U. S. SECURITIES AND EXCHANGE COMMISSION FORM 10-K
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1999
Commission File Number: 0-27384
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CAPITAL CORP OF THE WEST
(Exact name of registrant
as specified in its charter)
CALIFORNIA 77-0405791
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
550 WEST MAIN STREET, MERCED, CALIFORNIA 95340
(Address of principal executive offices) (Zip Code)
(209) 725-2269
(Registrant's telephone number,
including area code)
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act (Title of Class):
COMMON STOCK, NO PAR VALUE.
The Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Company was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
X Yes No
- --- ---
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $37,090,818 (based on the $9.00 average of bid and
ask prices per common share on March 7, 2000). The number of shares outstanding
of the Registrant's common stock, no par value, as of March 7, 2000 was
4,512,862.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement for the 2000 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A are incorporated by reference in Part III, Items 10 through 13
and portions of the Annual Report to Shareholders for 1999 are incorporated by
reference in Part II, Item 5 through 8.
CAPITAL CORP OF THE WEST
TABLE OF CONTENTS
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Page Reference
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PART I
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ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . 3
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ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . 19
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ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . 21
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE Proxy Statement for 2000
OF SECURITY HOLDERS . . . . . . . . . . . . . . . 21 Annual Meeting
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PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK Page 20 of 1999 Annual
AND RELATED SECURITY HOLDER MATTERS . . . . . . . 22 Report
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ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . 19 Page 11 of 1999 Annual
Report
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL Pages 12 through 21 of
CONDITION AND RESULTS OF OPERATIONS . . . . . . . 19 1999 Annual Report
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . 19 Pages 23 through 46 of
1999 Annual Report
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON Proxy Statement for 2000
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . 19 Annual Meeting
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. 19 Proxy Statement for 2000
Annual Meeting
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ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . 19 Proxy Statement for 2000
Annual Meeting
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND Proxy Statement for 2000
MANAGEMENT . . . . . . . . . . . . . . . . . . . . 20 Annual Meeting
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . 20 Proxy Statement for 2000
Annual Meeting
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PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 20
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SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE COMPANY
GENERAL
Capital Corp of the West (the "Company" or "Capital Corp") is a bank holding
company incorporated under the laws of the State of California on April 26,
1995. On November 1, 1995, the Company became registered as a bank holding
company and is the holder of all of the capital stock of County Bank (the
"Bank"). During 1999, Town and Country Finance and Thrift (the "Thrift) was
merged into County Bank. The Company's primary asset is the Bank and the Bank is
the Company's primary source of income. As of December 31, 1999, the Company's
securities consist of 4,496,201 shares of Common Stock, no par value, and no
shares of Preferred Stock. As of March 7, 2000 there were 4,511,835 common
shares outstanding, held by approximately 3,000 shareholders. There were no
preferred shares outstanding at February 25, 2000. The Bank has two wholly owned
subsidiaries, Merced Area Investment & Development, Inc. ("MAID") and County
Asset Advisors ("CAA"). CAA is currently inactive. All references herein to the
"Company" include the Bank and the Bank's subsidiaries, unless the context
otherwise requires.
INFORMATION ABOUT COMMERCIAL BANKING & GENERAL BUSINESS OF THE COMPANY AND ITS
SUBSIDIARIES
The Bank was organized on August 1, 1977, as County Bank of Merced, a California
state banking corporation. The Bank commenced operations in 1977. In November
1992, the Bank changed its legal name to County Bank. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC"), up to applicable
limits. The Bank is not a member of the Federal Reserve System.
The Company acquired the Thrift on June 28, 1996 for a combination of cash and
stock with an aggregate value of approximately $5.8 million. The Thrift was an
industrial loan company with four offices. It specialized in direct loans to the
public and the purchase of financing contracts principally from automobile
dealerships and furniture stores. It was originally incorporated in 1957. Its
deposits (technically known as investment certificates or certificates of
deposit rather than deposits) are insured by the FDIC up to applicable limits.
On November 23, 1999, the Thrift was merged into County Bank, and the separate
Thrift charter was eliminated. The existing branch offices of Town and Country
were converted into County Bank branches, and the operations of the Modesto
downtown Thrift branch were consolidated with the Bank's Modesto downtown
location.
INDUSTRY & MARKET AREA
The Bank engages in general commercial banking business primarily in Fresno,
Madera, Mariposa, Merced, Stansilaus, Tulare and Tuolomne counties. The Bank has
sixteen branch offices; two of which are located in Merced with the branch
located in downtown Merced currently serving as the both a branch and as
administrative headquarters. There are offices in Atwater, Hilmar, Los Banos,
Sonora, two offices in Modesto, two offices in Turlock and one office in
Visalia. In 1997, the Bank also opened an office in Madera and purchased three
branch offices from Bank of America in Livingston, Dos Palos and Mariposa. In
1999, the Bank opened an office in Fresno. The Bank's administrative
headquarters also provides accommodations for the activities of MAID, the Bank's
wholly owned real estate development subsidiary. (See "ITEM 2. PROPERTIES")
COMPETITION
The Company's primary market area consists of Fresno, Madera, Mariposa, Merced,
Tulare, Tuolomne and Stanislaus Counties and nearby communities. The banking
business in California generally, and specifically in the Company's primary
market area, is highly competitive with respect to both loans and deposits. The
banking business is dominated by a relatively small number of major banks which
have many offices
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operating over wide geographic areas. Many of the major commercial banks offer
certain services (such as international, trust and securities brokerage
services) which are not offered directly by the Company or through its
correspondent banks. By virtue of their greater total capitalization, such
banks have substantially higher lending limits than the Company and substantial
advertising and promotional budgets.
Smaller independent financial institutions, savings and loans and credit unions
also serve as competition in our service area. At June 30, 1999, the Bank
maintained a market share of 28% of total FDIC insured deposits in the County of
Merced, California. The Bank's market share of FDIC insured deposits in the
counties of Mariposa, Stanislaus and Tuolumne, California was 34%, 3% and 2%,
respectively. The Bank's market share of total FDIC insured deposits in the
counties of Fresno, Madera and Tulare, California were less than 1% of the total
FDIC insured deposits in those counties.
In the past, the Bank's principal competitors for deposits and loans have been
other banks (particularly major banks), savings and loan associations and credit
unions. To a lesser extent, competition was also provided by thrift and loans,
mortgage brokerage companies and insurance companies. Other institutions, such
as brokerage houses, credit card companies, and even retail establishments have
offered new investment vehicles, such as money-market funds, which also compete
with banks. The direction of federal legislation in recent years seems to favor
competition between different types of financial institutions and to foster new
entrants into the financial services market, and it is anticipated that this
trend will continue.
To compete effectively in our service area, the Bank relies upon specialized
services, responsive handling of customer needs, local promotional activity, and
personal contacts by its officers, directors and staff. For customers whose loan
demands exceed the Bank's lending limits, the Bank seeks to arrange funding for
such loans on a participation basis with its correspondent banks or other
independent commercial banks. The Bank also assists customers requiring services
not offered by the Bank to obtain such services from its correspondent banks.
See also the discussion under "Regulation and Supervision - Financial Services
Modernization Legislation."
BANK'S SERVICES AND MARKETS
BANK
The Bank conducts a general commercial banking business including the acceptance
of demand (includes interest bearing), savings and time deposits. The Bank also
offers commercial, real estate, personal, home improvement, home mortgage,
automobile, credit card and other installment and term loans. The Bank offers
travelers' checks, safe deposit boxes, banking-by-mail, drive-up facilities,
24-hour automated teller machines, and other customary banking services to its
customers. The Bank does not operate a trust department nor does it offer these
services through a correspondent banking relationship to its customers.
The five general areas in which the Bank has directed its lendable assets are
(i) real estate mortgage loans, (ii) consumer loans, (iii) agricultural loans,
(iv) commercial loans, and (v) real estate construction loans. As of December
31, 1999, these five categories accounted for approximately 36%, 26%, 18%, 16%
and 4%, respectively, of the Bank's loan portfolio.
In 1990, the Bank entered into a cooperative agreement with Prudential
Agricultural Group to offer agricultural real estate loans to farmers in Merced,
Stanislaus, San Joaquin, Madera, Monterey, Santa Cruz and San Benito Counties.
The program is designed to have a select group of independent banks throughout
the United States generate farm real estate loans and process them within the
underwriting standards of the Federal Agricultural Mortgage Corporation ("Farmer
Mac") program. The qualifying loans are for the purchase or refinance of
production oriented agricultural properties and are secured by a first deed of
trust on the property. Loan terms range from 5 to 20 years in length and loan
amounts range from $500,000 to $3.0 million. The Bank originates, packages and
subsequently sells these loans to the Prudential Agricultural Group and retains
servicing rights on these loans. The Bank is the only representative in Merced
and Stanislaus Counties to offer this program.
4
In 1992, the Bank became a certified Farmers Home Administration lender, now
known as the Farm Service Agency. The Bank originates loans under the guidelines
of such program both to retain for the Bank's loan portfolio and to sell in the
secondary market. The Bank may also sell loans, in the $100,000 range, directly
to Farmer Mac.
In 1994, the Bank organized a department to originate loans within the
underwriting standards of Small Business Administration ("SBA"). The Bank
originates packages and subsequently sells these loans in the secondary market
and retains servicing rights on these loans.
The Bank's deposits are attracted primarily from individuals and small and
medium-sized business-related sources. The Bank also attracts some deposits from
municipalities and other governmental agencies and entities. In connection with
the deposits of municipalities or other governmental agencies, the Bank is
generally required to pledge securities to secure such deposits, except when the
depositor signs a waiver with respect to the first $100,000 of such deposits,
which amount is insured by the FDIC.
The principal sources of the Bank's revenues are (i) interest and fees on loans,
(ii) interest on investment securities (principally U.S. Government securities,
mortgage-backed securities, collateralized mortgage obligations, corporate bonds
and municipal bonds), and (iii) service charges on deposit accounts. For the
year ended December 31, 1999, these sources comprised approximately 64%, 21%,
and 7% respectively, of the Bank's total interest and noninterest income.
Most of the Bank's business originates from individuals, businesses and
professional firms located in its service area. The Bank is not dependent upon a
single customer or group of related customers for a material portion of its
deposits, nor is a material portion of the Bank's loans concentrated within a
single industry or group of related industries. The quality of Bank assets and
Bank earnings could be adversely affected by a downturn in the local economy,
including the agricultural sector.
BANK'S REAL ESTATE SUBSIDIARY (MAID)
GENERAL
California state-chartered banks previously were allowed, under state law, to
engage in real estate development activities either directly or through
investment in a wholly-owned subsidiary. Pursuant to this authorization, the
Bank established MAID, its wholly-owned subsidiary, as a California corporation
on February 18, 1987. MAID engaged in real estate activities for approximately
seven years.
Federal law now precludes banks from engaging in real estate development. The
uncertainty about the effect of the investment in MAID on the results of future
operations caused management to recognize a write-down equal to the total
investment in MAID in late 1995. At December 31, 1999, MAID held one real estate
project consisting of one unimproved parcel of land. MAID does not currently
intend to develop the remaining properties. MAID continues to market these
properties, and any amounts realized upon sale or other disposition of these
assets above their current carrying value of zero will result in noninterest
income at the time of such sale or disposition.
EMPLOYEES
As of December 31, 1999, the Company employed a total of 231 full-time
equivalent employees. The Company believes that employee relations are
excellent.
SEASONAL TRENDS IN THE COMPANY'S BUSINESS
Although the Company does experience some immaterial seasonal trends in deposit
growth and funding of its agricultural and construction loan portfolios, in
general the Company's business is not seasonal.
OPERATIONS IN FOREIGN COUNTRIES
The Company conducts no operations in any foreign country.
5
REGULATION AND SUPERVISION
REGULATORY ENVIRONMENT
The banking and financial services industry is heavily regulated. Regulations,
statutes and policies affecting the industry are frequently under review by
Congress and state legislatures, and by the federal and state agencies charged
with supervisory and examination authority over banking institutions. Changes in
the banking and financial services industry can be expected to occur in the
future. Some of the changes may create opportunities for the Company and the
Bank to compete in financial markets with less regulation. However, these
changes also may create new competitors in geographic and product markets which
have historically been limited by law to bank institutions, such as the Bank.
Changes in the regulation, statutes or policies that impact the Company and the
Bank cannot necessarily be predicted and may have a material effect on their
business and earnings.
The operations of bank holding companies and their subsidiaries are affected by
the credit and monetary policies of the Federal Reserve Bank (FRB). An important
function of the FRB is to regulate the national supply of bank credit. Among the
instruments of monetary policy used by the FRB to implement its objectives are
open market operations in U.S. government securities, changes in the discount
rate on bank borrowings and changes in reserve requirements on bank deposits.
These instruments of monetary policy are used in varying combinations to
influence the overall level of bank loans, investments and deposits, the
interest rates charged on loans and paid for deposits, the price of the dollar
in foreign exchange markets, and the level of inflation. The credit and monetary
policies of the FRB will continue to have a significant effect on the Bank and
on the Company.
Set forth below is a summary of significant statutes, regulations and policies
that apply to the operation of banking institutions. This summary is qualified
in its entirety by reference to the full text of such statutes, regulations and
policies.
BANK HOLDING COMPANY ACT
As a bank holding company, Capital Corp is subject to regulation under the BHC
Act, and is registered as such with, and subject to examination by, the FRB.
Pursuant to the BHC Act, Capital Corp is subject to limitations on the kinds of
businesses in which it can engage directly or through subsidiaries. It may of
course manage or control banks. Generally, however, it is prohibited, with
certain exceptions, from acquiring direct or indirect ownership or control of
more than five (5) percent of any class of voting shares of an entity engaged in
nonbanking activities, unless the FRB finds such activities to be "so closely
related to banking" as to be deemed "a proper incident thereto" within the
meaning of the BHC Act. Removal of many of the activity limitations is currently
under review by Congress, but whether any legislation liberalizing permitted
bank holding company activities will be enacted is not known. As a bank holding
company, the Company may not acquire more than (5) percent of the voting shares
of any domestic bank without the prior approval of (or, for "well managed"
companies, prior written notice to) the FRB.
The BHC Act subjects bank holding companies to minimum capital requirements. See
"--Regulatory Capital Requirements." Regulations and policies of the FRB also
require a bank holding company to serve as a source of financial and managerial
strength to its subsidiary banks. It is the FRB's policy that a bank holding
company should stand ready to use available resources to provide adequate
capital funds to a subsidiary bank during periods of financial stress or
adversity and should maintain the financial flexibility and capital-raising
capacity to obtain additional resources for assisting a subsidiary bank. Under
certain conditions, the FRB may conclude that certain actions of a bank holding
company, such as a payment of a cash dividend, would constitute an unsafe and
unsound banking practice.
COUNTY BANK
County Bank is a California state-licensed bank. The Bank is a member of the
Federal Reserve Bank (FRB) and maintains deposits insured by the Federal Deposit
Insurance Corporation (FDIC) and thus is subject to the rules and regulations of
the FDIC pertaining to deposit insurance, including deposit insurance
assessments. The Bank is subject to regulation and supervision by the FRB and
the California Department of Financial Institutions (the "Department" or DFI).
Applicable federal and state regulations address many
6
aspects of the Bank's business and activities, including investments, loans,
borrowings, transactions with affiliates, branching, reporting and other areas.
County Bank may acquire other banks or branches of other banks with approval of
the FRB, FDIC and the Department. County Bank is subject to examination by both
the FRB and the Department.
DIVIDENDS
The Company may make a distribution to its shareholders if the corporation's
retained earnings equal at least the amount of the proposed distribution. In the
event sufficient retained earnings are not available for the proposed
distribution, such a corporation may nevertheless make a distribution to its
shareholders if, after giving effect to the distribution, the corporation's
assets equal at least 125% of its liabilities and certain other conditions are
met. Since the 125% ratio translates into a minimum capital ratio of 20%, most
bank holding companies, including the Company based on its current capital
ratios, are unable to meet this last test.
The primary source of funds for payment of dividends by the Company to its
shareholders is the receipt of dividends from the Bank. The Company's ability to
receive dividends from the Bank is limited by applicable state and federal law.
A California state-licensed bank may not make a cash distribution to its
shareholders in excess of the lesser of the following: (i) the bank's retained
earnings, or (ii) the bank's net income for its last three fiscal years, less
the amount of any distributions made by the bank to its shareholders during such
period. However, with the approval of the Commissioner of Financial Institutions
(the "Commissioner"), a bank may pay dividends in an amount not to exceed the
greater of (i) a bank's retained earnings, (ii) its net income for its last
fiscal year, or (iii) its net income for the current fiscal year.
The FRB, FDIC and the Commissioner have authority to prohibit a bank from
engaging in practices which are considered to be unsafe and unsound. Depending
on the financial condition of the Bank and upon other factors, the FRB or the
Commissioner could determine that payment of dividends or other payments by the
Bank might constitute an unsafe or unsound practice. Finally, any dividend that
would cause a bank to fall below required capital levels could also be
prohibited.
REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are required to maintain a minimum risk-based capital
ratio of 8% (at least 4% in the form of Tier 1 capital) of risk-weighted assets
and off-balance sheet items. "Tier 1" capital consists of common equity,
non-cumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries and excludes goodwill. "Tier 2" capital
consists of cumulative perpetual preferred stock, limited-life preferred stock,
mandatory convertible securities, subordinated debt and (subject to a limit of
1.25% of risk-weighted assets) general loan loss reserves. In calculating the
relevant ratio, a bank's assets and off-balance sheet commitments are
risk-weighted: thus, for example, loans are included at 100% of their book value
while assets considered less risky are included at a percentage of their book
value (20%, for example, for interbank obligations, and 0% for vault cash and
U.S. Government securities).
The Company and the Bank are also subject to leverage ratio guidelines. The
leverage ratio guidelines require maintenance of a minimum ratio of 3% Tier 1
capital to total assets for the most highly rated organizations. Institutions
that are less highly rated, anticipating significant growth or subject to other
significant risks will be required to maintain capital levels ranging from 1% to
2% above the 3% minimum.
Recent federal regulation established five tiers of capital measurement ranging
from "well capitalized" to "critically undercapitalized." Federal bank
regulatory authorities are required to take prompt corrective action with
respect to inadequately capitalized banks. If a bank does not meet the minimum
capital requirements set by its regulators, the regulators are compelled to take
certain actions, which may include a prohibition on payment of dividends to a
parent holding company and requiring adoption of an acceptable plan to restore
capital to an acceptable level. Failure to comply will result in further
sanctions, which may include orders to raise capital, merge with another
institution, restrict transactions with affiliates, limit asset growth or reduce
asset size, divest certain investments and /or elect new directors. It is
Capital Corp's intention to maintain risk-based capital ratios for itself and
for the Bank at above the minimum for the "well capitalized" level (6% Tier 1
risk-based; 10% total risk-based) and to maintain the leverage capital ratio for
County Bank above the 5% minimum for "well-capitalized" banks. At December 31,
1999, the Company's leverage, Tier 1 risk-based and total risk-based capital
ratios were 7.50%, 9.99% and 11.24%, and the Bank's leverage, Tier 1 risk-
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based and total risk-based capital ratios were 7.09%, 9.47% and 10.73%. No
assurance can be given that the Company or the Bank will be able to maintain
capital ratios in the "well capitalized" level in the future.
CROSS-INSTITUTION ASSESSMENTS
Any insured depository institution owned by the Company can be assessed for
losses incurred by the FDIC in connection with assistance provided to, or the
failure of, any other depository institution owned by the Company.
INSURANCE PREMIUMS AND ASSESSMENTS
The FDIC has authority to impose a special assessment on members of the Bank
Insurance Fund (the "BIF") to ensure that there will be sufficient assessment
income for repayment of BIF obligations and for any other purpose which it deems
necessary. The FDIC is authorized to set semi-annual assessment rates for BIF
members at levels sufficient to increase the BIF's reserve ratio to a designated
level of 1.25% of insured deposits. The BIF achieved this level in mid-1995.
Congress is considering various proposals to merge the BIF with the Savings
Association Insurance Fund ("SAIF") or otherwise to require banks to contribute
to the insurance funds for savings associations. Adoption of any of these
proposals might increase the cost of deposit insurance for all banks, including
the Bank.
The FDIC has developed a risk-based assessment system, under which the
assessment rate for an insured depository institution will vary according to the
level of risk incurred in its activities. An institution's risk category is
based upon whether the institution is well capitalized, adequately capitalized
or less than adequately capitalized. Each insured depository institution is also
to be assigned to one of the following "supervisory subgroups": Subgroup A, B or
C. Subgroup A institutions are financially sound institutions with few minor
weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses
which, if not corrected, could result in significant deterioration; and Subgroup
C institutions are institutions for which there is a substantial probability
that the FDIC will suffer a loss in connection with the institution unless
effective action is taken to correct the areas of weakness. The FDIC assigns
each member institution an annual FDIC assessment rate which, as of the date of
this Prospectus, varies between 0.0% per annum with a $2,000 minimum (for well
capitalized Subgroup A institutions) and 0.27% per annum (for undercapitalized
Subgroup C institutions). Insured institutions are not permitted to disclose
their risk assessment classification.
Under recent legislation, the cost of carrying bonds issued by the Financing
Corporation ("FICO") to cover losses of failed savings associations will be
allocated between BIF-insured institutions and SAIF-- insured institutions, with
BIF-insured institutions paying twenty (20) percent of the amount paid by
SAIF--insured institutions. The FDIC recently estimated that to cover these
costs BIF institutions will pay an assessment of approximately $.0128 annually
per $100 insured deposits, and SAIF institutions will pay approximately $.0644
annually per $100 of insured deposits. Starting in the year 2000, BIF and SAIF
institutions will share the FICO bond costs equally, with an estimated
assessment of $.0243 annually per $100 of insured deposits.
This legislation will increase the Bank's premiums, as it will be required to
share in the cost of carrying the FICO bonds. The increase will be slight until
the year 2000, at which time it will increase.
AUDIT REQUIREMENTS
All depository institutions are required to have an annual, full-scope on-site
examination. Those depository institutions with assets greater than $500 million
are required to have annual independent audits and to prepare all financial
statements in accordance with generally accepted accounting principles. Each
institution is required to have an independent audit committee comprised
entirely of outside directors.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each bank to identify the
communities served by the bank's offices and to identify the types of credit the
bank is prepared to extend within such communities. It also requires the bank's
regulators to assess the bank's performance in meeting the credit needs of its
community and to take such assessment into consideration in reviewing
application for mergers, acquisitions and other transactions, such as the Branch
Acquisition. An unsatisfactory rating may be the basis for denying such an
application. The Bank completed a CRA examination as of December 1997, and
received an "outstanding" rating.
8
POTENTIAL ENFORCEMENT ACTIONS
Banks and their institution-affiliated parties may be subject to potential
enforcement actions by the bank regulatory agencies for unsafe or unsound
practices in conducting their businesses, or for violations of any law, rule or
regulation or provision, any consent order with any agency, any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver,
cease-and-desist orders and written agreements, the termination of insurance of
deposits, the imposition of civil money penalties and removal and prohibition
orders against institution-affiliated parties. See " -- County Bank".
INTERSTATE BANKING
Riegle-Neal Interstate Banking and Branching Efficiency Act. The Riegle-Neal
Interstate Banking and Branching Efficiency Act (the "Riegle-Neal Act") was
enacted in 1994. Generally, provisions of the Riegle-Neal Act authorize
interstate banking and interstate branching, subject to certain state options.
The following is a summary of its provisions:
INTERSTATE BANKING AND BRANCHING
- Interstate acquisition of banks by holding companies was permitted in
all states on and after September 29, 1995. However, states may continue to
prohibit acquisition of banks that have been in existence less than five years
and interstate chartering of new banks.
- Interstate mergers of banks were permitted as of June 1, 1997, unless
a state adopted legislation before June 1, 1997 to "opt out" of interstate
merger authority. Individual states were permitted to enact legislation to
permit interstate mergers earlier than that date.
- Interstate acquisition of branches is permitted to a bank only if the
law of the state where the branch is located expressly permits interstate
acquisition of a branch without acquiring the entire bank.
- Interstate de novo branching is permitted to a bank only if a state
adopts legislation to "opt in" to interstate de novo branching authority.
LIMITATIONS ON CONCENTRATIONS. An interstate banking application may
not be approved if the applicant and its depository institution affiliates would
control more than 10% of insured deposits nationwide or more than 30% of insured
deposits in the state in which the bank to be acquired in located. These limits
do not apply to mergers solely between affiliates. States may waive the 30% cap
on a nondiscriminatory basis. Nondiscriminatory state caps on deposit market
share of a depository institution and its affiliates are not affected.
AGENCY AUTHORITY. A bank subsidiary of a bank holding company is
authorized to receive deposits, renew time deposits, close loans, service loans
and receive payments on loans as an agent for a depository institution affiliate
without being deemed a branch of the affiliate. A bank is not permitted to
engage, as agent for an affiliate, in any activity as agent that it could
conduct as a principal, or to have an affiliate, as its agent, conduct any
activity that it could not conduct directly, under federal or state law.
HOST STATE REGULATION. Out-of-state banks seeking to acquire or
establish a branch are required to comply with any nondiscriminatory filing
requirements of the host state where the branch is located. The host state may
set notification and reporting requirements for a branch of an out-of-state
bank. A branch of an out-of-state bank is subject to all of the laws of the host
state regarding intrastate branching, consumer protection, fair lending and
community reinvestment. A branch of an out-of-state bank is not permitted to
conduct any activities at the branch that are not permissible for a bank
chartered by the host state.
MEETING LOCAL CREDIT NEEDS. CRA evaluations are required for each state
in which an interstate bank has a branch. Interstate banks are prohibited from
using out-of-state branches "primarily for the purpose of deposit production."
Federal banking agencies have adopted regulations to ensure that interstate
branches are being operated with a view to the needs of the host communities.
CALIFORNIA LAW. In October 1995, California enacted state legislation
in accordance with authority under the Riegle-Neal Act. This law permits banks
headquartered outside California to acquire or merge with California banks that
have been in existence for at least five years, and thereby establish one or
more California branch offices. An out-of-state bank may not enter California by
acquiring one or more branches of a California bank or other operations
constituting less than the whole bank. The law authorizes waiver of the 30%
limit on state-wide market share for deposits as permitted by the Riegle-Neal
Act. This law also authorizes California state-licensed banks to conduct certain
banking activities (including receipt of
9
deposits and loan payments and conducting loan closings) on an agency basis on
behalf of out-of-state banks and to have out-of-state banks conduct similar
agency activities on their behalf.
It is impossible to predict with any degree of accuracy the competitive impact
the laws and regulations described above will have on commercial banking in
general and on the business of the Company in particular, or to predict whether
or when any of the proposed legislation and regulations will be adopted. It is
anticipated that the banking industry will continue to be a highly regulated
industry. Additionally, if experience is any indication, there appears to be a
continued lessening of the historical distinction between the services offered
by financial institutions and other businesses offering financial services.
Finally, the trend toward nationwide interstate banking is expected to continue.
As a result of these factors, it is anticipated banks will experience increased
competition for deposits and loans and, possibly, further increases in their
cost of doing business.
FINANCIAL SERVICES MODERNIZATION LEGISLATION
On November 12, 1999 President Clinton signed into law the Gramm-Leach-Bliley
Act of 1999 (the "Modernization Act"). The Modernization Act repeals the two
affiliation provisions of the Glass-Steagall Act: Section 20, which restricts
the affiliation of Federal Reserve member banks with firms "engaged principally"
in specified securities activities; and Section 32, which restricts officer,
director, or employee interlocks between a member bank and any company or person
"primarily engaged" in specified securities activities. In addition, the
Modernization Act also expressly preempts any state law restricting the
establishment of financial affiliations, primarily related to insurance. The law
establishes a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms, and other financial service
providers by revising and expanding the BHC Act framework to permit a holding
company system to engage in a full range of financial activities through a new
entity known as a Financial Holding Company. "Financial activities" is broadly
defined to include not only banking, insurance, and securities activities, but
also merchant banking and additional activities that the nature, incidental to
such financial activities, or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally.
In order for the Company to take advantage of the ability provided by the
modernization Act to affiliate with other financial service providers, it must
become a "Financial Holding Company." To do so, the Company would file a
declaration with the Federal Reserve, electing to engage in activities
permissible for Financial Holding companies and certifying that it is eligible
to do so because its insured depository institution subsidiary (the Bank) is
well-capitalized and well-managed. In addition, the Federal Reserve must also
determine that an insured depository institution subsidiary has at least a
"satisfactory" rating under the Community Reinvestment Act. [The Company
currently meets the requirements for Financial Holding Company status]. The
Company will continue to monitor its strategic business plan to determine
whether, based on market conditions and other factors, the Company wishes to
utilize any of its expanded powers provided in the modernization Act.
The Modernization Act also includes a new section of the Federal Deposit
Insurance Act governing subsidiaries of state banks that engage in "activities
as principal that would only be permissible" for a national bank to conduct in a
financial subsidiary. It expressly preserves the ability of a state bank to
retain all existing subsidiaries. Because California permits commercial banks
chartered by the state to engage in any activity permissible for national banks,
the Bank will be permitted to form subsidiaries to engage in the activities
authorized by the Modernization Act to the same extent as a national bank. In
order to form a financial subsidiary, the Bank must be well-capitalized, and the
Bank would be subject to the same capital deduction, risk management and
affiliate transaction rules as applicable to national banks. [the Bank currently
meets those requirements.]
Under the Modernization Act, securities firms and insurance companies that elect
to become Financial Holding Companies may acquire banks and other financial
institutions. The Company does not believe that the Modernization Act will have
a material adverse effect on its operations in the near-term. However, to the
extent that it permits banks, securities firms, and insurance companies to
affiliate, the financial services industry may experience further consolidation.
The Modernization Act is intended to grant to community banks certain powers as
a matter of right that larger institutions have accumulated on an ad hoc basis.
10
Nevertheless, this act may have the result of increasing the amount of
competition that the Company and the Bank face from larger institutions and
other types of companies offering financial products, many of which may have
substantially more financial resources than the Company and the Bank.
11
SELECTED STATISTICAL INFORMATION
The following tables in pages 12 through 17 present certain statistical
information concerning the business of the Company. This information should be
read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" at ITEM 7, pages 9 through 21 of the
Company's 1999 Annual Report to Shareholders incorporated herein by reference,
and with the Company's Consolidated Financial Statements and the Notes thereto
included in Item 14, pages 23 through 46 of the Company's 1999 Annual Report to
Shareholders incorporated herein by reference. The statistical information that
follows is generally based on average daily amounts.
INTEREST RATES AND MARGINS:
Managing interest rates and margins is essential to the Company in order to
maintain profitability. The following table presents, for the periods indicated,
the distribution of average assets, liabilities and shareholder's equity, as
well as the total dollar amount of interest income from average interest-earning
assets and resultant yields and the dollar amounts of interest expense and
average interest-bearing liabilities, expressed both in dollars and rates.
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
(Dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Federal funds sold $ 9,140 $ 443 4.85% $ 23,469 $ 1,253 5.34% $ 6,288 $ 344 547%
Time deposits at other financial institutions 2,691 156 5.80 1,040 57 5.48 1,124 53 4.21
Nontaxable investment securities(1) 30,057 1,378 4.58 16,320 797 4.88 4,358 231 5.30
Taxable investment securities 114,402 7,129 6.23 121,728 7,348 6.66 68,900 4,638 6.73
Loans, gross 303,463 30,255 9.97 242,989 25,159 10.35 198,140 20,646 10.42
------- ------ ------- ------ ------- ------
Total interest-earning assets 459,753 39,361 8.56 405,546 34,614 8.54 278,810 25,912 9.29
Allowance for loan losses (5,902) (4,158) (2,615)
Cash and noninterest-bearing deposits
at other banks 24,579 19,610 14,384
Premises and equipment, net 13,146 13,390 9,596
Interest receivable and other assets 24,310 22,084 14,016
-------- -------- --------
Total assets $515,886 $456,472 $314,191
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Negotiable orders of withdrawal $ 68,134 458 .67% $ 57,602 503 .87% $ 38,164 345 .90%
Savings deposits 174,301 5,752 3.30 156,956 5,696 3.63 117,357 4,770 4.06
Time deposits 141,497 7,074 5.00 112,555 6,143 5.46 71,808 3,983 5.55
Other borrowings 10,772 756 7.02 20,862 1,292 6.19 18,721 1,092 5.83
------- ------ ------- ------ ------ -----
Total interest-bearing liabilities 394,704 14,040 3.56 347,975 13,634 3.92 246,050 10,190 4.14
Noninterest-bearing deposits 74,979 63,243 38,023
Accrued interest, taxes and other liabilities 3,118 2,976 2,583
------ ------ ------
Total liabilities 472,801 414,194 286,656
Total shareholders' equity 43,085 42,278 27,535
------ ------ ------
Total liabilities and shareholders' equity $515,886 $456,472 $314,191
======== ======== ========
NET INTEREST INCOME AND MARGIN (2) $25,321 5.51% $20,980 5.17% $15,722 5.64%
(1) INTEREST ON MUNICIPAL SECURITIES IS NOT COMPUTED ON TAX-EQUIVALENT BASIS.
(2) NET INTEREST MARGIN IS COMPUTED BY DIVIDING NET INTEREST INCOME BY TOTAL
AVERAGE INTEREST-EARNING ASSETS.
The Company's net interest income is affected by changes in the amount and mix
of interest-earning assets and
12
interest-bearing liabilities. It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and borrowed
funds. The following table sets forth changes in interest income and interest
expense for each major category of interest-earning asset and interest-bearing
liability and the amount of change attributable to volume and rate changes for
the years indicated. The changes due to both rate and volume have been allocated
to rate and volume in proportion to the relationship of the absolute dollar
amount of the change in each.
(Dollars in thousands) 1999 COMPARED TO 1998 1998 COMPARED TO 1997
- -----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME VARIANCE ANALYSIS VOLUME RATE TOTAL VOLUME RATE TOTAL
--------------------------------------------------------------
INCREASE (DECREASE) IN INTEREST INCOME:
Loans $6,059 $ (963) $5,096 $4,644 $ (131) $4,513
Taxable investment securities (452) 233 (219) 3,233 (523) 2,710
Nontaxable investment securities 633 (52) 581 586 (20) 566
Federal funds sold (704) (106) (810) 917 (8) 909
Time deposit at other institutions 96 3 99 (4) 8 4
------- ------ ------ ------ ------- ------
Total 5,632 (885) 4,747 9,376 (674) 8,702
INCREASE (DECREASE) IN INTEREST EXPENSE:
Interest-bearing demand deposits 83 (128) (45) 159 (1) 158
Savings deposits 598 (542) 56 1,088 (162) 926
Time deposits 1,480 (549) 931 2,162 (2) 2,160
Other borrowings (690) 154 (536) 130 70 200
------- ------- ------ ------ ------- ------
Total 1,471 (1,065) 406 3,539 (95) 3,444
------- ------- ------ ------ ------- ------
INCREASE (DECREASE) IN NET INTEREST INCOME $4,161 $ 180 $4,341 $5,837 $ (579) $5,258
======= ======= ====== ====== ======= ======
INVESTMENT PORTFOLIO MATURITIES
The following table sets forth the maturities of debt securities at December 31,
1999 and the weighted average yields of such securities calculated on a book
value basis using the weighted average yield within each scheduled maturity
grouping. Maturities of mortgage-backed securities and collateralized mortgage
obligations are stipulated in their respective contracts, however, actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call prepayment penalties.
Yields on municipal securities have not been calculated on a tax-equivalent
basis.
Within One Year One to Five Years Five to Ten Years Over Ten Years
------------------------------------------------------------------------------------
(Dollars in thousands) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
Available for sale debt
securities:
U.S. Treasury and U.S.
government agencies $ - -% $12,277 6.72% $ 4,371 7.05% $ 108 5.19% $ 16,756
State and political
subdivisions 515 3.80 - - 3,342 5.07 19,514 5.65 23,371
Mortgage-backed securities - - 1,081 7.37 578 7.46 42,064 7.21 43,723
Collateralized mortgage
obligations 157 6.82 5,131 7.27 4,088 7.14 10,965 7.50 20,341
Corporate debt securities - - 4,120 7.41 - - 5,540 7.18 9,660
Held to maturity debt
securities:
U.S. Treasury and U.S.
government agencies - - - - 1,004 5.79 - - 1,004
State and political
subdivisions - - - - - - 4,389 4.85 4,389
Mortgage-backed securities - - - - - - 24,161 7.18 24,161
----- ---- ------- ---- ------- ---- -------- ---- --------
Total debt securities $ 672 4.51% $22,609 7.00% $13,383 6.51% $106,741 6.85% $143,405
===== ==== ======= ==== ======= ==== ======== ==== ========
13
The Company does not own securities of a single issuer whose aggregate book
value is in excess of 10% of its total equity.
ASSET / LIABILITY REPRICING
The interest rate gaps reported in the table below arise when assets are funded
with liabilities having different repricing intervals. Since these gaps are
actively managed and change daily as adjustments are made in interest rate views
and market outlook, positions at the end of any period may not reflect the
Company's interest rate sensitivity in subsequent periods. Active management
dictates that longer-term economic views are balanced against prospects for
short-term interest rate changes in all repricing intervals. For purposes of the
analysis below, repricing of fixed-rate instruments is based upon the
contractual maturity of the applicable instruments. Actual payment patterns may
differ from contractual payment patterns.
BY REPRICING INTERVAL
-------------------------------------------------------------------------------
After three
Within months, After one Noninterest-
three Within year, within After bearing
(Dollars in thousands) months one year five years five years funds Total
-------------------------------------------------------------------------------
ASSETS
Federal funds sold $ 8,640 $ - $ - $ - $ - $ 8,640
Time deposits at other institutions 850 - - - - 850
Investment securities 5,648 7,384 18,766 111,607 3,963 147,368
Loans 128,738 44,462 110,452 47,616 - 331,268
Noninterest-earning assets and
allowance for loan losses - - - - 75,424 75,424
---------- --------- --------- --------- --------- ---------
Total assets $ 143,876 $ 51,846 129,218 $ 159,223 $ 79,387 $ 563,550
========= ========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ - $ - $ - $ - $ 87,564 $ 87,564
Savings, money market & NOW deposits 236,946 - - - - 236,946
Time deposits 47,286 94,727 28,378 - - 170,391
Other interest-bearing liabilities 15,000 2,600 - 3,214 - 20,814
Other liabilities and shareholders' equity - - - - 47,835 47,835
--------- --------- --------- --------- --------- --------
Total liabilities and shareholders' equity $ 299,232 $ 97,327 $ 28,378 $ 3,214 $ 135,399 $ 563,550
========= ========= ========= ========= ========= =========
Interest rate sensitivity gap $(155,356) $ (45,481) $ 100,840 $ 156,009 $ (56,012) $ -
Cumulative interest rate sensitivity gap $(155,356) $(200,837) $ (99,997) $ 56,012 $ - -
14
LOAN PORTFOLIO
At December 31, 1999, the Company had approximately $101,847,000 in undisbursed
loan commitments. This compares with $76,894,000 at December 31, 1998. Standby
letters of credit were $2,674,000 and $2,694,000, at December 31, 1999 and
December 31, 1998. For further information about the composition of the
Company's loan portfolio see "ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" section entitled "Credit Risk
Management and Asset Quality," pages 18 through 20 of the Company's 1999 Annual
Report to Shareholders incorporated herein by reference.
The following table shows the composition of the loan portfolio of the Company
by type of loan on the dates indicated:
(Dollars in thousands) December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------
Amount Amount Amount Amount Amount
------ ------ ------ ------ ------
Commercial, financial
and agricultural $ 112,179 $ 87,245 $ 78,550 $ 71,786 $ 65,563
Real estate -construction 11,926 13,840 12,657 13,923 12,006
Real estate - mortgage 120,978 96,957 70,802 57,098 42,128
Consumer installment 86,185 70,891 55,968 40,440 14,039
--------- --------- --------- --------- ---------
Total $ 331,268 $ 268,933 $ 217,977 $ 183,247 $ 133,736
========= ========= ========= ========= =========
The table that follows shows the maturity distribution of the portfolio of
commercial and agricultural, real estate construction, real estate mortgage and
installment loans on December 31, 1999 by fixed and floating rate attributes:
December 31, 1999
----------------------------------------------------
Within One to Over
(Dollars in thousands) One Year Five Years Five Years Total
-------- ---------- ---------- -----
COMMERCIAL AND AGRICULTURAL
Loans with floating rates $ 45,955 $ 27,877 $ 17,535 $ 95,367
Loans with predetermined rates 8,605 6,016 6,191 16,812
--------- --------- --------- ---------
Subtotal 54,560 33,893 23,726 112,179
REAL ESTATE--CONSTRUCTION
Loans with floating rates 4,730 1,169 1,578 7,477
Loans with predetermined rates 2,738 1,711 - 4,449
--------- --------- --------- ---------
Subtotal 7,468 2,880 1,578 11,926
REAL ESTATE--MORTGAGE
Loans with floating rates 7,027 68,770 24,041 99,838
Loans with predetermined rates 4,232 16,908 - 21,140
--------- --------- --------- ---------
Subtotal 11,259 85,678 24,041 120,978
CONSUMER INSTALLMENT
Loans with floating rates 19,186 9,593 - 28,779
Loans with predetermined rates 23,129 33,301 976 57,406
--------- --------- --------- ---------
Subtotal 42,315 42,894 976 86,185
Total $ 115,602 $ 165,345 $ 50,321 $ 331,268
========= ========= ========= =========
The Company seeks to mitigate the risks inherent in its loan portfolio by
adhering to certain underwriting practices. They include analysis of prior
credit histories, financial statements, tax returns and cash flow
15
projections of its potential borrowers as well as obtaining independent
appraisals on real and personal property taken as collateral and audits of
accounts receivable or inventory pledged as security.
The Company also has an internal loan review process as well as periodic
external reviews. The results of these reviews are assessed by the Company's
audit committee. Collection of delinquent loans is generally the responsibility
of the Company's credit administration staff. However, certain problem loans may
be dealt with by the originating loan officer. The Directors Loan Committee
reviews the status of delinquent and problem loans on a monthly basis. The
Company's underwriting and review practices notwithstanding, in the normal
course of business, the Company expects to incur loan losses in the future.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table summarizes nonperforming loans of the Company as of the
dates indicated:
December 31,
(Dollars in thousands) -------------------------------------------------------
1999 1998 1997 1996 1995
Amount Amount Amount Amount Amount
------- ------- ------- ------- -------
Nonaccrual loans $ 1,984 $ 1,164 $ 2,611 $ 4,968 $ 4,626
Accruing loans past due 90 days or more 6 413 131 600 224
------- ------- ------- ------- -------
Total nonperforming loans 1,990 1,577 2,742 5,568 4,850
Other real estate owned 247 60 60 1,466 47
------- ------- ------- ------- -------
Total nonperforming assets $ 2,237 $ 1,637 $ 2,802 $ 7,034 $ 4,897
======= ======= ======= ======= =======
Nonperforming loans to total loans 0.60% 0.59% 1.26% 3.04% 3.63%
Nonperforming assets to total assets 0.40% 0.33% 0.66% 2.64% 2.34%
Loans with significant potential problems or impaired loans are placed on
nonaccrual status. Management defines impaired loans as those loans, regardless
of past due status, in which management believes the collection of principal and
interest is in doubt. The amount of gross interest income that would have been
recorded in the periods then ended if the loans had been current in accordance
with the original terms and had been outstanding throughout the period or since
origination, if held for part of the period, was $143,000, $91,000, $189,000,
$489,000 and $25,000 in 1999, 1998, 1997, 1996 and 1995. The amount of interest
income on these loans that was included in net income was $126,000, $134,000,
$471,000, $625,000 and $216,000 in 1999, 1998, 1997, 1996 and 1995.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The following table summarizes a breakdown of the allowance for loan losses by
loan category and the percentage by loan category of total loans for the dates
indicated:
(Dollars in thousands) December 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------
Loans Loans Loans Loans Loans
% to % to % to % to % to
total total total total Total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial, financial
and agricultural $ 3,365 34% $ 2,618 33% $ 1,868 36% $ 840 39% $ 944 49%
Real estate -construction 358 4 376 5 640 6 1,421 8 708 9
Real estate - mortgage 1,815 36 1,260 36 1,058 32 219 31 - 31
Installment 1,004 26 521 26 267 26 312 22 49 11
------- --- ------- --- ------- --- ------- --- ------- ---
Total $ 6,542 100% $ 4,775 100% $ 3,833 100% $ 2,792 100% $ 1,701 100%
======= === ======= === ======= === ======= === ======= ===
16
OTHER INTEREST-BEARING ASSETS
The following table relates to other interest bearing assets not disclosed above
for the dates indicated. This item consists of a salary continuation plan for
the Company's executive management and a deferred compensation plan for
participating board members. The plans are informally linked with universal life
insurance policies containing cash surrender values as listed in the following
table:
DECEMBER 31
----------------------------------------
(Dollars in thousands) 1999 1998 1997
---- ---- ----
Cash surrender value of life insurance $ 6,292 $ 4,104 $ 3,839
ITEM V DEPOSITS
The following table sets forth the average balance and the average rate paid for
the major categories of deposits for the years indicated:
Deposits
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
---- ---- ----
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------------------------------------------------------------
Noninterest-bearing demand deposits $ 74,979 - % $ 63,243 - % $ 38,023 - %
Interest-bearing demand deposits 68,134 0.67 57,602 0.87 38,164 0.90
Savings deposits 174,301 3.30 156,956 3.63 117,357 4.06
Time deposits under $100,000 90,586 4.73 86,020 5.34 58,262 5.41
Time deposits $100,000 and over 50,911 5.48 26,535 5.84 13,546 6.13
MATURITIES OF TIME CERTIFICATES OF DEPOSITS OF $100,000 OR MORE
Maturities of time certificates of deposits of $100,000 or more outstanding at
December 31, 1999 are summarized as follows:
(Dollars in thousands)
Remaining Maturity:
Three months or less $ 21,157
Over three through six months 20,655
Over six through twelve months 16,901
Over twelve months 10,283
--------
Total $ 68,996
=========
17
ITEM VI RETURN ON EQUITY AND ASSETS
The following table sets forth certain financial ratios for the periods
indicated (averages are computed using actual daily figures):
RETURN ON AVERAGE EQUITY AND ASSETS
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------
1999 1998 1997
---- ---- ----
Return on average assets 0.99% 0.60% 0.13%
Return on average equity 11.86 6.48 1.46
Dividend payout ratio - - -
Average equity to average assets 8.35% 9.26% 8.76%
MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCK MATTERS
The Company's stock is included for quotation on the Nasdaq National Market
System with a stock quotation symbol of CCOW. The following table indicates the
range of high and low sales prices for the period shown, based upon information
provided by the Nasdaq National Market System. Such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily reflect actual transactions. There were
approximately 3,000 CCOW shareholders as of December 31, 1999.
- ------------------------------------------
1999 HIGH LOW
- ------------------------------------------
4th quarter $ 12.00 $ 8.50
3rd quarter 13.88 11.75
2nd quarter 14.09 9.75
1st quarter $ 10.75 $ 8.50
1998 HIGH LOW
- ------------------------------------------
4th quarter $ 12.00 $ 9.38
3rd quarter 13.37 9.81
2nd quarter 15.35 12.75
1st quarter $ 14.28 $ 11.67
- ------------------------------------------
18
ITEM 2. PROPERTIES
THE BANK
(1) NORTH MERCED OFFICE
The Bank's north Merced office is located at 490 West Olive Avenue in Merced
with approximately 5,600 square feet of interior floor space. This building
was constructed in 1978 at a cost of approximately $400,000 and is situated
on a lot of approximately 47,000 square feet, which the Bank purchased in
1977 for approximately $186,000. Management believes that this facility will
be adequate to accommodate the operations of this branch for the foreseeable
future.
(2) DOWNTOWN MERCED BRANCH
The Bank's downtown Merced Branch was located at 606 West 19th Street in Merced
until September 2, 1997. On that date, the Bank relocated its downtown Merced
branch to 550 West Main Street in Merced and it was re-designated as the main
branch of the Bank. The branch and certain centralized lending operations occupy
the first floor of the three story building, occupying approximately 9,200
square feet. The Bank continued to lease the previously occupied building
through June, 1999. Management believes that the new facility will be adequate
to accommodate the operations of this branch for the foreseeable future.
(3) ATWATER BRANCH
On October 5, 1981, the Bank opened a branch office at 735 Bellevue Road,
Atwater. The building contains approximately 6,000 square feet of interior floor
space, and was built at a total cost of approximately $500,000. In 1994, the
Bank purchased the lot at a cost of $316,000. Management of the Bank believes
that this facility will be adequate to accommodate the operations of this branch
for the foreseeable future. The data processing and central service support
personnel and related equipment were relocated to the new facility in downtown
Merced, as discussed above in late 1997.
(4) ADMINISTRATIVE HEADQUARTERS
On September 2, 1997, the Company vacated its three previously leased
administrative facilities in Merced and relocated to 550 West Main Street in
Merced. The facility is a three story facility with a two story attached parking
facility and is approximately 29,000 square feet. Approximately 19,800 square
feet is occupied by the administrative and central support functions. The
facility cost was approximately $5.1 million. Management believes that this
facility will be adequate to accommodate the operations of Company for the
foreseeable future.
(5) LOS BANOS BRANCH
On August 15, 1989, the Bank opened a branch office at 1341 East Pacheco
Boulevard, Los Banos, located in the Canal Farm Shopping Center. The Bank
entered into a five-year lease with a nonaffiliated third party, commencing on
August 1, 1989. In October of 1994, the Los Banos branch was relocated to 953 W.
Pacheco Boulevard, Los Banos. The Bank entered into a ten-year lease with a
non-affiliated third party on the facility. The new facility contains 4,928
square feet of interior floor space. Remodeling and redecorating expenses were
approximately $355,000. Management believes that this facility will be adequate
to accommodate the operation of the branch for the foreseeable future.
(6) HILMAR BRANCH
On November 15, 1993, the Bank opened a branch office at 8019 N. Lander Avenue,
Hilmar. The building was purchased at a cost of $328,000 and consists of a
single story building of approximately 4,456 square feet of interior floor
space. Remodeling and redecorating expenses were approximately $53,000.
Management believes that this facility will be adequate to accommodate the
operation of this branch for the foreseeable future.
(7) SONORA BRANCH
On January 12, 1996, the Bank received approval to open a full service banking
facility at the Crossroads Shopping Center and entered into a five-year lease
with a non-affiliated third party on January 12, 1996 for a
19
2,500 square foot facility. The branch opened April 1, 1996. On August 28,
1998, the Bank relocated from the Crossroads Shopping Center to a larger
facility of 3,131 square feet in a nearby shopping center. As part of the
move the Bank entered into a ten-year lease with a non-affiliated third
party. Management believes that this facility will be adequate to accommodate
the operation of this branch for the foreseeable future.
(8) TURLOCK BRANCHES
On September 1, 1995, the Bank opened a branch in Turlock, California. In May
1995 the Bank acquired 2 lots for $297,000 at 2001 Geer Road, Turlock. The Bank
completed the construction of a permanent facility in February 1997 at a cost of
approximately $694,000 and the facility is approximately 3,300 square feet.
Additionally, in November, 1999, the Bank received approval to convert the
Turlock Town and Country branch into a full service County Bank branch. The
original lease was signed with a non-affiliated third party on March 1, 1995 and
covered a five year term. This lease was assumed by County Bank and is for an
approximate 2,160 square foot facility located at 410 East Olive Avenue,
Turlock, California. Management believes that this facility will be adequate to
accommodate the operation of this branch for the foreseeable future.
(9) MODESTO BRANCHES
On January 24, 1996, the Bank received approval to open a full service banking
facility in Modesto and entered into a ten-year lease with a non-affiliated
third party on December 2, 1996 for an approximately 5,413 square foot building
at 3508 McHenry Avenue, Modesto. The branch opened for business on December 10,
1996. Management believes that this facility will be adequate to accommodate the
branch for the foreseeable future.
On September 26, 1996, the Bank received approval to open a second branch in
Modesto and entered into a four-year lease with a non-affiliated third party
on December 1, 1996 for an approximately 8,208 square foot building at 1003
12th Street, Modesto. The branch opened for business on December 31, 1996.
Management believes that this facility will be adequate to accommodate the
banking operation for the foreseeable future.
(10) ACQUIRED BRANCHES - DOS PALOS, LIVINGSTON, AND MARIPOSA
On December 11, 1997, the Bank purchased the sites of three former branches of
Bank of America. These facilities are located at 640 Main Street, Livingston,
1507 Center Street, Dos Palos and 5121 Hwy 140, Mariposa. The branch in
Livingston was purchased at a cost of $251,000 and is a 5,699 square feet
facility. The Dos Palos branch was purchased at a cost of $296,000 and is an
8,274 square feet facility. The Mariposa branch was purchased for a cost of
$313,000 and is a 4,200 square feet facility. Management believes that these
facilities will be adequate to accommodate the banking operation for the
foreseeable future.
(11) MADERA BRANCH
In October, 1999, the Bank entered into a 3 year lease with a nonaffiliated
third party for an approximate 4,000 square foot facility located at 413
Yosemite Avenue, Suite 101, Madera, California. The branch relocated to this
larger facility on October 29, 1999 from a temporary facility that was rented on
a month to month basis. Management believes the new facility will be adequate to
accommodate the banking operation for the foreseeable future.
(12) FRESNO BRANCH
In November, 1999, the Bank received approval to convert the Fresno Town and
County branch into a full service County Bank office. The Bank relocated the
previous Thrift office to a larger facility, entering into a 4 year lease with a
nonaffiliated party for an approximate 5,200 square foot facility located at
2150 West Shaw Avenue, Fresno, California. The new lease agreement was entered
into in August, 1999. Management believes the new facility will be adequate to
accommodate the banking operation for the foreseeable future.
(13) VISALIA BRANCH
In November, 1999, the Bank received approval to convert the Visalia Town and
Country branch into a full service County Bank office. The Town and Country
lease signed in May, 1998 covered a five year term and was assumed by County
Bank. The facility encompasses approximately 1,275 square feet located at 725
20
West Main Street, Visalia, California. Management believes the new facility
will be adequate to accommodate the banking operation for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1999, the Company, is not a party to, nor is any of their
property the subject of, any material pending legal proceedings, nor are any
such proceedings known to be contemplated by government authorities, except
as discussed in Regulation and Supervision --- County Bank."
The Company is, however, also exposed to certain potential claims encountered
in the normal course of business. In the opinion of Management, the
resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations in the
foreseeable future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not commit any matters to a vote of security holders in the
quarter ended December 31, 1999.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
For information concerning the market for the Company's common stock and
related shareholder matters, see page 20 of the Company's 1999 Annual Report
to Shareholders incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
For selected consolidated financial data concerning the Company, see page 11 of
the Company's 1999 Annual Report to Shareholders incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For management's discussion and analysis of financial condition and results
of operations, see pages 12 through 24 of the Company's 1999 Annual Report to
Shareholders incorporated herein by reference.
ITEM 7A. MARKET RISK
For management's discussion and analysis of market risk and interest rate
risk management, see pages 20 through 21 of the Company's 1999 Annual Report
to Shareholders incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Audited Consolidated Balance Sheets as of December 31, 1999 and 1998 and
Audited Consolidated Statements of Income and Comprehensive Income,
Shareholders' Equity and Cash Flows for the fiscal years ending December 31,
1999, 1998, and 1997 appear on pages 28 through 31 of the Company's 1999
Annual Report to Shareholders incorporated herein by reference. Notes to the
Consolidated Financial Statements appear on pages 32 through 48 of the
Company's 1999 Annual Report to Shareholders incorporated herein by
reference. The Independent Auditors' Report appears on page 27 of the
Company's 1999 Annual Report to Shareholders incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in and there were no disagreements with accountants on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
section of the Company's 1999 Proxy Statement titled "Election of Directors,"
which is to be filed on or about March 7, 2000.
ITEM 11. EXECUTIVE COMPENSATION
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
section of the Company's 1997 Proxy Statement titled "Information Pertaining
to Election of Directors," which is to be filed on or about March 7, 2000.
22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
Company's 1999 Proxy Statement, which is to be filed on or about March 7,
2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
Company's 1999 Proxy Statement, which was filed on or about March 7, 2000.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) FINANCIAL STATEMENTS AND SCHEDULES
An index of all financial statements and schedules filed as part of this
Form 10-K appears below and the material which begins on the pages of the
Company's Annual Report to Shareholders for the year ended December 31, 1999
listed, are incorporated herein by reference in response to Item 8 of this
report.
- ------------------------------------------------------------------------------------------------------------
Financial Statements: Page
- -------------------- ----
- ------------------------------------------------------------------------------------------------------------
Independent Auditors' Report 27
- ------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets as of December 31, 1999 and 1998 28
- ------------------------------------------------------------------------------------------------------------
Consolidated Statements of Income and Comprehensive Income for the Years Ended 1999,
1998, and 1997 29
- ------------------------------------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity for the Years Ended 1999, 1998, and 1997 30
- ------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows for the Years Ended 1999, 1998, and 1997 31
- ------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financials 32
- ------------------------------------------------------------------------------------------------------------
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed in the quarter ending December
31, 1999.
(c) EXHIBITS
The following is a list of all exhibits required by Item 601 of
Regulation S-K to be filed as part of this Form 10-K:
- -------------------------------------------------------------------------------------------------------------
Sequentially
Exhibit Numbered
Number Exhibit Page
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
3.1 Articles of Incorporation (filed as Exhibit 3.1 of the Company's *
September 30, 1996 Form 10Q filed with the SEC on or about
November 14, 1996).
- -------------------------------------------------------------------------------------------------------------
Bylaws (filed as Exhibit 3.2 of the Company's September 30, 1996 Form
3.2 10Q filed with the SEC on or about November 14, 1996). *
- -------------------------------------------------------------------------------------------------------------
23
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
10 Employment Agreement between Thomas T. Hawker and Capital Corp. *
- -------------------------------------------------------------------------------------------------------------
10.1 Administration Construction Agreement (filed as Exhibit 10.4 of the *
Company's 1995 Form 10K filed with the SEC on or about March 31, 1996).
- -------------------------------------------------------------------------------------------------------------
10.2 Stock Option Plan (filed as Exhibit 10.6 of the Company's 1995 Form 10K *
filed with the SEC on or about March 31, 1996).
- -------------------------------------------------------------------------------------------------------------
10.3 401(k) Plan (filed as Exhibit 10.7 of the Company's 1995 Form 10K filed *
with the SEC on or about March 31, 1996).
- -------------------------------------------------------------------------------------------------------------
10.4 Employee Stock Ownership Plan (filed as Exhibit 10.8 of the Company's *
1995 Form 10K filed with the SEC on or about March 31, 1996).
- -------------------------------------------------------------------------------------------------------------
10.5 Purchase Agreement for three branches from Bank of America is *
incorporated herein by reference from Exhibit 2.1 Registration
Statement on Form S-2 filed July 14, 1997, File No. 333-31193.
- -------------------------------------------------------------------------------------------------------------
10.6 Change-in-Control Agreement between R. Dale McKinney and Capital Corp
of the West
- -------------------------------------------------------------------------------------------------------------
10.7 Deferred Compensation Agreement between members of the board of
directors and Capital Corp of the West
- -------------------------------------------------------------------------------------------------------------
10.8 Executive Salary Continuation Agreement between certain members of
executive management and Capital Corp of the West
- -------------------------------------------------------------------------------------------------------------
11 Statement Regarding the Computation of Earnings Per Share is
incorporated herein by reference from Note 1 of the Company's
Consolidated Financial Statements.
- -------------------------------------------------------------------------------------------------------------
13 Annual Report to Security Holders.
- -------------------------------------------------------------------------------------------------------------
* Denotes documents which have been incorporated by reference.
- -------------------------------------------------------------------------------------------------------------
(d) FINANCIAL STATEMENT SCHEDULES
All other supporting schedules are omitted because they are not applicable,
not required, or the information required to be set forth therein is
included in the financial statements or notes thereto incorporated herein by
reference.
Consent of accountant (for incorporation by reference of report of
accountants into form S-8 registration statement.)
24
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, as amended, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 7th day of March,
2000.
CAPITAL CORP OF THE WEST
By: /s/ THOMAS T. HAWKER
-----------------------
THOMAS T. HAWKER
(President and Chief Executive Officer
of Capital Corp of the West)
By: /s/ R. DALE MCKINNEY
----------------------
R. DALE MCKINNEY
(Senior Vice President and Chief Financial
Officer of Capital Corp of the West)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- --------- -------- ----
/s/ LLOYD H. ALHEM Chairman of the March 7, 2000
- ------------------- Board of Directors
LLOYD H. ALHEM
/s/ DOROTHY L. BIZZINI Director March 7, 2000
- ----------------------
DOROTHY L. BIZZINI
/s/ JERRY E. CALLISTER Director March 7, 2000
- ----------------------
JERRY E. CALLISTER
/s/ JACK F. CAUWELS Director March 7, 2000
- -------------------
JACK F. CAUWELS
/s/ JOHN FAWCETT Director March 7, 2000
- ----------------
JOHN FAWCETT
/s/ THOMAS T. HAWKER Director/CEO and March 7, 2000
- -------------------- Principal Operations Officer
THOMAS T. HAWKER
/s/ BERTYL W. JOHNSON Director March 7, 2000
- ---------------------
BERTYL W. JOHNSON
25
/s/ JAMES W. TOLLADAY Director March 7, 2000
- ---------------------
JAMES W. TOLLADAY
/s/ TOM A.L. VAN GRONINGEN Director March 7, 2000
- --------------------------
TOM A.L. VAN GRONINGEN
26