U. S. SECURITIES AND EXCHANGE COMMISSION FORM 10-K/A
Washington, D. C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1996
Commission File Number: 0-27384
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CAPITAL CORP OF THE WEST
(Exact name of registrant as specified in its charter)
California 77-0405791
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1160 West Olive Avenue, Suite A, Merced, California 95348-1952
(Address of principal executive offices) (Zip Code)
(209) 725-2200
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act (Title of Class):
Common Stock, no par value.
Preferred Stock, no par value.
The Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Company was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
X Yes No
- --- ---
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $32,165,469 (based on the $18.50 average of bid and
ask prices per common share on February 28, 1997). The number of shares
outstanding of the Registrant's common stock, no par value, as of February 28,
1997 was 1,738,674. No shares of preferred stock, no par value, were outstanding
at February 28, 1997.
Documents incorporated by reference:
Portions of the definitive proxy statement for the 1997 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A are incorporated by reference in Part I, Item 4; Part II, Item 9
and Part III, Items 10 through 13 and portions of the Annual Report to
Shareholders for 1996 are incorporated by reference in Part II, Item 5 through
8.
1
Capital Corp of the West
Table of Contents
Page Reference
PART I
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ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
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ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . .32
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ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 34
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF Proxy Statement for
SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . 34 1997 Annual Meeting
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PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
STOCK AND RELATED SECURITY HOLDER Page 23 of 1996 Annual
MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 Report
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ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . 34 Page 24 of 1996 Annual
Report
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF Pages 19-22 of 1996
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Annual Report
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY Pages 9-18 of 1996
DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Annual Report
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND Proxy Statement for 1997
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . 34 Annual Meeting
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE Proxy Statement for 1997
REGISTRANT. . . . . . . . . . . . . . . . . . . . . . . . . . .34 Annual Meeting
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ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . 35 Proxy Statement for 1997
Annual Meeting
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL Proxy Statement for 1997
OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . . . 35 Annual Meeting
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED Proxy Statement for 1997
TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . .35 Annual Meeting
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PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K . . . . . . 35
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37-38
2
PART I
ITEM 1. BUSINESS
General Development of the Company
General
Capital Corp of the West (the "Company" or Capital Corp") is a bank holding
company incorporated under the laws of the State of California on April 26,
1995. On November 1, 1995, the Company became registered as a bank holding
company, and is the holder of all of the capital stock of County Bank (the
"Bank") and all of the capital stock of Town and Country Finance and Thrift (the
"Thrift"). During 1996 the Company formed Capital West Group, a new subsidiary
that engages in the financial institution advisory business and purchased the
Thrift. The Company's primary asset is the Bank and the Bank is the Company's
primary source of income. The Company's securities consist of 20,000,000 shares
of Common Stock, no par value, and 10,000,000 shares of Preferred Stock. As of
February 28, 1997 there were 1,738,674 common shares outstanding, held of record
by approximately 1,175 shareholders. There were no preferred shares outstanding
at February 28, 1997. The Bank has two wholly owned subsidiaries, Merced Area
Investment & Development, Inc. ("MAID") and County Asset Advisors ("CAA"). CAA
is currently inactive. All references herein to the "Company" include the Bank,
the Bank's subsidiaries, Capital West Group and the Thrift, unless the context
otherwise requires.
Information about Commercial Banking & General Business of the Company and its
Subsidiaries
The Bank was organized on August 1, 1977, as County Bank of Merced, a California
state banking corporation. The Bank commenced operations on December 22, 1977.
In November 1992, the Bank changed its legal name to County Bank. The Bank's
securities consist of one class of Common Stock, no par value and is wholly
owned by the Company. The Bank's deposits are insured under the Federal Deposit
Insurance Act, by the Federal Deposit Insurance Corporation ("FDIC"), up to
applicable limits stated therein. Like most state-chartered banks of its size in
California, it is not a member of the Federal Reserve System.
The Company acquired the Thrift on June 28, 1996 for a combination of cash and
stock with an aggregate value of approximately $5.8 million. The Thrift is an
industrial loan company with four offices. It specializes in direct loans to the
public and the purchase of financing contracts principally from automobile
dealerships and furniture stores. It was originally incorporated in 1957. Its
deposits (technically known as investment certificate or certificates of deposit
rather than deposits) are insured by the FDIC up to applicable limits.
Industry & Market Area
The Bank engages in general commercial banking business primarily in Merced,
Tuolomne and Stanislaus Counties. The Bank has nine branch offices; two in
Merced with the branch located in north Merced currently designated as the head
office, and offices in Atwater, Turlock, Hilmar, Sonora, Los Banos, and two
offices in Modesto opened in late 1996. The Company's administrative
headquarters are located in Merced in three separate suites in the same office
complex. The administrative facilities also provides accommodations for the
activities of Merced Area Investment and Development ("MAID"), the Bank's wholly
owned real estate development subsidiary and Capital West Group. Although
approved to be a full service branch banking office, the administrative
headquarters facility is presently used solely as the Company's corporate
headquarters. The Thrift engages in general consumer lending business primarily
in Stanislaus, Fresno and Tulare Counties from its main office in Turlock; and
branch offices located in Modesto, Visalia, and Fresno. (See "ITEM 2.
PROPERTIES")
Competition
The Company's primary market area consists of Merced, Tuolomne and Stanislaus
Counties and nearby communities of adjacent counties. The banking business in
California generally, and specifically in the Company's primary market area, is
highly competitive with respect to both loans and deposits. The banking business
is dominated by a relatively small number of major banks which have many offices
operating over wide geographic areas. Many of the major commercial banks offer
certain services (such as international, trust and
3
securities brokerage services) which are not offered directly by the Company or
through its correspondent banks. By virtue of their greater total
capitalization, such banks have substantially higher lending limits than the
Company and substantial advertising and promotional budgets.
However, smaller independent financial institutions, savings and loans and
credit unions also represent a competitive force. To illustrate the Bank's
relative market share, based upon total deposits in the County of Merced,
California at June 30, 1996 (more recent data is not available), the Bank's
deposits represented approximately 15.7% of total deposits in all other
financial institutions in the county. Deposits in Stanislaus and Tuolomne
counties were not material as of that date.
In the past, an independent bank's principal competitors for deposits and loans
have been other banks (particularly major banks), savings and loan associations
and credit unions. To a lesser extent, competition was also provided by thrift
and loans, mortgage brokerage companies and insurance companies. Other
institutions, such as brokerage houses, credit card companies, and even retail
establishments have offered new investment vehicles, such as money-market funds,
which also compete with banks. The direction of federal legislation in recent
years seems to favor competition between different types of financial
institutions and to foster new entrants into the financial services market, and
it is anticipated that this trend will continue. It should be noted, however,
that savings and loan institutions have now been restricted in their ability to
make commercial loans under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") legislation.
To compete with major financial institutions in its service area, the Bank
relies upon specialized services, responsive handling of customer needs, local
promotional activity, and personal contacts by its officers, directors and
staff, as opposed to large multi-branch banks which compete primarily by rate
and location of branches. For customers whose loan demands exceed the Bank's
lending limits, the Bank seeks to arrange funding for such loans on a
participation basis with its correspondent banks or other independent commercial
banks. The Bank also assists customers requiring services not offered by the
Bank to obtain such services from its correspondent banks.
Bank's Services and Markets
Bank
The Bank conducts a general commercial banking business including the acceptance
of demand (includes interest bearing), savings and time deposits. The Bank also
offers commercial, real estate, personal, home improvement, home mortgage,
automobile, credit card and other installment and term loans. The Bank offers
travelers' checks, safe deposit boxes, banking-by-mail, drive-up facilities,
24-hour automated teller machines, and other customary banking services to its
customers. Although Management believes there is demand for trust services in
its service area, the Bank does not operate a trust department nor does it offer
these services through a correspondent banking relationship to its customers.
The four general areas in which the Bank has directed virtually all of its
lendable assets are (i) commercial loans, including agricultural loans, (ii)
consumer installment loans, (iii) real estate mortgage loans, and (iv) real
estate construction loans. As of December 31, 1996, these four categories
accounted for approximately 39%, 22%, 31% and 8%, respectively, of the Bank's
loan portfolio.
In 1990, the Bank entered into a cooperative agreement with Prudential
Agricultural Group to offer agricultural real estate loans to farmers in Merced,
Stanislaus, San Joaquin, Madera, Monterey, Santa Cruz and San Benito Counties.
The program is designed to have a select group of independent banks throughout
the United States generate farm real estate loans and process them within the
underwriting standards of the proposed Farmer Mac program. The qualifying loans
are for the purchase or refinance of production oriented agricultural properties
and are secured by a first deed of trust on the property. Loan terms range from
5 to 20 years in length and loan amounts range from $500,000 to $3.0 million.
The Bank originates, packages and subsequently sells these loans to the
Prudential Agricultural Group and retains servicing rights on these loans. The
Bank is the only representative in Merced and Stanislaus Counties to offer this
program.
4
In addition in 1992, the Bank became a certified Farmers Home Administration
lender, now known as the Farm Service Agency. The Bank originates loans under
the guidelines of such program both to retain for the Bank's loan portfolio and
to sell in the secondary market. The Bank may also sell loans, in the $100,000
range, direct to Farmer Mac.
In 1994, the Bank organized a department to originate loans within the
underwriting standards of Small Business Administration. The Bank originates
packages and subsequently sells these loans in the secondary market and retains
servicing rights on these loans.
The Bank's deposits are attracted primarily from individuals and small- and
medium-sized business-related sources. The Bank also attracts some deposits from
municipalities and other governmental agencies and entities. In connection with
the deposits of municipalities or other governmental agencies, the Bank is
generally required to pledge securities to secure such deposits, except when the
depositor signs a waiver with respect to the first $100,000 of such deposits,
which amount is insured by the FDIC.
The principal sources of the Bank's revenues are (i) interest and fees on loans,
(ii) interest on investment securities (principally U.S. Government securities
and municipal bonds), and (iii) service charges on deposit accounts. For the
year ended December 31, 1996, these sources comprised approximately 106%, 20%,
and 8% respectively, of the Bank's total operating income.
Bank's Business Not Dependent upon a Small Number of Individuals
Most of the Bank's business originates from individuals, businesses and
professional firms located in and around Merced, Tuolomne and Stanislaus
Counties. The Bank is not dependent upon a single customer or group of related
customers for a material portion of its deposits, nor is a material portion of
the Bank's loans concentrated within a single industry or group of related
industries. As of December 31, 1996, the largest industry within the Bank's loan
portfolio is it's real estate mortgage loans at 31% of the loan portfolio.
Agriculture loans are 24% including dairy loans of 15%. Thus, the quality of
these Bank assets and Bank earnings could be adversely affected by a downturn in
the local economy, including the dairy industry sector.
Bank's Real Estate Subsidiary (MAID)
General
As authorized by Section 751.3 of the California Financial Code, California
state-chartered banks are allowed to engage in real estate development
activities either directly or through investment in a wholly-owned subsidiary.
Pursuant to this authorization, the Bank established MAID, its wholly-owned
subsidiary, as a California corporation on February 18, 1987.
In late 1995, the Company wrote down the entire remaining investment in MAID in
the amount of $2,881,000. The uncertainty about the effect of the investment in
MAID on the results of future operations caused management to recognize the
complete write-down in 1995.
At December 31, 1996, MAID held two real estate projects including improved and
unimproved land in various stages of development. MAID continues to market these
projects, and any amounts realized upon sale or other disposition of these
assets above their current carrying value of zero will result in non-interest
income at the time of such sale or disposition. The following is a general
discussion of these properties:
(1) This project consists of 9 remaining improved lots and 117 additional
unimproved lots. MAID does not currently intend to develop the subsequent three
phases (117 lots) of this property.
(2) This project is comprised of 230 unimproved lots of which 143 are remaining.
MAID does not currently intend to develop the remaining property.
Bank's subsidiary, County Asset Advisors
General
5
Pursuant to section 772 of the California Financial code, the Bank established
County Asset Advisors, a wholly-owned subsidiary, as a California corporation in
1994. County Asset Advisors is not currently engaged in any activities.
The Thrift
General
The Thrift is a licensed California Industrial Loan Company specializing in
direct loans to the public and the purchase of financing contract principally
from car dealerships and furniture stores. The Thrift offers certain deposit
products including savings and time deposits which are technically referred to
as installment investment certificates and fully paid investment certificates.
An industrial loan company is prohibited by the Industrial Loan Company Law to
offer transaction accounts to its customers.
Capital West Group
General
Capital West Group was formed in April 1996 as a wholly owned subsidiary of
Capital Corp. The subsidiary specializes in a variety of consulting work for
independent financial institutions located primarily in the western states.
Consulting services would include strategic planning, capital planning, new bank
formation, providing fairness opinions and other special projects for both
boards and management of client institutions.
Research Activities
The Company has not engaged in any material research activities relating to the
development of new services or the improvement of existing banking services
during the past two fiscal years. During that time, however, Company directors,
officers and employees have continually engaged in marketing activities,
including the evaluation and development of new services, in order to maintain
and improve the Company's competitive position in its primary service area. The
costs of these activities have not been significant during this period.
The Company has no present plans to introduce a new product or line of business
which would require the invest ment of a material amount of the Company's total
assets.
Number of Employees
As of December 31, 1996, the Company employed a total of 141 full-time
equivalent employees. The Company beleives that employee relations are
excellent.
Seasonal Trends in the Company's Business
Although the Company does experience some immaterial seasonal trends in deposit
growth and funding of its dairy and construction loan portfolios, in general the
Company's business is not seasonal.
Operations in Foreign Countries
The Company conducts no operations in any foreign country.
Supervision and Regulation
Overview
The Company is subject to extensive regulation by federal and state authorities.
As a California chartered bank holding company, the Company is subject to and
examined by the Board of Governors of the Federal Reserve System ("FRB"). The
Bank, as a California state licensed bank with accounts insured by the FDIC to
the maximum amount permitted by law, is subject to regulation, supervision and
regular examination by the California Superintendent of Banks ("Superintendent")
and the FDIC. The Bank is also subject to certain regulations of the FRB. The
Thrift, as an industrial loan company with accounts insured by the FDIC to the
maximum amount
6
permitted by law is subject to regulation, supervision and regular examination
by the California Department of Corporations and the FDIC. The Company is
subject to the periodic requirements of Section 15(d) of the Securities Exchange
Act of 1934, as amended, which include, but are not limited to filing, annual,
quarterly, and other current reports with the Securities and Exchange
Commission. The primary current function of the Company is to hold the stock of
the Bank and its other subsidiaries.
Most aspects of the Bank's business and operations, including periodic reports,
investments, loans, certain checkclearing activities, branching, reserves
against deposits, the permissible scope of the Bank's activities, and numerous
other areas, are governed by federal and state statutes and regulations,
including the regulations of the FDIC and the FRB. The banking industry in the
United States is affected by the extensive regulation of commercial banking
activities and, on an ongoing basis, by the enactment of federal and state
legislation. Such legislation may have the effect of increasing or decreasing
the cost of doing business, may modify permissible activities, and could enhance
the competitive position of non-bank financial institutions. Any change in
applicable laws or regulations may have a material adverse effect on the
business and prospects of the Bank.
In addition to the challenges presented by the great breadth of the regulatory
subject matter which will affect the Company, it should also be noted that the
regulatory agencies which have jurisdiction over the Company have broad
discretion in exercising their supervisory powers. For example, under federal
law the FDIC has authority to prohibit a state bank from engaging in banking
practices which it considers unsafe and unsound.
The laws of the State of California also affect the Bank's business and
operations. Pursuant to the California Financial Code, if it appears to the
Superintendent that a bank is violating its articles of incorporation or state
law, or is engaging in unsafe or injurious business practices, the
Superintendent can order the bank to comply with the law or to cease the unsafe
or injurious practices. The Superintendent has the power to suspend or remove
bank officers, directors and employees who (i) violate any law or regulation
relating to the business of the bank or breach any fiduciary duty to the bank,
(ii) engage in any unsafe or unsound practices related to the business of the
bank, or (iii) are charged with or convicted of a felony involving dishonesty or
breach of trust. The Superintendent is also required to order the Bank to
correct any impairment of its contributed capital and to assess the shares of
the Bank's stock to correct such impairment if necessary.
In addition to the regulation and supervision outlined above, banks must also
deal with judicial scrutiny of their lending and collection practices. For
example, some banks have been found liable for exercising remedies which their
loan documents authorized upon the borrower's default. This has occurred in
cases where the exercise of those remedies has been determined to be
inconsistent with the previous course of dealing between the bank and the
borrower. As a result, banks have had to exercise increased caution, incur
greater expense and face increased exposure to liability when dealing with
nonperforming loans.
Bank Holding Company Act
Capital Corp is a bank holding company within the meaning of the Bank Holding
Company Act ("BHC") Act and is registered as such with the FRB. A bank holding
company is required to file with the FRB annual reports and other information
regarding its business operations and those of its subsidiaries. It is also
subject to examination by the FRB and is required to obtain FRB approval before
acquiring, directly or indirectly, ownership or control of any voting shares of
any bank, if after such acquisition, it would directly or indirectly own or
control more than 5% of the voting stock of that bank, unless it already owns a
majority of the voting stock of that bank. The BHC Act further provides that the
FRB shall not approve any such acquisition that would result in or further the
creation of a monopoly, or the effect of which may be substantially to lessen
competition, unless the anti-competitive effects of the proposed transaction are
clearly outweighed by the probable effect in meeting the convenience and needs
of the community to be served.
Under the BHC Act, a bank holding company is, with limited exceptions,
prohibited from (i) acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any company which is not a bank or (ii) engaging
in any activity other than managing or controlling banks. With the prior
approval of the FRB, however, a bank holding company may own shares of a company
engaged in activities which the FRB has determined to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
7
The FRB has by regulation determined that certain activities are so closely
related to banking as to be a proper incident thereto within the meaning of the
BHC Act. These activities include, but are not limited to: operating an
industrial loan company, industrial bank, Morris Plan bank, savings association,
mortgage company, finance company, credit card company or factoring company;
performing certain data processing operations; providing investment and
financial advice; operating a trust company in certain instances, selling
traveler's checks, United States savings bond and certain money orders;
providing certain courier services; providing management consulting advice to
nonaffiliated depository institutions in some instances; acting as insurance
agent for certain types of credit-related insurance; leasing property or acting
as agent, broker or advisor for leasing property on a "full pay-out basis";
acting as a consumer financial counselor, including tax planning and return
preparation; performing futures and options advisory services, check guarantee
services and discount brokage activities; operating a collection or credit
bureau; or performing personal property appraisals. Capital Corp has no present
intention to engage in any of such permitted activities, except operating an
industrial loan company and providing management consulting advice to
nonaffiliated depository institutions.
The FRB has also determined that certain activities are not so closely related
to banking to be a proper incident thereto within the meaning of the BHC Act.
Such activities include real estate brokerage and syndication; land development;
property management; underwriting of life insurance not related to credit
transactions; and, with certain exceptions, securities underwriting, and equity
financing.
Under the BHC Act, a bank holding company and its subsidiaries are prohibited
from acquiring and voting shares of interest in all or substantially all of the
assets of any bank located outside the state in which the operations of the bank
holding company's banking subsidiaries are principally conducted, unless the
acquisition is specifically authorized by the law of the state in which the bank
to be acquired is located or unless the transaction qualifies under federal law
as "emergency interstate acquisition" of a closed or failing bank. California
law expressly permits interstate banking.
Regulations and policies of the FRB require a bank holding company to serve as a
source of financial and managerial strength to its subsidiary banks. It is the
FRB's policy that a bank holding company should stand ready to use available
resources to provide adequate capital funds to a subsidiary bank during periods
of financial stress or adversity and should maintain the financial flexibility
and capital-raising capacity to obtain additional resources for assisting a
subsidiary bank. Under certain conditions, the FRB may conclude that certain
actions of a bank holding company, such as payment of cash dividends, would
constitute an unsafe and unsound practice because they violate the FRB's "source
of strength" doctrine.
A bank holding company and its subsidiaries are prohibited from certain tie-in
arrangements in connections with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions, a bank
may not condition an extension of credit on a promise by its customer to obtain
other services provided by it, its holding company or other subsidiaries, or on
a promise by its customer not to obtain other services from a competitor. In
addition, federal law imposes certain restrictions on transactions between
Capital Corp and its subsidiaries. In addition, Capital Corp is subject, with
certain exceptions, to provisions of federal law imposing limitations on and
requiring collateral for, extensions of credit by Capital Corp's subsidiary bank
to its other affiliates.
Directors, officers and principal shareholders of Capital Corp, and the
companies with which they are associated, have had and will continue to have
banking transactions with the Bank and the Thrift in the ordinary course of
business. Any loans and commitments to lend included in such transactions are
made in accordance with applicable law, on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons of similar creditworthiness, and on
terms not involving more than the normal risks of collectibility or presenting
other unfavorable features. At December 31, 1996, loans to such persons totaled
$573,000 or 2.7% of Capital Corp's shareholders' equity.
Capital Adequacy Requirements
Federal regulators have established minimum risk-based capital standards for
commercial banks and bank holding companies. These guidelines provide a measure
of capital levels and are intended to reflect the degree of risk associated with
both on- and off-balance sheet items. The risk-based capital rules establish
minimum standards; they do not evaluate all factors affecting an organization's
financial condition, and overall capital assessments by federal regulators
include analysis of such additional factors as (i) overall interest rate
exposure; (ii) liquidity,
8
funding and market risk; (iii) quality and level of earnings; (iv) investment or
loan portfolio concentrations; (v) quality of loans and investments; (vi) the
effectiveness of loan and investment policies; and (vii) management's overall
ability to monitor and control other financial and operating risks.
A financial institution's risk-based capital ratio is calculated by dividing its
qualifying capital by its period-end risk-weighted assets. Financial
institutions, including the Bank and the Thrift, generally are expected to meet
a minimum ratio of qualifying total capital to risk-weighted assets of eight
percent, at least one-half of which capital must be in the form of core (Tier 1)
capital, consisting of common stock, noncumulative perpetual preferred stock,
minority interests in equity capital accounts of consolidated subsidiaries and
limited amounts of qualifying mortgage servicing rights, less most other
intangible assets. Supplementary (Tier 2) capital consists of, among other
things, the allowance for loan losses up to 1.25 percent of risk-weighted
assets, cumulative, perpetual and term preferred stock, certain hybrid capital
instruments, and term subordinated debt. The maximum amount of Tier 2 capital
which may be recognized for risk-based capital purposes is limited to 100
percent of Tier 1 capital (after any deductions for disallowed intangibles and
other items). The aggregate amount of term subordinated debt and intermediate
term preferred stock that may be treated as Tier 2 capital is limited to 50
percent of Tier 1 capital. Certain other limitations and restrictions apply as
well.
The risk-based capital requirements did not replace or eliminate the minimum
leverage ratios of capital to total assets that are required to be maintained by
financial institutions. The federal regulatory agencies have adopted a three
percent minimum leverage ratio, which is intended to supplement risk-based
capital requirements and to ensure that all financial institutions, even those
that invest predominantly in low-risk assets, continue to maintain a minimum
level of core capital. These regulations provide that a financial institution's
minimum leverage ratio is determined by dividing its Tier 1 capital by its
quarterly average total assets, less intangibles not includable in Tier 1
capital.
Under these rules, a minimum leverage ratio of three percent is required for
institutions which have been determined to be in the highest of the five
categories used by regulators to rate financial institutions. All other
organizations are required to maintain leverage ratios of at least l00 to 200
basis points above the three percent minimum. It is improbable, however, that an
institution with a three percent leverage ratio would be rated in the highest
category, since a strong capital position is so closely tied to the rating
system. Therefore, the "minimum" leverage ratio is, for all practical purposes,
significantly above three percent.
The leverage ratio establishes a minimum standard affecting the ability of
financial institutions, including the Bank and the Thrift, to increase assets
and liabilities without increasing capital proportionately. A state bank or
thrift which fails to maintain sufficient capital to meet both capital
requirements is required to submit a plan to the FDIC describing the means and
schedule by which the institution will achieve its minimum capital ratios.
Failure to submit a plan, or failure to comply with an approved plan, may
subject a institution to restrictions on its operations and activities, and to
other regulatory actions, including assessments of civil money penalties.
Pursuant to federal law, continued failure to achieve minimum capital
requirements may result in placement of the institution under a conservatorship
or receivership and, ultimately, in liquidation by the FDIC. Pursuant to
California law, the Superintendent has authority, under certain circumstances
(e.g., if the institution's capital is impaired or the institution is conducting
its business in an unsafe or unsound manner) to take possession of the property
and business of the institution and tender it to the FDIC for liquidation. In
addition, if the Superintendent believes that a institution's capital is
impaired, the Superintendent is required to order the institution to correct the
impairment. In such a case, the institution must levy and collect an assessment
on the shares of the institution's common stock.
Regulatory Ratios
As of December 31, 1996, the Company's total risk-based capital ratio was
approximately 11.2% and its leverage ratio was approximately 8.2%. The Company
does not presently expect that compliance with the risk-based capital guidelines
or minimum leverage requirements will have a materially adverse effect on its
business in the reasonably foreseeable future. For further information about
regulatory capital requirements see "Note 8--Notes to Consolidated Financial
Statements" section entitled "Regulatory Matters" at page 16 of the Company's
1996 Annual Report to the Shareholders incorporated herein by reference.
9
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires federal regulators to take "prompt corrective action" with respect to
institutions that do not meet minimum capital requirements. In response to this
requirement, federal regulators adopted rules based upon FDICIA's five capital
tiers. These rules, which will apply to the Bank and the Thrift, provide that an
institution is "well capitalized" if its risk-based capital ratio is ten percent
or greater, its Tier 1 risk-based capital ratio is six percent or greater, its
leverage ratio is five percent or greater, and the institution is not subject to
a capital directive or other enforceable order by federal regulators. An
institution is "adequately capitalized" if its risk-based capital ratio is eight
percent or greater, its Tier 1 risk-based capital ratio is four percent or
greater; and its leverage ratio is four percent or greater (three percent or
greater for the most highly-rated institutions, as rated by federal regulators).
An institution is considered "undercapitalized" if its risk-based capital ratio
is less than eight percent; its Tier 1 risk-based capital ratio is less than
four percent; or its leverage ratio is four percent or less (less than three
percent for the most highly-rated institutions). An institution is
"significantly undercapitalized" if (i) its risk-based capital ratio is less
than six percent; (ii) its Tier 1 risk-based capital ratio is less than three
percent; or (iii) its leverage ratio is less than three percent. An institution
is deemed to be "critically undercapitalized" if its ratio of tangible equity
(Tier 1 capital) to total assets is equal to or less than two percent. An
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if the FDIC determines that the
institution is in an unsafe and unsound condition or if the FDIC deems the bank
to be engaged in an unsafe or unsound banking practice.
No sanctions apply to institutions which are "well capitalized." "Adequately
capitalized" institutions are prohibited from accepting brokered deposits
without the consent of their primary federal regulator. "Undercapitalized"
institutions are (i) required to submit a capital restoration plan for improving
capital, and are prohibited from making capital distributions or paying
management fees to controlling persons if such distributions or fees would
result in the institution being undercapitalized; (ii) may be subject to growth
limitations; and (iii) acquisitions, branching and entering into new lines of
business would be subject to prior regulatory approval. Finally, the
institution's regulatory agency has discretion to impose certain of the
restrictions generally applicable to "significantly undercapitalized"
institutions.
In the event an institution is deemed to be "significantly undercapitalized," it
may be required to (i) sell additional shares of its stock; (ii) merge or be
acquired; (iii) restrict transactions with affiliates; (iv) restrict interest
rates paid; (v) restrict asset growth or reduce total assets; (vi) divest a
subsidiary; or (vii) dismiss specified directors or officers. A "critically
undercapitalized" institution is generally prohibited from making payments on
subordinated debt and among other things may not, without the prior approval of
the FDIC, (i) enter into a material transaction other than in the ordinary
course of business; (ii) engage in certain transactions with affiliates; or
(iii) pay excessive compensation or bonuses. "Critically undercapitalized"
institutions are subject to appointment of a receiver or conservator by the
institution's federal regulator. As of the most recent data available, the Bank
and Thrift were both well capitalized institutions.
Enforcement Powers
FIRREA provided civil and criminal penalties that are available for use by the
federal regulatory agencies against depository institutions and certain
"institution-affiliated parties" (primarily including management, employees and
agents of a financial institution, independent contractors such as attorneys and
accountants, and others who participate in the conduct of the financial
institution's affairs). These practices can include the failure of an
institution to timely file required reports or the filing of false or misleading
information or the submission of inaccurate reports. Civil penalties may be as
high as $1 million a day for violations and criminal penalties for financial
institution crimes range up to 20 years. In addition, federal regulators are
provided with great flexibility to commence enforcement actions against
institutions and institution-affiliated parties. Possible enforcement actions
include the termination of deposit insurance. Furthermore, FIRREA expanded the
appropriate banking agencies' power to issue cease and desist orders that may,
among other things, require affirmative action to correct any harm resulting
from a violation or practice, including restitution, reimbursement,
indemnifications or guarantees against loss. A financial institution may also be
ordered to restrict its growth, dispose of certain assets,
10
rescind agreements or contracts, or take other actions as determined by the
ordering federal agency to be appropriate.
In addition, California law provides the Superintendent with certain enforcement
powers. For example, if it appears to the Superintendent that a bank is
violating its articles of incorporation or state law, or is engaging in unsafe
or unsound business practices, the Superintendent can order the bank to comply
with the law or to cease the unsafe or injurious practices. The Superintendent
also has the power to suspend or remove bank officers, directors and employees
who (i) violate any law, regulation or fiduciary duty to the bank; (ii) engage
in any unsafe or unsound practices related to the business of the bank, or (iii)
are charged with or convicted of a crime involving dishonesty or breach of
trust.
Limitations on Dividends by the Company
Under the California General Corporation Law (The "California Law") the holders
of common stock are entitled to receive dividends when and as declared by the
Board of Directors, out of funds legally available therefor, subject to the
restrictions set forth in the California Law. The California Law provides that a
corporation may make a distribution to its shareholders if the corporation's
retained earnings will equal at least the amount of the proposed distribution.
The California Law further provides that in the event sufficient retained
earnings are not available for the proposed distribution a corporation may
nevertheless make a distribution to its shareholders if, after giving effect to
the distribution, it meets two conditions, which generally stated ate as
follows: (i) the corporation's assets must equal at least 125% of its
liabilities; and (ii) the corporation's current assets must equal at least its
current liabilities or, if the average of the corporation's earnings before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of the corporation's current assets must equal at
least 125% of its current liabilities. Most bank holding companies are unable to
meet this test.
The payment of cash dividends by the Company depends on various factors,
including the earnings and capital requirements of itself and its subsidiaries,
and other financial conditions. The primary source of funds for payment of
dividends by the Company to its shareholders is the receipt of dividends and
management fees from the Bank and, to a lesser extent, the Thrift.
Payment of Dividends
Under California law, the directors of California state-licensed banks,
including the Bank, may declare distributions to shareholders (which include
cash dividends), subject to the restriction that the amount available for the
payment of cash dividends shall be the lesser of retained earnings of the bank
or the bank's net income for its last three fiscal years (less the amount of any
distributions to shareholders made during such period). If the above test is not
met, distributions to shareholders may be made with the prior approval of the
Superintendent in an amount not exceeding the greatest of (i) the bank's
retained earnings, (ii) the bank's net income for its last fiscal year, or (iii)
the bank's net income for its current fiscal year. If the Superintendent finds
that the shareholders' equity of a bank is not adequate, or that the making by a
bank of a distribution to shareholders would be unsafe or unsound for the bank,
the Superintendent can order the bank not to make any distribution to
shareholders.
The ability of the Bank to pay dividends is further restricted under FDICIA,
which prohibits a bank from paying dividends if, after making such payment, the
bank would fail to meet any of its minimum capital requirements. As a result of
these provisions, the Bank may find it difficult to pay dividends out of
retained earnings from historical periods prior to the most recent fiscal year
or to take advantage of earnings generated by extraordinary items. Under the
Financial Institutions Supervisory Act and FIRREA, federal regulators also have
authority to prohibit financial institutions from engaging in business practices
which are considered to be unsafe or unsound. It is possible, depending upon the
financial condition of the Bank and other factors, that the regulators could
assert that the payment of dividends in some circumstances might constitute
unsafe or unsound practices, and that the regulators might prohibit the payment
of dividends even though under the circumstances such payments would be
technically permissible.
Accordingly, the future payment of cash dividends of the Company will not only
depend upon the Bank's earnings during any fiscal period but will also depend
upon an assessment by the Bank's Board of Directors of
11
the capital requirements of the Bank and other factors, including the dividend
guidelines and the maintenance of an adequate allowance for loan and lease
losses. As noted above the Bank pays dividends to the Company which in turn can
pay dividends to its shareholders subject to the laws limiting corporate
dividends.
The Thrift may not pay dividends unless its remaining capital exceeds $750,000
plus $50,000 for each branch office.
Governmental Monetary Policies
The principal sources of funds essential to the business of banks are deposits,
shareholders' equity, and borrowed funds. The availability of these sources of
funds and other potential sources, such as preferred stock or commercial paper,
and the extent to which they are utilized, depends on many factors, the most
important of which are the FRB's monetary policies and the relative costs of
different types of funds. An important function of the FRB is to regulate the
national supply of bank credit in order to combat recession and curb
inflationary pressures. Among the instruments of monetary policy used by the FRB
to implement these objectives are (i) open market operations in United States
Government securities, (ii) changes in the discount rate on bank borrowings, and
(iii) changes in reserve requirements against bank deposits.
The monetary policies of the FRB have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future. Since banking is a business which depends largely on interest rate
differentials, the influence of economic conditions and monetary policies on
interest rates may directly affect the Company's earnings. In view of the recent
changes in regulations affecting commercial banks and other actions and proposed
actions by the federal government and its monetary and fiscal authorities,
including proposed changes in the structure of banking in the United States, no
prediction can be made as to future changes in interest rates, credit
availability, deposit levels or the overall performance of banks generally or of
the Company in particular.
Community Reinvestment Act
Pursuant to the Community Reinvestment Act of 1977, the federal regulatory
agencies which oversee the banking industry are required to use their authority
to encourage financial institutions to help meet the credit needs of the local
communities in which such institutions are chartered, consistent with safe and
sound banking practices. When conducting an examination of a financial
institution such as the Bank and the Thrift, the agencies assess the
institution's record of meeting the credit needs of its entire community,
including low- and moderate-income neighborhoods. This record is taken into
account in an agency's evaluation of an application for creation or relocation
of domestic branches or for merger with another institution. Failure to address
the credit needs of a institution's community may also result in the imposition
of certain other regulatory sanctions, including a requirement that corrective
action be taken. As of the last exam in August of 1995 and April 1995
respectively, the Bank and the Thrift were each given "satisfactory" ratings for
community reinvestment.
New Community Reinvestment Act Regulations
Under the revised CRA regulations, the agencies determine an institution's
rating under the CRA by evaluating its performance on lending, service and
investment tests, with the lending test as the most important. The tests are to
be applied in an "assessment context" that is developed by the agency for the
particular institution. The assessment context takes into account demographic
data about the community, the community's characteristics and needs, the
institution's capacities and constraints, the institution's product offerings
and business strategy, the institution's prior performance, and data on
similarly situated lenders. Since the assessment context is developed by the
regulatory agencies, a particular bank will not know until it is examined
whether its CRA programs and efforts have been sufficient.
Larger institutions are required under the revised regulations to compile and
report certain data on their lending activities in order to measure performance.
Some of this data is already required under other laws, such as the ECOA. Small
institutions (with less than $250 million in assets) are now being examined on a
"streamlined assessment method." The streamlined method focuses on the
institution's loan to deposit ratio, degree of local lending, record of lending
to borrowers and neighborhoods of differing income levels, and record of
responding to complaints. The Federal regulators who are implementing the new
regulations have reported that the time spent
12
at the banks during CRA examination is reduced under the new regulations, and
the institutions spend less time on paperwork evidencing compliance.
Large and small institutions have the option of being evaluated for CRA purposes
in relation to their own pre-approved strategic plan. Such a strategic plan must
be submitted to the institution's regulator three months before its effective
date and be published for public comment.
Limitation on Activities
FDICIA prohibits state chartered-banks and their subsidiaries from engaging, as
principal, in activities not permissible to national banks and their
subsidiaries, unless the FDIC determines the activity poses no significant risk
to the Bank Insurance Fund and the state bank is and continues to be adequately
capitalized. Similarly, state bank subsidiaries may not engage, as principal, in
activities impermissible to subsidiaries of national banks. This prohibition
extends to acquiring or retaining any investment, including those that would
otherwise be permissible under California law.
Bank Sales of Insurance Products
If the Bank elects to make insurance products available to its customers, those
sales will be subject to various legal and regulatory restrictions. California
state-chartered banks now have statutory authority to engage in the insurance
business as an agent or broker. FDICIA prohibits state-chartered banks and their
subsidiaries from engaging, as principal, in activities not permissible to
national banks and their subsidiaries, unless the FDIC determines the activity
poses no significant risk to the bank insurance fund and the state bank is and
continues to be adequately capitalized. Similarly, state bank subsidiaries may
not engage, as principal, in activities impermissible to subsidiaries of
national banks. This prohibition extends to insurance underwriting activities by
California state chartered banks. It does not, however, prevent California
chartered banks from engaging in insurance agency activities.
Change in Senior Executives or Board Members
Certain banks and bank holding companies must file a notice with their primary
regulator prior to (i) adding or replacing a member of the board of directors,
or (ii) the employment of or a change in the responsibilities of a senior
executive officer. Notice is required if the bank or holding company is failing
to meet its minimum capital standards or is otherwise in a "troubled condition,"
as defined in FDIC regulations, has undergone a change in control within the
past two years, or has received its bank charter within the past two years.
Environmental Liability
Compliance with federal, state and local regulations regarding the discharge of
materials into the environment could have a substantial effect on the capital
expenditures, earnings and competitive position of the Company. Under federal
law, liability for environmental damage and the cost of cleanup may be imposed
upon any person or entity who is an owner or operator of contaminated property.
State law provisions, which were modeled after federal law, are substantially
similar. Especially relevant for the Company are judicial interpretations of the
law which have held that banks that take real estate as security for loans may
be deemed to be owners or operators of the property if their involvement with
the borrower's management is broad enough to support an inference that the
institution, if it chose to do so, could affect hazardous waste disposal
decisions made by the borrower.
Environmental Regulation
Both Federal and state laws were amended in 1996 to provide generally that a
lender who is not actively involved in causing contamination to property will
not be liable to clean up the property, even if the lender has a security
interest in the property or becomes an owner of the property through
foreclosure, so long as it merely maintains the property and moves to divest it
at the earliest possible time after foreclosure. Under California law, a lender
generally will not be liable to the State for the cost associated with cleaning
up contaminated property unless the lender realized some benefit from the
property, failed to divest the property promptly after foreclosure, caused or
contributed to the release of the hazardous materials or made the loan primarily
for purpose of investing in the property. This amendment to California law
became effective with respect to judicial proceedings filed and orders issued
after January 1, 1997.
13
It is the Bank's policy to perform environmental due diligence procedures in the
following cases: prior to foreclosure upon any commercial or industrial property
or any suspect residential property; prior to commitment on any commercial or
industrial or/and real estate development loan greater than $100,000 or any
single family or multifamily loan greater than $200,000. Due diligence
procedures include an environmental questionnaire completed by the borrower,
onsite inspection of the property by the originating loan officer and, in
certain cases, a formal environmental audit report. A formal environmental audit
report may be required on properties that are in a high risk category, where
Management believes potential risk exists on a property or where the loan amount
exceeds $500,000. The Bank establishes a list of approved environmental
consultants which it contracts with for these services.
The extent of the protection provided by both the federal and state lender
protection statutes will depend on their interpretation by the administrative
agencies and courts, and the Company cannot predict whether it will be
adequately protected for the types of loans made by the Bank.
In the event the Bank was held liable as an owner or operator of a toxic
property, it could be responsible for the entire cost of the environmental
damage and cleanup. Depending on the amount of liability assessed and the amount
of cleanup required, such an outcome could have a serious effect on the
Company's consolidated financial condition.
In addition, the Company and the Bank are still subject to the risks that a
borrower's financial position will be impaired by liability under the
environmental laws and that property securing a loan made by the Bank may be
environmentally impaired and not provide adequate security for the Bank.
California law provides some protection against the second risk, by establishing
certain additional, alternative remedies for a lender in the situation where the
property securing a loan is later found to be environmentally impaired.
Primarily, the law permits the lender in such a case to pursue remedies against
the borrower other than foreclosure under the deed of trust.
Money Laundering Control Act
The Money Laundering Control Act of 1986 provides sanctions for the failure to
report high levels of cash deposits to non-bank financial institutions. Federal
banking regulators possess the power to revoke the charter or appoint a
conservator for any institution convicted of money laundering. Offending
state-chartered banks could lose their federal deposit insurance, and bank
officers could face lifetime bans from working in financial institutions. The
Community Development Act, which contains a number of provisions which amend the
Bank Secrecy Act, allows the Secretary of the Treasury to exempt certain
currency transactions from reporting requirements, and allows the federal
banking agencies to impose civil money penalties on banks for violations of the
currency transaction reporting requirements.
Recent Accounting Rules
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount which the carrying value exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. Adoption of this Statement did not have a material impact on
the Company's financial position, results of operations, or liquidity.
On January 1, 1996, the Company adopted SFAS No.123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25 and provide pro
forma net income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based method
14
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
Interstate Banking and The Riegle-Neal Interstate Banking and Branching
Efficiency Act Certain restrictions in the BHC Act, have historically prevented
interstate banking. Provisions of FIRREA allow out-of-state bank holding
companies to acquire depository institutions located in California which have
failed or are in danger of failing provided certain requirements are satisfied,
including an assessment of the estimated cost to the FDIC of not allowing the
acquisition.
Since 1991, California law has allowed banks and bank holding companies to be
acquired by bank holding companies from other states on a reciprocal basis; that
is, such transactions are permissible if the state in which the bank holding
company is located would permit a California bank holding company to acquire a
bank located in that state on substantially the same terms and conditions as are
applicable to bank holding companies located in that state.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("IBBEA") was enacted to enable banks and bank holding companies to merge with
and acquire other banks and bank holding companies without geographic
limitations. Beginning in September 1995, bank holding companies were permitted
to acquire banks located in any state regardless of state laws that prohibit
such acquisition. Bank holding companies are only permitted to make such
acquisitions if they are adequately capitalized and managed. Beginning June 1,
1997, banks will be permitted to merge with banks located in other states,
provided that neither state acts to opt out of the IBBEA before that date. The
IBBEA also permits a bank to establish an agency relationship with an affiliated
insured depository institution located in another state for the purpose of
receiving deposits, renewing time deposits, closing loans, servicing loans and
receiving payments. Additionally, the IBBEA allows states to enact statutes
permitting interstate bank mergers before June 1, 1997.
The IBBEA prohibits an interstate acquisition where the resulting bank or bank
holding company would control more than ten percent of the insured deposits held
by depository institutions nationwide or more than 30 percent of the insured
deposits in any state affected by the merger. States are permitted to waive or
increase the 30 percent limit. Further, the IBBEA permits states to prohibit the
acquisition of banks that have been established fewer than five years.
In October 1995, the California Interstate Banking and Branching Act of 1995,
became effective. Assembly Bill 1482 was designed to implement important
features of the IBBEA in California. Assembly Bill 1482 opts-in early to
interstate branching by permitting a bank domiciled in another state to acquire
an entire California bank by merger or purchase and thereby establish one or
more California branch offices. To be eligible to be acquired, a California bank
must have been in existence for at least five years. In addition, while the
IBBEA authorizes agency relationships only between affiliated financial
institutions, Assembly Bill 1482 is more expansive in that it allows California
state banks to establish agency relationships with both affiliated and
unaffiliated insured depository institutions. It also expands the list of
authorized agency activities to include, in addition to the activities listed in
the IBBEA, the evaluation of loan applications and the disbursement of loan
funds.
The full impact of interstate banking legislation cannot be estimated at this
time. However, the IBBEA and Assembly Bill 1482 are generally expected to have
the effect of increasing competition and consolidation within the financial
services industry.
The Riegle Community Development and Regulatory Improvement Act of 1994
The Riegle Community Development and Regulatory Improvement Act of 1994
("Community Development Act") is broad in scope, and many aspects of banking
regulation are affected. Among other things, the Act encourages and provides
funding for community development institutions. Also included are provisions
meant to increase small business access to capital. The Act also amends the
Truth in Lending Act by creating additional restrictions on and requiring
disclosures for some loans secured by a consumer's principal dwelling, and by
creating penalties for violations of Truth in Lending.
15
The Community Development Act offers banks regulatory relief by requiring the
federal banking agencies to coordinate examinations, to streamline their
regulations, to consider the burden of compliance when enacting new
requirements, and to create a formal appeals process for material examination
determinations. Additionally, the Community Development Act created a new,
alternative procedure for the formation of a bank holding company, with the time
period within which a merger or acquisition governed by the BHC Act can be
affected following FRB approval reduced from 30 days to 15 days. The Community
Development Act also modified and clarified the FDIC's powers as receiver or
conservator, provided an exemption under the Truth in Savings Act for business
purpose accounts, and simplified certain disclosure requirements for mortgage
lenders. A number of the Act's provisions were directed at suppressing money
laundering.
The full impact of the Community Development Act cannot be estimated until the
federal banking agencies complete implementation of regulations under the Act.
It is anticipated that the Act may reduce the overall regulatory burden on the
Bank.
Safety and Soundness Standards
FDICIA, along with the Community Development Act, mandated the creation of
safety and soundness standards that will allow federal regulators to identify
and address problems at financial institutions before capital becomes impaired.
Accordingly, the federal regulators have adopted a Safety and Soundness Rule and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines"). Rather than requiring rules, the Community Development Act
allows the regulators to enact guidelines that do not dictate how institutions
must be managed and operated. The Guidelines create standards for a wide range
of operational and managerial matters including (i) internal controls,
information systems, and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate exposure; (v) asset growth; and (vi)
compensation and benefits. In addition, the agencies will soon issue proposed
standards for asset quality and earnings for public comment.
The Community Development Act required the agencies to prescribe standards
prohibiting as an unsafe and unsound practice the payment of excessive
compensation that could result in material financial loss to an institution, and
to specify when compensation, fees or benefits become excessive. The Guidelines
characterize compensation as excessive if it is unreasonable or disproportionate
to the services actually performed by the executive officer, employee, director
or principal shareholder being compensated.
The federal regulators have stated that the Guidelines are meant to be flexible
and general enough to allow each institution to develop its own systems for
compliance. With the exception of the standards for compensation and benefits, a
failure to comply with the Guidelines' standards does not necessarily constitute
an unsafe or unsound practice or an unsafe and unsound condition. On the other
hand, an institution in conformance with the standards may still be found to be
engaged in an unsafe and unsound practice or to be in an unsafe and unsound
condition.
Although meant to be flexible, an institution that falls short of the
Guidelines' standards may be requested to submit a compliance plan or be
subjected to regulatory enforcement actions. Generally, the federal banking
agencies will request a compliance plan if an institution's failure to meet one
or more of the standards is of such severity that it could threaten the safe and
sound operation of the institution. An institution must file a compliance plan
within 30 days of request by its primary federal regulator (the FDIC in the case
of the Bank and the Thrift). The Guidelines provide for prior notice of and an
opportunity to respond to the agency's proposed order. An enforcement action may
be commenced if, after being notified that it is in violation of a safety and
soundness standard, the institution fails to submit an acceptable compliance
plan or fails in any material respect to implement an accepted plan. The Federal
Deposit Insurance Act provides the agencies with a wide range of enforcement
powers. An agency may, for example, obtain an enforceable cease and desist order
in the United States District Court, or may assess civil money penalties against
an institution or its affiliated parties.
Insurance Premiums
FDICIA also required the FDIC to adopt a risk-based assessment system for
insurance premiums. For an individual institution, the FDIC must take into
consideration the probability that the Bank Insurance Fund ("BIF") will incur a
loss with respect to the institution. In making that assessment, the FDIC must
consider the different categories and concentrations of assets and liabilities
of the institution, the likely amount of any loss, the revenue
16
needs of BIF, and any other factors the FDIC considers relevant. The FDIC is
permitted to establish separate risk-based assessment systems for large and
small members of BIF. Regardless of the potential risk to BIF, FDICIA prohibited
assessment rates from falling below 23 cents per $100 of eligible deposits if
the FDIC has outstanding borrowings from the U.S. Treasury Department or if the
reserve ratio is below 1.25 percent.
The 1.25 percent reserve ratio was met during 1995. The FDIC will continue the
risk-based assessment system for insurance premiums, causing premiums to vary
between institutions. The assessment for the highest-rated institutions is
currently set at the statutory annual minimum of $2,000. Assessment rates for
institutions that are not well capitalized can range as high as 27 cents per
$100. The FDIC has maintained the current assessment rate schedule of 23 to 31
cents per $100 of deposits for the institutions whose deposits are subject to
assessment by the Savings Association Insurance Fund ("SAIF").
The disparity between the cost of deposit insurance for healthy banks and
similarly situated thrifts over the last several years caused many healthy
thrifts to seek ways to either convert to BIF insurance or to obtain BIF
insurance for some portions of their deposits, in order to remain competitive
with banks. The migration of deposits increased the pressure on the remaining
thrifts to build up reserves at the SAIF and pay the cost of servicing Financing
Company ("FICO") bonds that were issued to cover some of the losses incurred by
failed savings associations in the late 1980s.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the
"Economic Growth Act") required all remaining SAIF institutions (subject to
certain exceptions) to pay a one-time deposit assessment of $.657 per $100 of
insured deposits in 1996 in order to recapitalize the SAIF fund. The banking
agencies are now required by law to take actions to prevent the migration of
deposits from the SAIF to the BIF funds until the year 2000. In addition, the
cost of carrying the FICO bonds will now be allocated between BIF insured
institutions and SAIF insured institutions, with BIF insured institutions paying
1/5 the amount paid by SAIF insured institutions. The FDIC recently estimated
that BIF institutions will pay an assessment of approximately $.0128 annually
per $100 insured deposits; and SAIF institutions will pay approximately $.0644
annually per $100 of insured deposits. Starting in the year 2000, BIF and SAIF
institutions will share the FICO bond costs equally, with an estimated
assessment of $.0243 annually per $100 of insured deposits.
The legislation will increase the Bank's premiums, as it will now be required to
share in the cost of carrying the FICO bonds. The increase will be slight until
the year 2000, at which time it will increase.
The Economic Growth Act also included other regulatory relief provisions
applicable to the Company and the Bank. Application procedures for the Company
to engage in certain non-banking activities will be streamlined, so long as the
Company maintains an adequate financial position and is considered well-managed.
The lending restrictions on directors and officers have been relaxed to permit
loans having favorable terms under employee benefit plans. The FRB and the
Department of Housing and Urban Development ("HUD") are required to simplify and
improve their regulations with respect to disclosures relating to certain
mortgage loans, and certain exemptions from the disclosure requirements were
added.
The Economic Growth Act also provides protection for lenders who self-test for
compliance with the Equal Credit Opportunity Act (the "ECOA") and the Fair
Housing Act ("FHA"). The ECOA now provides that the results or reports generated
or obtained by a institution from a self-test may not be obtained by an agency,
department or applicant to be used with respect to any proceeding or civil
action alleging a violation of the ECOA. This change in the law protects the
Company against liability based on the results of internal tests done to enhance
compliance with the law and encourages the Company to use self-testing to
evaluate its compliance with the ECOA and the FHA.
Additional Requirements of FDICIA
FDICIA restricted the acceptance of brokered deposits by insured depository
institutions and included a number of consumer banking provisions, including
disclosure requirements and substantive contractual limitations with respect to
deposit accounts. FDICIA contained numerous other provisions, including new
reporting, examination, and auditing requirements, termination of the "too big
to fail" doctrine except in special cases, and revised
17
regulatory standards for, among other things, real estate lending. FDICIA also
expanded the grounds upon which a conservator or receiver of a institution can
be appointed. For example, a conservator or receiver can be appointed for a
institution which fails to maintain minimum capital levels and has no reasonable
prospect of becoming adequately capitalized.
Under FDICIA, the federal regulatory agencies are required to establish
loan-to-value guidelines for real estate loans, and to revise risk-based capital
guidelines to reflect interest-rate risk, concentration of credit risk, the risk
of nontraditional activities and the actual performance of nontraditional real
estate loans. The federal bank regulatory agencies are in the process of
developing interagency risk exposure guidelines which will establish risk-based
capital standards for interest rate and other risk exposures.
FDICIA also requires, with some exceptions, that each institution have an annual
examination performed by its primary federal regulatory agency, and that each
bank with $500 million or more in assets have an annual outside independent
audit. The outside audit must consider bank regulatory compliance in addition to
financial statement reporting. Although the independent audit requirements only
apply to institutions with assets of $500 million or more, the FDIC encourages
all institutions, regardless of size or charter, to have an annual independent
audit of their financial statements. The Company intends to have an annual audit
conducted by the Company's independent public accountants.
Implementation of the various provisions of FDICIA are subject to the adoption
of regulations by the various federal banking agencies or to certain phase-in
periods. The effect of the FDICIA provisions cannot be determined until such
regulations are promulgated.
State Bank Sales of Non-deposit Investment Products
Securities activities of state nonmember banks, as well as the activities of
their subsidiaries and affiliates, are governed by guidelines and regulations
issued by the securities and financial institution regulatory agencies. These
agencies have taken the position that bank sales of alternative investment
products, such as mutual funds and annuities, raise substantial bank safety and
soundness concerns involving consumer confusion over the nature of the products
offered, as well as the potential for mismanagement of sales programs which
could expose a bank to liability under the anti-fraud provisions of federal
securities laws.
Accordingly, the agencies have issued guidelines which require, among other
things, the establishment of a compliance and audit program to monitor (i)
bank's mutual funds sales activities and its compliance with applicable federal
securities laws; (ii) the provision of full disclosures to customers about the
risks of such investments (including the possibility of loss of the customer's
principal investment); and (iii) the conduct of securities activities of bank
subsidiaries or affiliates in separate and distinct locations. In addition, the
guidelines prohibit bank employees involved in deposit-taking activities from
selling investment products or giving investment advice. Banks are also required
to establish qualitative standards for the selection and marketing of the
investments offered by the bank, and to maintain appropriate documentation
regarding the suitability of investments recommended to bank customers.
Increased Permitted Activities
During 1996, the Federal banking agencies, especially OCC and the FRB, took
steps to increase the types of activities in which national banks and bank
holding companies can engage, and to make it easier to engage in such
activities. The FRB adopted interim regulations on November 1, 1996 to permit
certain well-capitalized bank holding companies to engage (de novo or by
acquisition) in activities previously approved by regulation without submitting
a prior application. In order to qualify, a bank holding company must be
well-capitalized and have received a sufficiently high composite rating and
management rating at its last examination.
To be well-capitalized for this purpose, a bank holding company must (i) have a
total risk-based capital ratio of 10% or more, (ii) have a Tier 1 risk-based
capital ratio of 6% or more, (iii) have either (a) a Tier leverage ratio of 4%
or more (b) a composite rating of 1 or uses a market risk adjustment of its
risk-based capital ratio, and has a tier 1 leverage ratio of 3% or more, and
(iv) not be subject to any written agreement, order or capital directive issued
by the Federal Reserve. The Company is considered well-capitalized under this
rule.
18
On November 20, 1996, the OCC issued final regulations permitting national banks
to engage in a wider range of activities through subsidiaries. "Eligible
Institutions" (those national banks that are well capitalized, have a high
overall rating and a satisfactory CRA rating, and are not subject to an
enforcement order) may engage in activities related to banking through operating
subsidiaries after going through a new expedited application process. In
addition, the new regulations include a provision whereby a national bank may
apply to the OCC to engage in an activity through a subsidiary in which the bank
itself may not engage. In determining whether to permit the subsidiary to engage
in the activity, the OCC will evaluate why the bank itself is not permitted to
engage in the activity and whether a Congressional purpose will be frustrated if
the OCC permits the subsidiary to engage in the activity. Parity legislation in
California may permit state-licensed banks to engage in similar new activities,
subject to the discretion of the Superintendent. See "State Bank Parity Act"
below.
State Bank Parity Act
Recent California legislation has ended some of the disparities between national
banks and California state-chartered banks. Commencing January 1, 1996, state
banks are able to repurchase their shares with the prior approval of the
California State Banking Department. Moreover, like national banks, they are no
longer required to publish their statement of condition in a local newspaper
(replaced by a lobby notice requiring prompt availability of a copy upon
request). In addition, much of the confusing interplay between the federal and
state insider lending rules (Pursuant to the Federal Reserve Regulation 0) has
been ironed out. Lastly, the legislation included, a "wild card" statute
empowering the Superintendent to remove future disparities by regulation.
ATM Fee Legislation
In April of 1996, two of the larger Automatic Teller Machines ("ATM") networks
lifted their prior restriction prohibiting ATM operators from directly
surcharging the users of the ATMs, which triggered a series of legislative
proposals and hearings with respect to whether the fees charged by the operators
of ATM machines should be regulated. The lifting of the prior restriction on
surcharges was controversial in part because customers may be required to pay
two charges for a single transaction, one to the bank issuing the ATM card and
another to the operator of the ATM being used.
Currently, Federal law requires a bank at which a depositor has an account to
disclose to its own customers the amount of fees it charges, and California law
requires an ATM operator to disclose to users of the ATM machine who are using
an ATM card issued by someone other than the ATM operator that a fee will be
charged. California law was amended in 1996, effective July 1, 1997, to require
the operators of ATMs in California to disclose to customers any surcharge or
fee that the operator of the machine will charge, including charges for
mini-statements and other services.
This legislation will not have a significant effect on the Bank as it is
currently stated. Other proposed changes could affect the Bank by limiting ATM
charges to customers, but the impact would not be material to the financial
condition of the Company.
Americans With Disabilities Act
The Americans With Disabilities Act ("ADA") enacted by Congress, in conjunction
with similar California legislation, is having an impact on institutions and
increasing their cost of doing business. The legislation requires employers with
15 or more employees and all businesses operating "commercial facilities" or
"public accommodations" to accommodate disabled employees and customers. The ADA
has two major objectives: (1) to prevent discrimination against disabled job
applicants, job candidates and employees, and (2) to provide disabled persons
with ready access to commercial facilities and public accommodations. Commercial
facilities, such as the Bank and the Thrift, must ensure all new facilities are
accessible to disabled persons, and in some instances may be required to adapt
existing facilities to make them accessible, such as ATMs and bank premises.
Recent and Proposed Legislation and Regulation
From time to time, legislation is proposed or enacted which has the potential to
increase the cost of doing business, limit or change permissible activities, or
affect the competitive balance between banks and other financial institutions.
In recent years, legislation has resulted in major changes to interest-rate
structures and the permissible powers of banks, increasing the relative cost of
funds and generally exposing banks to interest rate
19
risks in their liability portfolios. At the same time, legislation authorizing
changes in the powers of other types of financial institutions has had a
substantial impact on certain fundamental aspects of the Bank's business.
Proposals to change the laws and regulations governing the operations and
taxation of bank holding companies, banks and other financial institutions are
frequently made in Congress, in the California legislature and before various
bank holding company and bank regulatory agencies. The likelihood of any major
changes and the impact such changes might have been impossible to predict.
Conclusions
It is impossible to predict with any degree of accuracy the competitive impact
the laws and regulations described above will have on commercial banking in
general and on the business of the Company in particular, or to predict whether
or when any of the proposed legislation and regulations will be adopted. It is
anticipated that the banking industry will continue to be a highly regulated
industry. Additionally, if experience is any indication, there appears to be a
continued lessening of the historical distinction between the services offered
by financial institutions and other businesses offering financial services.
Finally, the trend toward nationwide interstate banking is expected to continue
as a result of the enactment of the IBBEA and Assembly Bill 1482. As a result of
these factors, it is anticipated banks will experience increased competition for
deposits and loans and, possibly, further increases in their cost of doing
business.
Selected Statistical Information
The following tables in pages 21 through 30 present certain statistical
information concerning the business of the Company. This information should be
read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" at ITEM 7, at page 19 of the Bank's 1996
Annual Report to Shareholders incorporated herein by reference, and with the
Bank's Consolidated Financial Statements and the Notes thereto included in Item
14, at pages 9 through 18 of the Company's 1996 Annual Report to Shareholders
incorporated herein by reference. Statistical information below is generally
based on average daily amounts.
20
Item I. Distribution of Average Assets, Liabilities and Shareholders' Equity;
Interest Rates and Differentials
The following table presents for the periods indicated condensed average balance
sheet information for the Company, together with interest rates earned and paid
on the various sources and uses of its funds. The table is arranged to group the
elements of interest-earning assets and interest-bearing liabilities, these
items being the major sources of income and expense. Nonaccruing loans are
included in the table for computational purposes, but the nonaccrued interest
thereon is excluded.
Average Balance Sheet & Analysis of Net Interest Earnings
Year Ended December 31, 1996 Year Ended December 31, 1995
------------------------------------- -------------------------------------
Interest Average Interest Average
Average Income/ Interest Average Income/ Interest
Balance Expense Rate Balance Expense Rate
--------- --------- ----- --------- --------- ----
(Dollar amounts in thousands)
ASSETS
Federal funds sold $ 3,920 $ 207 5.28% $ 6,253 $ 358 5.73%
--------- --------- ----- --------- --------- ----
Taxable investment
securities 38,331 2,596 6.77% 34,095 2,219 6.51%
Nontaxable investment
securities(1) 4,531 246 5.43% 5,858 327 5.58%
Loans gross(2) 157,098 16,302 10.38% 120,620 12,969 10.75%
--------- --------- ----- --------- --------- ----
Total interest
earning assets 203,880 19,351 9.49% 166,826 15,873 9.51%
Allowance for loan losses (1,913) (1,616)
Cash and noninterest-
bearing deposits at
other banks 10,436 8,832
Premises and equipment,
net 4,775 3,783
Interest, receivable
and other assets 10,946 8,056
--------- ---------
Total Assets $ 228,124 $ 185,881
========= =========
LIABILITIES AND SHAREHOLDER
EQUITY
Interest-bearing demand $ 29,376 268 .91% $ 26,192 239 .91%
Savings deposits 104,938 4,350 4.15% 91,509 4,213 4.65%
Time deposits 40,994 2,167 5.29% 25,431 1,254 4.93%
Other borrowings 1,020 80 7.84% 141 11 7.80%
--------- ----- ----- --------- ----- -----
Total interest-bearing
liabilitiies 176,328 6,865 3.89% 143,273 5,717 3.99%
Noninterest-bearing
demand deposits 30,549 26,478
Accrued interest,
taxes and other liabilities 3,067 641
------- -------
Total Liabilities 209,944 170,392
======= =======
Total shareholders'
equity 18,810 15,489
--------- ---------
Total Liabilities and
shareholder's equity $ 228,124 $ 185,881
========= =========
Net interest income
and margin(3) $ 12,486 6.12% $ 10,156 6.09%
Year Ended December 31, 1994
-----------------------------
Interest Average
Average Income/ Interest
Balance Expense Rate
------ ------- ----
ASSETS
Federal funds sold $6,330 $ 261 4.12%
------ ------- ----
Taxable investment
securities 26,966 1,479 5.48%
Nontaxable investment
securities(1) 4,579 272 5.94%
Loans gross(2) 110,690 10,795 9.75%
------ ------- ----
Total interest
earning assets 148,565 12,807 8.62%
Allowance for loan losses (1,690)
Cash and noninterest-
bearing deposits at
other banks 8,750
Premises and equipment,
net 2,578
Interest, receivable
and other assets 7,528
--------
Total Assets $165,831
========
LIABILITIES AND SHAREHOLDER
EQUITY
Interest bearing demand $25,126 237 .94%
Savings deposits 65,516 2,298 3.45%
Time deposits 34,420 1,312 3.81%
Other borrowings 48 3 6.25%
------- ----- ----
Total interest-bearing
liabilitiies 126,110 3,850 3.05%
Noninterest-bearing
demand deposits 25,326
Accrued interest,
taxes and other liabilities 842
-------
Total Liabilities 152,278
=======
Total shareholders'
equity 13,553
---------------
Total Liabilities and
shareholder's equity $ 165,831
===============
Net interest income
and margin(3) $8,957 6.03%
- ----------
(1) Interest on municipal securities is not computed on tax-equivalent basis.
(2) Amounts of interest earned includes loan fees of $1,106,000, $901,000 and
$812,000 for 1996, 1995, and 1994, respectively.
(3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
21
The following tables set forth, for the periods indicated, a summary of the
changes in average asset and liability balances and interest earned and interest
paid resulting from changes in average asset and liability balances (volume) and
changes in average interest rates. The change in interest due to both rate and
volume has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amount of the change in each. Nonaccruing
loans are included in the table for computational purposes, but the nonaccrued
interest thereon is excluded.
Net Interest Income Changes Due to Volume and Rate
1996 vs. 1995 1995 vs. 1994
------------- -------------
Due to Due to Total Due to Due to Total
Volume Rate Change Volume Rate Change
------- ------- ------- ------- ------- -------
(Dollar amounts in thousands)
Interest Income:
Investment securities $ 276 $ 101 $ 377 $ 434 $ 306 $ 740
Tax-exempt investment securities (74) (7) (81) 70 (15) 55
Federal funds sold (125) (26) (151) (3) 100 97
Loans, gross (2) 3,767 (434) 3,333 1,015 1,159 2,174
------- ------- ------- ------- ------- -------
Total 3,844 (366) 3,478 1,516 1,550 3,066
Interest Expense:
Interest-bearing demand deposits $ 29 $ -- $ 29 $ 9 $ (7) $ 2
Savings deposits 427 (290) 137 1,016 899 1,915
Time deposits 817 96 913 (90) 32 (58)
Other borrowings 69 -- 69 7 1 8
------- ------- ------- ------- ------- -------
Total 1,342 (194) 1,148 942 925 1,867
Net Interest Income $ 2,502 $ (172) $ 2,330 $ 574 $ 625 $ 1,199
======= ======= ======= ======= ======= =======
(1) Interest on municipal securities is not computed on a tax-equivalent basis.
(2) Amounts of interest earned includes loan fees of $1,106,000 for 1996 and
$901,000 for 1995.
22
Interest Rate Sensitivity
The interest rate gaps reported in the table arise when assets are funded with
liabilities having different repricing intervals. Since these gaps are actively
managed and change daily as adjustments are made in interest rate views and
market outlook, positions at the end of any period may not be reflective of the
Company's interest rate sensitivity in subsequent periods. Active management
dictates that longer-term economic views are balanced against prospects for
short-term interest rate changes in all repricing intervals. For purposes of the
analysis below, repricing of fixed-rate instruments is based upon the
contractual maturity of the applicable instruments. Actual payment patterns may
differ from contractual payment patterns.
Interest Rate Sensitivity
By Repricing Interval
----------------------------------------------------------------------
After three After one
months, year,
Within three within one within five After five Noninterest-
months year years years bearing funds Total
------ ---- ----- ----- ------------- -----
(Dollar amounts in thousands)
Assets
Federal funds sold $ 3,735 $ -- $ -- $ -- $ -- $ 3,735
Time deposits at other institutions 1,800 308 993 -- -- 3,101
Investment securities 315 3,976 8,279 30,808 -- 43,378
Loans 115,848 20,857 36,856 9,686 -- 183,247
Other interest-bearing assets 880 3,134 -- -- -- 4,014
Noninterest-earning assets
and allowances for loan losses -- -- -- -- 28,514 28,514
--------- -------- --------- --------- -------- ---------
Total Assets 122,578 28,275 46,128 40,494 28,514 265,989
=========
Liabilities and shareholders' equity
Savings, money market & NOW deposits 145,588 -- -- -- 39,157 184,745
Time deposits 12,180 29,877 11,543 -- -- 53,600
Other interest-bearing liabilities -- 791 -- 105 3,000 3,896
Other liabilities and
Shareholders' equity -- -- -- -- 23,748 23,748
--------- -------- --------- --------- -------- ---------
Total liabilities and shareholders' equ 157,768 30,668 11,543 105 65,905 $ 265,989
=========
Interest rate sensitivity
Gap (35,190) (2,393) 34,585 40,389 $ (37,391)
--------- -------- --------- --------- =========
Cumulative interest rate
Sensitivity Gap $ (35,190) $(37,583) $ (2,998) $ 37,391
========= ======== ========= =========
23
Item II: Investment Portfolio
All Company securities are classified available-for-sale as of December 31,
1996. The following table sets forth the fair value of investment securities at
the dates indicated:
Fair Value of Investment Securities
Fair Value
December 31
------------------------------------
1996 1995 1994
---- ---- ----
(Amount in thousands)
U.S. Treasury, U.S. Government agencies and corporatio $17,711 $22,521 $20,593
Obligations of states and political subdivisions 4,271 4,297 6,571
Mortgage-backed securities 20,751 17,932 8,175
Other securities 645 552 487
------- ------- -------
Total $43,378 $45,302 $35,826
======= ======= =======
The following table sets forth the maturities of investment securities at
December 31, 1996 and the weighted average yields of such securities calculated
on the basis of the cost and effective yields based on the scheduled maturity of
each security. Maturities of mortgage-backed securities are stipulated in their
respective contracts, however, actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call prepayment penalties. Yields on municipal securities have
not been calculated on a tax-equivalent basis.
Securities Available-for-Sale-Fair Value and Maturity Distribution
Stated Maturity
-------------------------------------------------------------------------------------------------
Within One Year One to Five Years Five to Ten Years Over Ten Years
------------------ -------------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Total
------ ----- ------ ----- ------ ----- ------ ----- -----
(Dollar amounts in thousands)
U.S. Treasury and other
U.S. government
agencies and corporations (1) $ 362 7.03% $ 6,455 6.05% $ 8,276 7.19% $ 23,369 7.35% $ 38,462
State and political subdivisions 619 9.05% 2,439 5.60% 83 4.20% 37 6.92% 4,271
------- -------- -------- -------- --------
Total debt securities 981 8,894 9,111 23,747 42,733
Equity securities - - - - 645
-------
Total $ 981 $ 8,894 $ 9,111 $ 23,747 $ 43,378
======= ======== ======== ======== ========
(1) Mortgage-backed securities are shown in this table at the contractual
maturity dates.
The Company does not own securities of a single issuer whose aggregate book
value is in excess of 10% of its total equity.
24
Item III: Loan Portfolio
The following table shows the composition of the loan portfolio at the dates
indicated:
Loans Outstanding
December 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
Commercial, financial and agricultural $ 71,786 $ 65,563 $ 55,827 $ 54,925 $ 57,091
Real estate--construction 13,923 12,006 11,726 9,143 7,131
Real estate--mortgage 57,098 42,128 34,743 32,984 21,338
Installment 40,440 14,039 11,304 10,072 11,775
--------- --------- --------- --------- ---------
Total 183,247 133,736 113,600 107,124 97,335
Less: Allowance for possible loan losses (2,792) (1,701) (1,621) (1,747) (1,616)
--------- --------- --------- --------- ---------
Total loans, net $ 180,455 $ 132,035 $ 111,979 $ 105,377 $ 95,719
========= ========= ========= ========= =========
At December 31, 1996, the Company had approximately $46,159,000 in undisbursed
loan commitments of which approximately $6,305,000 related to real estate
construction loans. This compares with $28,321,000 at December 31, 1995 of which
$4,232,000 related to real estate construction loans. Standby letters of credit
were $3,213,000 and $2,465,000, respectively, at December 31, 1996 and December
31, 1995. For further information about the composition of the Company's loan
portfolio see "ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" section entitled "Asset Quality" at page 21
of the Company's 1996 Annual Report to Shareholders incorporated herein by
reference.
The Company seeks to mitigate the risks inherent in its loan portfolio by
adhering to certain underwriting practices. They include careful analysis of
prior credit histories, financial statements, tax returns and cash flow
projections of its potential borrowers as well as obtaining independent
appraisals on real property and chattel taken as collateral and audits of
accounts receivable or inventory pledged as security.
The Company also has an internal loan review system as well as periodic external
reviews. The results of these external reviews are assessed by the Company's
audit committee. Collection of delinquent loans is generally the responsibility
of the Company's credit administration staff. However, certain problem loans may
be dealt with by the originating loan officer. The Board of Directors review the
status of delinquent and problem loans on a monthly basis. The Company's
underwriting and review practices notwithstanding, in the normal course of
business, the Company expects to incur loan losses in the future.
25
The table that follows shows the maturity distribution of the portfolio of
commercial, financial, and agricultural loans and real estate construction loans
on December 31, 1996, as well as sensitivity to changes in interest rates:
Loan Maturity Distribution and Sensitivity to Changes in Interest Rates
December 31, 1996
-------------------------------------------------------------------
Within One to Over
One Year Five Years Five Years Total
-------- -------- -------- --------
Commerical, financial and agricultural
Loans with floating rates $ 39,515 $ 20,150 $ 4,337 $ 64,002
Loans with predetermined rates 630 6,116 1,038 7,784
-------- -------- -------- --------
Subtotal 40,145 26,266 5,375 71,786
Real Estate--Construction
Loans with floating rates 5,419 4,528 2,542 12,489
Loans with predetermined rates 674 32 728 1,434
-------- -------- -------- --------
Subtotal 6,093 4,560 3,270 13,923
Real Estate--Mortgage 4,384 39,845 12,809 57,098
Installment 3,909 33,192 3,339 40,440
-------- -------- -------- --------
Total $ 54,531 $103,863 $ 24,793 $183,247
======== ======== ======== ========
Item IV: Nonperforming Assets
The following table summarizes the Company's nonaccrual, 90 days or more past
due and other real estate owned:
December 31
-----------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Nonaccrual loans $4,968 $4,626 $ 653 $1,019 $1,064
Accruing loans past due
90 days or more 600 224 46 64 145
Other real estate owned 1,466 47 -- -- 676
------ ------ ------ ------ ------
$7,034 $4,897 $ 699 $1,083 $1,885
====== ====== ====== ====== ======
26
The Company generally places loans on nonaccrual status and accrued but unpaid
interest is reversed against the current year's income when interest or
principal payments become 90 days or more past due unless the outstanding
principal and interest is adequately secured and, in the opinion of Management,
is deemed in the process of collection. Interest income on nonaccrual loans is
recorded on a cash basis. Payments may be treated as interest income or return
of principal depending upon Management's opinion of the ultimate risk of loss on
the individual loan. Cash payments are treated as interest income where
Management believes the remaining principal balance is fully collectible.
Additional loans not 90 days past due may also be placed on nonaccrual status if
Management reasonably believes the borrower will not be able to comply with the
contractual loan repayment terms and collection of principal or interest is in
question.
Interest income of loans on nonaccrual status during the year ended December 31,
1996, that would have been recognized during that same year if the loans had
been current in accordance with their original terms was approximately $497,000.
In the prior years of 1995, 1994, 1993 and 1992 the amounts were not material.
Nonperforming loans are those in which the borrower fails to perform under the
original terms of the obligation and are categorized as loans past due 90 days
or more, loans on nonaccrual status and restructured loans. Nonperforming loans
on December 31, 1996 amounted to $8,220,000. As of December 31, 1995, such loans
were $4,850,000. Included in these totals are loans secured by first deeds of
trust on real property totaling $3,626,000 in 1996 and $3,286,000 in 1995. The
reason for the increase is the purchased portfolio of the lease receivables
discussed below, a newly restructured commercial real estate loan and two
agricultural real estate properties acquired through foreclosure.
In late 1995, a $3.4 million commercial real estate development loan was placed
on non-accrual status due to restructuring of the loan and is included in
nonperforming loans for both years.
The Bank purchased a portfolio of lease receivables in 1994. The company which
packages and sells these leases to financial institutions filed a Chapter 11
reorganization in April 1996 and its chief financial officer has been charged by
the Securities and Exchange Commission with participating in securities fraud.
More than 360 banks nationwide had acquired similar lease receivable contracts.
The Bank has $1,281,000 of these leases on nonaccrual status as of December 31,
1996. The Bank has retained counsel jointly with other California banks and is
monitoring its position to ascertain the extent of loss the Bank may incur. As
of December 31, 1996, specific reserves of $385,000 have been established for
this portfolio. As of February 12, 1997, the Bank signed a settlement agreement
in regards to this portfolio of leases that established the projected recovery
rate at 78.5% or approximately $1,006,000.
The Bank closely monitors its loans classified by the regulatory agencies and
such loans totaled $10,239,000 at December 31, 1996.
Except for loans which are disclosed above, there are no assets as of December
31, 1996, where known information about possible credit problems of borrower
causes Management to have serious doubts as to the ability of the borrower to
comply with the present loan repayment terms and which may become nonperforming
assets. Given the magnitude of the Company's loan portfolio, however, it is
always possible that current credit problems may exist that may not have been
discovered by management.
At December 31, 1996, the Company had $1,466,000 in real estate acquired through
foreclosure. At December 31, 1995, the Company had $47,000 in real estate
acquired through foreclosure. The increase was due to the foreclosure on two
agricultural properties in late 1996. Current projections are that these two
properties will be sold in 1997.
27
Reconciliation of allowance for possible loan losses
December 31,
-------------------------------------------------------------------------
(Dollar amount in thousands)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Balance at beginning of period $ 1,701 $ 1,621 $ 1,747 $ 1,616 $ 1,699
Due to Acquisition of Thrift 148 -- -- -- --
Provision for Possible Loan Losses 1,513 228 -- 254 162
Charge-Offs
Commercial, Financial, and Agricultural 518 160 206 217 250
Real Estate--Construction and
Land Development -- -- -- -- --
Real Estate--Mortgage -- -- -- -- --
Installment Loans to Individuals 140 63 42 83 109
-------- -------- -------- -------- --------
Total Loans Charged Off 658 223 248 300 359
Recoveries
Commercial, Financial, and Agricultural 27 66 99 145 87
Real Estate--Construction and
Land Development -- -- 8 -- --
Real Estate--Mortgage -- -- -- -- --
Installment Loans to Individuals 61 9 15 32 27
-------- -------- -------- -------- --------
Total Recoveries 88 75 122 177 114
Net Loans Charged Off 570 148 1,621 123 245
-------- -------- -------- -------- --------
Balance at End of Period $ 2,792 $ 1,701 $ 1,621 $ 1,747 $ 1,616
======== ======== ======== ======== ========
Loans:
Average Loans Outstanding During Period,
Gross $157,098 $120,620 $110,690 $102,236 $ 91,458
Total Loans at End of Period, Gross $183,247 $133,736 $113,600 $107,124 $ 97,335
Ratio of net charge-offs to average
loans outstanding 0.36% 0.12% 0.12% 0.12% 0.27%
28
29
The provision for loan losses represents Management's determination of the
amount necessary to be added to the allowance for loan losses to bring it to a
level which is considered adequate in relation to the risk of foreseeable losses
inherent in the loan portfolio. Immediately upon determination of a specific
loss in the portfolio, an adjustment to the loan loss reserve is made.
In making this determination, Management takes into consideration the overall
growth trend in the loan portfolio, examinations of bank supervisory
authorities, internal and external credit reviews, prior loan loss experience
for the Company, concentrations of credit risk, delinquency trends, general and
local economic conditions and the interest rate environment. The normal risks
considered by Management with respect to real estate construction loans include
fluctuations in real estate values, the demand for housing and the availability
of permanent financing in the Company's market area and the home buyers ability
to obtain permanent financing. The normal risks considered by Management with
respect to real estate mortgage loans include fluctuations in the value of real
estate. The normal risks considered by Management with respect to agricultural
loans include the fluctuating value of the collateral, changes in weather
conditions and the availability of adequate water resources in the Company's
local market area. Additionally, the Company relies upon data obtained through
independent appraisals for significant properties in specific identification of
loss exposure in nonperforming loans.
The allowance for loan losses does not represent a specific judgment that loan
charge-offs of that magnitude will necessarily occur. It is always possible that
future economic or other factors may adversely affect the Company's borrowers,
and thereby cause loan losses to exceed the current allowance.
The following table summarizes a breakdown of the allowance for loan losses by
loan category and the percentage by loan category of total loans for the dates
indicated:
Allocation of the Allowance for Loan Losses
December 31
--------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
Commercial, financial
and agricultural $ 840 39% $ 944 49% $ 898 49% $ 974 51% $ 835 59%
Real estate - constructio 1,421 8% 708 9% 218 10% 317 9% 305 7%
Real estate - mortgage 219 31% -- 31% 376 31% 296 31% 275 22%
Installment 312 22% 49 11% 129 10% 160 9% 201 12%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $2,792 100% $1,701 100% $1,621 100% $1 747 100% $1,616 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
The following table relates to other interest bearing assets not disclosed above
for the dates indicated. This item consists of a salary continuation plan for
the Company's executive management and deferred retirement benefits for
participating board members. The plan is informally linked with universal life
insurance policies totaling $3,839,000 for the salary continuation plan.
Other Interest-Bearing Assets
December 31
----------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Cash surrender value of life insurance $3,134 $1,290 $ 288 $ - $ -
------ ------ ------ ------ -----
30
Item V Deposits
The following table sets forth the average balance and the average rate paid for
the major categories of deposits for the dates indicated:
December 31
----------------------------------------------------------------------------------------------
(Amounts in thousands except yield)
1996 1995 1994 1993 1992
------------------ ------------- ----------------- --------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- -------- ------ ------- ------ -------- ------ -------- -----
Noninterest-bearing demand deposits $ 30,549 -- $ 26,478 -- $ 25,326 -- $ 22,913 -- $ 19,662 --
Interest-bearing demand deposits 29,376 0.91% 26,192 0.91% 25,126 0.94% 21,782 12.7% 19,341 2.03%
Savings deposits 104,938 4.15% 91,509 4.60% 66,517 3.45% 52,385 2.81% 46,440 3.53%
Time deposits under $100,000 34,408 5.26% 19,073 4.84% 27,259 3.82% 24,048 3.86% 26,981 4.98%
Time deposits $100,000 or more 6,586 5.43% 6,358 5.17% 7,160 3.78% 10,148 3.77% 12,080 4.77%
-------- -------- -------- -------- --------
Total deposits $205,857 $169,610 $151,388 $131,276 $124,504
======== ======== ======== ======== ========
Maturities of Time Certificates of Deposits of $100,000 or More
Maturities of time certificates of deposits of $100,000 or more outstanding at
December 31, 1996 are summarized as follows:
December 31, 1996
-----------------
(In thousands)
Remaining Maturity:
Three months or less $ 2,840
Over three through six months 2,146
Over six through twelve months 3,383
Over twelve months 3,178
-----------
Total $ 11,547
==========
Item VI Return on Equity and Assets
The following table sets forth certain financial ratios for the periods
indicated (averages are computed using actual daily figures):
Return on Average Equity and Assets
For the year ended
December 31
--------------------------
1996 1995 1994
---- ---- ----
Return on average assets 0.88% 0.18% 1.05%
Return on average equity 11.05% 2.16% 12.81%
Dividend payout ratio .05% - -
Average equity to average assets 7.96% 8.33% 8.17%
Item VII Short Term Borrowings
The Company has a loan with an unaffiliated lender with an outstanding balance
of $791,000 as of December 31, 1996. The loan matures in July of 1998. The loan
was related to the cash portion of the purchase of the Thrift.
31
ITEM 2. PROPERTIES
The Bank
(1) Main Office
The Bank's main office is located at 490 West Olive Avenue in Merced, and
consists of a single-story building with approximately 5,600 square feet of
interior floor space. This building was constructed in 1978 at a cost of
approximately $400,000 and is situated on a lot of approximately 47,000 square
feet, which the Bank purchased in 1977 for approximately $186,000. The site
contains 43 parking spaces and six drive-up lanes, and Management believes that
this facility will be adequate to accommodate the operations of this branch for
the foreseeable future.
(2) Downtown Merced Branch
The Bank's downtown Merced Branch is located at 606 West 19th Street in Merced.
In August 1991, the Bank entered into an 8-1/2 year lease with two additional
five-year renewal options with a nonaffiliated third party for the lease of the
facility. The facility is approximately 7,680 square feet in size and is
intended to accommodate the current needs of the existing branch and the
agriculture and agriculture real estate departments. The annual rental under
this lease is $69,120 for the first three years and increases to $78,336 per
year for the remaining 5-1/2 years. Leasehold improvements including remodeling
and redecorating were approximately $235,000. In conjunction with the plans to
move the administrative facilities of the Company and Bank, as discussed below,
this branch will be relocated. Leasehold improvements will have been written off
and the Bank is currently seeking possible tenants for the remainder of the
lease term.
(3) Atwater Branch
On October 5, 1981, the Bank opened a branch office at 735 Bellevue Road,
Atwater. The branch is located on a lot of approximately 40,000 square feet, for
which the Bank entered into a 35-year ground lease with a nonaffiliated third
party, commencing on October 5, 1981. The building contains approximately 6,000
square feet of interior floor space, and was built at a total cost of
approximately $500,000. In 1994, the Bank purchased the lot at a cost of
$316,000. Management of the Bank believes that this facility will be adequate to
accommodate the operations of this branch for the foreseeable future. This
office has been subsequently remodeled and also accommodates the Company's data
processing and central services support personnel including the related
equipment. The data processing and central service support personnel and related
equipment will be relocated to the new facility in downtown Merced, as discussed
below.
(4) Administrative Headquarters
On August 22, 1986, the Bank entered into an eight-year lease with a
nonaffiliated third party for the relocation of the Bank's administrative
headquarters, located at 1160 West Olive Avenue, Suite A, in Merced. The lease
commenced on January 1, 1987 with one eight-year option to renew. The monthly
rental under the lease is $3,054 per month for the first three years, with an
annual increase of 3% for years four, five and six, and an increase of 5%
annually for years seven and eight. The building contains approximately 3,000
square feet of interior floor space. In 1995, the Bank extended its lease until
April 1, 1997. The facility also accommodates the staff of Capital West Group.
The Company plans to move the personnel at this facility to the new site
discussed below.
In addition, the Bank leased an additional 1,375 square feet located at 1170
West Olive Avenue, Suite B in September 1990 for administrative personnel. The
Bank entered into a two-year lease in April of 1992 for this facility at a cost
of $1,645 per month for the first year with a 5% increase for the second year.
In 1995, the Bank extended its lease until April 1, 1997. This facility also
accommodates the staff of Capital West Group. The Company plans to move the
personnel at this facility to the new site discussed below.
The Company's administrative headquarters are currently located at 1160 West
Olive Avenue, Suite A, in Merced, California. Effective July 15, 1995 the
Company entered into an agreement to relocate its existing administrative office
and an existing branch in downtown Merced to a new facility in downtown Merced.
Construction began in the summer of 1996 and is expected to be complete in late
summer of 1997. The estimated construction cost of the new 29,000 square foot
facility including a parking structure is estimated at approximately $4.7
million. In conjunction with the construction of the facility, the Merced
Redevelopment Agency has provided the Company with an interest-free loan in the
amount of $3.0 million. The loan matures on August 31, 1997. It is anticipated
that upon completion of the facility, a permanent mortgage loan will be obtained
from an unaffiliated lender.
(5) Real Estate Office
In September of 1992, the Bank relocated its real estate office to 1170 West
Olive Avenue, Suite I, in Merced. The Bank entered into a two-year lease
commencing in October of 1992 with a nonaffiliated third party at a cost per
month of $3,377. In 1995, the
32
Bank extended its lease until April 1, 1997. The facility contains approximately
3,200 square feet of interior floor space. It is the location for the Bank's
real estate department as well as centralized credit administration, credit card
services and the headquarters for MAID, the Bank's wholly owned subsidiary. The
Company plans to move the personnel at this facility to the new administrative
site discussed above.
(6) Los Banos Branch
On August 15, 1989, the Bank opened a fourth branch office at 1341 East Pacheco
Boulevard, Los Banos, located in the new Canal Farm Shopping Center. The Bank
entered into a five-year lease with a nonaffiliated third party, commencing on
August 1, 1989. In October of 1994, the Los Banos branch was relocated to 953 W.
Pacheco Boulevard, Los Banos. The Bank entered into a ten-year lease with a
non-affiliated third party on the facility. The new facility contains 4,928
square feet of interior floor space, parking facilities, a walk-up ATM and
drive-up facilities. Remodeling and redecorating expenses were approximately
$355,000. Management believes that this facility will be adequate to accommodate
the operation of the branch for the foreseeable future.
(7) Hilmar Branch
On November 15, 1993, the Bank opened a fifth branch office at 8019 N. Lander
Avenue, Hilmar. The building was purchased at a cost of $328,000 and consists of
a single story building of approximately 4,456 square feet of interior floor
space. The site contains 22 parking spaces and a drive-up facility. Remodeling
and redecorating expenses were approximately $53,000. Management believes that
this facility will be adequate to accommodate the operation of this branch for
the foreseeable future.
(8) Sonora Branch
On January 12, 1996, the Bank received approval to open a full service banking
facility at the Crossroads Shopping Center and entered into a five-year lease
with a non-affiliated third party on January 12, 1996 for a 2,500 square foot
facility. The branch opened April 1, 1996. Management is currently reviewing its
options for relocating this branch to a larger facility.
(9) Turlock Branch
On September 1, 1995, the Bank opened a branch in Turlock, California. In May
1995 the Bank acquired 2 lots for $297,000 at 2001 Geer Road, Turlock. The Bank
completed the construction of a permanent facility in February 1997 at a cost of
approximately $694,000 and the branch was subsequently relocated there from a
temporary facility at the same location.
(10) Modesto Branches
On January 24, 1996, the Bank received approval to open a full service banking
facility in Modesto and entered into a ten-year lease with a non-affiliated
third party on December 2, 1996 for an approximately 5,413 square foot building
at 3508 McHenry Avenue, Modesto. The branch opened for business on December 10,
1996. Management believes that this facility will be adequate to accommodate the
branch for the foreseeable future.
On September 26, 1996, the Bank received approval to open a second branch in
Modesto and entered into a four-year lease with a non-affiliated third party on
December 1, 1996 for an approximately 8,208 square foot building at 1003 12th
Street, Modesto. The branch opened for business on December 31, 1996. Management
believes that this facility will be adequate to accommodate the banking
operation for the foreseeable future.
The Thrift
The Thrift currently operates with four branch offices. The main office is the
office in Turlock and the other branch offices are located in Modesto, Visalia
and Fresno. All branch offices are leased facilities with minimal leasehold
improvements which are anticipated to be adequate to serve the needs of the
Thrift in the foreseeable future.
33
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1996, the Company is not a party to, nor is any of its
property the subject of, any material pending legal proceedings, nor are any
such proceedings known to be contemplated by government authorities.
The Company is, however, also exposed to certain potential claims encountered in
the normal course of business. In the opinion of Management, the resolution of
these matters will not have a material adverse effect on the Company's
consolidated financial position or results of operations in the foreseeable
future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As permitted by the Securities and Exchange Commission, the information called
for by this Item relating to Executive Officers is incorporated by reference
from the section of the Company's 1997 Proxy Statement titled "Executive
Officers Of Capital Corp" which is incorporated herein by reference and was
filed on or about March 20, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
For information concerning the market for the Company's common stock and related
shareholder matters, see page 23 of the Company's 1996 Annual Report to
Shareholders incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
For selected consolidated financial data concerning the Company, see page 24 of
the Company's 1996 Annual Report to Shareholders incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For management's discussion and analysis of financial condition and results of
operations, see pages 19 through 22 of the Company's 1996 Annual Report to
Shareholders incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Audited Consolidated Balance Sheets as of December 31, 1996 and 1995 and Audited
Consolidated Statements of Income, Shareholders' Equity and Cash Flows for the
fiscal years ending December 31, 1996, 1995, and 1994 appear on pages 9 through
11 of the Company's 1996 Annual Report to Shareholders incorporated herein by
reference. Notes to the Consolidated Financial Statements appear on pages 12
through 18 of the Company's 1996 Annual Report to Shareholders incorporated
herein by reference. The Independent Auditors' Report appears on page 23 of the
Company's 1996 Annual Report to Shareholders incorporated herein by reference.
SELECTED QUARTERLY FINANCIAL INFORMATION
The following tables present selected historical consolidated financial
information, including per share information, for each of the quarterly periods
indicated. The following financial data should be read in conjunction with the
consolidated financial statements of Capital Corp included or incorporated by
reference in this annual report.
SELECTED QUARTERLY FINANCIAL INFORMATION
(In thousands except per share data)
1995 FIRST SECOND THIRD FOURTH
Interest income $ 3,636 $ 3,893 $ 4,077 $4,267
Interest expense 1,360 1,413 1,449 1,495
Net interest income 2,276 2,480 2,628 2,772
Noninterest income 355 288 225 (2,092)
Noninterest expense 1,894 2,064 2,112 2,076
Net income (loss) 421 406 452 (944)
Net income (loss) per share(1) 0.20 0.19 0.22 (0.45)
1996 FIRST SECOND THIRD FOURTH
Interest income $ 4,250 $ 4,313 $ 5,226 $ 5,562
Interest expense 1,512 1,530 1,869 1,954
Net interest income 2,738 2,783 3,357 3,608
Noninterest income 571 684 694 986
Noninterest expense 2,353 2,853 2,986 2,544
Net income (loss) 501 296 613 599
Net income (loss) per share(1) 0.24 0.13 0.24 0.23
1997 FIRST SECOND
Interest income $ 5,601 $ 5,956
Interest expense 2,072 2,335
Net interest income 3,529 3,621
Noninterest income 734 1,212
Noninterest expense 3,240 3,180
Net income (loss) 513 (943)
Net income (loss) per share(1) 0.20 (0.36)
(1) Per share data reflects 15% stock dividends in June 1994 and
June 1995, 5% stock dividend in August 1996 and three-for-two stock split in
May 1997 and is based on weighted average shares outstanding excluding shares
issuable upon exercise of outstanding options.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in and there were no disagreements with accountants on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As permitted by Securities and Exchange Commission Regulation 14a, the
information called for by this item is incorporated by reference from the
section of the Company's 1997 Proxy Statement titled "Election of Directors,"
which was filed on or about March 20, 1997.
34
ITEM 11. EXECUTIVE COMPENSATION
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
section of the Company's 1997 Proxy Statement titled "Compensation and Other
Transactions With Management and Others" which was filed on or about
March 20, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
Company's 1997 Proxy Statement, which was filed on or about March 20, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
Company's 1997 Proxy Statement, which was filed on or about March 20, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements and Schedules
An index of all financial statements and schedules filed as part of this
Form 10-K appears below and the pages of the Company's Annual Report to
Shareholders for the year ended December 31, 1996 listed, are incorporated
herein by reference in response to Item 8 of this report.
Financial Statement Schedules: Page
----------------------------- ----
Independent Auditor's Report 23
Consolidated Balance Sheets as of December 31, 1996 and 10
1995
Consolidated Statements of Income for the Years Ended 9
1996, 1995, and 1994
Consolidated Statements of Shareholders' Equity for the 10
Years Ended 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the Years Ended 11
1996, 1995, and 1994
Notes to Consolidated Financials 12
(b) Reports on Form 8-K
There were no reports filed in the quarter ending December 31, 1996 on Form
8-K.
35
(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).
3.2 Bylaws (filed as Exhibit 3.2 of the Company's September 30, 1996 Form *
10Q filed with the SEC on or about November 14, 1996).
10 Employment Agreement between Thomas T. Hawker and Capital Corp.
10.1 Administration Construction Agreement (filed as Exhibit 10.4 of the *
Company's 1995 Form 10K filed with the SEC on or about March 31,
1996).
10.2 Stock Option Plan (filed as Exhibit 10.6 of the Company's 1995 Form *
10K filed with the SEC on or about March 31, 1996).
10.3 401(k) Plan (filed as Exhibit 10.7 of the Company's 1995 Form 10K *
filed with the SEC on or about March 31, 1996).
10.4 Employee Stock Ownership Plan (filed as Exhibit 10.8 of the *
Company's 1995 Form 10K filed with the SEC on or about March 31,
1996).
11 Statement Regarding the Computation of Earnings Per Share is
incorporated herein by reference from Note 1 of the Company's
Consolidated Financial Statements.
13 Annual Report to Security Holders.
23.1 Consent of KPMG Peat Marwick LLP
* Denotes documents which have been incorporated by reference.
(d) Financial Statement Schedules
All other supporting schedules are omitted because they are not applicable,
not required, or the information required to be set forth therein is
included in the financial statements or notes thereto incorporated herein by
reference.
36
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, as amended, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 26th day of
August, 1997
CAPITAL CORP OF THE WEST
By: /s/ THOMAS T. HAWKER
----------------------------------------------
THOMAS T. HAWKER
(President and Chief Executive Officer
of Capital Corp of the West)
By: /s/ JANEY E. BOYCE
----------------------------------------------
JANEY E. BOYCE
(Senior Vice President and Chief Financial Officer
of Capital Corp of the West)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ JERRY E. CALLISTER Chairman of the August 26, 1997
- ----------------------------------- Board of Directors
JERRY E. CALLISTER
/s/ ROBERT E. HOLL Director August 26, 1997
- ----------------------------------
ROBERT E. HOLL
/s/ BERTYL W. JOHNSON Director August 26, 1997
- ----------------------------------
BERTYL W. JOHNSON
/s/ DOROTHY L. BIZZINI Director August 26, 1997
- ----------------------------------
DOROTHY L. BIZZINI
/s/ LLOYD H. AHLEM Director August 26, 1997
- ----------------------------------
LLOYD H. AHLEM
/s/ JAMES W. TOLLADAY Director August 26, 1997
- ----------------------------------
JAMES W. TOLLADAY
/s/ JACK F. CAUWELS Director August 26, 1997
- ----------------------------------
JACK F. CAUWELS
37
/s/ THOMAS T. HAWKER Director/CEO August 26, 1997
- ----------------------------------
THOMAS T. HAWKER
/s/ JOHN FAWCETT Director August 26, 1997
- ----------------------------------
JOHN FAWCETT
/s/ TAPAN MONROE Director August 26, 1997
- ----------------------------------
TAPAN MONROE
/s/ JANEY E. BOYCE Chief Financial & August 26, 1997
- ---------------------------------- Accounting Officer
JANEY E. BOYCE
CAPITAL CORP OF THE WEST
38