- ------------------------------------------------------------------------------------------------
In thousands (except Average Average Average Average
percentages) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Loans(1) $ 88,905 $10,029 11.3% $ 86,542 $ 9,101 10.5%
Investment securities
Taxable 19,298 1,505 7.8% 16,906 985 5.8%
Nontaxable(2) 6,280 477 7.6% 7,279 547 7.5%
Federal funds sold 20,531 984 4.8% 10,460 427 4.1%
- ------------------------------------------------------------------------------------------------
Total earning assets 135,014 12,995 9.6% 121,187 11,060 9.1%
- ------------------------------------------------------------------------------------------------
Cash and due from banks 10,567 6,998
Bank premises and
equipment, net 5,914 2,934
Other assets 5,161 3,657
- ------------------------------------------------------------------------------------------------
Total Assets $156,656 $134,776
================================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
Interest bearing
liabilities
Demand deposits $ 35,556 936 2.6% $ 30,369 689 2.3%
Savings deposits 34,610 1,166 3.4% 30,803 903 2.9%
Time deposits 37,451 1,791 4.8% 32,018 1,210 3.8%
Borrowed funds 1,030 49 4.8% 2,147 87 4.1%
- ------------------------------------------------------------------------------------------------
Total interest
bearing liabilities 108,647 3,942 3.6% 95,337 2,889 3.0%
- ------------------------------------------------------------------------------------------------
Demand deposits 28,798 23,564
Other liabilities 2,308 372
- ------------------------------------------------------------------------------------------------
Total liabilities 139,753 119,273
Shareholders' equity 16,903 15,503
- ------------------------------------------------------------------------------------------------
Total Liabilities
and Shareholders' Equity $156,656 $134,776
================================================================================================
Net interest income and
margin (net yield)(3) $ 9,053 6.7% $ 8,171 6.7%
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1993
- ---------------------------------------------------------
In thousands (except Average Average
percentages) Balance Interest Rate
- ---------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Earning assets:
Loans(1) $ 81,143 $ 7,793 9.6%
Investment securities
Taxable 12,872 784 6.1%
Nontaxable(2) 6,475 518 8.0%
Federal funds sold 5,651 170 3.0%
- ---------------------------------------------------------
Total earning assets 106,141 9,265 8.7%
- ---------------------------------------------------------
Cash and due from banks 9,663
Bank premises and
equipment, net 1,689
Other assets 4,198
- ---------------------------------------------------------
Total Assets $121,691
=========================================================
LIABILITIES & SHAREHOLDERS' EQUITY
Interest bearing
liabilities
Demand deposits $ 30,462 711 2.3%
Savings deposits 28,425 801 2.8%
Time deposits 26,649 974 3.7%
Borrowed funds 1,924 102 5.3%
- ---------------------------------------------------------
Total interest
bearing liabilities 87,460 2,588 3.0%
- ---------------------------------------------------------
Demand deposits 19,401
Other liabilities 756
- ---------------------------------------------------------
Total liabilities 107,617
Shareholders' equity 14,074
- ---------------------------------------------------------
Total Liabilities
and Shareholders'
Equity $ 121,691
=========================================================
Net interest income
and margin
(net yield)(3) $ 6,677 6.3%
=========================================================
</TABLE>
1. Loan interest includes loan fees of $961,000, $1,031,000 and $835,000
in 1995, 1994 and 1993, respectively.
2. Tax exempt interest income includes $162,000, $186,000 and $176,000 in
1995, 1994 and 1993, respectively, to adjust to a fully taxable
equivalent basis using the Federal statutory rate of 34%.
3. Net interest margin is computed by dividing net interest income by
total average earning assets.
OTHER INCOME - Other income growth is a key to improving overall profitability
in a deregulated competitive environment. Noninterest income provides stability
to the income stream and enhances overall profitability. Total noninterest
income was $1,108,000 for 1995, $783,000 for 1994 and $666,000 for 1993.
Customer service fees, a major component of noninterest income, were $951,000
in 1995, an increase of $228,000, or 31.5%, over $723,000 in 1994, which
increased $142,000, or 24.4%, over $581,000 in 1993. Increases in customer
service fees are largely the result of growth in the total number of demand
deposit accounts.
In 1992, the Bank established a Small Business Administration ("SBA")
guaranteed loan origination program. The guaranteed portion of loans originated
under the program may be sold to investors in the secondary market. Gains on
the sale of SBA loans of $71,000, $46,000 and $68,000 for the years ended
December 31, 1995, 1994 and 1993, respectively, represented 6.4%, 5.9% and
10.2% of total other income. At December 31, 1995, the Bank had $445,000 in
SBA loans available for sale, compared to no such loans at December 31, 1994
and 1993. The Bank periodically evaluates the composition of earning assets,
loan demand and conditions in the secondary market for SBA loans to determine
if such loans will be sold or held in the portfolio.
There were no sales of investment securities in 1995, 1994, or 1993.
25
<PAGE> 26
OTHER EXPENSES - Noninterest expense reflects the costs of products and
services, systems, facilities and personnel for the Company. The major
components of other expense stated as a percentage of average earning assets
for the three years ended December 31, are as follows:
TABLE II. OTHER EXPENSES TO AVERAGE EARNING ASSETS
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and benefits 2.48% 2.23% 2.27%
Occupancy 0.41 0.42 0.53
Data and item processing 0.37 0.08 0.15
Equipment 0.30 0.28 0.32
Legal and professional fees 0.19 0.14 0.12
Forms and supplies 0.15 0.15 0.18
Marketing 0.14 0.16 0.17
Deposit insurance 0.11 0.25 0.26
Correspondent bank charges 0.09 0.11 0.02
Net cost of OREO 0.04 0.00 0.14
Other 0.91 0.62 0.32
-----------------------------------------------------------------------------------
Total 5.19% 4.44% 4.48%
===================================================================================
</TABLE>
Noninterest expense increased to $7,010,000 in the year ended December 31, 1995
compared to $5,377,000 and $4,754,000 for the same periods in 1994 and 1993. As
a percentage of average earning assets, noninterest expense increased to 5.19%
in 1995 compared to 4.44% in 1994 and 4.48% in 1993.
Salaries and employee benefits expense was $3,351,000 in 1995 as compared to
$2,703,000 in 1994, an increase of $648,000, or 24.0%. Salaries and employee
benefits expense represented 2.48% of average earning assets for 1995, as
compared to 2.23% and 2.27% in 1994 and 1993, respectively. The increase in
salaries and employee benefits expense is due to an increase in the number of
employees associated with increases in the volume of assets, the number of Bank
customers and the opening of a new office in San Juan Bautista.
Occupancy and equipment expenses increased $125,000, or 14.8%, to $970,000 in
1995 compared to $845,000 in 1994. The increase in occupancy and equipment
expenses in 1995 was primarily due to relocation of the Bank's Gilroy and
Hollister offices and acquisition of the San Juan Bautista office. In
addition, during the fourth quarter of 1994, the Bank made investments to
improve its data processing and customer service systems. The Bank absorbed
the cost of these investments in 1995.
Deposit insurance in 1995 was $149,000, a decrease of $158,000 from $307,000 in
1994. The decrease was attributable to decreases in the premium assessed by
the Federal Deposit Insurance Corporation (the "FDIC"). Based on current
information available from the FDIC, the Company expects that the cost of
deposit insurance will remain at current low levels throughout 1996, however,
there is no assurance this will occur.
The net carrying cost of other real estate owned ("OREO") in 1995 was $48,000,
compared to $2,000 in 1994 and $145,000 in 1993. The increase in cost during
1995 was primarily attributable to write downs in the carrying value of OREO
reflecting declines in the estimated fair market value.
26
<PAGE> 27
Other expenses were $1,238,000 in 1995, an increase of $515,000, or 71.2%, over
$723,000 in 1994. Other expenses in 1993 were $344,000. The increase in other
expenses in 1995 was partially attributable to expenses associated with a
higher volume of customers, the opening of a new office in San Juan Bautista
and the relocation of the Bank's Hollister office.
The Company's effective income tax rate was 39.3% for 1995 compared to 37.4%
for 1994 and 34.5% for 1993. Changes in the effective tax rate of the Company
are primarily due to fluctuations in the proportion of tax exempt income
generated from investment securities to pre-tax income. Tax exempt income
recognized by the Bank was $315,000, $361,000 and $342,000 in 1995, 1994 and
1993, respectively.
BALANCE SHEET ANALYSIS
Total assets of South Valley Bancorporation at December 31, 1995 were
$177,273,000 compared to $143,870,000 in 1994 and $128,191,000 in 1993,
representing increases of 23.2% and 12.2% in 1995 and 1994, respectively.
Based on average balances, total assets of $156,656,000 in 1995 represent an
increase of 16.2% over $134,776,000 in 1994 which increased 10.8% over average
total assets of $121,691,000 in 1993.
EARNING ASSETS
LOAN PORTFOLIO - The following table summarizes the loan portfolio by loan type
at December 31, for the past five years.
TABLE III. LOANS BY TYPE
<TABLE>
<CAPTION>
In thousands 1995 1994 1993 1992 1991
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $32,721 $33,619 $23,338 $21,075 $19,325
Real estate-other 28,524 28,057 36,057 39,729 38,950
Real estate-construction 15,338 16,813 16,405 12,424 14,564
Installment 13,496 11,579 10,061 9,159 8,567
-------------------------------------------------------------------------------------------
Total loans 90,079 90,068 85,861 82,387 81,406
Allowance for credit losses (1,313) (1,331) (1,246) (1,127) (1,004)
Deferred loan fees-net (528) (496) (550) (484) (425)
-------------------------------------------------------------------------------------------
Net loans $88,238 $88,241 $84,065 $80,776 $79,977
===========================================================================================
</TABLE>
Average loans in 1995 were $88,905,000 representing an increase of $2,363,000,
or 2.7%, over 1994. Average loans of $86,542,000 in 1994 increased $5,399,000,
or 6.7%, over 1993. Average loans comprised 65.8% of average earning assets in
1995 compared to 71.4% and 76.4% in 1994 and 1993, respectively.
Net loans outstanding at December 31, 1995 were $88,238,000 and did not change
materially from $88,241,000 at December 31, 1994. During 1995, real
estate-other and installment loans increased while commercial loans and real
estate-construction loans declined. For the past five years, the Bank has
noted a decline in real estate lending, both construction and other, relative
to other types of loans. The Bank believes this trend reflects a decline in
overall real estate activity in its market area attributable to economic
conditions. Table IV presents the composition of the loan portfolio by loan
type as a percentage of total loans as of December 31, for 1991 through 1995.
27
<PAGE> 28
TABLE IV. COMPOSITION OF THE LOAN PORTFOLIO
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial 36.3% 37.3% 27.2% 25.6% 23.7%
Real estate-other 31.7% 31.2% 42.0% 48.2% 47.9%
Real estate-construction 17.0% 18.7% 19.1% 15.1% 17.9%
Installment 15.0% 12.8% 11.7% 11.1% 10.5%
------------------------------------------------------------------------------------------
Total loans 100.0% 100.0% 100.0% 100.0% 100.0%
==========================================================================================
</TABLE>
Commercial loans consist of credit lines for operating needs, loans for
equipment purchases and working capital, and various other business loan
products. The Bank offers commercial loan products to businesses and
professionals in its service area. Specialized commercial loan products include
SBA loans. In the first quarter of 1996, the Bank established a commercial
finance department offering lines of credit which are typically more collateral
dependent than traditional bank loans.
Installment loans include a range of traditional consumer loan products offered
by the Bank such as home equity and personal lines of credit and loans to
finance purchases of autos, boats, recreational vehicles, mobile homes and
various other consumer items. The Bank also offers credit cards, primarily to
customers in its primary service area.
Construction loans are generally composed of extensions of credit to known
customers within the Bank's service area for construction of custom and
semi-custom single family residences. Approximately 83.0% of construction
loans outstanding at December 31, 1995 were to finance the construction of
homes built for resale. At December 31, 1994, approximately 65.0% of the Bank's
construction loan portfolio consisted of loans to finance the construction of
homes for resale. The construction loan portfolio at December 31, 1995
consisted of approximately 59 separate loans outstanding to 42 individual
borrowers. Management believes the decrease in construction loans during 1995
reflects continuing weakness in specific segments of the single family
residential real estate market served by the Bank.
Other real estate loans consist primarily of loans to Bank depositors secured
by first deeds of trust on commercial and residential properties typically with
short term maturities and original loan to value ratios not exceeding 75%. The
Bank does not make long term mortgage loans; however, the Bank has informal
arrangements in place with mortgage lenders to assist Bank customers in
securing single family mortgage financing.
Table V sets forth the maturity distribution of commercial loans and real
estate construction loans as of December 31, 1995:
TABLE V. LOAN MATURITY DISTRIBUTION
<TABLE>
<CAPTION>
One year
Less than through five Over five
one year years years Total
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $28,037,000 $4,048,000 $636,000 $32,721,000
Real estate-construction 15,012,000 36,000 290,000 15,338,000
</TABLE>
Loans shown above with maturities of greater than one year include $3,877,000
of fixed rate loans and $1,133,000 of variable rate loans.
28
<PAGE> 29
RISK ELEMENTS - The Company assesses and manages credit risk on an ongoing
basis through stringent credit review and approval policies, extensive internal
monitoring and established formal lending policies. Additionally, the Bank
contracts with an outside loan review consultant to periodically grade new
loans and to review the existing loan portfolio. Management believes its
ability to identify and assess risk and return characteristics of the Company's
loan portfolio is critical for profitability and growth. Management strives to
continue the historically low level of credit losses by continuing its emphasis
on credit quality in the loan approval process, active credit administration
and regular monitoring. With this in mind, management has designed and
implemented a comprehensive loan review and grading system that functions to
continually assess the credit risk inherent in the loan portfolio.
Additionally, management believes its ability to manage portfolio credit risk
is enhanced by the employment of lending personnel with knowledge of the Bank's
service area. Each Bank office is staffed with lending personnel who live in
the communities served by the office and virtually all of the directors of the
Company and the Bank are active members of the communities served by the Bank.
Further, the senior management and the Board of Directors of the Company and
the Bank have experienced minimal turnover since inception of the Company in
1982 and the Bank in 1983.
Ultimately, credit quality may be influenced by underlying trends in the
economic and business cycles. In the period spanning the second half of 1990
and continuing through 1995, the Bank's market area and California generally
experienced a softening in real estate values related to the slowdown in
general economic conditions. In the year ended December 31, 1995, real estate
values firmed up slightly as housing became more affordable due to relatively
low levels of market interest rates and improved economic conditions in
California. At December 31, 1995, construction loans and other real estate
secured loans comprised 17.0% and 31.7%, respectively, of total loans
outstanding. Management believes that its lending policies and underwriting
standards will tend to minimize losses in an economic downturn; however, there
is no assurance that losses will be limited to the extent provided for under
such circumstances. The Bank's loan policies and underwriting standards
include, but are not limited to, the following: 1) maintaining a thorough
understanding of the Bank's service area and limiting investments outside of
this area, 2) maintaining a thorough understanding of the borrowers' knowledge
and capacity in their field of expertise, 3) basing real estate construction
loan approval not only on salability of the project, but also on the borrowers'
capacity to support the project financially in the event it does not sell
within the original projected time period, and 4) maintaining conforming and
prudent loan to value and loan to cost ratios based on independent outside
appraisals and ongoing inspection and analysis by Bank construction lending
officers. In addition, the Bank strives to diversify the risk inherent in the
construction portfolio by avoiding concentrations to individual borrowers and
on any one project.
NONACCRUAL LOANS, LOANS PAST DUE 90 DAYS AND OREO - Management generally places
loans on nonaccrual status when they become 90 days past due, unless the loan
is well secured and in the process of collection. Loans are charged off when,
in the opinion of management, collection appears unlikely. At December 31,
1995, nonaccrual loans amounted to $1,488,000, or 1.7% of total loans, compared
to $1,260,000, or 1.4% of total loans, and $679,000, or 0.8% of total loans, at
December 31, 1994 and 1993, respectively.
Loans past due 90 days and still accruing interest at December 31, 1995 were
$120,000 compared to $727,000 at December 31, 1994 and $44,000 at December 31,
1993.
29
<PAGE> 30
Other real estate owned included in other assets was $1,953,000 at December 31,
1995 and consisted of one commercial property, one parcel of undeveloped land,
and two parcels of undeveloped commercial property. Other real estate owned
was $1,627,000 at December 31, 1994 and consisted of one commercial property
and land held for sale. The market value of other real estate owned at
December 31, 1995 and 1994, based on current appraisals, was in excess of the
carrying value.
At December 31, 1995, the Bank had $513,000 in loans which were troubled debt
restructurings as defined by SFAS 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings," and which were not either nonaccrual loans or
loans past due 90 days or more and still accruing interest.
POTENTIAL PROBLEM LOANS - At December 31, 1995, the Company did not have any
loans other than those disclosed as nonaccrual loans, loans past due 90 days or
more and still accruing and troubled debt restructurings, where known
information about 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.
FOREIGN OUTSTANDINGS - At December 31, 1995, the Company had no loans
outstanding to borrowers in foreign countries.
CONCENTRATIONS - At December 31, 1995, the Company does not have any
concentration of loans to multiple borrowers engaged in similar activities
which would cause them to be similarly impacted by economic or other
conditions, other than real estate-construction loans.
PROVISION AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES - The provision for credit
losses is based upon management's evaluation of the adequacy of the existing
allowance for loans outstanding. This allowance is increased by provisions
charged to expense and reduced by loan charge-offs net of recoveries.
Management determines an appropriate provision based upon the interaction of
three primary factors: (1) the loan portfolio growth in the period, (2) a
comprehensive grading and review formula for total loans outstanding, and (3)
actual previous charge-offs. The allowance for credit losses totaled
$1,313,000, or 1.46% of total loans, at December 31, 1995 compared to
$1,331,000, or 1.47% of total loans, at December 31, 1994 and $1,246,000, or
1.45% of total loans, at December 31, 1993. It is the responsibility of
management to maintain the allowance for credit losses at a level adequate for
known and future risks inherent in the loan portfolio. Based on information
currently available to analyze credit loss potential, including economic
factors, overall credit quality, historical delinquency and a history of actual
charge-offs, management believes that the credit loss provision and allowance
is prudent and warranted. However, no prediction of the ultimate level of
loans charged off in future years can be made with any certainty. An analysis
of the activity in the Bank's allowance for credit losses is presented in Note
5 of Notes to Consolidated Financial Statements.
In evaluating the adequacy of the allowance for loan losses, the Company does
not attempt to allocate the allowance for loan losses to specific categories of
loans. Management believes that any breakdown or allocation of the allowance
for possible loan losses into loan categories lends an appearance of exactness
which does not exist in that the allowance is utilized as a single unallocated
allowance available for all loans.
30
<PAGE> 31
INVESTMENT PORTFOLIO - An analysis of the Company's investment portfolio at
December 31, 1995 and 1994 including book value, maturities and weighted
average yields is presented in Note 4 of Notes to Consolidated Financial
Statements. At December 31, 1995 and 1994, there were no issuers for which the
book value was greater than 10% of shareholders' equity other than the U.S.
Government and U.S. Government Agencies and Corporations.
FUNDING SOURCES
Deposits represent the Bank's principal source of funds for investment.
Deposits are primarily core deposits in that they are demand, savings and time
deposits under $100,000 generated from local businesses and individuals. These
sources represent relatively stable, long term deposit relationships which
minimizes fluctuations in overall deposit balances. At December 31, 1995 such
accounts comprise 90.9% of all deposit balances compared to 91.0% and 93.0% at
December 31, 1994 and 1993. The Bank has never had brokered deposits. Table VI
presents the deposit portfolio by deposit type for the five years ended
December 31, 1995.
TABLE VI. DEPOSITS BY TYPE
<TABLE>
<CAPTION>
In thousands 1995 1994 1993 1992 1991
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand, noninterest bearing $ 43,873 $ 30,869 $ 24,955 $ 22,653 $ 17,256
Time 39,323 30,105 30,186 26,633 34,644
Demand, interest bearing 37,900 31,823 27,747 33,781 29,791
Savings 36,593 31,844 27,814 26,087 20,534
-------------------------------------------------------------------------------------------------------
Total deposits $ 157,689 $ 124,641 $ 110,702 $ 109,154 $ 102,225
=======================================================================================================
</TABLE>
The increase in 1995 year end total deposits is primarily attributable to
increases in core demand and savings categories. As a result of the Bank's
efforts to market its services to businesses, noninterest bearing deposits as a
percentage of total deposits increased from 1994 to 1995, continuing a 5 year
trend. The Bank believes that the relatively slower growth in interest bearing
deposits is also a reflection of recent low market rates of interest, which
have resulted in the disintermediation of bank deposits towards uninsured
investment alternatives such as mutual funds, stocks and bonds. Table VII
shows the mix of deposits by type as a percentage of total deposits at December
31, for the past 5 years.
TABLE VII. COMPOSITION OF DEPOSITS
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand, noninterest bearing 27.8% 24.8% 22.5% 20.8% 16.9%
Time 24.9% 24.2% 27.3% 24.4% 33.9%
Demand, interest bearing 24.0% 25.5% 25.1% 30.9% 29.1%
Savings 23.3% 25.5% 25.1% 23.9% 20.1%
------------------------------------------------------------------------------------------
Total deposits 100.0% 100.0% 100.0% 100.0% 100.0%
==========================================================================================
</TABLE>
Average deposits for 1995 were $136,415,000 as compared to average deposits of
$116,754,000 in 1994, an increase of $19,661,000, or 16.8%. The increase in
average deposits is attributable to growth in deposits in the Bank's Morgan
Hill, Gilroy and Hollister offices and the acquisition of the deposit customers
of Bank of America's former San Juan Bautista office, which represented
approximately $9 million of the increase. The Bank also acquired approximately
$8 million in deposits from the former Gilroy office of Comerica Bank in late
1995. The Comerica transaction
31
<PAGE> 32
was completed on December 15, 1995 and did not have a significant impact on
average deposits for the full year.
Table VIII presents the maturities of time certificates of deposit of $100,000
or more at December 31, 1995.
TABLE VIII. MATURITIES OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
<TABLE>
<CAPTION>
December 31,
1995
----------------------------------------------------------
<S> <C>
3 months or less $ 6,448,000
Over 3 months through 6 months 2,040,000
Over 6 months through 12 months 4,009,000
Over 12 months 1,812,000
---------------------------------------------------------
Total $14,309,000
=========================================================
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
LIQUIDITY - Liquidity management refers to the Bank's ability to provide funds
on an ongoing basis to meet fluctuations in deposit levels as well as the
credit needs and requirements of its clients. The liquidity position of the
Bank involves both assets and liabilities. In addition, off balance sheet
items such as loan commitments and available borrowing lines play an important
role in liquidity management. Cash and Federal funds lines, investment
securities, loan repayments and the acquisition of new deposits represent
sources of immediate, or short term, liquidity. This liquidity is available to
fund new loans and deposit withdrawals. The Bank assesses projected funding
requirements by reviewing historical funding patterns, current and forecasted
economic conditions and individual client funding needs. The Bank maintains a
line of credit with one of its correspondent banks for up to $10,000,000 which
is available on a short term basis. Formal and informal agreements are also in
place with various other banks to purchase participations in the Bank's loan
portfolio, if necessary.
Commitments to fund loans and outstanding standby letters of credit at December
31, 1995, were approximately $37,373,000 and $986,000, respectively. Such
loans and letters of credit relate primarily to revolving lines of credit and
other commercial loans, and to real estate construction loans.
The Bank manages its liquidity by maintaining a majority of its investment
portfolio in Federal funds sold and other liquid investments. Liquidity is
measured by various ratios, the most common being the liquidity ratio of cash,
Federal funds sold and unpledged investment securities, compared to total
deposits. At December 31, 1995, this ratio was 48.0% compared to 35.3% at
December 31, 1994. Another key liquidity ratio is the ratio of loans to
deposits, which was 57.1% at December 31, 1995 and 72.3% at December 31, 1994.
During 1995, the Bank experienced higher levels of liquidity than normal and
compared to the previous year. The high levels of liquidity in 1995 are
attributable, in part, to large increases in deposits which were deployed in
investment securities and Federal funds sold. Management of the Bank expects
that a portion of its liquid assets at December 31, 1995 will ultimately be
used to fund growth in the loan portfolio.
INTEREST RATE SENSITIVITY - Interest rate sensitivity is a measure of the
exposure of the Bank's future earnings to fluctuations in interest rates.
Generally, if assets and liabilities do not reprice simultaneously and in equal
volumes, the Bank's net interest margin and net interest income will
32
<PAGE> 33
change. It is management's objective to maintain stability in the net interest
margin in times of fluctuating interest rates by maintaining an appropriate mix
of interest sensitive assets and liabilities. To achieve this goal, the Bank
prices the majority of its interest bearing liabilities at variable rates that
adjust with the prime rate. At the same time, the majority of its interest
earning assets are also priced at variable rates that float with the prime
rate. This pricing structure tends to stabilize the net interest margin.
Table IX sets forth the distribution of repricing for interest earning assets
and interest bearing liabilities included in the Company's consolidated balance
sheet at December 31, 1995, and the related interest rate sensitivity gap, both
for each individual repricing period and on a cumulative basis.
TABLE IX. INTEREST RATE SENSITIVITY (in thousands)
<TABLE>
<CAPTION>
Over thirty days Over three
Assets and liabilities which Immediately and and within three months and Over one year and Over five
mature or reprice: within 30 days months within one year within five years years Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 27,900 $ - $ - $ - $ - $ 27,900
Investment securities - 1,615 8,022 20,968 10,782 41,997
Loans excluding nonaccrual
loans and overdrafts 57,268 2,006 13,265 10,769 5,283 88,591
- -----------------------------------------------------------------------------------------------------------------------------------
Period total $ 85,168 $ 3,621 $ 21,287 $ 31,737 $ 16,015 $ 157,828
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative total $ 85,168 $ 88,789 $ 110,076 $ 141,813 $ 157,828
- -----------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Demand $ 37,900 $ - $ - $ - $ - $ 37,900
Savings 36,593 - - - - 36,593
Time certificates 9,677 7,831 16,265 5,550 - 39,528
Other borrowings 376 - - - - 376
- -----------------------------------------------------------------------------------------------------------------------------------
Period total $ 84,546 $ 7,831 $ 16,265 $ 5,550 $ - $ 114,192
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative total $ 84,546 $ 92,377 $ 108,642 $ 114,192 $ 114,192
- -----------------------------------------------------------------------------------------------------------------------------------
Amounts
Interest rate sensitivity gap $ 622 $ (4,210) $ 5,022 $ 26,187 $ 16,015
Cumulative interest rate
sensitivity gap $ 622 $ (3,588) $ 1,434 $ 27,621 $ 43,636
Ratios:
Interest rate sensitivity gap 1.01 0.46 1.31 5.72 N/A
Cumulative interest rate
sensitivity gap 1.01 0.96 1.01 1.24 N/A
</TABLE>
The table indicates the time periods in which interest earning assets and
interest bearing liabilities will mature or reprice in accordance with their
contractual terms. The table does not necessarily indicate the impact of
general interest rate movements on the net interest margin since the repricing
of various categories of assets and liabilities is subject to competitive
pressures. The Company and the Bank have historically maintained a cumulative
interest rate sensitivity gap ratio approximating 1:1 for assets and
liabilities repricing within one month, that is, a nearly equal amount of
interest earning assets and interest bearing liabilities will reprice or mature
within 30 days. At December 31, 1995, the cumulative interest rate sensitivity
gap for assets and liabilities that reprice within 30 days was 1.01:1.
Similarly, a virtually equal amount of interest earning assets and interest
bearing liabilities reprice within one year as reflected in the cumulative
interest rate sensitivity gap ratio of 1.01:1 for that period. The effect of
this matching of maturities and repricing of interest earning
33
<PAGE> 34
assets and interest bearing liabilities is to stabilize the Bank's net interest
margin in times of both rising and falling interest rates.
CAPITAL RESOURCES
The Company has been able to sustain its growth in capital through profit
retention and the exercise of stock options by directors and officers of the
Company. Prior to 1994, all earnings were retained to maintain the Company's
capital position and support additional growth in the future. In the third
quarter of 1994, the Company declared and paid an initial cash dividend of $.08
per common share. An additional cash dividend of $.08 per common share was
declared and paid in the fourth quarter of 1994. The Company declared and paid
four quarterly dividends of $0.08 per common share during 1995. In addition,
the Company declared and paid a cash dividend of $0.08 per common share and a
10% stock dividend in the first quarter of 1996.
For the year ended December 31, 1995, the Company retained earnings of
$1,195,000 net of $382,000 in dividends. For the year ended December 31, 1994,
the Company retained earnings of $1,695,000 after payment of $191,000 in cash
dividends. During 1993 shareholders' equity increased $1,326,000 which was
attributed to retention of earnings.
The Company and Bank are subject to capital adequacy guidelines issued by the
Board of Governors of the Federal Reserve System (the "FRB") and the Office of
the Comptroller of the Currency (the "OCC"). The FRB and the OCC have adopted
risk based capital guidelines for bank holding companies and national banks.
The Company and the Bank are required to maintain capital equal to at least
8.0% of assets and commitments to extend credit, weighted by risk. At least
4.0% must consist primarily of common equity (including retained earnings) and
the remainder may consist of subordinated debt, cumulative preferred stock or a
limited amount of loan loss reserves. Certain assets and commitments to extend
credit present less risk than others and will be assigned to lower risk
weighted categories requiring less capital allocation than the 8.0% total
ratio. For example, cash and government securities are assigned to a 0% risk
weighted category; most home mortgage loans are assigned to a 50% risk weighted
category requiring a 4.0% capital allocation; and commercial loans are assigned
to a 100% risk weighted category requiring an 8.0% capital allocation. In
addition, the FRB and the OCC have adopted a 3.0% minimum leverage ratio for
banking organizations as a supplement to the risk weighted capital guidelines.
The minimum leverage ratio is intended to limit the ability of banking
organizations to leverage their equity capital base by increasing assets and
liabilities without increasing capital proportionately. The 3.0% ratio
constitutes a minimum ratio for well-run banking organizations under the FRB
standards and organizations experiencing or anticipating significant growth or
failing to meet such standards will be required to maintain a minimum leverage
ratio ranging from 100 to 200 basis points in excess of the 3.0% ratio.
Table X presents the capital and leverage ratios of the Company as of December
31:
TABLE X. RISK BASED CAPITAL AND LEVERAGE RATIOS
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIOS 1995 1994
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital $ 17,141 14.8% $ 16,303 15.5%
Total capital $ 18,448 16.0% $ 17,621 16.7%
Total risk adjusted assets $ 115,452 $ 105,461
LEVERAGE RATIOS
---------------------------------------------------------------------------------------------
Tier 1 capital $ 17,141 10.1% $ 16,303 12.1%
Quarterly average total assets $ 170,132 $ 134,776
---------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 35
On December 19, 1991, the President signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 (the "FDICIA"). The FDICIA, among other
matters, substantially revises banking regulations and establishes a framework
for determination of capital adequacy of financial institutions. Under the
FDICIA, financial institutions are placed into one of five capital adequacy
categories as follows: (1) "well capitalized" consisting of institutions with a
total risk based capital ratio of 10% or greater, a Tier 1 risk based capital
ratio of 6% or greater and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive or
prompt corrective action directive; (2) "adequately capitalized" consisting of
institutions with a total risk based capital ratio of 8% or greater, a Tier 1
risk based capital ratio of 4% or greater and a leverage ratio of 4% or
greater, and the institution does not meet the definition of a "well
capitalized" institution; (3) "undercapitalized" consisting of institutions
with a total risk based capital ratio less than 8%, a Tier 1 risk based capital
ratio of less than 4%, or a leverage ratio of less than 4%; (4) "significantly
undercapitalized" consisting of institutions with a total risk based capital
ratio of less than 6%, a Tier 1 risk based capital ratio of less than 3%, or a
leverage ratio of less than 3%; and, (5) "critically undercapitalized"
consisting of an institution with a ratio of tangible equity to total assets
that is equal to or less than 2%.
Financial institutions classified as undercapitalized or below are subject to
various limitations including, among other matters, certain supervisory actions
by bank regulatory authorities and restrictions related to (i) growth of
assets, (ii) payment of interest on subordinated indebtedness, (iii) payment of
dividends or other capital distributions, and (iv) payment of management fees
to a parent holding company. The FDICIA requires the bank regulatory
authorities to initiate corrective action regarding financial institutions
which fail to meet minimum capital requirements. Such action may, among other
matters, require a financial institution to augment capital and reduce total
assets. Critically undercapitalized financial institutions may also be subject
to appointment of a receiver or conservator unless the financial institution
submits an adequate capitalization plan.
RETURN ON EQUITY AND ASSETS
Table XI presents return on average assets, return on beginning equity,
dividend payout ratio and the average equity to average assets ratio.
TABLE XI. RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------------------------------------
<S> <C> <C>
Return on average assets 1.01% 1.40%
Return on beginning equity 9.70% 12.91%
Dividend payout ratio 29.33% 10.13%
Average equity to average assets ratio 10.79% 11.50%
-------------------------------------------------------------------------
</TABLE>
INFLATION
The impact of inflation on a financial institution differs significantly from
that exerted on manufacturing, or other commercial concerns, primarily because
its assets and liabilities are largely monetary. In general, inflation
primarily affects the Company indirectly through its effect on market rates of
interest, and thus the ability of the Bank to attract loan customers.
Inflation affects the growth of total assets by increasing the level of loan
demand, and potentially adversely
35
<PAGE> 36
affects the Company's capital adequacy because loan growth in inflationary
periods can increase at rates higher than the rate that capital grows through
retention of earnings which the Company may generate in the future. In
addition to its effects on interest rates, inflation directly affects the
Company by increasing the Company's operating expenses.
36
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 38
Consolidated Balance Sheets 39
December 31, 1995 and 1994
Consolidated Statements of Income 40
Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity 41
Years Ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements 42
</TABLE>
All Schedules have been omitted since the required information is not present
in amounts sufficient to require submission of the schedule or because the
information required is included in the Consolidated Financial Statements or
notes thereto.
37
<PAGE> 38
THE BOARD OF DIRECTORS
AND SHAREHOLDERS OF
SOUTH VALLEY BANCORPORATION
We have audited the accompanying consolidated balance sheets of South Valley
Bancorporation and subsidiary as of December 31, 199 and 1994, and the related
consolidated statements of income, cash flows and shareholders' equity for each
of the three years in the period ended December 31, 1995. 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 South Valley Bancorporation and
subsidiary at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
Deloitte & Touche, LLP
San Jose, California
January 28, 1996
38
<PAGE> 39
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1994
-------------- --------------
<S> <C> <C> <C>
ASSETS Cash and due from banks $ 9,436,000 $ 6,015,000
Federal funds sold 27,900,000 13,700,000
-------------- --------------
Total cash and equivalents 37,336,000 19,715,000
-------------- --------------
Securities available for sale at market
value (amortized cost-1995,
$34,145,000; 1994, $10,544,000) 34,247,000 10,460,000
Securities held to maturity at cost (market value-
1995, $7,213,000; 1994, $15,876,000) 7,089,000 16,765,000
Loans:
Commercial 32,721,000 33,619,000
Real estate-construction 15,338,000 16,813,000
Real estate-other 28,524,000 28,057,000
Installment 13,496,000 11,579,000
-------------- --------------
Total loans 90,079,000 90,068,000
Allowance for credit losses (1,313,000) (1,331,000)
Deferred loan fees-net (528,000) (496,000)
-------------- --------------
Net loans 88,238,000 88,241,000
-------------- --------------
Premises and equipment, net 5,984,000 4,519,000
Accrued interest receivable and other assets 4,379,000 4,170,000
-------------- --------------
Total assets $ 177,273,000 $ 143,870,000
============== ==============
LIABILITIES AND Deposits:
SHAREHOLDERS' EQUITY Demand, noninterest bearing $ 43,873,000 $ 30,869,000
Demand, interest bearing 37,900,000 31,823,000
Savings 36,593,000 31,844,000
Time 39,323,000 30,105,000
-------------- --------------
Total deposits 157,689,000 124,641,000
Other liabilities 2,027,000 2,977,000
-------------- --------------
Total liabilities 159,716,000 127,618,000
-------------- --------------
Commitments and contingencies (notes 6 and 9)
Shareholders' equity
Preferred stock-no par value; authorized
2,000,000 shares; no shares issued
Common stock-no par value; authorized 4,000,000
shares; outstanding 1,194,697 shares 11,331,000 11,331,000
Retained earnings 6,166,000 4,971,000
Unrealized gain (loss) on securities available
for sale 60,000 (50,000)
-------------- --------------
Shareholders' equity 17,557,000 16,252,000
-------------- --------------
Total liabilities and shareholders' equity $ 177,273,000 $ 143,870,000
============== ==============
</TABLE>
39
<PAGE> 40
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1995 1994 1993
--------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME Loans (including fees) $ 10,029,000 $ 9,101,000 $ 7,793,000
Investment securities
Taxable 1,505,000 985,000 829,000
Tax exempt 315,000 361,000 342,000
Federal funds sold 984,000 427,000 125,000
--------------------------------------------------------------
Total interest income 12,833,000 10,874,000 9,089,000
--------------------------------------------------------------
INTEREST EXPENSE Interest on deposits 3,893,000 2,802,000 2,486,000
Other 49,000 87,000 102,000
--------------------------------------------------------------
Total interest expense 3,942,000 2,889,000 2,588,000
--------------------------------------------------------------
Net interest income before provision
for credit losses 8,891,000 7,985,000 6,501,000
Provision for credit losses (392,000) (379,000) (388,000)
--------------------------------------------------------------
Net interest income after provision
for credit losses 8,499,000 7,606,000 6,113,000
--------------------------------------------------------------
OTHER INCOME Customer service fees 951,000 723,000 581,000
Net gains on sales of loans 71,000 45,000 68,000
Other 86,000 14,000 17,000
--------------------------------------------------------------
Total other income 1,108,000 783,000 666,000
OTHER EXPENSES Salaries and benefits 3,351,000 2,703,000 2,410,000
Occupancy 560,000 508,000 562,000
Data and item processing 498,000 101,000 158,000
Equipment 410,000 337,000 344,000
Legal and professional fees 251,000 175,000 124,000
Forms and supplies 198,000 184,000 191,000
Marketing 183,000 199,000 178,000
Deposit insurance 149,000 307,000 281,000
Correspondent bank charges 124,000 138,000 17,000
Net cost of OREO 48,000 2,000 145,000
Other 1,238,000 723,000 344,000
--------------------------------------------------------------
Total other expenses 7,010,000 5,377,000 4,754,000
--------------------------------------------------------------
Income before income taxes 2,597,000 3,012,000 2,025,000
Provision for income taxes 1,020,000 1,126,000 699,000
--------------------------------------------------------------
Net income $ 1,577,000 $ 1,886,000 $ 1,326,000
==============================================================
Net income per common and
common equivalent share (adjusted
for 10% stock dividend on
February 23, 1996) $ 1.20 $ 1.58 $ 1.01
==============================================================
</TABLE>
40
<PAGE> 41
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1995 1994 1993
---------------------------------------------------
<S> <C> <C> <C>
OPERATIONS Net income $ 1,577,000 $ 1,886,000 $ 1,326,000
Adjustments to reconcile net income to net
cash proved by (used in) operating activities:
Provision for credit losses 392,000 379,000 388,000
Depreciation and amortization 374,000 177,000 234,000
Origination of loans held for sale (1,316,000) (596,000) (619,000)
Proceeds from sale of loans held for sale 924,000 520,000 535,000
Gain (loss) on sale of OREO 66,000 (8,000) 14,000
Deferred gain on sale of facilities - (39,000)
Deferred income taxes 129,000 34,000 (29,000)
Accrued interest receivable and other assets (1,473,000) (790,000) 193,000
Other liabilities (950,000) 94,000 (667,000)
Net deferred loan fees 32,000 (54,000) 66,000
---------------------------------------------------
Net cash provided by (used in) operations (245,000) 1,642,000 1,402,000
---------------------------------------------------
INVESTING ACTIVITIES Proceeds from maturities of
securities available for sale 12,755,000 3,059,000 -
Purchase of securities available for sale (28,303,000) (7,399,000) -
Proceeds from maturities of
securities held to maturity 5,695,000 1,464,000 4,658,000
Purchase of securities held to maturity (4,593,000) (1,963,000) (9,601,000)
Net (increase) decrease in loans 11,000 (4,695,000) (4,340,000)
Proceeds from sale of OREO 1,285,000 935,000 279,000
Capital expenditures (1,650,000) (3,319,000) (399,000)
---------------------------------------------------
Net cash used in investing activities (14,800,000) (11,918,000) (9,403,000)
---------------------------------------------------
FINANCING ACTIVITIES Net increase in deposits 16,881,000 13,939,000 1,548,000
Cash received in connection with branch
acquisition 16,167,000
Payment of cash dividends (382,000) (191,000) -
---------------------------------------------------
Net cash provided by financing activities 32,666,000 13,748,000 1,548,000
---------------------------------------------------
Net increase (decrease) in cash and
equivalents 17,621,000 3,472,000 (6,453,000)
Cash and equivalents, beginning of year 19,715,000 16,243,000 22,696,000
---------------------------------------------------
Cash and equivalents, end of year $ 37,336,000 $ 19,715,000 $ 16,243,000
===================================================
NONCASH INVESTING AND In 1995 the Company obtained $1,574,000 ($269,000 and $662,000 in 1994 and 1993, respectively) of
FINANCING ACTIVITIES real estate (OREO) in connection with foreclosures of delinquent loans.
SUPPLEMENTAL DISCLOSURE Cash paid for interest $ 3,939,000 $ 2,937,000 $ 2,504,000
OF CASH FLOW Cash paid for income taxes $ 777,000 $ 1,055,000 $ 979,000
INFORMATION
</TABLE>
41
<PAGE> 42
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Gain
YEARS ENDED DECEMBER 31, 1995 Common Stock Common Stock (Loss) on Securities
1994, 1993 Shares Amount Retained Earnings available for sale Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1993 1,194,697 $11,331,000 $1,950,000 $ - $13,281,000
Net income 1,326,000 1,326,000
- --------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1993 1,194,697 11,331,000 3,276,000 - 14,607,000
Initial recognition of net
unrealized gain on securities
available for sale 58,000 58,000
Cash dividends (191,000) (191,000)
Net income 1,886,000 1,886,000
Change in net unrealized loss on
securities available for sale (108,000) (108,000)
- --------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1994 1,194,697 11,331,000 4,971,000 (50,000) 16,252,000
Cash dividends (382,000) (382,000)
Net income 1,577,000 1,577,000
Change in net unrealized gain on
securities available for sale 110,000 110,000
- --------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 1,194,697 $11,331,000 $6,166,000 $ 60,000 $17,557,000
================================================================================================================================
</TABLE>
42
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements include South
Valley Bancorporation (the "Company") and its wholly-owned subsidiary, South
Valley National Bank (the "Bank"). All material intercompany accounts and
transactions are eliminated in consolidation.
The accounting and reporting policies of the Company and the Bank
conform to generally accepted accounting principles and prevailing practices
within the banking industry.
ESTIMATES. In preparing such financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheets and revenues and expenses for
the periods presented. Actual results could differ significantly from those
estimates. A material estimate that is particularly susceptible to significant
changes in the near term relates to the determination of the allowance for
credit losses. Management also uses information provided by an independent
loan review service in connection with its determination of the allowance for
loan losses.
SECURITIES. Effective January 1, 1994, the Bank adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" which requires the Bank to classify
debt and equity securities at time of purchase into one of three categories:
held to maturity, trading or available for sale. Investment securities
classified as held to maturity are measured at amortized cost based on the
Bank's positive intent and ability to hold such securities to maturity.
Trading securities are bought and held principally for the purpose of selling
them in the near term and are carried at market value with a corresponding
recognition of unrecognized holding gain or loss in the results of operations.
The remaining investment securities are classified as available for sale and
are measured at market value with a corresponding recognition of the unrealized
holding gain or loss (net of tax effect) as a separate component of
shareholders' equity until realized. Any gains and losses on sales of
investments are computed on a specific identification basis.
Prior to the adoption of SFAS 115, the Bank accounted for all
investment securities at amortized cost based on its intent and ability to hold
them to maturity.
LOANS are stated at the principal amount outstanding, net of unearned
income. Unearned income consists of deferred loan fees net of deferred direct
incremental loan origination costs and is amortized to interest income by a
method approximating the effective interest method generally over the
contractual life of the loan.
The Bank originates small business loans. A portion of certain loans
is guaranteed by the Small Business Administration ("SBA"). In determining the
gain realized on the guaranteed portion of the loans sold, the recorded
investment is allocated between the portion of the loan sold and the portion
retained based on an estimate of the relative fair values of those portions as
of the date the loan is sold. Loans held for sale were $445,000 at December
31, 1995. There were no loans held for sale at December 31, 1994. No losses
on sale are anticipated.
43
<PAGE> 44
Interest income is accrued as earned. The accrual of interest on
loans is discontinued and any accrued and unpaid interest is reversed when
principal or interest is ninety days past due, when payment in full of
principal or interest is not expected or when a portion of the principal
balance has been charged off. Income on such loans is then recognized only to
the extent that cash is received and future collection of principal is
probable. Generally, a loan may be returned to accrual status when all
delinquent interest and principal become current in accordance with the
original terms of the loan agreement or when the loan is both well secured and
in process of collection.
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. On January 1, 1995,
the Company adopted SFAS 114, "Accounting by Creditors for Impairment of a
Loan" and SFAS 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." A loan is considered impaired when it is
probable that interest and principal will not be collected according to the
contractual terms of the loan agreement. Under SFAS 114 and 118, impaired
loans are required to be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The accrual of interest is
discontinued on loans determined to be impaired. Income on such loans is then
recognized only to the extent that cash is received and future collection of
principal is probable. The adoption of this statement had no effect on the
Company's financial condition or results of operation.
THE ALLOWANCE FOR CREDIT LOSSES 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 collectability and prior loss
experience. The allowance is established through a provision charged to
expense. Loans are charged against the allowance when management believes that
the collectability of the principal is unlikely. In evaluating the adequacy of
the reserve, management considers numerous factors such as changes in the
composition of the portfolio, overall portfolio quality, loan concentrations,
specific problem loans, and current and anticipated local economic conditions
that may affect the borrowers' ability to pay.
Management believes that the allowance for credit losses at December
31, 1995 is adequate, based on information currently available. However, no
prediction of the ultimate level of loans charged off in future years can be
made with any certainty.
OTHER REAL ESTATE OWNED. Real estate and other assets acquired in
satisfaction of indebtedness are recorded at the lower of the recorded loan
amount or the estimated fair market value net of anticipated selling costs, and
any difference between this and the loan amount is treated as a loan loss.
Costs of maintaining other real estate owned, subsequent declines in fair
value, if any, and gains or losses on sale are reflected in current earnings.
PREMISES AND EQUIPMENT are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed on a
straight-line basis over the lesser of the lease terms or estimated useful
lives of the assets, which are generally 3 to 30 years.
INCOME TAXES are provided at current rates. Deferred income taxes are
provided for temporary differences between financial statement and income tax
reporting purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS. In 1995, the Company adopted SFAS
107, "Disclosures about Fair Value of Financial Instruments," which requires
the Company to disclose the fair value of
44
<PAGE> 45
financial instruments, both assets and liabilities recognized and not
recognized in the statement of financial position, for which it is practicable
to estimate fair value. (See Note 12).
STOCK BASED COMPENSATION. In October 1995, SFAS 123, "Accounting for
Stock-Based Compensation" was issued. Under the new standard, compensation cost
is measured based on the fair value of the stock award when granted and is
recognized as an expense over the service period, which is usually the vesting
period. This standard will be effective for the Company beginning in 1996 and
requires measurement of awards made in 1995. The new standard permits
companies to continue to account for equity transactions with employees under
existing accounting rules, but requires disclosure in a note to the financial
statements of the proforma net income and earnings per share as if the company
had applied the new method of accounting. The Company intends to follow these
disclosure requirements for its employee stock plans. As a result, adoption of
the new standard will not impact reported earnings or earnings per share, and
will have no effect on the Company's cash flows.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified
to conform to the financial statement presentation for the current year. The
reclassifications had no impact on results of operations or shareholders'
equity.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE is calculated using
the weighted average shares outstanding plus the dilutive effect of shares
issuable under stock option plans, adjusted retroactively for subsequent stock
dividends and splits. On January 25, 1996 the Company declared a 10% stock
dividend for shareholders of record of common stock as of February 16, 1996 and
payable February 23, 1996. The number of shares used to compute net income per
common and equivalent share amounts, adjusted for the stock dividend, for the
years ended December 31, 1995, 1994 and 1993 was 1,316,102, 1,314,167 and
1,314,167, repsectively. The difference between primary and fully diluted net
income per share is not significant in any year.
NOTE 2. BRANCH ACQUISITIONS
During 1995 the Bank purchased certain assets and assumed certain
liabilities of the San Juan Bautista branch of Bank of America, NT&SA. As a
result of this transaction, the Bank assumed $8,514,000 of deposit liabilities
and received $7,560,000 of cash and tangible assets of $688,000. The
transaction resulted in an intangible asset of $266,000, representing the
excess of liabilities assumed over the fair value of the tangible assets
acquired.
During 1995 the Bank also purchased certain assets and assumed certain
liabilities of the Gilroy branch of Comerica Bank. As a result of this
transaction, the Bank assumed $7,653,000 of deposit liabilities and received
$7,528,000 of cash. The transaction resulted in an intangible asset of
$125,000, representing the excess of liabilities assumed over the fair value of
the tangible assets acquired.
NOTE 3. CASH AND DUE FROM BANKS
The Company, through its bank subsidiary, is required to maintain
reserves with the Federal Reserve Bank. Reserve requirements are based on a
percentage of deposits. At December 31, 1995 the Company maintained reserves of
$1,299,000 in the form of vault cash and balances at the Federal Reserve to
satisfy regulatory requirements.
45
<PAGE> 46
NOTE 4. SECURITIES
The carrying value and approximate market value of securities are as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------
Amortized Unrealized Unrealized
In thousands Cost Gains Losses Market Value
---------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury and agency securities $ 23,492 $ 163 $ 56 $ 23,599
Mortgage backed securites 10,123 3 8 10,118
Other 530 - - 530
---------------------------------------------------------------
Total $ 34,145 $ 166 $ 64 $ 34,247
===============================================================
SECURITIES HELD TO MATURITY:
State and municipal obligations $ 5,500 $ 56 $ 7 $ 5,549
Mortgage backed securities 1,589 80 5 1,664
---------------------------------------------------------------
Total $ 7,089 $ 136 $ 12 $ 7,213
===============================================================
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------
Amortized Unrealized Unrealized
In thousands Cost Gains Losses Market Value
---------------------------------------------------------------
<S> <C>
December 31, 1994
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury and agency securities $ 7,962 $ 14 $ 87 $ 7,889
State and municipal obligations 1,567 1 9 1,559
Other 1,015 - 3 1,012
---------------------------------------------------------------
Total $ 10,544 $ 15 $ 99 $ 10,460
===============================================================
SECURITIES HELD TO MATURITY:
U.S. Treasury and agency securities $ 11,583 $ - $ 770 $ 10,813
State and municipal obligations 5,182 19 138 5,063
---------------------------------------------------------------
Total $ 16,765 $ 19 $ 908 $ 15,876
===============================================================
</TABLE>
At December 31, 1995 securities with a book value of approximately
$2,943,000 were pledged to secure certain deposits of public funds as required
by law or contract. There were no sales of securities during 1995 or 1994.
46
<PAGE> 47
The following table lists the maturities and weighted average
yield of securities as of December 31, 1995:
<TABLE>
<CAPTION>
Weighted
Amortized Market Average
Cost Value Yield
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and agency securities:
-------------------------------------------------------------------------------------------
Within one year $ 5,994 $ 6,029 5.47%
Over one year, but within 5 years 17,497 17,570 5.88%
-------------------------------------------------------------------------------------------
Subtotal 23,491 23,599 5.78%
-------------------------------------------------------------------------------------------
Mortgage backed securities, over 5 years 10,124 10,118 6.59%
Other 530 530 6.00%
-------------------------------------------------------------------------------------------
Total $ 34,145 $ 34,247 6.02%
===========================================================================================
SECURITIES HELD TO MATURITY
State and municipal obligations: (1)
Within one year $ 1,847 $ 1,868 7.46%
Over one year, but within 5 years 3,097 3,127 6.02%
Over 5 years 556 554 4.74%
-------------------------------------------------------------------------------------------
Subtotal 5,500 5,549 6.37%
-------------------------------------------------------------------------------------------
Mortgage backed securities:
Over one year, but within 5 years 808 823 7.53%
Over 5 years 781 841 8.52%
-------------------------------------------------------------------------------------------
Subtotal 1,589 1,664 8.01%
-------------------------------------------------------------------------------------------
Total $ 7,089 $ 7,213 6.74%
===========================================================================================
</TABLE>
(1) The weighted average yield on tax exempt securities is
calculated on a fully taxable equivalent basis using the expected
Federal statutory rate of 34%.
Effective December 15, 1995, investment securities totaling $8,426,000
in amortized cost and $8,243,535 in market value were reclassified from held to
maturity to available for sale in connection with adoption of the Financial
Accounting Standards Board Special Report "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities."
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Bank's loans are virtually all made within its defined market area
of South Santa Clara and San Benito counties. Real estate-construction loans
represented 17% of total loans at December 31, 1995, almost all of which are
for the construction of single family residential properties. In addition, 32%
of the Bank's loans (excluding construction loans) were real estate secured
term loans. These loans were primarily made to Bank depositors and are secured
by first deeds of trust on commercial and residential properties and with
original loan to value ratios not exceeding 75%. Commercial loans comprise 36%
of total loans. The Bank's loans are not concentrated in any particular
industry. The Bank's service area is somewhat dependent on the economy of the
greater Santa Clara Valley which has a concentration of high technology
companies and, accordingly, the ability of the Bank's borrowers to repay loans
may be affected by the performance of this sector of the economy. Virtually all
loans are collateralized, and the majority have adjustable rates. Generally,
real estate loans are secured by real property, and commercial and other loans
are secured by bank deposits and business or personal assets.
47
<PAGE> 48
For commercial and other loans, repayment is generally expected to
come from the cash flow of the borrower. In the case of construction loans,
repayment is generally expected from the sale of the related property or
refinance upon completion of construction.
The activity in the allowance for credit losses is summarized as
follows:
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,331 $ 1,246 $ 1,127
Provision charged to expense 392 379 388
Loans charged-off (529) (361) (298)
Recoveries 119 67 29
----------------------------------------------------------------------------------------
Balance, end of year $ 1,313 $ 1,331 $ 1,246
========================================================================================
</TABLE>
Management believes that the allowance for credit losses at December
31, 1995 is adequate, based on information currently available. However, no
prediction of the ultimate level of loans charged off in future years can be
made with any certainty.
Past due, nonaccrual and restructured loans at December 31, are
summarized below:
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Past due 90 days or more and still accruing:
Real estate $ 37 $ 543 $ -
Commercial 83 171 44
Installment and other - 13 -
----------------------------------------------------------------------------------------
subtotal 120 727 44
----------------------------------------------------------------------------------------
Nonaccrual:
Real estate 363 1,073 679
Commercial 1,116 132 -
Installment and other 9 55 -
----------------------------------------------------------------------------------------
subtotal 1,488 1,260 679
----------------------------------------------------------------------------------------
Restructured:
Real estate 255 147 -
Commercial 249 - -
Installment and other 8 - -
----------------------------------------------------------------------------------------
subtotal 513 147 -
----------------------------------------------------------------------------------------
Total $ 2,121 $ 2,134 $ 723
========================================================================================
</TABLE>
The reduction in income associated with nonaccrual loans was
approximately $123,000 in 1995, $123,000 in 1994 and $142,000 in 1993.
The recorded investment in impaired loans was $1,488,000 and the
portion of the allowance for credit losses related to loan impairment was
$469,000 at December 31, 1995. Average impaired loans for 1995 were
$1,629,000. The Bank did not recognize any interest income on impaired loans
during 1995.
Other real estate owned included in other assets was $1,953,000 at
December 31, 1995 and $1,627,000 at December 31, 1994. At December 31, 1995,
other real estate owned consisted of one commercial property, one parcel of
undeveloped residential land, and two parcels of undeveloped commercial
property. The net cost of operation of other real estate owned is as follows:
48
<PAGE> 49
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Gain) loss on sale $(65) $(8) $ 14
Reductions in estimated fair market value 45 - 70
Net holding costs 68 10 61
-----------------------------------------------------------------------------------------------
Total $ 48 $ 2 $145
===============================================================================================
</TABLE>
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment at December 31, are summarized as follows:
<TABLE>
<CAPTION>
In thousands 1995 1994
---------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,146 $ 961
Buildings 3,588 2,737
Furniture and equipment 2,894 2,235
Leasehold improvements 46 -
Construction in progress 3 226
---------------------------------------------------------------------------------
Subtotal 7,677 6,159
Accumulated depreciation and amortization (1,693) (1,640)
---------------------------------------------------------------------------------
Premises and equipment, net $ 5,984 4,519
=================================================================================
</TABLE>
In 1990, the Bank exchanged its primary facility in Morgan Hill for
land to be used for a new facility in Gilroy and simultaneously leased back the
Morgan Hill facility for a ten year period, with an option to renew for five
years. The net present value of the excess of the lease payments over the
estimated fair market rental rate ($800,000) has been accounted for as an
obligation and capitalized, together with the carrying value of the Morgan Hill
facility. At December 31, 1995, the remaining obligation of $480,000 is
included in other liabilities in the consolidated balance sheet. Also, in 1992
the Bank determined that a portion of the land acquired in the exchange exceeded
its expansion requirements. The allocated book value relating to this portion
has been included in other assets as land held for sale. The allocated book
value of land held for sale was $1,213,000 at December 31, 1995 and $1,237,000
at December 31, 1994.
In addition to the Morgan Hill facility lease, certain facilities and
equipment are leased under non-cancelable operating leases. The minimum annual
lease commitments and the annual amortization of the excess lease payments
representing additional purchase price for the Gilroy land are as follows:
49
<PAGE> 50
<TABLE>
<CAPTION>
In thousands Gilroy Land Operating Leases
----------------------------------------------------
<S> <C> <C>
1996 $ 123 $ 160
1997 123 165
1998 123 165
1999 123 165
2000 123 165
Thereafter 10 620
----------------------------------------------------
625 $1,440
======
Less imputed (145)
------------------------------
Total $ 480
==============================
</TABLE>
Rental expense under operating leases was approximately $278,000,
$294,000, and $347,000 in 1995, 1994 and 1993, respectively.
NOTE 7. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 633 $ 762 $502
State 258 330 226
---------------------------------------------------------------------------------------------------
Total 891 1,092 728
---------------------------------------------------------------------------------------------------
Deferred
Federal 91 26 (31)
State 38 8 2
---------------------------------------------------------------------------------------------------
Total 129 34 (29)
---------------------------------------------------------------------------------------------------
Total $1,020 $1,126 $699
===================================================================================================
</TABLE>
A reconciliation of the Federal income tax rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal Incone tax rate 35.0% 35.0% 34.0%
State income taxes (not part of Federal Income tax benefit) 7.6 7.4 7.3
Tax exempt interest (3.8) (3.9) (6.1)
Other 0.6 0.6 (1.7)
-----------------------------------------------------------------------------------------------
Effective rax rate 39.3% 37.4% 34.5%
===============================================================================================
</TABLE>
50
<PAGE> 51
Components of deferred tax assets and liabilities at December 31, are as
follows:
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Provision for credit losses $450 $495 $459
State income taxes 99 71 42
OREO valuation reserve - 14 86
Unrealized loss on securities available for - 34 -
-------------------------------------------------------------------------------------------------------
Total 549 614 587
-------------------------------------------------------------------------------------------------------
Deferred tax liablities:
Depreciation and amortization 93 33 38
Amortization of lease liability 61 36 -
Unrealized gain on securities available for sale 42 - -
Other 16 3
-------------------------------------------------------------------------------------------------------
Total 212 72 45
-------------------------------------------------------------------------------------------------------
Net deferred tax assets $337 $542 $542
=======================================================================================================
</TABLE>
There was no valuation allowance at December 31, 1995, 1994 or 1993.
NOTE 8. EMPLOYEE BENEFIT PLANS
The Company has a stock option plan which provides for the granting of
nonqualified or incentive stock options to purchase, 332,000 shares of common
stock. The plan provides that options may be granted to officers, directors
and key employees of the Company and the Bank, upon such terms as the Board of
Directors or the Stock Option Committee shall determine. The current stock
option plan is subject to shareholder approval at the Company's next Annual
Meeting of Shareholders scheduled for May 1996 and any options granted under
the plan are not effective until such approval has been obtained. Outstanding
options have been granted at an exercise price equal to the fair market value
at the date of grant and are exercisable in installments over three to five
years. Options expire either five or ten years after the date of the grant.
Stock option activity is as follows:
<TABLE>
<CAPTION>
Shares Price per
--------------------------------------------------------------
<S> <C> <C>
Balances, January 1, 1993 88,120 $12.50-16.53
Canceled (9,900) 12.50-16.53
--------------------------------------------------------------
Balances, December 31, 1993 78,220 12.50-16.53
--------------------------------------------------------------
Granted 6,600 11.00
Canceled (46,320) 14.94-16.53
--------------------------------------------------------------
Balances, December 31, 1994 38,500 11.00-16.53
--------------------------------------------------------------
Granted 60,000 15.00
Canceled (12,100) 16.53
--------------------------------------------------------------
Balances, December 31, 1995 86,400 $11.00-16.53
--------------------------------------------------------------
</TABLE>
At December 31, 1995, options for 17,160 shares were exercisable and
options for 272,000 shares were available for future grant.
The Company has an Employee Stock Ownership Plan ("ESOP") in which,
generally, all full-time salaried employees over the age of 20 are eligible to
participate. Each year, the Company may contribute common stock and/or cash to
the Plan, which is allocated to each participant in proportion to his or her
51
<PAGE> 52
total annual regular compensation for the year. The ESOP may borrow funds
which, in addition to the Company's cash contribution, may be used to purchase
the Company's common stock from the Company or on the open market. The
Company's accrued contributions for 1995, 1994 and 1993 were $92,000, $111,000
and $82,000, respectively. During 1995, 1994 and 1993, respectively, the ESOP
purchased 4,204, 4,593 and 9,450 shares of the Company common stock in the open
market.
The Company has a 401 (k) tax-deferred savings plan in which,
generally, all of the Bank's employees are eligible to participate. Under the
terms of the 401(k) plan, eligible employees may elect to have a portion of
their salary deferred and contributed to the plan. The amount of salary
deferred is not subject to Federal income tax at the time of deferral. The
Company, at its option, may match employee contributions at a rate determined
annually by the Company. The matching contribution vests over a period of seven
years. For 1995, 1994 and 1993 the Company's matching contributions were
$30,000, $34,000 and $26,000, respectively, or 26%, 41% and 35% of eligible
employee contributions.
NOTE 9. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are various commitments
outstanding to extend credit which are not reflected in the financial
statements, including unused loan commitments of approximately $37,373,000
and standby letters of credit of $986,000 at December 31, 1995. However,
all such commitments will not necessarily culminate in actual extensions of
credit by the Bank in the future. The Bank does not anticipate any losses as
a result of these transactions.
Approximately $10,619,000 of loan commitments outstanding at December
31, 1995 relate to construction loans and are expected to fund within the next
twelve months. The remainder relate primarily to revolving lines of credit or
other commercial loans and many of these commitments are expected to expire
without being drawn upon. Therefore, the total commitments do not necessarily
represent future cash requirements.
Standby letters of credit are commitments written by the Bank to
guarantee the performance of a customer to a third party. These guarantees are
issued primarily relating to purchases of inventory by the Bank's commercial
customers and are typically short term in nature. Credit risk is similar to
that involved in extending loan commitments to customers and the Bank
accordingly uses evaluation and collateral requirements similar to those for
loan commitments. Virtually all such commitments are collateralized.
NOTE 10. RELATED PARTY LOANS
The Company makes loans to officers and directors and their associates
subject to loan committee approval and ratification by the Board of Directors.
These transactions are on substantially the same terms as those prevailing at
the time for comparable transactions with
52
<PAGE> 53
unaffiliated parties and do not involve more than normal risk of
collectability. An analysis of changes in related party loans for the year
ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Beginning balance Additions Repayments Ending balance
----------------------------------------------------------------------------------
<S> <C> <C> <C>
$2,082,000 $496,000 $1,809,000 $769,000
</TABLE>
NOTE 11. REGULATORY MATTERS
The Board of Governors of the Federal Reserve System (the "FRB"), the
Office of the Comptroller of the Currency (the "OCC") and the Federal Deposit
Insurance Corporation (the "FDIC") have specified minimum risk-based capital
guidelines for purposes of evaluating the capital adequacy of holding companies
and national banks. The guidelines require a minimum ratio of total capital to
risk-weighted assets of 8% at December 31, 1995. The Company's and the Bank's
total risk weighted capital ratios were 16.0% and 13.9%, respectively, at
December 31, 1995.
In addition, the FRB and OCC have adopted a minimum leverage ratio,
equal to at least 3% to 5% of total assets, for banking organizations as a
supplement to the risk-weighted capital guidelines. The minimum leverage ratio
is intended to limit the ability of banks to leverage their equity capital base
by increasing assets and liabilities without increasing capital proportionately.
At December 31, 1995, the Company's and the Bank's leverage ratios were 9.9%
and 8.5%, respectively.
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and short term investments
For cash and short term instruments, the carrying amount is a
reasonable estimate of fair value.
Investment securities
For investment securities, fair value equals quoted market prices.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans
The fair value of loans with fixed rates is estimated discounting the
future cash flows using current rates at which similar loans would be made to
borrowers with similar credit ratings. For loans with variable rates which
adjust with changes in market rates of interest, the carrying amount is a
reasonable estimate of fair value.
Deposit liabilities
The fair value of demand deposits, savings accounts and certain money
market deposits, is the amount payable on demand at the reporting date and is
equal to the carrying value. The fair value of fixed maturity certificates of
deposit is estimated using rates currently offered for deposits of similar
remaining maturities.
53
<PAGE> 54
Commitments to extend credit and standby letters of credit
Commitments to extend credit and standby letters of credit are issued
in the normal course of business by the Bank. Commitments to extend credit are
issued with variable interest rates tied to market interest rates at the time
the commitment is funded. Standby letters of credit are supported by
commitments to extend credit with variable interest rates tied to market
interest rates at the time the commitment is funded. The fair values of
commitments to extend credit and standby letters of credit were not
significantly different from the carrying amounts.
The estimated fair values of the Company's financial instruments are
as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1995 Carrying amount Fair value
- ----------------------------------------------------------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and short-term $ 37,336 $ 37,336
Investment securities 41,336 41,460
Loans 90,079 90,029
Allowance for credit losses (1,313) (1,313)
- ----------------------------------------------------------------
$167,438 $167,512
================================================================
FINANCIAL LIABILITIES:
Deposits $157,689 $157,593
================================================================
</TABLE>
NOTE 13. CONDENSED FINANCIAL INFORMATION OF SOUTH VALLEY BANCORPORATION
The condensed financial statements of South Valley Bancorporation
follow (in thousands):
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash-interest bearing account with Bank $ 1,461 $ 1,185
Investment in Bank 14,960 13,667
Loan participations purchased from Bank 1,149 1,405
Other assets 37 33
- ------------------------------------------------------------------------------------
Total assets $17,607 $16,290
====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 50 $ 38
Common stock 11,331 11,331
Retained earnings 6,166 4,971
Unrealized gain/loss) on securities available for sale 60 (50)
- ------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $17,607 $16,290
====================================================================================
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1995 1994 1993
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash dividends received from the Bank $ 382 $ 96 $ -
Interest income 145 129 93
Operating expenses 132 106 78
--------------------------------------------------------------------------------------------
Income before taxes and equity in undistributed net
Income of Bank 395 119 15
Provision for income taxes (2) (8) (3)
Equity in undistributed net income of Bank 1,184 1,775 1,314
--------------------------------------------------------------------------------------------
Net income $1,577 $1,886 $1,326
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash:
Operations:
Net income $ 1,577 $ 1,886 $ 1,326
Adjustments to reconcile net income to
net cash provided by operations:
Equity in undistributed net income of Bank (1,184) (1,775) (1,314)
Increase in other assets (4) - -
Increase (decrease) in liabilities 13 6 (2)
--------------------------------------------------------------------------------
Net cash provided by operations 402 117 10
--------------------------------------------------------------------------------
Investing Activity:
Net change in loan participations purchased
from subsidiary Bank 256 (198) (283)
--------------------------------------------------------------------------------
Financing Activities:
Cash dividends paid to shareholders (382) (191) -
--------------------------------------------------------------------------------
Net increase (decrease) in cash 276 (272) (273)
Cash, beginning of year 1,185 1,457 1,730
Cash, end of year $ 1,461 $ 1,185 $ 1,457
================================================================================
</TABLE>
The ability of the Company to pay dividends in the future will largely
depend upon the dividends paid to it by the Bank. Under Federal law regulating
national banks, dividends declared by the Bank in any calendar year generally
may not exceed its undistributed net income for the preceding three fiscal
years or its retained earnings. Under these provisions, and considering
minimum regulatory capital requirements, the amount available for distribution
from the Bank to the Company was approximately $4,273,000 as of December 31,
1995.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
55
<PAGE> 56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K is incorporated by reference
to the information contained in the Registrant's Proxy Statement for the 1996
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference
to the information contained in the Registrant's Proxy Statement for the 1996
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by reference
to the information contained in the Registrant's Proxy Statement for the 1996
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by reference
to the information contained in the Registrant's Proxy Statement for the 1996
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
56
<PAGE> 57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements, See Item 8.
(2) Financial Statement Schedules. See Item 8.
(3) List of Exhibits (numbered in accordance with Item 601
of regulation S-K).
(3.1) Articles of Incporation of South Valley Bancorporation, as
amended, filed with the Securities and Exchange Commission on
March 30, 1992.
(3.2) Bylaws of South Valley Bancorporation, as amended, filed with
the Securities and Exchange Commission on March 30, 1992.
(4.1) Specimen Stock Certificate incorporated by reference to
Exhibit 3.1 of Registrant's Exhibits to Amendment No. 2 to
Form S-18 Registration Statement, filed with the Securities
and Exchange Commission on September 2, 1982.
*(10.1) 1982 Amended and Restated Stock Option Plan incorporated by
reference to Exhibit 10.4 of Registrant's Exhibits to Form
10-K for the fiscal year ended December 31, 1982, filed with
the Securities and Exchange Commission on March 31, 1983.
*(10.2) 1984 Non-Qualified Stock Option Plan incorporated by reference
to Exhibit 10.5 of Registrant's Exhibits to Form 10-K for the
fiscal year ended December 31, 1985, filed with the Securities
and Exchange Commission on March 31, 1986.
*(10.3) Employment agreement with Brad Smith effective February 17,
1991 incorporated by reference to Exhibit 10.5 of
Registrant's Exhibits to Form 10-K for the fiscal year ended
December 31, 1990, filed with the Commission on March 31,
1991.
*(10.4) Amendment to the 1982 Amended and Restated Stock Option Plan
incorporated by reference to Exhibit 10.10 of Registrant's
Exhibits to Form 10-K for the fiscal year ended December 31,
1989, filed with the Securities and Exchange Commission on
March 31, 1990.
*(10.5) Amendment to the 1984 Non-Qualified Stock Option Plan
incorporated by reference to Exhibit 10.10 of Registrant's
Exhibits to Form 10-K for the fiscal year ended December 31,
1989, filed with the Securities and Exchange Commission on
March 31, 1990.
*(10.6) 1991 Directors' Stock Option Plan incorporated by reference to
Exhibit 10.14 of Registrant's Exhibits to Form 10-K for the
fiscal year ended December 31, 1990, filed with the Securities
and Exchange Commission on March 31, 1991.
*(10.7) Specimen stock option agreement pursuant to the 1991
Directors' Stock Option Plan incorporated by reference to
Exhibit 10.15 of Registrant's Exhibits to Form 10-K for the
fiscal year ended December 31, 1990 filed with the Securities
and Exchange Commission on March 31, 1991.
(10.8) Morgan Hill office lease agreement, incorporated by reference
to Exhibit 10.16 of Registrant's Exhibits to Form 10-K for the
fiscal year ended December 31, 1990, filed with the Securities
and Exchange Commission on March 31, 1991.
57
<PAGE> 58
*(10.9) South Valley Bancorporation Employee Stock Ownership Plan,
incorporated by reference to Exhibit 10.11 of Registrant's
Exhibits to Form 10-K for the fiscal year ended December 31,
1993, filed with the Securities and Exchange Commission on
March 31, 1994.
*(10.10) South Valley Bancorporation Cash or Deferred 401(k) Plan,
incorporated by reference to Exhibit 10.12 of Registrant's
Exhibits to Form 10-K for the fiscal year ended December 31,
1993, filed with the Securities and Exchange Commission on
March 31, 1994.
(10.11) Hollister office ground lease dated August 11, 1994,
incorporated by reference to Exhibit 10.12 of Registrant's
Exhibits to Form 10-K for the fiscal year ended December 31,
1994, filed with the Securities and Exchange Commission on
March 31, 1995.
(10.12) Agreement dated October 1993 between South Valley National
Bank and Knopf Construction Inc. for construction of the
Gilroy office, incorporated by reference to Exhibit 10.13 of
Registrant's Exhibits to Form 10-K for the fiscal year ended
December 31, 1994, filed with the Securities and Exchange
Commission on March 31, 1995.
(10.13) Agreement for item processing services dated August 1, 1994
between South Valley National Bank and Fiserv Division I,
Western Region, incorporated by reference to Exhibit 10.14 of
Registrant's Exhibits to Form 10-K for the fiscal year ended
December 31, 1994, filed with the Securities and Exchange
Commission on March 31, 1995.
(10.14) Branch Purchase and Assumption Agreement dated July 27, 1994
between South Valley National Bank and Bank of America, NT &
SA.
(10.15) Purchase and Assumption Agreement dated August 31, 1995
between South Valley National Bank and Comerica
Bank-California.
(10.16) 1995 Stock Option Plan.
(10.17) Specimen stock option agreements pursuant to the 1995 Stock
Option Plan.
(21.1) The registrant's only subsidiary is its wholly-owned
subsidiary, South Valley National Bank.
(23.1) Independent Auditor's Consent.
(27.1) Financial Data Schedule
(b) Reports on Form 8-K. During the fourth quarter ended December
31, 1995 one Form 8-K was filed on October 30, 1995 reporting
third quarter earnings and announcing declaration of a cash
dividend.
An Annual Report to Shareholders for the fiscal year ended December
31, 1995, and Notice of Annual Meeting and Proxy Statement for the Company's
1996 Annual Meeting will be mailed to security holders subsequent to the date
of filing this Report. Copies of said materials will be furnished to the
Securities and Exchange Commission in accordance with the Commission's Rules
and Regulations.
* Denotes management contract, compensatory plan or arrangement.
58
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SOUTH VALLEY BANCORPORATION
Date: 3/25/96 By: s/s Brad L. Smith
------------------------------------
Brad L. Smith, President & CEO
(Principal Executive Officer)
By: s/s Richard L. Coniff
------------------------------------
Richard L. Conniff, SVP & CFO
(Principal Financial & Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated below.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
s/s Roger C. Knopf Chairman of the Board 3/25/96
- ------------------------------------------- -------------------------
(Roger C. Knopf)
s/s Laurence M. Connell Director 3/25/96
- ------------------------------------------- --------------------------
(Laurence M. Connell)
s/s Joseph A. Filice Director 3/25/96
- ------------------------------------------- --------------------------
(Joseph A. Filice)
s/s Eugene R. Guglielmo Director 3/25/96
- ------------------------------------------- --------------------------
(Eugene R. Guglielmo)
s/s Edward J. Lazzarini Director 3/25/96
- ------------------------------------------- --------------------------
(Edward J. Lazzarini)
s/s Donald G. Mountz Director 3/25/96
- ---------------------------------- -------------------------
(Donald G. Mountz)
s/s James R. Price Director 3/25/96
- ------------------------------------------- --------------------------
(James R. Price)
s/s Mary Lou Rawitser Director 3/25/96
- ------------------------------------------- --------------------------
(Mary Lou Rawitser)
s/s Brad L. Smith Director, President and 3/25/96
- ------------------------------------------- -------------------------
(Brad L. Smith) Chief Executive Officer
</TABLE>
59
