EXHIBIT 99.10
FORM F-2
ANNUAL REPORT UNDER SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
FDIC Certificate No. 22260-7
CAPITOLBANK SACRAMENTO
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(Exact name of bank as specified in its charter)
State of California
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(State or other jurisdiction of incorporation or organization)
94-2319513
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(IRS Employer Identification No.)
300 Capitol Mall
Sacramento, California 95814
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(Address of principal office, including zip code)
Bank's telephone number, including area code (916) 449-8300
Securities registered under Section 12(b) of the Act:
None
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Securities registered under Section 12(g) of the Act:
Common Stock, par value $1.5625 per share
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(Title of Class)
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Indicate by check mark whether the Bank (1) has filed all reports required to be
filed by Section 13 of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Bank was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
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The aggregate market value of voting stock held by non-affiliates as of
April 15, 1994:
Number of shares of the Bank's common stock outstanding as of April 15, 1994:
4,080,302
Indicate by check mark if disclosure of delinquent filers pursuant to item 10 is
not contained herein, and will not be contained, to the best of Bank's
knowledge, in definitive proxy or information statements incorporated by
reference in part III of this Form F-2 or any amendment of this Form F-2. [_]
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TABLE OF CONTENTS
Page No.
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ITEM 1. Business.......................................................... 1
ITEM 2. Properties........................................................ 13
ITEM 3. Legal Matters..................................................... 13
ITEM 4. Security Ownership of Certain Beneficial Owners and Management.... 13
ITEM 5. Market for the Bank's Common Stock and Related Security Holder
Matters........................................................... 15
ITEM 6. Selected Financial Data........................................... 15
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 16
ITEM 8. Financial Statements and Supplementary Data....................... 23
ITEM 9. Directors and Principal Officers of the Bank...................... 51
ITEM 10. Management Compensation and Transactions.......................... 54
ITEM 11. Exhibits, Financial Statement Schedules and Reports on Form F-3... 59
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ITEM 1. BUSINESS
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General
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CAPITOLBANK SACRAMENTO was incorporated under the laws of the State of
California on December 31, 1975, and was licensed by the California State
Banking Department and commenced operations as a California state-chartered bank
on April 22, 1976. The Bank's securities consist of one class of common stock
having a par value of $1.5625 per share. As of December 31, 1993, there were
4,080,302 shares outstanding; these shares were held by 1,073 shareholders of
record. The Bank is an insured bank under the Federal Deposit Insurance Act, up
to applicable limits thereof. Like many state-chartered banks of its size in
California, it is not a member of the Federal Reserve System.
As of December 31, 1993, the Bank employed 77 full time equivalent (F.T.E.)
persons. The Bank is engaged in substantially all of the business operations
customarily conducted by independent commercial banks in California. These
operations include the acceptance of checking and savings deposits, and the
making of commercial, real estate, home improvement, consumer, and other
installment and term loans. Inventory and accounts receivable financing,
fixture and equipment financing, and short-term operating loans are also
provided.
Consumer loans include loans for automobiles, and other personal needs. The Bank
also offers a full service Trust department, safe deposit, night depository,
wire transfers, and other customary bank services to its customers.
The two areas in which the Bank has directed a substantial portion of its
lending activities are (i) commercial loans; and (ii) real estate loans
(including construction and land development loans). As of December 31, 1993,
these two categories accounted for approximately 28% and 68%, respectively, of
the Bank's loan portfolio.
The Bank offers trust services through its Trust and Investment Department. As
of December 31, 1993, the Trust and Investment Department had trust assets under
management totaling $178,018,000.
The Bank's deposits are attracted primarily from individuals and small and
medium-sized businesses. As of December 31, 1993, the Bank had a total of
approximately 1,437 accounts representing approximately $28.7 million in total
non-interest bearing demand deposits, with an average balance of approximately
$19,972 each; approximately 3,274 accounts representing approximately $82.6
million in money markets and total time and savings deposits for individuals and
corporations, with an average balance of approximately $25,229 each.
Approximately $8.3 million of the deposits held by the Bank, as of December 31,
1993, were in the form of certificates of deposit in denominations of $100,000
or greater.
The Bank holds no patents or licenses (other than licenses required by
appropriate bank regulatory agencies), franchises, or concessions.
For a complete statement of all subsidiaries of the Bank and the functions
performed by each, see Exhibit 9, "List of Subsidiaries of the Bank."
Section 751.3 of the California Financial Code expressly permits real estate
investment and development on the part of state-chartered commercial banks,
subject to certain limitations.
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The major limitation imposed by Section 751.3 is that the total of all
investments, loans, and guarantees by a commercial bank in real estate
development activities shall not exceed ten percent (10%) of the total assets of
the Bank. Section 751.3 was amended in 1984 to permit direct investment in real
estate projects by the Bank (rather than requiring that such investments be
accomplished through stock ownership in a subsidiary corporation). As amended,
Section 751.3 further required that a bank's general plan of real estate
investment and development activities shall be given prior approval of the
California Superintendent of Banks. The following are brief descriptions of
each continuing development project in which the Bank has a continuing
investment under the authority of Section 751.3:
(i) Capitol Commerce Development Corp. VI. This wholly owned subsidiary owns
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the following:
(a) Bank Certificates of deposit of -0-.
(b) Investment in real estate joint venture at -0-.
(ii) Capitol Commerce Development Corp. VII. This wholly owned subsidiary owns
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the following:
(a) Bank Certificates of deposit valued at $298,000.
(b) Investment in a real estate joint venture valued at -0-.
The Bank has a continuing investment under the authority of Section 772 as
follows:
Commerce Corporation. This wholly owned subsidiary owns the following:
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(a) Bank certificates of deposit valued at -0-.
The Bank has not expended a material amount of funds for research activities
relating to the development of new services or the improvement of existing
banking services during the last two fiscal years; however, the officers and
employees of the Bank are engaged continually in marketing activities, including
the evaluation and development of new services, to enable the Bank to retain and
improve its competitive position in its service area. The cost to the Bank for
these marketing activities cannot, however, be calculated with any degree of
certainty.
Other than real estate investment and development activities in projects as
permitted under Financial Code Section 751.3, the Bank has no present plans
regarding new lines of business requiring the investment of a material amount of
total assets.
Most of the Bank's business originates from within Sacramento County,
California. All banking services offered to customers are located at the main
office of the Bank. There are no branch operations, and the Bank does not have
any application pending to add a branch office. The Bank's business is not
seasonal. There has been no material effect upon the Bank's capital
expenditures, earnings, or competitive position as a result of federal, state or
local environmental regulation.
Competition
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The banking business in California generally, and in the market area served by
the Bank, is highly competitive. The Bank competes for loans and deposits
principally with other commercial banks, including many which are much larger
than the Bank, savings and loan associations, finance companies,
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thrift and loans, credit unions, mortgage companies, insurance companies, other
financial institutions, and money market funds. In recent years, money market
funds, which are not regulated by banking agencies, have played an increasingly
important role in the competition for funds. As a result of interest rate
deregulation in recent years, there is also increased competition among banks,
savings and loan associations, and credit unions for loans and deposits (see
"Effect of Economic Conditions, Governmental Policies, and Recent Legislation").
In addition, other entities (both governmental and private industry) seeking to
raise capital through the issuance and sale of debt or equity securities and
instruments provide competition for the Bank in the acquisition of deposits.
The Bank's primary service area consists of Sacramento and the surrounding areas
of Sacramento County, California. In recent years, United States banks
domiciled outside of California and foreign banks have established or purchased
facilities to compete for business in the market served by the Bank. Beginning
in 1991, state legislation allows non-California state chartered banks the
opportunity to establish branch offices in California if the laws of the state
in which such banks are chartered also allow branch banking by California-
chartered banks. Such reciprocity may result in the establishment of branch
offices in California by various major banking institutions, principally those
chartered under the laws of the State of New York. Management is unable to
predict the extent to which this might affect competition within the Bank's
primary service area, although it is anticipated such competition could be
significant. Many of the Bank's competitors have significantly greater assets,
capital resources and higher lending limits and offer certain services not
directly provided by the Bank, including international banking.
In order to compete with other financial institutions in its primary service
area, the Bank relies principally upon personal contact by its officers,
directors, employees and shareholders, specialized services, local promotional
activities, and advertising. For customers whose loan demands exceed the Bank's
lending limit, the Bank has attempted in the past, and will continue in the
future, to arrange for such loans on a participation basis with other financial
institutions. The Bank also assists customers requiring other services not
offered by the Bank in obtaining such services from its correspondent banks.
Supervision and Regulation
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As a California state-chartered bank whose accounts are insured by the FDIC, the
Bank is subject to regulation, supervision, and regular examination by the
California Superintendent of Banks ("the Superintendent") and by the FDIC. In
addition, while the Bank is not a member of the Federal Reserve System, it is
subject to regulation by the Board of Governors of the Federal Reserve System
("BGFRS"). The regulations of these agencies govern most aspects of the Bank's
business, including periodic reports, capital ratios, investments, loans,
certain check-clearing activities, branching, acquisitions, reserves against
deposits and numerous other areas.
Effect of Economic Conditions, Governmental Policies and Recent Legislation
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Banking is a business which depends on interest rate differentials. In general,
the differences between the interest paid by a bank on its deposits and its
other borrowings and the interest received by a bank on loans extended to its
customers and on securities held in its investment portfolio comprise the major
portion of a bank's earnings. Thus, the earnings and growth of the Bank are
subject to the influence of economic conditions generally, both domestic and
foreign. The nature and timing of changes in general economic conditions and
their impact on the Bank are subject to the nature and length of the condition
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which are difficult to predict. In addition to the influence of general
economic conditions, the earnings of the Bank are affected by the fiscal and
monetary policies of the federal government and its various agencies,
particularly the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). The Federal Reserve Board regulates reserve requirements of
depository institutions, the discount rate on borrowings by depository
institutions, and interest rates paid on the deposits of such institutions. The
Federal Reserve Board generally regulates the money supply and prevailing
interest rates through the purchase and sale of United States government
securities in the open market. The policies influence the growth of the bank
loans, investments, and deposits and also affect the interest rates charged on
loans and paid on deposits. These activities, correspondingly, have a material
effect on bank earnings. The nature and impact of future changes in monetary
policies are not predictable.
Capital Adequacy of the Bank
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The FDIC, BGFRS and Office of the Comptroller of the Currency ("OCC") recently
adopted regulations implementing risk-based capital guidelines for certain
state-chartered banks which are not members of the Federal Reserve System ("non-
member bank") and regulated by the FDIC such as the Bank, member banks regulated
by the BGFRS and national banks regulated by the OCC, and their parent bank
holding corporations and subsidiaries. Under the guidelines for banks, both
assets as reported on the balance sheet and certain off-balance sheet items are
assigned to risk categories. Each category has an assigned risk weight.
Capital ratios are calculated by dividing an institution's qualifying total
capital base by its risk-weighted assets. The guidelines characterize an
institution's capital as being "Tier 1" capital (consisting of common
shareholders' equity, noncumulative perpetual preferred stock, and minority
interests in consolidated subsidiaries) and "Tier 2" capital (consisting of
cumulative perpetual preferred stock, auction rate preferred stock, mandatory
convertible debt, the allowance for loan and lease losses, term subordinated
debt and limited-life preferred stock) to supplement Tier 1 capital.
Effective December 31, 1992, a state non-member bank such as the Bank and other
financial institutions subject to the guidelines were required to maintain a
total risk-based capital ratio of 8 percent (of which 4 percent should be in the
form of Tier 1 capital). Certain assets and commitments to extend credit
present less risk than others and will be assigned to lower risk weighted
categories requiring less capital allocation than the 8 percent ratio. For
example, cash and government securities are assigned to a 0 percent risk
weighted category; most home mortgage loans are assigned to a 50 percent risk-
weighted category requiring a 4 percent capital allocation; and commercial loans
are assigned to a 100 percent risk weighted category requiring an 8 percent
capital allocation. As of December 31, 1993, the Bank's total risk-based
capital ratio was approximately 12.48 percent.
At the time the FDIC, BGFRS and OCC announced the new risk-based capital
guidelines, such agencies announced plans to develop minimum leverage ratios for
bank holding companies and banks. Effective September 7, 1990, the BGFRS
adopted a minimum leverage ratio of 3 percent Tier 1 capital to total assets
(the "leverage ratio") based upon the definition of Tier 1 capital for year-end
1993. The leverage ratio is intended to limit the ability of banking
organizations to leverage their equity capital base by increasing assets and
liabilities without increasing capital proportionately. The leverage ratio
constitutes a minimum ratio for well-run banking organizations under BGFRS
standards and organizations experiencing or anticipating significant growth or
failing to meet such BGFRS standards will be required to maintain a minimum
leverage ratio ranging from 100 to 200 basis points in excess of the 3 percent
leverage ratio. The OCC adopted the leverage ratio effective December 31, 1990.
The FDIC adopted a minimum leverage ratio on February 28, 1991, which became
effective April 10, 1991. The FDIC
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proposal established (i) a 3 percent Tier 1 minimum capital leverage ratio for
highly-rated banks (those with a composite so-called CAMEL rating of 1 and not
experiencing or anticipating significant growth); and (ii) a 4 percent Tier 1
minimum capital leverage ratio for all other banks, as a supplement to the risk-
based capital guidelines.
It is not possible to predict precisely what effect the risk-based capital
guidelines and the minimum capital leverage ratio will have upon the Bank in the
future. However, a relatively large percentage of the Bank's assets are
assigned to less than 100 percent risk weighted categories and the leverage
limitations are no more restrictive than previously applicable capital
requirements. Consequently, the Bank does not presently expect compliance with
the risk-based capital guidelines and minimum capital leverage ratio to have a
materially adverse effect upon the business of the Bank.
Dividends
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The California Financial Code provides that a bank may not make a cash
distribution to its shareholders in excess of the lesser of the following: (i)
the bank's retained earnings, or (ii) the bank's net income for its last three
fiscal years, less the amount of any distributions made by the bank to its
shareholders during such a period. However, a bank, with the prior approval of
the Superintendent, may make a distribution to its shareholders of an amount not
to exceed the greater of (i) a bank's retained earnings, (ii) its net income for
its last fiscal year, or (iii) its net income for the current fiscal year. In
the event that the Superintendent determines that the shareholders' equity of a
bank is inadequate or that the making of a distribution by a bank would be
unsafe or unsound, the Superintendent may order a bank to refrain from making
such a proposed distribution. The FDIC may similarly restrict the payment of
dividends if such payment would be deemed unsafe or unsold or if after the
payment of such dividends, the Bank would be included in one of the
"undercapitalized" categories for capital adequacy purposes pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991.
The Bank has not paid cash or stock dividends in the past several years and has
no intention of doing so in the immediate foreseeable future. Whether or not
stock dividends or any cash dividends will be paid in the future will be
determined by the Board of Directors after consideration of various factors.
The Bank's profitability and regulatory capital ratios in addition to other
financial conditions will be key factors considered by the Board of Directors in
making such determinations regarding the payment of dividends by the Bank.
Recent Changes in the Law--FDICIA
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On December 19, 1991, the President signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The FDICIA substantially
revises banking regulations, certain aspects of the Federal Deposit Insurance
Act and establishes a framework for determination of capital adequacy of
financial institutions, among other matters. Under the FDICIA, financial
institutions are placed into five capital adequacy categories as follows: (1)
well capitalized, (2) adequately capitalized, (3) undercapitalized, (4)
significantly undercapitalized, and (5) critically undercapitalized. The FDICIA
authorized the BGFRS, OCC and FDIC to establish limits below which financial
institutions will be deemed critically undercapitalized, provided that such
limits cannot be less than two percent (2%) of the ratio of tangible equity to
total assets or sixty-five percent (65%) of the minimum leverage ratio
established by regulation. Financial institutions classified as
undercapitalized or below are subject to limitations including restrictions
related to (i) growth of assets, (ii) payment of interest on subordinated
indebtedness, (iii) capital
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distributions, and (iv) payment of management fees to a parent holding company.
The FDICIA requires the BGFRS, OCC and FDIC to initiate corrective action
regarding financial institutions which fail to meet minimum capital
requirements. Such action may result in orders to augment capital such as
through sale of voting stock, reduction in total assets, and restrictions
related to correspondent bank deposits. Critically undercapitalized financial
institutions may also be subject to appointment of a receiver or conservator
unless the financial institution submits an adequate capitalization plan.
The FDIC, BGFRS and OCC adopted regulations effective on December 19, 1992,
implementing a system of prompt corrective action pursuant to Section 38 of the
Federal Deposit Insurance Act and Section 131 of the FDICIA. The regulations
establish the five capital categories described above with the following
characteristics: (1) "Well capitalized"--consisting of institutions with a
total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive or
prompt corrective action directive; (2) "Adequately capitalized"--consisting of
institutions with a total risk-based capital ratio of 8% or greater, a Tier 1
risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater,
and the institution does not meet the definition of a "well capitalized"
institution; (3) "Undercapitalized"--consisting of institutions with a total
risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less
than 4%, or a leverage ratio of less than 4%; (4) "Significantly
undercapitalized"--consisting of institutions with a total risk-based capital
ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a
leverage ratio of less than 3%; (5) "Critically undercapitalized"--consisting of
an institution with a ratio of tangible equity to total assets that is equal to
or less than 2%.
The regulations establish procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are classified
in one of the three "undercapitalized" categories are subject to certain
mandatory and discretionary supervisory actions. Mandatory supervisory actions
include (1) increased monitoring and review by the appropriate federal banking
agency; (2) implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitation upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (l) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have
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been necessary) to bring the institution into compliance with all capital
standards applicable with respect to such institution as of the time it fails to
comply with the plan. If a depository institution fails to submit an acceptable
plan, it is treated as if it were "significantly undercapitalized." FDICIA also
restricts the solicitation and acceptance of and interest rates payable on
brokered deposits by insured depository institutions that are not "well
capitalized." An "undercapitalized" institution is not allowed to solicit
deposits by offering rates of interest that are significantly higher than the
prevailing rates of interest on insured deposits in the particular institution's
normal market areas or in the market areas in which such deposits would
otherwise be accepted.
Any institution which is classified as "critically undercapitalized" must be
placed in conservatorship or receivership within 90 days of such determination
unless it is also determined that some other course of action would better serve
the purposes of the regulations. Critically undercapitalized institutions are
also prohibited from making (but not accruing) any payment of principal or
interest on subordinated debt without the prior approval of the FDIC and the
FDIC must prohibit a critically undercapitalized institution from taking certain
other actions without its prior approval, including (1) entering into any
material transaction other than in the usual course of business, including
investment expansion, acquisition, sale of assets or other similar actions; (2)
extending credit for any highly leveraged transaction; (3) amending articles or
bylaws unless required to do so to comply with any law, regulation or order; (4)
making any material change in accounting methods; (5) engaging in certain
affiliate transactions; (6) paying excessive compensation or bonuses; and (7)
paying interest on new or renewed liabilities at rates which would increase the
weighted average costs of funds beyond prevailing rates in the institution's
normal market areas.
The capital ratio requirements for the "adequately capitalized" category
generally are the same as the existing minimum risk-based capital ratios
applicable to the Bank. It is not possible to predict what effect the new
prompt corrective action regulation will have upon the Bank or the banking
industry taken as a whole.
The Bank's total and Tier 1 risk-based capital ratios currently exceed the
regulatory minimum capital ratios and the Bank does not anticipate the
implementation of the FDICIA will have a material adverse effect upon the
results of operations of the Bank.
The strength of the Bank's capital position is evidenced by the table below:
December 31,
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1993 1992 1991
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Ratio Description
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Leverage Ratio
CapitolBank Sacramento 7.54% 7.05% 7.79%
Minimum requirement for "Well-
Capitalized institution" 5.00% 5.00%
Minimum regulatory requirement 4.00% 4.00% 4.00%
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December 31,
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1993 1992 1991
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Tier I Risk-Based Capital Ratio
CapitolBank Sacramento 11.65% 13.33% 12.64%
Minimum requirement for "Well-
Capitalized institution" 6.00% 6.00%
Minimum regulatory requirement 4.00% 4.00% 3.60%
Total Risk-Based Capital Ratio
CapitolBank Sacramento 12.90% 14.58% 13.97%
Minimum requirement for "Well-
Capitalized institution" 10.00% 10.00%
Minimum regulatory requirement 8.00% 8.00% 7.25%
Under the FDIC's risk-based capital regulations, balance sheet assets and
certain off-balance sheet commitments are weighted by risk and compared to
capital. The decrease in the Bank's Tier I and Total Risk-Based Capital ratios
at December 31, 1993 compared to 1992 was primarily due to an $11.9 million
(18.4%) increase in gross loans at December 31, 1993 as compared to 1992.
Accordingly, total risk-weighted assets increased $11.9 million (17.7%) from
$79.0 million at December 31, 1993 compared to $67.1 million at December 31,
1992.
The FDIC adopted a regulation pursuant to Section 302(a) of the FDICIA,
effective on November 2, 1992, amending its regulations on insurance assessments
to, among other matters, adopt a recapitalization schedule for the Bank
Insurance Fund and establish a risk-based insurance assessment system to replace
the uniform assessment rate system formerly applicable to insured financial
institution members of the Bank Insurance Fund. The regulation requires that
each insured institution be assigned to one of three capital groups and one of
three supervisory subgroups within each capital group, based upon financial data
reported by each institution in its Report of Income and Condition, as well as
supervisory evaluations by the institution's primary federal regulatory agency.
The three capital groups have the following characteristics: (1) "Well
capitalized"--consisting of institutions having a total risk-based capital
ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and
a Tier 1 leverage ratio of 5% or greater; (2) "Adequately capitalized"--
consisting of institutions that are not "well capitalized," but have a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of
4% or greater, and a Tier 1 leverage ratio of 4% or greater; and (3)
"Undercapitalized"--consisting of institutions that do not qualify as either
"well capitalized" or "adequately capitalized." The three supervisory subgroups
have the following characteristics: (A) Subgroup "A"--consisting of financially
sound institutions with only a few minor weaknesses; (B) Subgroup "B"--
consisting of institutions that demonstrate weaknesses which, if not corrected,
could result in significant deterioration of the institution and increased risk
of loss to the Bank Insurance Fund; and (C) Subgroup "C"--consisting of
institutions that pose a substantial probability of loss to the Bank Insurance
Fund unless effective corrective action is taken.
The annual assessment rate for each insured institution continued at the rate of
0.23% per $100 of deposits through year-end December 31, 1992. Commencing
January 1, 1993, the assessment rate is
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based upon a risk assessment schedule with rates ranging from 0.23% to 0.31% per
$100 of deposits utilizing the capital group and supervisory subgroup analysis
as follows:
Supervisory Subgroup
----------------------------------------
Capital Group A B C
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1 .23 .26 .29
2 .26 .29 .30
3 .29 .30 .31
On June 25, 1993, the FDIC adopted a permanent risk-based insurance assessment
system which retained the transitional system without substantial modification.
Based upon the new risk assessment rate system and the Bank's current level of
deposits, the Bank estimates that its annual non-interest expense for
assessments will not materially increase during 1994.
Under FDICIA, the federal banking agencies have adopted regulations which
require institutions to establish and maintain comprehensive written real estate
policies which address certain lending considerations, including loan-to-value
limits, loan administrative policies, portfolio diversification standards, and
documentation, approval and reporting requirements. FDICIA further generally
prohibits an insured state bank from engaging as principal in any activity that
is impermissible for a national bank, absent FDIC determination that the
activity would not pose a significant risk to the Bank Insurance Fund, and that
the bank is, and will continue to be, within applicable capital standards.
Similar restrictions apply to subsidiaries of insured state banks. The Bank
does not currently intend to engage in any activities which would be restricted
or prohibited under FDICIA.
As required by FDICIA, the federal banking agencies have solicited comments on a
proposed method of incorporating an interest rate risk component into the
current risk-based capital guidelines, with the goal of ensuring that
institutions with high levels of interest rate risk have sufficient capital to
cover their exposures. Interest rate risk is the risk that changes in market
interest rates might adversely affect a bank's financial condition. Under the
proposal, interest rate risk exposures would be quantified by weighing assets,
liabilities and off-balance sheet items by risk factors which approximate
sensitivity to interest rate fluctuations. Institutions identified as having an
interest rate risk exposure greater than a defined threshold would be required
to allocate additional capital to support this higher risk. Higher individual
capital allocations could be required by the bank regulators based on
supervisory concerns.
The federal banking agencies have also asked for comments on certain safety and
soundness standards required to be prescribed under FDICIA, in order to assist
such agencies in the development of proposed rules. Such standards would apply
to insured depository institutions and depository institution holding companies
in a number of areas, including (a) operational and managerial standards, (b)
asset quality, earnings and stock valuation, and (c) employee compensation.
FIRREA. The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") was enacted on August 9, 1989. FIRREA provided for a major
restructuring of the federal regulatory framework applicable to depository
institutions and their parent bank holding companies. Among other things, and
subject to applicable phase-in provisions, FIRREA contains provisions which (i)
established two separate financial industry insurance funds, both administered
by the FDIC--the Bank Insurance
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Fund and the Savings Association Insurance Fund; (ii) abolished the Federal Home
Loan Bank Board and Federal Savings and Loan Insurance Corporation and created
the Office of Thrift Supervision as an office of the Treasury Department, with
responsibility for examination and supervision of the savings and loan industry;
(iii) increased the insurance premiums paid by FDIC-insured institutions; (iv)
permitted bank holding companies to acquire healthy savings and loan
associations; (v) expanded, enhanced and clarified federal banking agencies'
enforcement authority over the operations of all insured depository institutions
and increased the civil and criminal penalties that may be imposed in connection
with violations of laws and regulations; (vi) curtailed investments and certain
other activities of state-chartered savings and loan associations; and (vii)
increased the capital requirements of savings and loan associations. At the same
time, the FDIC was given enhanced power over both savings institutions and banks
with regard to deposit insurance, conservatorships and receiverships.
The deposits of the Bank are insured by the Bank Insurance Fund. FIRREA provides
that the Bank Insurance Fund and the Savings Association Insurance Fund are to
be maintained separately and restricts proposed conversions from one fund to
another.
FIRREA's civil enforcement provisions apply to any "institution-affiliated
party," which includes not only directors, officers, employees, agents and
persons participating in the conduct of the affairs of a financial institution,
but also attorneys, appraisers, and accountants, as well as other independent
contractors, who participate in a law or regulation violation, any breach of
fiduciary duty or any unsafe or unsound practice that causes (or is likely to
cause) more than a minimum financial loss to, or a significant adverse effect
on, a financial institution. FIRREA also prohibits an insured depository
institution from entering into a contract with any person to provide goods,
products or services to the financial institution that would jeopardize the
institution's safety or soundness.
FIRREA details the powers that can be exercised by the FDIC as conservator or
receiver. The powers are designed to allow the FDIC to take the actions needed
to resolve the problems posed by a financial institution in default. For
example, when acting as a conservator or receiver, the FDIC is expressly given
the power to operate the institution, conduct all of the institution's business,
and perform all of the functions of the institution in its own name.
FIRREA also permits access for commercial banks to Federal Home Loan Bank
advances, alters the former procedures for obtaining advances and mandates the
use of certain Federal Home Loan Bank funds for community investment and
affordable housing programs.
California Law. In 1988, Proposition 103 was adopted by California voters.
- - --------------
Proposition 103 authorized California state-chartered banks to engage in
insurance agency and insurance brokerage activities. As a result of Proposition
103, the Superintendent, in conjunction with the California Department of
Insurance, adopted procedures for permitting state-chartered banks to apply for
licenses to engage in insurance activities. The Bank has not sought a license
to engage in such insurance activities to date.
California law authorizes California banks (a) to provide real estate appraisal
services, management consulting and advice services, electronic data processing
services, and (b) to acquire and hold voting stock of one or more corporations,
the activities of which are primarily investment in real estate. Additionally,
California state-chartered banks and savings and loan associations are
authorized to organize, sponsor or operate or render investment advice to an
investment company or to underwrite, distribute or sell securities of any
investment company which has qualified to sell securities in California.
-10-
Regulations of the Superintendent adopted to implement the provisions of Section
772 of the California Financial Code authorize California state-chartered banks
to invest in the capital stock, obligations or other securities of corporations
not acting as insurance companies, insurance agents or insurance brokers. The
regulations delineate the type of investments which may be made, establish
procedures for administrative approval of certain investments and for the
examination of a corporation which a bank is deemed to control as a result of an
investment pursuant to Section 772, and include rules relating to pre-1983
investments.
Competitive Equality Banking Act. In 1987, the Competitive Equality Banking Act
- - --------------------------------
was enacted, which affected almost all sectors of the financial services
industry. This legislation included among other things: (i) the imposition of
certain restrictions on transactions between banks and their affiliates; (ii)
limitations on the time banks may hold certain deposits prior to making the
deposited funds available for withdrawal and provision for the payment of
interest on such funds deposited in interest-bearing accounts; (iii) a
requirement that any adjustable rate mortgage loan originated after December 8,
1989 and secured by a lien on a one-to-four family dwelling include a limitation
on the maximum rate which interest may accrue on the principal balance during
the term of such loan; (iv) the expansion of the FDIC's authority in arranging
supervisory interstate acquisitions and acquisitions of failing banks; (v) the
renewal of emergency acquisition authorities; (vi) the exemption of assessment
income of federal banking agencies from budget restrictions imposed by the
Office of Management and Budget and from the budget balancing requirements of
the Gramm-Rudman-Hollings Act; and (vii) the application of the Glass-Steagall
Act to state-chartered banks, prohibiting affiliations with companies
principally engaged in securities activities.
Interstate Banking Legislation. In 1986 and 1987, legislation was enacted in
- - ------------------------------
California permitting out-of-state bank holding companies to acquire banks in
California after July 1987, if the holding company conducted its principal
operations in Alaska, Arizona, Colorado, Hawaii, Idaho, Nevada, New Mexico,
Oregon, Texas, Utah or Washington. Generally, such acquisitions are subject to
the approval of the BGFRS and the Superintendent and require the existence of
reciprocal interstate legislation in the state in which the operations of the
bank holding company are conducted. The interstate banking authorization became
applicable to other out-of-state bank holding companies on January 1, 1991.
The United States Congress has periodically considered legislation which could
result in interstate banking and further deregulation of banks and other
financial institutions. Such legislation could result in the relaxation or
elimination of geographic restrictions on banks and bank holding companies and
could place the Bank in more direct competition with other financial
institutions, including mutual funds, securities brokerage firms, investment
banking firms and other entities. The effect of this legislation on the Bank
cannot be determined at this time.
Accounting Pronouncements
- - -------------------------
In December 1991, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments ("SFAS 107"). SFAS 107 requires entities such as
the Bank to disclose, either in the body of their financial statements or in the
accompanying notes, the "fair value" of financial instruments for which it is
"practicable to estimate that value." Most deposit and loan instruments issued
by financial institutions are subject to SFAS 107, and its effect on the Bank is
to require financial statements disclosure, in addition to their carrying value,
of the fair value of most of the assets and liabilities of the Bank. Excepted
from the
-11-
disclosure requirement, among other types of instruments, are most employee
benefit plan obligations, insurance contracts, leases, warranties, minority and
equity interests in consolidated subsidiaries, and other investments accounted
for under the equity method. The Bank has included the disclosure required by
SFAS 107 in footnote 14 to its financial statements for the year ended December
31, 1993, copies of which are included in this report. The disclosure
requirements contained in SFAS 107 could adversely affect the market price of
the Bank's Common Stock and its ability to raise funds in the financial markets.
In February 1992, FASB issued Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes ("SFAS 109"), which established new financial
accounting and reporting standards for the effects of income taxes that result
from an enterprise's activities during the current and preceding years. The new
standard requires an asset and liability approach for financial accounting and
reporting for income taxes, replacing the income statement approach inherent in
the current income tax accounting standard. In 1993, the Bank adopted SFAS 109.
Adoption of the provisions of SFAS 109 had no material impact on the Bank's
financial position or results of operations.
In November 1992, FASB issued Statement of Financial Accounting Standards No.
112, Accounting for Postemployment Benefits ("SFAS 112"), which requires the
accrual of postemployment benefits, such as the continuation of health care
benefits and life insurance coverage. SFAS 112 is effective for fiscal years
beginning after December 15, 1993. The Bank does not currently offer
postemployment benefits to its employees and therefore the implementation of
SFAS 112 is not applicable to the Bank.
In May 1993, FASB issued Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan. This statement, which becomes
effective in the first quarter of 1995, requires the Bank to measure impaired
loans based upon the present value of expected future cash flows discounted at
the loan's effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent. A loan is
impaired when, based upon current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The Bank has not completed the analysis necessary
to determine the impact, if any, of this statement on its financial position or
results of operations.
In May 1993, FASB issued Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities. This
statement, which becomes effective in the first quarter of 1994, requires the
Bank to classify investment securities into one of three categories at
acquisition: held-to-maturity, trading or available-for-sale. Investments in
debt securities shall be classified as held-to-maturity and measured at
amortized cost only if the Bank has the positive intent and ability to hold such
securities to maturity. All other investments in debt and equity securities
that have readily determinable fair values shall be classified as either trading
securities, which are bought and held principally for the purpose of selling
them in the near term and are carried at market value with a corresponding
recognition of the unrealized holding gain or loss in results of operations, or
as available-for-sale securities, which are all other securities and are carried
at market value with a corresponding recognition of the unrealized holding gain
or loss as a net amount in a separate component of stockholders' equity until
realized. The Bank adopted this statement as of January 1, 1994. If the
provisions of this statement would have been applied as of December 31, 1993,
stockholders' equity would have been increased by approximately $220,000.
-12-
ITEM 2. PROPERTIES
----------
The Bank currently maintains one banking office. This facility is located at
the Capitol Bank Center, 300 Capitol Mall, Sacramento, California.
Commencing February 1, 1985, the Bank entered into a lease with Capitol Mall
Venture to house the Bank's main office. Under this lease, as substantially
amended, the Bank obtained 32,809 net rentable square feet at a monthly lease
cost, commencing November 1, 1985, of $83,000, subject to annual adjustments and
certain property maintenance costs. The lease is for an initial term of fifteen
years with options to extend the lease for a total of fifteen additional years.
Under the terms of the lease, the Bank occupied a portion of the first, second
and third floors of the eighteen story Capitol Bank Center. The Bank has sublet
the second and third floors of the Bank. During 1993 the Bank collected
$190,054 in rental payments pursuant to sublease agreements with unrelated third
parties.
On March 1, 1991, the Bank leased auxiliary administrative office space in an
office building located at 3410 Industrial Boulevard, West Sacramento,
California. The Bank leases 7,200 square feet of space for its Finance, Trust
Operations, Data Processing, Human Resources, Note and Courier Service
Departments under a lease agreement which terminates September 30, 1996. The
Bank received six months free of rent. The base rent is $5,063.10, subject to
adjustments of four percent (4%) per annum.
ITEM 3. LEGAL MATTERS
-------------
The Bank is involved in litigation of a routine nature which is being handled
and defended in the ordinary course of the Bank's business. In the opinion of
management, the resolution of this litigation will have no material impact on
the Bank's financial position.
ITEM 4. SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth certain information regarding shareholders who
own beneficially more than five percent (5%) of the outstanding common stock of
the Bank (the only class outstanding) as of December 31, 1993.
Amount and Nature Percent of
Name and Address of Beneficial Outstanding
of Beneficial Owner Shares Shares
- - -------------------------------------------------------------
J. Al Wickland, Jr. 839,254/(1)/ 20.6%
3640 American River Drive
Sacramento, CA 95853
__________
(1) Mr. Wickland, Chairman of the Board, holds sole voting and investment power
to all of his shares.
-13-
The following table sets forth certain information with regard to the ownership,
as of December 31, 1993, of the common stock of the Bank (the only class
outstanding) by all directors individually, and all directors and principal
officers of the Bank, as a group.
Common Stock
Position(s) Beneficially Owned
Name Age Held on 12/31/93(1)
- - --------------------------------------------------------------------------------
Louis G. Fifer 45 Director 500 .01%
Thomas J. Hammer, Jr. 61 Director 1,500 .03%
Thomas T. Jenkins 50 Director 1,000 .02%
Thomas E. King(2) 50 Director 20,801 0.51%
Carolyn G. Reid 55 Director 3,000 .07%
J. Al Wickland, Jr. 73 Chairman of
the Board 839,254 20.50%
John A. Wickland, III 49 Director 180,705 4.40%
All directors and executive
officers of the Bank as a
group (10 persons)(3)(4) 1,052,166 25.79%
- - ----------
(1) Unless otherwise indicated, each of the above Directors holds either sole
voting and investment power as to all shares owned or shares voting and
investment power with his spouse as to the shares owned.
(2) Includes 20,401 shares which may be acquired under stock options
exercisable within 60 days of December 31, 1993. Mr. King will cease being
the President and Chief Executive Officer and a Director of the Bank,
effective April 15, 1994. For information regarding Mr. King's cessation
of employment, see "Item 10."
(3) As used in this proxy statement, the term "officer" or "principal officer"
means a Chairman of the Board of Directors, Vice Chairman of the Board,
President, Executive Vice Presidents, Senior Vice Presidents, Corporate
Secretary, Vice President, and any other person who participates in major
policy-making functions of the Bank.
(4) Includes 24,801 shares which may be acquired under stock options
exercisable within 60 days of December 31, 1993.
-14-
ITEM 5. MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER
--------------------------------------------------------------
MATTERS
-------
During 1993, the Bank's common stock was not listed on any stock exchange or on
NASDAQ. The primary market makers for the Bank's common stock are Kidder
Peabody & Co., Inc and Hoefer & Arnett, Inc. There were eighteen trades which
occurred in 1993, ranging in price from a high of $2.25 to a low of $1.50.
There were forty trades which occurred in 1992. The price ranged from a high of
$2.50 to a low of $2.00.
During 1993 and 1992, the Bank declared no dividends on its stock. Under
California banking laws, it may not pay cash dividends without prior approval
until such time as the deficit in undivided profits is restored and there are
sufficient earnings to cover the dividend.
As of December 31, 1993, there were approximately 1,073 holders of the Bank's
common stock.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Years Ended December 31,
1993 1992 1991 1990 1989
- - -----------------------------------------------------------------------------------------------------------
Total interest income $ 8,950,842 $ 9,125,106 $ 12,488,049 $ 13,289,560 $ 11,362,711
Total interest expense 2,671,141 3,281,012 5,337,012 6,453,069 5,609,110
------------ ------------ ------------ ------------ ------------
Net interest income 6,279,701 5,844,094 7,151,037 6,836,491 5,753,601
Provision for loan losses 436,000 519,778 1,066,823 525,000 250,000
------------ ------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 5,843,701 5,324,316 6,084,214 6,311,491 5,503,601
------------ ------------ ------------ ------------ ------------
Total non-interest income 1,213,053 1,290,233 1,670,837 2,120,735 1,221,774
Total non-interest expense 6,663,133 8,478,118 7,473,238 6,692,883 5,743,842
------------ ------------ ------------ ------------ ------------
Income (loss) before provision
for income taxes and extra-
ordinary item 393,621 (1,863,569) 281,813 1,739,343 981,533
Provision for income taxes 78,500 -- 114,453 713,000 399,500
------------ ------------ ------------ ------------ ------------
Income (loss) before extra-
ordinary item 315,121 (1,863,569) 167,360 1,026,343 582,033
Extraordinary item, tax benefit of
net operating loss carryforward -- -- 44,000 630,000 374,000
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 315,121 $(1,863,569) $ 211,360 $ 1,656,343 $ 956,033
============ ============ ============ ============ ============
-15-
Years Ended December 31,
1993 1992 1991 1990 1989
- - -----------------------------------------------------------------------------------------------------------
Income (loss) before extra-
ordinary item $ 0.08 $ (0.46) $ 0.04 $ 0.25 $ 0.14
Extraordinary item -- -- 0.01 0.16 0.09
------------ ------------ ------------ ------------ ------------
Net income (loss) per share $ 0.08 $ (0.46) $ 0.05 $ 0.41 $ 0.23
============ ============ ============ ============ ============
Total Assets $123,393,109 $119,945,633 $148,454,333 $150,020,495 $129,551,463
============ ============ ============ ============ ============
Long-term Obligations -- -- -- -- --
============ ============ ============ ============ ============
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
1. Overview
Management's discussion and analysis of the financial condition and results of
operation is intended to provide a better understanding of significant changes
in the trends of CapitolBank Sacramento. The discussion and analysis should be
read in conjunction with the consolidated financial statements and notes,
thereto, along with other financial information included in this report.
CapitolBank Sacramento was incorporated under the laws of the State of
California on December 31, 1975, and was licensed by the California State
Banking Department and commenced operations as a California state-chartered bank
on April 22, 1976. The Bank's securities consist of one class of common stock
having a par value of $1.5625 per share. As of December 31, 1993, there were
4,080,302 shares outstanding; these shares were held by 1,073 shareholders. The
Bank is an insured bank under the Federal Deposit Insurance Act, up to
applicable limits thereof. Like many state-chartered banks of its size in
California, it is not a member of the Federal Reserve System.
The Bank's net income was $315,121 for the year ended December 31, 1993,
representing earnings per share of $0.08. This represents a dramatic
improvement over the 1992 loss of $ 1,863,569 ($0.46 loss per share) and a 49.1%
increase from 1991 earnings of $211,360 ($0.05 per share). The increase in net
income during 1993 when compared to 1992 was principally due to improvements in
the quality and size of the Bank's loan portfolio, an improvement in the net
interest margin due primarily to reduced interest expense while maintaining loan
interest rates constant and reductions in Other Real Estate Owned, legal fees
and other expenses. 1992 results were also negatively impacted by a one time
charge to income of $1,060,000 resulting from the divestiture of a real estate
joint venture, undertaken in 1990 by Capitol Commerce Development Company VI, a
wholly owned subsidiary of the Bank.
Return on average equity for the years 1993, 1992 and 1991 was 3.57%, (21.65%)
and 1.95%, respectively. The Bank's risk-based capital ratio at December 31,
1993 was 12.90% compared to 14.58% at December 31, 1992. These ratios are in
excess of the Federal Reserve Board's requirement of 8.00%.
-16-
2. Net Interest Income
Net interest income, the primary component of bank revenue, is the difference
between interest and loan fees earned by the Bank on its earning assets and the
interest expense paid on its interest-bearing deposit liabilities and other
borrowed funds. Net interest income, expressed as a percentage of average total
earning assets, is referred to as "net interest margin."
1993 Compared to 1992
- - ---------------------
The Bank's net interest income of $6,279,701 increased $435,607 (7.5%) when
compared to 1992. This increase resulted from the combination of a $3,936,000
(6.0%) increase in average loans, a $5,174,000 (24.1%) reduction in average time
deposits and a 15.3% decrease in the average cost of funds. The decrease in
time deposits is consistent with management's desire to shift its deposit mix
from time deposits to interest-bearing transaction accounts. The decrease in
the average cost of funds resulted from the shift in the deposit mix combined
with a general decline in deposit interest rates.
1992 Compared to 1991
- - ---------------------
During 1992, net interest income declined 18.28% to $5,844,094 from $7,151,037
in 1991. This was due to a combination of decreasing interest rates and a
declining loan portfolio. The average prime rate for the year ended December
31, 1992 was 6.29% compared to 8.46% for the year ended December 31, 1991.
These two factors contributed to the decrease in the yield on interest-earning
assets of 10.08% in 1991 to 8.17% in 1992.
The rate paid on interest-bearing liabilities decreased from 5.53% in 1991 to
3.67% in 1992. This decrease is due primarily to repricing of deposits
periodically throughout the year in response to decreases in the Bank's prime
lending rate and market conditions affecting the financial industry.
3. Deposits
The Bank's efforts to move towards "relationship" banking is evidenced by a
decreasing concentration in time deposit accounts and a shift to interest-
bearing transaction accounts. The following table sets forth information
regarding the trends in the Bank's average deposits for 1993, 1992 and 1991:
Deposits Average for the Years Ended December 31,
1993 1992 1991
-------------------------------------------------------------
(Dollar amounts in Thousands) Amount % Amount % Amount %
-------- ------- ---------- --------- --------- --------
Demand deposits $ 26,889 24.20% $ 25,444 22.35% $ 27,685 22.69%
Interest-bearing transaction
accounts 63,781 57.39% 62,670 55.06% 60,234 49.37%
Savings accounts 4,133 3.72% 4,216 3.70% 2,196 1.80%
-------- ------ -------- ------ -------- ------
94,803 85.31% 92,330 81.11% 90,115 73.86%
Time accounts 16,324 14.69% 21,498 18.89% 31,897 26.14%
-------- ------ -------- ------ -------- ------
Total deposit accounts $111,127 100.00% $113,828 100.00% $122,012 100.00%
======== ====== ======== ====== ======== ======
-17-
4. Loans
The following table sets forth information regarding trends in the Bank's
average loans for 1993, 1992 and 1991:
Loans Average for the Years Ended December 31,
1993 1992 1991
---------------------------------------------------------------------
(Dollar amounts in Thousands) Amount % Amount % Amount %
---------- ------- ---------- ------- ---------- -------
Real estate construction $ 16,010 22.89% $ 20,578 31.17% $ 24,247 32.06%
Real estate mortgages 29,837 42.65% 21,902 33.18% 23,637 31.25%
Commercial and agricultural 20,705 29.60% 19,139 28.99% 22,245 29.41%
Individual consumer 2,562 3.66% 3,553 5.38% 4,510 5.96%
Other 840 1.20% 846 1.28% 1,000 1.32%
---------- ------- ---------- ------- ----------- -------
$ 69,954 100.00% $ 66,018 100.00% $ 75,638 100.00%
========== ======= ========== ======= =========== =======
Ninety-one percent of the Bank's loans have floating rates of interest,
generally indexed to the Bank's reference rate or to another market rate
indicator. The remaining nine percent of the loans are fixed rate loans with
the following maturity distribution: due in one year or less--2%, due after one
year to five years--3% and due after five years--4%.
5. Loan to Deposit Ratio
The Bank's average loan to deposit ratio was 63% during 1993 compared to 58%
during 1992 and 62% during 1991. This ratio represents the amount of each
deposit dollar that is invested in loans, expressed as a percent. Although the
loan and deposit functions operate separately, they are managed continuously
during the year to ensure that this ratio remains within acceptable industry
standards, and more importantly, consistent with the specific objectives
established by the Bank.
6. Allowance for Loan Losses
The purpose of the allowance for loan losses is to provide a reserve sufficient
to cover loan losses which can reasonably be anticipated. To determine the
level of reserves needed, the Bank reviews, on a monthly basis, the quality of
its loans, the general economic conditions, historical loan loss experience and
other pertinent data.
-18-
At December 31, 1993, the allowance for loan losses totaled $1,405,784 or 1.83%
of gross loans. This compares to $1,170,174 or 1.80% of total loans at December
31, 1992. The activity in the allowance for loan losses is summarized as
follows:
--------------------------------------------
1993 1992 1991
--------------------------------------------
Balance, beginning of year $ 1,170,174 $ 1,122,597 $ 1,161,245
Provision for loan losses 436,000 519,778 1,066,823
Recoveries 160,959 207,617 44,209
Loans charged off (361,394) (679,818) (1,149,680)
------------- ------------ ------------
Balance, end of year $ 1,405,784 $ 1,170,174 $ 1,122,597
============= ============ ============
As of December 31, 1993 and 1992, loans totaling approximately $138,000 and
$2,449,000, respectively, were on non-accrual status.
The aggregate effect of non-accrual loans was to reduce interest income by
approximately $87,000, $159,000, and $248,000 for the years ended December 31,
1993, 1992 and 1991, respectively.
7. Non-Interest Income
Non-interest income is composed of service charges on deposit accounts, security
gains, real estate joint venture revenue, trust fees and commissions, gains
resulting from the disposition of other real estate owned and other income.
Non-interest income was $1,213,053 in 1993 compared to $1,290,233 in 1992 and
$1,670,837 in 1991.
Trust services revenue decreased 2.3% during 1993 as compared to 1992 and
increased 8.8% during 1992 as compared to 1991. During the first quarter of
1992, a major trust account was terminated. The 2.3% decrease in trust revenue
during 1993 as compared to 1992 was principally due to the loss of that account.
Service charges on deposit accounts decreased $94,595 (42.4%) during 1993 as
compared to 1992. The decrease is attributable to the loss of one account
relationship. The Bank's direct costs associated with the administration of
this account were reduced by approximately $80,000, thereby resulting in an
immaterial impact on the overall results of operations.
During 1993, the Bank reported gains of $49,197 on the sale of other real estate
owned. This was the result of the Bank selling other real estate owned with a
carrying value of $893,000.
Consistent with management's commitment to emphasize core banking revenue
sources, during 1993, the Bank completely divested itself of all real estate
joint venture activity. Gross income from real estate development projects
totaled $0, $28,000 and $130,797 during the years ended December 31, 1993, 1992
and 1991, respectively.
-19-
The following schedule reflects the components of non-interest income for the
years 1993, 1992 and 1991:
----------------------------------------------------------
1993 1992 1991
----------------------------------------------------------
Amount % Amount % Amount %
----------------------------------------------------------
Non-interest income:
Trust fees and commissions $ 689,221 56.8% $ 705,291 54.7% $ 648,418 38.8%
Gains on securities
transactions, net 282,729 23.3% 268,619 20.8% 448,694 26.9%
Service charges on deposit
accounts 128,711 10.6% 223,306 17.3% 227,427 13.6%
Gains on sale of other real estate 49,197 4.1% 16,960 1.3% 149,195 8.9%
Real estate development revenue -- -- 28,000 2.2% 130,797 7.8%
Other income 63,195 5.2% 48,057 3.7% 66,306 4.0%
---------- ----- ---------- ----- ---------- -----
$1,213,053 100.0% $1,290,233 100.0% $1,670,837 100.0%
========== ===== ========== ===== ========== =====
8. Non-Interest Expense
Non-interest expense includes salaries and benefits, occupancy costs, equipment
and other expenses. These costs represent not only the cost of ongoing
operations but, to some extent, an investment toward future growth and
profitability. The following table summarizes the significant components of
non-interest expense for 1993, 1992 and 1991:
-----------------------------------------
1993 1992 1991
-----------------------------------------
Salaries and benefits $ 3,379,284 $ 3,359,829 $ 3,186,070
Occupancy 1,402,170 1,439,257 1,371,807
Equipment 396,701 417,270 391,793
Divestiture of joint venture investment -- 1,060,000 --
Provision for loss on other real estate 61,721 466,000 --
Special shareholder meeting -- -- 712,822
Professional services 148,768 233,619 276,990
All other non-interest expenses 1,274,489 1,502,143 1,533,756
------------ ------------ ------------
$ 6,663,133 $ 8,478,118 $ 7,473,238
============ ============ ============
Non-interest expense decreased $1,814,985 (21.4%) to $6,663,133 in 1993 from
$8,478,118 in 1992. These expenses increased $1,004,880 (13.5%) in 1992 as
compared to 1991.
Salaries and benefits increased $19,455 (.58%) to $3,379,284 during 1993 as
compared to $3,359,829 in 1992. Salaries and benefits totaled $3,186,070 during
1991. The nominal increase during 1993 is due to the effects of the 1993 salary
and hiring freeze. The increase in 1992 is due, in part, to the hiring of
additional senior level personnel.
Occupancy costs decreased $37,087 (2.6%) to $1,402,170 during 1993 as compared
to $1,439,257 in 1992 and $1,371,807 in 1991. The decrease in 1993 is due to a
reduction in general operating costs on the Bank building. For the years ended
December 31, 1993, 1992 and 1991, the Bank collected
-20-
$190,054, $188,943 and $183,331 in rental payments pursuant to sublease
agreements with unrelated third parties. In accordance with the terms of the
lease on the Bank building, the rent is scheduled to increase April 1, 1994
based upon the three year increase in the Consumer Price Index since February,
1991.
Occupancy costs on the Bank's main banking facility continue to have a negative
effect on earnings. The current monthly lease rate of $3.65 per square foot
significantly exceeds current market rates. The lease was initiated in 1985 and
includes escalation clauses. In management's opinion, the lease rate is one of
the highest of any community bank in the United States. To date, the Bank's
landlord has been unwilling to renegotiate this lease. Management's strategy is
to mitigate the negative effects of this lease through prudent growth.
Equipment expense decreased by $20,569 (4.9%) in 1993 as compared to an increase
of $25,477 in 1992. The increase in 1992 is attributable to an expansion of the
Bank's computer system, including the addition of "CapitolAccess," a product
which enables customers to access their accounts via their own personal
computer.
During 1992, the Bank divested itself from a real estate joint venture which
resulted in a charge to other non-interest expense totaling $1,060,000.
The provision for real estate losses of $61,721 in 1993 and $466,000 in 1992
reflects the decline in the fair market value of real estate acquired through
foreclosure. Fair value is generally determined based upon periodic independent
third party appraisals.
During 1993, the Bank reduced the level of service provided by outside
consultants which resulted in an $84,851 (36.3%) reduction in professional
services.
All other non-interest expenses decreased $227,654 (15.2%) to $1,274,489 during
1993 as compared to $1,502,143 in 1992 and $1,533,756 in 1991. A portion of the
decrease in 1993 as compared to 1992 is attributable to an $80,000 reduction in
expenses associated with the administration of one customer account that was
terminated during 1992. The balance of the reductions are the result of cost
control efforts initiated during mid 1992.
9. Income Taxes
Effective January 1, 1993, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). The cumulative effect of that change in the method of accounting for
income taxes was not material. Prior to January 1, 1993, the Bank determined
income tax expense under the provisions of Accounting Principles Board opinion
No. 11. "Accounting for Income Taxes." For further information regarding the
adoption of SFAS 109, refer to notes 1 and 7 to the consolidated financial
statements.
10. Investments to Deposit Ratio
The investments to deposit ratio is the portion of each deposit dollar directed
to investment securities. During 1993 average investments decreased from
$45,743,000 to $40,676,000. The average investments
-21-
to deposit ratio was 36.6%, 40.2% and 39.5% at December 31, 1993, 1992 and
1991, respectively. The decrease in investments provided the funding for the
Bank's 1993 loan growth.
11. Liquidity
Liquidity is the ability to meet present and future financial obligations either
through the sale or maturity of existing assets or by the acquisition of funds
through liability management. The primary sources of liquidity for CapitolBank
Sacramento include: cash and due from banks, marketable securities, time
deposits with other banks and federal funds sold. At December 31, 1993, these
assets were $46,016,404 (37.3%) of total assets, compared to $52,201,536 (43.5%)
and $74,429,247 (50.1%) at December 31, 1992 and 1991, respectively.
The Bank's management monitors the liquidity position continuously and projects
it based on the trends of loans and deposits. Management attempts to adjust
maturity distribution and interest rate sensitivity in response to these
changes.
The Bank has available a $3 million short-term Federal funds borrowing line with
a major bank to meet short-term, liquidity requirements should the need arise.
12. Regulatory Capital
Effective December 31, 1990, the Federal Deposit Insurance Corporation (the
FDIC) specified minimum capital ratios for banks using both risk-weighted assets
(risk-based capital ratio) and average assets (leverage ratio). Regulatory
accounting principles, which differ from generally accepted accounting
principles, are applied in the calculation of these ratios.
Total risk-based capital consists of the following two elements:
Tier I - Common stock, paid-in-surplus, retained earnings, less certain
intangible assets such as goodwill and core deposit premiums,
plus;
Tier II - Allowance for loan losses, limited to 1.25% of risk-weighted
assets in 1993 and 1992 and 1.5% in 1991.
In addition, on December 19, 1992, certain additional capital guidelines were
defined under the Federal Deposit Insurance Corporation Improvement Act. These
guidelines included minimum capital ratios for banks considered to be well
capitalized.
-22-
The Bank's capital ratios and the respective minimum regulatory requirements at
December 31, 1993, 1992 and 1991 were as follows:
--------------------------
1993 1992 1991
--------------------------
Ratio Description
- - -----------------
Leverage Ratio
CapitolBank Sacramento 7.54% 7.05% 7.79%
Minimum requirement for "Well-
Capitalized" institution 5.00% 5.00%
Minimum regulatory requirement 4.00% 4.00% 4.00%
Tier I Risk-Based Capital Ratio
CapitolBank Sacramento 11.65% 13.33% 12.64%
Minimum requirement for "Well-
Capitalized" institution 6.00% 6.00%
Minimum regulatory requirement 4.00% 4.00% 3.60%
Total Risk-Based Capital Ratio
CapitolBank Sacramento 12.90% 14.58% 13.97%
Minimum requirement for "Well-
Capitalized" institution 10.00% 10.00%
Minimum regulatory requirement 8.00% 8.00% 7.25%
Under the FDIC's risk-based capital regulations, balance sheet assets and
certain off-balance sheet commitments are weighted by risk and compared to
capital. The decrease in the Bank's Tier I and Total Risk-Based Capital ratios
at December 31, 1993 as compared to 1992 was primarily due to an $11.9 million
(18.4%) increase in gross loans at December 31, 1993 as compared to 1992.
Accordingly, total risk-weighted assets increased $11.9 million (17.7%) from
$79.0 million at December 31, 1993 compared to $67.1 million at December 31,
1992.
-23-
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
------------------------------------------
Audited consolidated balance sheets of the Bank and its subsidiaries as of the
close of the last two (2) fiscal years, audited consolidated statements of
operations of the Bank and its subsidiaries for the last three (3) years, notes
and certain tables are included herein.
Financial Highlights
1993 1992 1991
- - -------------------------------------------------------------------------------
Net Income (loss) $ 315,121 $(1,863,569) $ 211,360
Per Share $ 0.08 $ (0.46) $ 0.05
- - -------------------------------------------------------------------------------
Return on Average Equity 3.57% (21.65%) 1.95%
Return on Average Assets 0.26% (1.50%) 0.16%
Average Total Loans to Average Deposits 62.95% 58.00% 61.99%
Net Interest Margin 5.68% 5.23% 5.77%
- - -------------------------------------------------------------------------------
Average Daily Prime Rate 6.00% 6.29% 8.46%
- - -------------------------------------------------------------------------------
At Year-End (in thousands, except per
share data)
Total Assets $ 123,393 $ 119,946 $ 148,454
Net Loans 74,503 63,228 68,310
Total Deposits 111,063 108,188 133,621
Trust Assets
At Cost 178,018 163,551 224,414
At Market 189,830 177,898 250,440
Stockholders' Equity 9,217 8,902 10,766
Book Value Per Share $ 2.26 $ 2.18 $ 2.64
- - -------------------------------------------------------------------------------
-24-
CONSOLIDATED BALANCE SHEETS
December 31,
1993 1992
---------------------------
Assets
Cash and due from banks $ 6,456,108 $ 5,942,738
Federal funds sold 4,820,000 7,600,000
------------ ------------
Cash and cash equivalents 11,276,108 13,542,738
Interest-bearing deposits with other banks 398,000 4,470,000
Investment securities at cost:
Market values--$35,217,000 for 1993
and $35,146,000 for 1992 34,342,296 34,188,798
Loans, net of deferred fees and allowance for
loan losses
of $1,405,784 for 1993 and $1,170,174 for 1992 74,502,992 63,227,571
Bank premises, leasehold improvements and
equipment, net 1,484,333 1,784,846
Other real estate owned 70,000 962,862
Interest receivable and other assets 1,319,380 1,768,818
------------ ------------
Total Assets $123,393,109 $119,945,633
============ ============
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 28,439,209 $ 25,198,108
Interest bearing 82,624,062 82,990,062
------------ ------------
Total deposits 111,063,271 108,188,170
------------ ------------
Short-term borrowings 2,734,047 2,520,728
Interest payable and other liabilities 378,305 334,370
------------ ------------
Total liabilities 114,175,623 111,043,268
============ ============
Commitments and contingent liabilities (Note 8)
Stockholders' Equity
Common stock--Par value $1.5625 per share;
authorized 10,000,000 shares, issued and
outstanding 4,080,302 shares in 1993 and 1992 6,375,472 6,375,472
Paid in surplus 5,744,748 5,744,748
Deficit (2,902,734) (3,217,855)
------------ ------------
Total stockholders' equity 9,217,486 8,902,365
------------ ------------
Total Liabilities and Stockholders' Equity $123,393,109 $119,945,633
============ ============
The accompanying notes are an integral part of these consolidated statements.
-25-
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
1993 1992 1991
-------------------------------------------
Interest income:
Interest and fees on loans and leases $ 6,679,645 $ 6,333,944 $ 8,881,555
Interest on Federal funds sold 162,284 146,688 247,673
Interest on investment securities 1,987,764 2,267,673 2,738,701
Interest on deposits with other banks 121,149 376,801 620,120
------------ ------------ ------------
Total interest income 8,950,842 9,125,106 12,488,049
------------ ------------ ------------
Interest expense:
Interest on deposits 2,631,160 3,239,865 5,249,696
Interest on short-term borrowings 39,981 41,147 87,316
------------ ------------ ------------
Total interest expense 2,671,141 3,281,012 5,337,012
------------ ------------ ------------
Net interest income 6,279,701 5,844,094 7,151,037
Provision for loan losses 436,000 519,778 1,066,823
------------ ------------ ------------
Net interest income after
provision for loan losses 5,843,701 5,324,316 6,084,214
------------ ------------ ------------
Non-interest income:
Service charges on deposit accounts 128,711 223,306 227,427
Trust fees and commissions 689,221 705,291 648,418
Gains on sale of other real estate owned 49,197 16,960 149,195
Gains on securities transactions, net 282,729 268,619 448,694
Real estate development revenue -- 28,000 130,797
Other income 63,195 48,057 66,306
------------ ------------ ------------
Total non-interest income 1,213,053 1,290,233 1,670,837
------------ ------------ ------------
Non-interest expense:
Salaries and employee benefits 3,379,284 3,359,829 3,186,070
Net occupancy expense 1,402,170 1,439,257 1,371,807
Equipment expense 396,701 417,270 391,793
Divestiture of joint venture investment -- 1,060,000 --
Other operating expenses 1,484,978 2,201,762 2,523,568
------------ ------------ ------------
Total non-interest expense 6,663,133 8,478,118 7,473,238
------------ ------------ ------------
Income (loss) before provision for
income taxes and extraordinary item 393,621 (1,863,569) 281,813
Provision for income taxes 78,500 -- 114,453
------------ ------------ ------------
Income (loss) before extraordinary item 315,121 (1,863,569) 167,360
Extraordinary item, tax benefit of net
operating loss carryforward -- -- 44,000
------------ ------------ ------------
Net income (loss) $ 315,121 (1,863,569) $ 211,360
============ ============ ============
Per share amounts:
Income (loss) before extraordinary item $ 0.08 $ (0.46) $ 0.04
Extraordinary item -- -- 0.01
------------ ------------ ------------
Net income (loss) $ 0.08 $ (0.46) $ 0.05
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
-26-
Consolidated Statements of Stockholders' Equity
Common Stock
------------------------
Number of Paid in
Shares Amount Surplus Deficit Total
---------- ------------ ------------ ------------- -------------
Balance, December 31, 1990 4,080,302 $ 6,375,472 $ 5,744,748 $ (1,565,646) $ 10,554,574
Net Income 211,360 211,360
---------- ------------ ------------ ------------- -------------
Balance, December 31, 1991 4,080,302 6,375,472 5,744,748 (1,354,286) 10,765,934
Net Loss (1,863,569) (1,863,569)
---------- ------------ ------------ ------------- -------------
Balance, December 31, 1992 4,080,302 6,375,472 5,744,748 (3,217,855) 8,902,365
Net Income 315,121 315,121
---------- ------------ ------------ ------------- -------------
Balance, December 31, 1993 4,080,302 $ 6,375,472 $ 5,744,748 $ (2,902,734) $ 9,217,486
========== ============ ============ ============== ============
The accompanying notes are an integral part of these consolidated statements.
-27-
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1993 1992 1991
- - ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 315,121 $ (1,863,569) $ 211,360
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Gain on sale on investment
securities (282,729) (268,619) (448,694)
Amortization of discounts and
premiums, net 148,845 128,049 (14,048)
Provision for loan losses 436,000 519,778 1,066,823
Increase (decrease) in deferred
loan fees, net 401,536 116,662 (135,234)
Depreciation and amortization 375,045 408,732 420,949
Provision for other real estate
owned 61,721 466,000 --
Gain on sale of other real
estate owned (49,197) (16,960) (149,195)
Deferred taxes 78,500 -- --
Net change in operating assets
and liabilities:
Interest receivable and other
assets 370,938 954,321 545,687
Interest payable and other
liabilities 43,935 188,613 (429,070)
----------- ------------ -----------
Net cash provided by operating
activities 1,899,715 633,007 1,068,578
----------- ------------ -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of certificates of
deposit (2,876,000) (5,265,000) (9,043,000)
Purchase of investment securities (16,315,143) (15,345,755) (40,532,870)
Proceeds from maturity of
certificates of deposit 6,948,000 9,640,000 8,078,000
Proceeds from maturity of
investment securities 3,706,092 14,725,020 10,723,711
Proceeds from sale of investment
securities 12,589,437 13,569,444 17,890,737
Loans originated and principal
collected, net (13,386,732) 2,501,799 9,253,921
Additions to bank premises and
equipment (74,532) (91,963) (300,831)
Proceeds from sale of other real
estate owned 2,154,113 1,305,958 1,138,068
----------- ------------ -----------
Net cash (used for) provided by
investing activities (7,254,765) 21,039,503 (2,792,264)
----------- ------------ -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net increase (decrease) in
deposits 2,875,101 (25,432,336) (1,783,935)
Net increase (decrease) in
short-term borrowings 213,319 (1,284,746) 315,667
----------- ------------ -----------
Net cash provided by (used for)
financing activities 3,088,420 (26,717,082) (1,468,268)
----------- ------------ -----------
Decrease in cash and cash
equivalents (2,266,630) (5,044,572) (3,191,954)
Cash and cash equivalents, at
beginning of year 13,542,738 18,587,310 21,779,264
----------- ------------ -----------
Cash and cash equivalents, at end
of year $11,276,108 $ 13,542,738 $18,587,310
=========== ============ ===========
- - ------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 2,642,819 $ 3,385,533 $ 5,493,347
Cash paid for taxes 21,500 8,000 271,651
Total gross additions to other
real estate 1,273,775 1,827,860 1,878,873
- - ------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
-28-
Average Balances, Yields and Rates
(Dollar amounts in thousands)
1993 1992 1991
----------------------------- ----------------------------- ------------------------------
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expenses Paid
----------------------------- ----------------------------- ------------------------------
ASSETS
Federal funds sold $ 5,910 $ 162 2.74% $ 4,683 $ 147 3.14% $ 4,121 $ 248 6.02%
Interest-bering deposits with
other financial institutions 3,023 121 4.00% 5,706 377 6.61% 8,490 620 7.30%
Investment securities:
U.S. Treasury securities 24,375 1,548 6.35% 23,241 1,575 6.78% 21,729 1,660 7.64%
U.S. Government Agencies 6,045 390 6.45% 5,728 445 7.77% 10,507 904 8.60%
Other securities 1,323 50 3.78% 6,385 247 3.88% 3,378 174 5,15%
Loans 69,954 6,680 9.55% 66,018 6,334 9.59% 75,638 8,882 11.74%
-------- -------- -------- ------ -------- -------
Total Interest-Earning Assets 110,630 8,951 8.09% 111,761 9,125 8.17% 123,863 12,488 10.08%
-------- ------ -------
Cash and due from banks 8,587 8,664 7,302
Furniture, fixtures and equipment 1,636 1,982 2,157
Interest receivable and other assets 2,508 3,536 3,700
Reserve for loan losses (1,268) (1,400) (1,306)
-------- -------- --------
Total Assets $122,093 $124,543 $135,716
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing transaction accounts 63,781 1,869 2.93% 62,670 2,090 3.33% 60,234 2,971 4.93%
Savings accounts 4,133 128 3.10% 4,216 154 3.65% 2,196 115 5.24%
Time accounts 16,324 634 3.88% 21,498 996 4.63% 31,897 2,164 6.78%
Other borrowed funds 1,614 40 2.48% 1,092 41 3.75% 2,084 87 4.17%
-------- -------- -------- ------ -------- -------
Total Interest-Bearing Liabilities 85,852 2,671 3.11% 89,476 3,281 3.67% 96,411 5,337 5.53%
Demand accounts 26,889 25,444 27,685
Accrued expenses and other liabilities 527 1,017 781
Shareholders' equity 8,825 8,606 10,839
-------- -------- --------
Total Liabilities and
Shareholders' Equity $122,093 $124,543 $135,716
======== ======== ========
NET INTEREST INCOME $ 6,280 $ 5,844 $ 7,151
======== ======== =======
NET INTEREST MARGIN 5.68% 5.23% 5.77%
NOTE: Loan fees are included in interest income for loans. Non-accrual loans
have been included in average loan balances.
-29-
Analysis of Changes in Interest Income and Expenses
(In thousands)
1993 Over 1992 1992 Over 1991
------------------------------------------------------------------
Volume Rate Total Volume Rate Total
------------------------------------------------------------------
Increase (decrease) in interest and fee income:
Federal funds sold $ 39 $ (24) $ 15 $ 34 $ (135) $ (101)
Interest-bearing deposits with other
financial institutions (177) (79) (256) (203) (40) (243)
Investment securities:
U.S. Treasury securities 77 (104) (27) 116 (201) (85)
U.S. Government Agencies 26 (80) (54) (411) (49) (460)
Other securities (197) (1) (198) 155 (81) 74
Loans 378 (32) 346 (1,130) (1,418) (2,548)
------ -------- ------ ------ -------- ---------
146 (320) (174) (1,439) (1,924) (3,363)
------ -------- ------ ------ -------- ---------
Increase (decrease) in interest expense:
Deposits:
Interest-bearing transaction accounts 37 (257) (220) 120 (1,001) (881)
Savings accounts (3) (23) (26) 106 (68) 38
Time accounts (240) (123) (363) (705) (462) (1,167)
Other borrowed funds 20 (21) (1) (42) (4) (46)
------ -------- ------ ------ -------- ---------
(186) (424) (610) (521) (1,535) (2,056)
------ -------- ------ ------ -------- ---------
Changes in Net Interest Income $ 332 $ 104 $ 436 $ (918) (389) (1,307)
====== ======== ====== ====== ======== =========
-30-
Notes to the Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The accounting and reporting policies of CapitolBank Sacramento and Subsidiaries
conform with generally accepted accounting principles and prevailing practices
within the banking industry. The following is a summary of the significant
accounting and reporting policies used in preparing the consolidated financial
statements.
Principles of Consolidation
- - ---------------------------
The consolidated financial statements include the accounts of CapitolBank
Sacramento (the Bank) and its wholly owned subsidiaries, Capitol Commerce
Development Corporations VI and VII and Commerce Corporation. All material
intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
- - -------------------------
For the purpose of the statement of cash flows, the Bank considers cash and
amounts due from banks and Federal fund sold to be cash and cash equivalents.
Investment Securities
- - ---------------------
Investment securities are carried at cost, adjusted for amortization of premium
and accretion of discount. Premium and discounts are amortized and accreted
using the interest method. Gains or losses on the sale of securities are
determined on the specific identification method and are shown separately in the
consolidated statements of operations No allowance for market decline, if any,
is provided as interest is current on the investment portfolio and management
intends and has the ability to hold these investments until maturity.
Allowance for Loan Losses
- - -------------------------
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can reasonably be expected to occur. Bank management
makes continuous credit reviews of the loan portfolio and considers current
economic conditions, historical loan loss experience and other factors in
determining the adequacy of this allowance. The evaluation process requires the
use of current estimates which may vary from the ultimate losses. As adjustment
to these estimates become necessary, they are charged to operations in the
periods when they become known.
Material estimates relating to the determination of the allowance for loan
losses are particularly susceptible to significant change in the near term.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, the Federal Deposit Insurance Corporation (the FDIC),
as an integral part of its examination process, periodically reviews the Bank's
allowance for loan losses. The FDIC may require the Bank to recognize additions
to the allowance based on their judgment about information available to them at
the time of their examination.
-31-
Bank Premises, Leasehold Improvements and Equipment
- - ---------------------------------------------------
Bank premises, leasehold improvements and equipment are carried at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Estimated useful lives of the premises and
equipment are from three to ten years. Leasehold improvements at the Bank's
main office are amortized over twenty years, representing the term of the lease
of fifteen years and one of three five-year renewal options. Leasehold
improvements at the Bank's auxiliary office are amortized over five years in
accordance with the term of the lease.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in income for the period. The cost of maintenance and
repairs is charged to expense as incurred; significant renewals or betterments
are capitalized.
Real Estate Joint Venture Divestiture
- - -------------------------------------
During 1992, the Bank elected to divest itself of a real estate joint venture
project initiated in 1990 through its wholly owned subsidiary, Capitol Commerce
Development Company VI. Funding of this development project had been
capitalized and included in Other Assets in prior periods on the Bank's
Consolidated Balance Sheet. The expense associated with the elimination of this
investment was charged to Non-Interest Expense during the year ended December
31, 1992.
Other Real Estate
- - -----------------
Other real estate includes real estate acquired in full or partial settlement of
loan obligations. When property is acquired, any excess of the Bank's recorded
investment in the loan balance and accrued interest income over the estimated
fair market value of the property is charged against the allowance for loan
losses. Thereafter, it is carried at the lower of cost or fair value minus
estimated selling costs. Fair value is generally determined based upon periodic
independent third party appraisals. Subsequent gains or losses on sales or
write-downs are recorded in other income or expense as incurred.
Interest and Fees on Loans
- - --------------------------
Interest on loans is calculated by using the simple interest method on the daily
balance of the principal amount outstanding. However, when, in the opinion of
management, the future collectibility of interest and principal is in serious
doubt, a loan is placed on non-accrual status and the accrual of interest income
is suspended. Any interest accrued but unpaid is charged against income.
Interest accruals are resumed on such loans only when they are brought fully
current with respect to interest and principal and when, in the judgment of
management, the loans are estimated to be fully collectible as to both principal
and interest.
Substantially all loan origination fees, commitment fees, direct loan
origination costs and discounts on loans are deferred and recognized as an
adjustment of yield, to be amortized to interest income over the contractual
term of the loan. The unamortized balance of deferred fees and costs is
reported as a component of net loans.
-32-
Income Taxes
- - ------------
Effective January 1, 1993 the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
--------
The cumulative effect of that change in the method of accounting for income
taxes was not material. Under the asset and liability method of SFAS 109,
--------
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
--------
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Pursuant to the deferred method under APB Opinion 11, which was applied in 1992
and prior years, deferred income taxes are recognized for income and expense
items that are reported in different years for financial reporting purposes and
income tax purposes using the tax rate applicable for the year of the
calculation. Under the deferred method, deferred taxes are not adjusted for
subsequent changes in tax rates.
In the financial statements, deferred tax assets, net of deferred tax
liabilities are included in interest receivable and other assets.
Reclassifications
- - -----------------
Certain reclassifications have been made to prior years' balances to conform
with classifications used in 1993.
-33-
2. Investment Securities
The amortized cost and estimated market values of investment securities are as
follows at December 31, 1993:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
U.S. Treasury $25,162,828 $ 845,298 $ 14,126 $25,994,000
U.S. Agency 3,033,800 100,200 -- 3,134,000
Mortgage-backed 5,643,687 19,229 76,916 5,586,000
Obligations of State and
Political Subdivisions 251,981 1,019 -- 253,000
Other 250,000 -- -- 250,000
----------- ---------- ---------- -----------
$34,342,296 $ 965,746 $ 91,042 $35,217,000
=========== ========== ========== ===========
The amortized cost and estimated market values of investment securities are as
follows at December 31, 1992:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
U.S. Treasury $27,325,384 $ 827,914 $ 54,298 $28,099,000
U.S. Agency 4,031,063 108,778 2,421 4,137,000
Mortgage-backed 2,327,394 79,606 -- 2,407,000
Obligations of State
and Political
Subdivisions 254,957 -- 2,377 253,000
Other 250,000 -- -- 250,000
----------- ---------- ---------- -----------
$34,188,798 $1,016,298 $ 59,096 $35,146,000
=========== ========== ========== ===========
The amortized cost and estimated market value of investment securities at
December 31, 1993 by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities
-34-
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
------------------------
Due in one year or less $ 3,256,415 $ 3,342,000
Due after one year through five years 23,431,980 24,195,000
Due after five years through ten years 2,010,214 2,094,000
----------- -----------
28,698,609 29,631,000
Mortgage-backed 5,643,687 5,586,000
----------- -----------
$34,342,296 $35,217,000
=========== ===========
Gross gains realized on sales of investment securities totaled $283,998,
$305,560 and $449,543 in 1993, 1992 and 1991, respectively. Gross losses of
$1,269, $36,941 and $849 were realized on sales of investment securities in
1993, 1992 and 1991, respectively.
The book value of securities pledged to secure public deposits totaled
$12,416,000 and $11,438,000 at December 31, 1993 and 1992, respectively.
-35-
3. Loans and Allowance for Loan Losses
Outstanding loans are summarized as follows:
December 31,
--------------------------
1993 1992
--------------------------
Real estate construction $21,188,594 $12,439,932
Real estate mortgage 30,684,510 27,410,064
Commercial and agricultural 21,637,422 21,437,041
Consumer installment 2,196,718 2,863,165
Other 1,041,009 688,221
----------- -----------
76,748,253 64,838,423
Unearned discount (13,274) (16,011)
Allowance for loan losses (1,405,784) (1,170,174)
Deferred loan fees (826,203) (424,667)
----------- -----------
$74,502,992 $63,227,571
=========== ===========
Real estate loans totaling $0 and $490,000 were pledged to secure public
deposits at December 31, 1993 and 1992, respectively. Activity in the allowance
for loan losses is summarized as follows:
--------------------------------------
1993 1992 1991
--------------------------------------
Balance, beginning of year $1,170,174 $1,122,597 $1,161,245
Provision for loan losses 436,000 519,778 1,066,823
Recoveries 160,959 207,617 44,209
Loans charged off (361,349) (679,818) (1,149,680)
---------- ---------- ----------
Balance, end of year $1,405,784 $1,170,174 $1,122,597
========== ========== ==========
At December 31, 1993 and 1992, loans totaling approximately $138,000 and
$2,151,000, respectively, were on non-accrual status.
-36-
The aggregate effect of non-accrual loans was to reduce interest income by
approximately $87,000, $159,000 and $248,000 for the years ended December 31,
1993, 1992 and 1991, respectively.
4. Bank Premises, Leasehold Improvements and Equipment
A summary of Bank premises, leasehold improvements and equipment is as follows:
December 31,
--------------------------
1993 1992
--------------------------
Bank premises and equipment $ 2,054,105 $ 1,991,426
Leasehold improvements 1,955,240 1,955,967
----------- -----------
4,009,345 3,947,393
Less accumulated depreciation (2,525,012) (2,162,547)
----------- -----------
$ 1,484,333 $ 1,784,846
=========== ===========
Depreciation charged to expense amounted to $375,045, $408,732 and $420,949 in
1993, 1992 and 1991, respectively.
5. Interest-Bearing Deposits
Interest-bearing deposits consisted of the following:
December 31,
-------------------------
1993 1992
-------------------------
Savings $ 4,017,208 $ 6,127,289
Money Market 46,618,981 42,168,853
NOW Accounts 16,600,870 17,095,435
Time, $100,000 or More 8,323,775 9,632,686
Other Time 7,063,229 7,965,799
----------- -----------
$82,624,062 $82,990,062
=========== ===========
Interest expense recognized on time deposits of $100,000 or more during the
years ended December 31, 1993, 1992 and 1991 totaled $349,000, $540,000 and
$1,259,000, respectively.
6. Short-Term Borrowings
Short-term borrowings consist of treasury tax and loan deposits and generally
mature within one to 120 days from the transaction date.
The Bank has a $3 million unsecured Federal funds purchase agreement with one of
its correspondent banks. There were no borrowings outstanding under this
agreement at December 31, 1993 and 1992.
-37-
7. Income Taxes
As discussed in Note 1, the Bank adopted SFAS 109 as of January 1, 1993. The
--------
cumulative effect of that change in the method of accounting for income taxes
was not material. Prior years' consolidated financial statements have not been
restated to apply the provisions of SFAS 109.
--------
The provision for income taxes for the years ended December 31, 1993, 1992 and
1991 consists of the following:
------------------------
1993 1992 1991
------------------------
Current
Federal $ -- $ -- $ 84,453
State -- -- 30,000
------- ----- --------
-- -- 114,453
Deferred
Federal 50,500 -- --
State 28,000 -- --
------- ----- --------
78,500 -- --
------- ----- --------
$78,500 $ -- $114,453
======= ===== ========
Significant temporary differences and carryforwards that give rise to the
deferred tax assets and liabilities as of December 31, 1993 are as follows:
Deferred tax assets:
Allowance for loan losses $ 291,700
Net operating loss carryforwards 1,600,200
General tax credit carryforwards 226,800
Other 16,500
----------
Total gross deferred tax assets 2,135,200
Less valuation reserve (1,827,000)
----------
Net deferred tax assets 308,200
----------
Deferred tax liabilities:
Bank premises, leasehold improvements and equipment (104,100)
----------
Total gross deferred tax liabilities (104,100)
----------
Net deferred taxes $ 204,100
==========
A valuation allowance has been provided for net operating loss carryforwards and
the general tax credit carryforwards because of the uncertainty surrounding
their realization.
-38-
The provision for income taxes differs from the amounts computed by applying the
statutory federal tax rates to income before taxes. The reasons for the
differences are as follows:
--------------------------------------------------------------
1993 1992 1991
--------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
--------------------------------------------------------------
Federal income tax expense
at statutory rates $133,800 34.0% (630,213) (34.0%) $ 95,816 34.0%
State franchise taxes, net of
Federal income tax benefit 28,000 7.1% (131,400) (7.1%) 19,605 7.0%
Tax benefit of loss
carryforwards (63,900) (16.2%) 761,613 41.1%
Other, net (19,400) (5.0%) (968) (0.3%)
-------- ------- ---------- ------- -------- ------
$ 78,500 19.9% $ -- --% $ 114,453 40.7%
======== ======= ========== ======= ======== ======
At December 31, 1993, the Bank has the following net operating loss (NOL) and
tax credit carryforwards for tax return purposes:
Federal
Expires Operating Loss Tax Credit
December 31, Carryforward Carryforward
- - ---------------------------------------------------
2001 $ $ 227,000
2002 744,000
2003 390,000
2005 40,000
2007 4,465,000
2008 26,000
-------------- ------------
$ 5,665,000 $ 227,000
============== ============
The Bank also has alternative minimum tax credit carryforwards for tax purposes
of approximately $6 million, which are available to reduce future federal
regular income taxes over an indefinite period.
The Internal Revenue Code imposes restrictions on a bank's ability to utilize
NOL and tax credit carryforwards if a 50 percent change in ownership occurs
within a three-year period. Changes in ownership are defined to include, among
other things, ownership changes involving owners of 5 percent or more of a
bank's common stock and public stock offerings.
Certain events in the future, including the issuance of additional shares of the
Bank's common stock or activities involving persons owning 5 percent or more of
the Bank's common stock, could occur that would trigger such a change in
control. This may result in the loss of some or all of the Bank's NOL or tax
credit carryforwards.
-39-
8. Commitments and Contingent Liabilities
Financial Instruments with Off-Balance Sheet Risk
- - -------------------------------------------------
The Bank makes commitments to extend credit in the normal course of business to
meet the financing needs of its customers. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amount does not necessarily represent future cash
requirements.
The Bank is exposed to credit loss, in the event of nonperformance by the
borrower, in the contract amount of the commitment. The Bank uses the same
credit policies in making commitments as it does for on-balance sheet
instruments and evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank, is
based on management's credit evaluation of the borrower. Collateral held varies
but may include cash, accounts receivable, inventory, equipment and real estate
property.
The Bank also issues standby letters of credit which are unconditional
commitments to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support construction bonds, private borrowing
arrangements and similar transactions. Most of these guarantees are short-term
commitments expiring in decreasing amounts through 1994 and are not expected to
be drawn upon. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds collateral as deemed necessary, as described above.
The contract amount of commitments not reflected on the balance sheet at
December 31, 1993 and 1992 is as follows:
1993 1992
- - -----------------------------------------------------
Loan Commitments $25,488,000 $13,459,000
Standby Letters of Credit 974,000 2,609,000
Significant Concentration of Credit Risk
- - ----------------------------------------
The Bank accepts deposits and grants credit primarily within its local service
area which the Bank has identified as the Greater Sacramento Area. That
comprises the four counties of Sacramento, El Dorado, Placer and Yolo. At year-
end, the Bank had construction loans comprising 27.61% of the loan portfolio.
This comprises 17.2% of total assets at December 31, 1993.
Although the Bank has a diversified loan portfolio, a substantial portion of its
portfolio is secured by commercial and residential real estate.
-40-
Federal Reserve Requirements
- - ----------------------------
Banks are required to maintain reserves with the Federal Reserve Bank equal to a
percentage of their reservable deposits. The reserve balances held with the
Federal Reserve Bank totaled $1,013,000 and $901,000 as of December 31, 1993 and
1992, respectively.
Operating Leases
- - ----------------
The Bank has executed a non-cancelable operating lease for its main office
space. The lease provides for an initial term of fifteen years, three five-year
renewal options, and a market value adjustment at the end of 10 years. In
addition, the Bank has executed a noncancelable operating lease for its
auxiliary office space. The lease provides for a term of five years. Both
operating leases are included in the following schedule of future minimum lease
payments as of December 31, 1993:
Year Ending December 31,
1994 $1,377,000
1995 1,408,000
1996 1,386,000
1997 1,339,000
1998 1,339,000
1999-2000 1,674,000
----------
$8,523,000
==========
Rental expense under operating leases totaled $1,239,000, $1,230,000 and
$1,165,000 in 1993, 1992 and 1991, respectively.
Legal Actions
- - -------------
The Bank is involved in litigation of a routine nature which is being defended
in the ordinary course of the Bank's business. In the opinion of management,
the resolution of this litigation will have no material impact on the Bank's
financial position.
9. Stockholders' Equity
Capital Adequacy
- - ----------------
The Federal Deposit Insurance Corporation has specified guidelines for purposes
of evaluating a Bank's capital adequacy. Banks are required to satisfy two
separate capital requirements.
First, banks must meet a minimum leverage capital ratio ranging from three to
five percent based upon the bank's CAMEL (capital adequacy, asset quality,
management, earnings and liquidity) rating. At December 31, 1993, the Bank's
leverage capital ratio was 7.54%.
Second, banks must meet a minimum risk-based capital ratio of 8.0%. Risk-based
capital guidelines vary from leverage capital guidelines by redefining the
components of capital, categorizing assets into different risk classes, and
including certain off-balance sheet items in the calculation of the capital
ratio.
-41-
The effect of the risk-based capital guidelines is that banks with high risk
exposure will be required to raise additional capital while institutions with
low risk exposure could, with the concurrence of regulatory authorities, be
permitted to operate with lower capital ratios. The Bank's risk-based capital
ratio at December 31, 1993 was 12.90%.
Earnings Per Share
- - ------------------
Earnings per share amounts were computed on the basis of the weighted average
number of shares of common stock outstanding during the year. There were no
dilutive common stock equivalents outstanding during 1993, 1992 or 1991. The
number of shares used for the computations was 4,080,302 in all three years.
Dividend Restrictions
- - ---------------------
Under California banking laws, the Bank may not pay cash dividends without prior
approval until such time as the deficit in undivided profits is restored and
there are sufficient earnings to cover the dividends.
Stock Options
- - -------------
During June 1992, the Board of Directors adopted an incentive stock option plan
(the Plan). Final approval of the Plan was subject to the Bank obtaining the
approval of the State Banking Department and the stockholders. The State
Banking Department approved the Plan in July 1992 and the stockholders approved
the Plan at the 1993 annual stockholders' meeting.
Under the terms of the Plan, 306,023 shares of common stock have been reserved
for issuance to employees of the Bank. The Plan requires that the option price
of all options granted may not be less than the fair market value-of the stock
at the date the option is granted, and that the stock must be paid for in full
at the time the option is exercised. All options expire on a date determined by
the Board of Directors, but not later than ten years from the date of the grant.
The following summarizes the activity under the Plan:
Balance January 1, 1992 --
Options Granted 141,608
-------
Balance December 31, 1992 141,608
Options Canceled (26,400)
-------
Balance December 31, 1993 115,208
=======
Stock options granted during 1992 were not exercisable until the Plan was
approved by the stockholders. At December 31, 1993, stock options for 24,801
shares were exercisable at a price of $2.00 per share.
-42-
10. Other Expenses
Other expenses consisted of the following:
----------------------------------------
1993 1992 1991
----------------------------------------
FDIC Assessment $ 279,721 $ 258,058 $ 257,779
Legal fees 211,117 226,312 192,184
Professional services 148,768 233,619 276,990
Stationery, printing and supplies 101,210 100,895 114,744
Data processing 76,300 78,699 156,891
Provision for loss on other real estate 61,721 466,000 --
Client data processing 18,477 97,909 145,236
Special stockholder meeting -- -- 712,822
Other 587,664 740,270 666,922
------------ ----------- ------------
$ 1,484,978 $ 2,201,762 $ 2,523,568
============ =========== ============
11. Related Party Transactions
In the normal course of business, the Bank enters into transactions with related
parties, including directors, principal shareholders and their affiliates. The
transactions are on substantially the same terms and conditions as those
prevailing for comparable transactions with unrelated parties. It is the Bank's
policy not to make loans to Directors; and accordingly, no loans were
outstanding to Directors at December 31, 1993 and 1992, respectively.
12. Tax Deferred Investment Plan
The Bank established a trusteed tax deferred investment plan (the "Plan") for
all eligible employees during 1988. The Plan permits each employee to
contribute up to 15% of compensation on a pre-tax basis up to a specified
maximum, which for calendar year 1993, was $8,994. The Bank provides a matching
contribution of $1.00 for every 51.00 of compensation deferred by the employee
with a maximum matching contribution of 3% of the employee's annual
compensation. The Bank's Plan expense totaled $54,000, $54,400 and $56,900 for
the years ending December 31, 1993, 1992 and 1991, respectively.
13. Regulatory Agreements
On February 24, 1993, the Bank entered into a Memorandum of Understanding (the
"Memorandum") with the Federal Deposit Insurance Corporation (the "FDIC") and
the California State Banking Department (the "State") as a result of a joint
examination of the Bank by the FDIC and the State.
The FDIC performed a subsequent examination of the Bank as of November 15, 1993.
Based upon the results of the examination, on February 7, 1994, the FDIC, along
with the State, terminated the existing Memorandum.
-43-
14. Prospective Accounting Pronouncements
Impairment of Loans
- - -------------------
In May of 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for Impairment
of a Loan. This statement applies to financial statements for fiscal years
beginning after December 15, 1994. It requires that impaired loans be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Initial adoption of this statement is required to be
reflected prospectively. The Bank has not completed the analysis necessary to
determine the impact, if any, of this statement on its financial position or
results of operations.
Investments
- - -----------
In May of 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities. This statement applies to financial statements for
fiscal years beginning after December 15, 1993 and is to be applied as of the
beginning of an enterprise's fiscal year. Initial adoption of this statement is
required to be reflected prospectively. The statement requires that investments
of equity securities that have readily determinable fair values and all
investments in debt securities be classified in these categories and accounted
for as follows:
Debt securities that the enterprise has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported
at amortized cost.
Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
stockholders' equity.
The Bank adopted this statement as of January 1, 1994. If the provisions of the
statement would have been applied as of December 31, 1993, stockholders' equity
would have been increased by approximately $220,000.
Fair Value Disclosures
- - ----------------------
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 107 "Disclosures about Fair Value of
Financial Instruments." The provisions of Statement 107 are effective for
financial statements issued for years ending after December 15, 1992 for
entities whose total assets exceed $150 million. For those entities whose total
assets are less than $150 million at December 15, 1992, the provisions of
Statement 107 are effective for years ended after December 15, 1995. Statement
107 requires the disclosure of the fair value of financial instruments for which
it is practicable to estimate that value. Most loan and deposit instruments
issued by financial
-44-
institutions will be subject to Statement 107. These disclosures apply to off-
balance sheet financial instruments as well as those recorded on the balance
sheet.
-45-
[Letterhead of KPMG Peat Marwick]
KPMG Peat Marwick
Certified Public Accountants
2495 Natomas Park Drive
Sacramento, CA 95833-2936
Independent Auditors' Report
----------------------------
To the Shareholders and Board of Directors
of CapitolBank Sacramento:
We have audited the accompanying consolidated balance sheet of CapitolBank
Sacramento and Subsidiaries as of December 31, 1993 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The consolidated
financial statements of CapitolBank Sacramento and Subsidiaries for the years
ended December 31, 1992 and 1991, were audited by other auditors whose report
thereon dated February 19, 1993, expressed an unqualified opinion on those
consolidated statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1993 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CapitolBank
Sacramento and Subsidiaries as of December 31, 1993 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Notes 1 and 7 to the consolidated financial statements, the Bank
changed its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
-46-
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information included in Schedules I, II, III, IV, V and VI to Form F-2 is
presented for purposes of additional analysis and is not a required part of the
basic consolidated financial statements. Such information has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
/s/ KPMG Peat Marwick
Sacramento, California
February 25, 1994
-47-
Report of Independent Public Accountants
To the Shareholders and Board of Directors
of CapitolBank Sacramento:
We have audited the accompanying consolidated balance sheets of CAPITOLBANK
SACRAMENTO (a California state chartered bank) AND SUBSIDIARIES as of December
31, 1992, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1992. These financial statements are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CapitolBank Sacramento and
Subsidiaries as of December 31, 1992, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1992, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen & Co.
Sacramento, California
February 19, 1993
-48-
Report of Independent Public Accountants
To the Shareholders and Board of Directors
of CapitolBank Sacramento:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements included in CAPITOLBANK SACRAMENTO'S annual
report to shareholders and incorporated by reference in this Form F-2, and have
issued our report thereon dated February 19, 1993. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. Schedules
I, II, III, IV, V and VI for the year ended December 31, 1992, listed in Item 11
are presented for purposes of complying with the Federal Deposit Insurance
Corporation's rules and are not part of the consolidated financial statements.
These schedules have been subjected to the auditing procedures applied in our
audit of the consolidated financial statements and, in our opinion, fairly state
in all material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen & Co.
Sacramento, California
February 19, 1993
-49-
ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF BANK
----------------------------------------
Mr. Louis G. Fifer, 45, has served as a director since May 1991. Currently, Mr.
Fifer also serves as the Vice President of Operations with Hotel Information
Systems, a manufacturer and provider of hospitality information systems. Prior
to that time, he served in various managerial and ownership capacities with
Systems Integrators, Inc., a company engaged in the development and sales of
computerized publishing systems. Mr. Fifer terminated his employment with
Systems Integrators, Inc. on October 31, 1992. Systems Integrators, Inc. filed
a petition under Chapter 11 of the U.S. Bankruptcy Code on September 22, 1993.
Mr. Thomas J. Hammer, Jr., 61, has served as a director since November 1991.
For more than five years, Mr. Hammer has served as the President of Shasta Linen
Supply, Inc., a Sacramento based linen service provider.
Mr. Robert T. Jenkins, 50, has served as a director since September 1991. For
more than five years, he has served in various capacities with Intel
Corporation, a worldwide developer and manufacturer of advanced computer chips.
Most recently, Mr. Jenkins has served as Vice President and Director of
Corporate Licensing of Intel Corporation.
Ms. Carolyn G. Reid, 55, has served as a director since May 1991. For more than
five years, she has been Vice President and co-owner of Reid and Associates, a
building materials marketing and sales company in Sacramento.
Mr. J. Al Wickland, Jr., 73, has served as a Director since March 1986 and as
Chairman of the Board from January 1987 to August 1990. Mr. Wickland was re-
elected Chairman of the Board in August 1991, and currently serves in this
capacity. For more than five years, he has served as Chairman of the Board of
Wickland Oil Co., a Sacramento based petroleum distribution and marketing
company.
Mr. John A. Wickland, III, 49, has served as a Director since January 1989.
Since 1989, he has also been the president of Wickland Corporation and Wickland
Properties. He also holds executive positions with Wickland Oil Company. From
1975 through 1989, he was President of Regal Stations, Inc., the predecessor
corporation of Wickland Properties.
Mr. Thomas E. King, 50, served as the Bank's President and Chief Executive
Officer and as a director from April 1992 through April 15, 1994, at which time
he will cease being an officer and director of the Bank. For information
regarding Mr. King's cessation of employment, see "Item 10."
Mr. Thayer T. Prentice, 56, was appointed as Vice Chairman of the Board, Chief
Executive Officer and a Director on March 30, 1994. Prior to that time, Mr.
Prentice served in various capacities at Bank of San Francisco, including
Chairman, President and Chief Executive Officer (from November 1, 1991 through
August 4, 1993) and Vice Chairman (from 1990 through November 1, 1991). From
1988 to 1990, Mr. Prentice served as Executive Vice President and Division
Manager of First Interstate Bank, and from 1979 to 1988, Mr. Prentice served as
President and Chief Executive Officer of Point West Bank. Mr. Prentice also has
served on the Board of Directors of the Dean's Advisory Council of the Graduate
School of Management of the University of California at Davis since 1990 and on
the Salvation Army Advisory Board in Sacramento, California, since 1980 (serving
as Chairman in 1984).
-50-
Mr. Ralph Andersen, 54, was appointed as a Director on March 30, 1994. Since
his retirement in 1987, Mr. Andersen has served as a member of the Board of
Directors of the Junior Statesmen Foundation, University of California Berkeley
Foundation, Sutter Community Hospitals, Salvation Army, and the ICMA Retirement
Corporation. From 1972 to 1987, Mr. Andersen owned and operated Ralph Andersen
& Associates, a management consulting firm, with offices in Sacramento and
Newport Beach, California and Dallas, Texas. Mr. Andersen also engaged in real
estate development and investment in Sacramento, California, and served on the
Board of Directors of Point West Bank (from 1982 to 1988) until Point West Bank
was sold to First Interstate Bank. From 1964 to 1971, Mr. Andersen served as
Principal Assistant to the Director of the League of California Cities.
Mr. William J. Martin, 47, was appointed as President and Chief Operating
Officer on April 2, 1994. Mr. Martin will become a Director on April 15, 1994.
From December 1993 to April 1, 1994, Mr. Martin served as Executive Vice
President of American River Bank. From October 1990 to December 1993, Mr.
Martin served as Executive Vice President and Commercial Lending Manager of the
Sacramento Regional Office of Bank of San Francisco. For more than 20 years
prior to that time, Mr. Martin served in various capacities in the banking
industry, including as Senior Vice President and Manager of First Interstate
Bank's Sacramento Business Banking Center (from January 1989 to October 1990),
Executive Vice President of Point West Bank, Sacramento, California (from
October 1986 to January 1989) and with Crocker National Bank (from 1971 to
1986).
Director's Compensation
- - -----------------------
Each outside member of the Board of Directors receives $400 per board meeting
and $200 per committee meeting attended. A total of $54,500 was paid during
1993 to all outside directors. Employee directors receive no compensation for
attending meetings of the Board of Directors or committees of the Board.
Executive Officers of the Bank
- - ------------------------------
The following table sets forth certain information regarding the current
executive officers of the Bank. Officers are elected annually and serve until
their successors are elected.
Name Age Position with the Bank
- - ---- --- ----------------------
Thayer T. Prentice 56 Vice Chairman of the Board and Chief
Executive Officer
William J. Martin 47 President and Chief Operating Officer
Lawrence McGovern 39 Senior Vice President and Chief Financial
Officer
Bernard Rao 57 Senior Vice President and Chief
Administrative Officer
Susan J. Drack 39 Senior Vice President and Commercial
Lending Manager
Florence A. Bellacosa 61 Vice President and Trust Manager
-51-
Name Age Position with the Bank
- - ---- --- ----------------------
Kathleen M. Thomas 47 Senior Vice President and Chief Credit
Officer
Mr. Prentice was appointed as Vice Chairman of the Board, Chief Executive
Officer and a Director of the Bank on March 30, 1994. Prior to that time, Mr.
Prentice served in various capacities at Bank of San Francisco, including
Chairman, President and Chief Executive Officer (from November 1, 1991 through
August 4, 1993) and Vice Chairman (from 1990 through November 1, 1991). From
1988 to 1990, Mr. Prentice served as Executive Vice President and Division
Manager of First Interstate Bank, and from 1979 to 1988, Mr. Prentice served as
President and Chief Executive Officer of Point West Bank. Mr. Prentice also has
served on the Board of Directors of the Dean's Advisory Council of the Graduate
School of Management of the University of California at Davis since 1990 and on
the Salvation Army Advisory Board in Sacramento, California, since 1980 (serving
as Chairman in 1984).
Mr. Martin was appointed as President and Chief Operating Officer of the Bank on
April 2, 1994. Mr. Martin will become a Director on April 15, 1994. From
December 1993 to April 1, 1994, Mr. Martin served as Executive Vice President of
American River Bank. From October 1990 to December 1993, Mr. Martin served as
Executive Vice President and Commercial Lending Manager of the Sacramento
Regional Office of Bank of San Francisco. For more than 20 years prior to that
time, Mr. Martin served in various capacities in the banking industry, including
as Senior Vice President and Manager of First Interstate Bank's Sacramento
Business Banking Center (from January 1989 to October 1990), Executive Vice
President of Point West Bank, Sacramento, California (from October 1986 to
January 1989) and with Crocker National Bank (from 1971 to 1986).
Mr. McGovern was appointed as Senior Vice President and Chief Financial Officer
on April 2, 1994. From December 1993 to April 1, 1994, Mr. McGovern served as
Senior Vice President, Lending of American River Bank. From January 1991 to
December 1993, Mr. McGovern served as Senior Vice President, Lending of the Bank
of San Francisco and from December 1988 to January 1991, he served as Division
Finance Manager of First Interstate Bank of California. From December 1983 to
December 1988, Mr. McGovern served as Vice President and Chief Financial Officer
of Point West Bank.
Mr. Rao has served as Senior Vice President and Chief Administrative Officer of
the Bank from August 1985 to the present. From March 1979 until August 1985, he
was Vice President and Senior Operations Officer with Union Bank in Sacramento,
California.
Ms. Drack has served as Senior Vice President and Commercial Lending Manager of
the Bank since June 1993. From November 1991 to June 1993 Ms. Drack served in
various real estate lending positions with the Bank. Prior to joining the Bank,
Ms. Drack was employed with First Interstate Bank of California in Real Estate
Portfolio Management.
Ms. Bellacosa has served as Vice President and Trust Manager since June 1992.
From October 1982 to May 1992, Ms. Bellacosa served as a Trust Officer. Prior
to her employment with the Bank, Ms. Bellacosa was employed by Nevada National
Bank as a Trust Officer for approximately eight years.
Ms. Thomas was appointed as the Senior Vice President and Chief Credit Officer
of the Bank on April 2, 1994. From December 1993 to April 1, 1994, Ms. Thomas
served as Senior Vice President and Chief Credit Officer of American River Bank.
From December 1990 to December 1993, Ms. Thomas
-52-
served as Senior Vice President and Team Leader of the Sacramento Regional
Office of the Bank of San Francisco. For ten years prior to that time, Ms.
Thomas served in various capacities in the banking industry, including Vice
President and Credit Administration Support Manager of First Interstate Bank of
California, a Vice President of Wells Fargo Bank and Assistant Vice President
Team Leader with Crocker National Bank.
There is no family relationship between any of the directors and executive
officers listed above, except for the relationship between J. Al Wickland, Jr.
and John A. Wickland, III which is a father/son relationship.
ITEM 10. MANAGEMENT COMPENSATION AND TRANSACTIONS WITH MANAGEMENT EXECUTIVE
------------------------------------------------------------------
COMPENSATION
------------
The following table sets forth the aggregate remuneration for services in all
capacities paid or accrued for the fiscal year ended December 31, 1993: (a) to
each of the five most highly compensated principal officers of the Bank whose
aggregate cash and cash equivalent forms of remuneration exceeded $60,000; and
(b) to all principal officers of the Bank as a group:
- - --------------------------------------------------------------------------------
CASH COMPENSATION TABLE
Identification and Capacities in Salaries, Fees
which Remuneration is Received and Bonuses(1)(2)
- - --------------------------------------------------------------------------------
Thomas E. King $ 170,680(3)
President & Chief Executive Officer
Susan J. Drack $ 101,160
Senior Vice President and Commercial Lending Manager
Bernard Rao $ 95,640
Senior Vice President and Chief Administrative Officer
Dennis F. Ceklovsky $ 90,340(4)
Senior Vice President and Chief Credit Officer
Florence A. Bellacosa $ 77,760
Vice President and Trust Department Manager
All Principal Officers as a Group(5) (10 Persons) $ 714,782
- - ----------
(1) Includes deferrals to salary pursuant to the 401(k) plan as described in
footnote (2) below. No other compensation was paid or distributed during
the last fiscal year to the: (i) individuals named in the cash
compensation table above which in the aggregate equals or exceeds the
lesser of $25,000 or 10 percent of the compensation set forth in the cash
compensation table for such
-53-
individual or (ii) group named in the cash compensation table above which
in the aggregate equals or exceeds the lesser of $25,000 times the number
of persons in the group or 10 percent of the aggregate compensation set
forth in the cash compensation table for such group.
(2) The Bank's practice is to pay for health insurance, long-term disability
insurance and vision insurance for all salaried employees of the Bank.
These insurance policies require co-payments by the employees. The Bank
established a 401(k) investment plan (the "Plan") for all eligible
employees during 1988. The Plan permits each eligible employee to defer up
to 15% of compensation on a pre-tax basis up to a specified maximum which,
for calendar year 1993, was $8,994. The Bank makes a matching contribution
of $1.00 for every $1.00 of compensation deferred by the employee with a
maximum matching contribution of 3% of the employee's annual compensation.
The Bank incurred expenses on behalf of the Plan of approximately $54,000
for the year ended December 31, 1993.
(3) Mr. King will cease being the President and Chief Executive Officer and a
Director of the Bank effective April 15, 1994. For more information
regarding Mr. King's cessation of employment, see "Severance Contract with
Thomas E. King."
(4) Mr. Ceklovsky ceased being the Senior Vice President and Chief Credit
Officer of the Bank effective April 15, 1994. It is expected that Mr.
Ceklovsky will cease providing services to the Bank effective May 15, 1994.
The Bank is currently negotiating a severance arrangement with Mr.
Ceklovsky.
(5) Includes all principal officers who served during 1993.
Compensation Plans
The Bank established a 401(k) investment plan (the "Plan") for all eligible
employees in 1988. The Plan permits each eligible employee to defer up to 15%
of compensation on a pre-tax basis up to a specified maximum which for calendar
year 1993 was $8,994. The Bank makes a matching contribution of $1.00 for every
$1.00 of compensation deferred by the employee with a maximum matching
contribution of 3% of the employee's annual compensation. The Bank incurred
expenses on behalf of the Plan of approximately $54,000 for the year ended
December 31, 1993. During fiscal year 1993, the Bank made matching contributions
for its principal officers as follows:
1993
-------
Thomas E. King $ 4,680
Susan J. Drack 2,655
Bernard Rao 2,640
Dennis F. Ceklovsky 2,340
Florence A. Bellacosa 2,008
All Principal Officers as a Group (6 persons) 14,848
-54-
Stock Options
- - -------------
During June 1992, the Bank adopted the 1992 Stock Option Plan (the "Stock Option
Plan"), which was approved by the shareholders of the Bank at the Bank's 1993
Annual Meeting of Shareholders. The Stock Option Plan is administered by a
committee of at least two Directors, who during their service as an
administrator of the Stock Option Plan, and during the one-year period prior to
such service, have not received or been awarded any of the Bank's common stock
pursuant to the Stock Option Plan or other stock option or stock appreciation
rights plan of the Bank. The Committee is currently composed of the same
members whom comprise the Compensation Committee.
Options may be granted to officers and employees (including directors who are
employees) of the Bank or a subsidiary of the Bank. Nonemployee directors of
the Bank are not eligible to receive options under the Stock Option Plan.
Options are granted at not less than the fair market value of the underlying
shares on the date of the grant. Under the Stock Option Plan, the Bank may
issue stock options with respect to an aggregate of 306,023 shares of common
stock. As of April 15, 1994, 275,367 shares of common stock will be subject to
outstanding options granted under the Stock Option Plan (including the options
described below that were recently granted to Messrs. Prentice and Martin) and
30,656 shares will remain available for subsequent option grants. Options may
be either incentive stock options or non-qualified stock options.
Options granted under the Stock Option Plan shall be granted to employees and
officers of the Bank who in the judgment of the Board of Directors or the
committee designated by the Board, contribute to the successful conduct of the
Bank's operations through their judgment, interest, ability and special efforts,
and shall vest in such manner as the Board or the committee designated by the
Board determines, but such vesting period shall not exceed ten years from the
date the option is granted.
If the optionee ceases to be an officer or employee of the Bank or any of its
subsidiaries due to death or disability, the Stock Option Plan provides that the
optionee's estate, or in the case of disability of the optionee, the optionee,
may exercise the options for a period of twelve months following the date of
such death or disability to the extent the option was exercisable on such date,
and provided that the date of exercise is in no event after the expiration of
the term of the option. If the optionee ceases to be an officer or employee of
the bank or any of its subsidiaries because the optionee has been terminated for
cause, the optionee shall have no right to exercise such options. In all other
circumstances, the optionee may exercise any vested stock options within three
months after such optionee ceases to be an officer or employee of the Bank or
any of its subsidiaries, provided that the date of exercise is in no event after
the expiration of the term of the option. Currently, the Bank has 7 principal
officers and 77 other full-time employees.
-55-
The following table shows, as to the persons named therein, certain information
with respect to stock options, including: (i) the title and aggregate amount of
shares subject to options granted since January 1, 1992, and (ii) the average
per share exercise price thereof.
Shares of Thomas E. Thayer T. William J. Bernard Dennis F. Susan J. Florence
Common Stock King(2) Prentice Martin Rao Ceklovsky(2) Drack Bellacosa
- - -------------------------------------------------------------------------------------------------------------
Granted from January 1,
1992 to April 15, 1994:
Number of Shares 102,008 125,000 104,167 16,600 16,600 10,000 3,000
Average per share
option price $ 2.00 $ 1.50 $ 1.50 $ 1.70 $ 1.70 $ 1.50 $ 1.50
Exercised from January 1,
1992 to April 15, 1994:
Number of Shares 0 0 0 0 0 0 0
Net value (market value
of shares on date options
exercised less exercise
price) $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Exercisable options at
April 15, 1994:
Number of Shares (1) 31,250 26,042 2,200 2,200 0 0
Average per share
option price (1) $ 1.50 $ 1.50 $ 2.00 $ 2.00 $ 0.00 $ 0.00
- - ----------
(1) Mr. King will cease being an officer and director of the Bank on April 15,
1994. As part of Mr. King's severance Agreement described below, Mr. King
agreed that his stock options will have terminated effective April 4, 1994.
(2) Mr. Ceklovsky ceased being an officer of the Bank effective April 2, 1994
and will cease providing services to the Bank effective May 15, 1994. The
Bank is currently negotiating a severance arrangement with Mr. Ceklovsky.
As of April 15, 1994, all principal officers as a group (seven in number), held
options to purchase 275,367 shares of the Bank's Common Stock at an exercise
prices ranging between $1.50 and $2.00 per share. There are no options
outstanding other than those described in the table above.
Employment Contract with Thomas E. King
- - ---------------------------------------
On April 3, 1992, the Bank entered into an employment agreement with Thomas E.
King, President and Chief Executive Officer, which provided for a base salary of
$150,000 per year. In addition, the agreement provided that Mr. King was
entitled to participate in the Bank's stock option plan and was eligible to
receive up to 50% of his annual base salary in the form of an incentive bonus
based upon the achievement of certain performance goals. Under the agreement,
Mr. King was also entitled to severance compensation equal to twelve months base
salary if the Board of Directors terminated Mr. King's employment during the
first year of employment for reasons other than serious misbehavior or
malfeasance. The severance compensation was to decrease each year after the
first year of his employment until it reached zero after five years of
employment.
-56-
On August 26, 1993, the severance compensation portion of the agreement with Mr.
King was amended. The amendment, among other things, provided that if Mr. King
was terminated for reasons other than serious misbehavior or malfeasance, the
Bank would pay to Mr. King as severance compensation the difference, if any,
between $150,000 and the before-tax gain realized by Mr. King upon the sale of
shares of the Bank's common stock that Mr. King had acquired, or had a right to
acquire, pursuant to the Bank's Stock Option Plan.
Severance Contract with Thomas E. King
- - --------------------------------------
Pursuant to the terms of a severance agreement dated April 7, 1994 (the
"Severance Agreement"), between the Bank and Mr. King, Mr. King will cease being
the President and Chief Executive Officer and a Director of the Bank effective
April 15, 1994. In connection with the termination of Mr. King's employment,
Mr. King, among other things, agreed to provide consulting services to the Bank
through August 15, 1994, relinquish rights he had to compensation that accrued
and had not been paid prior to the time of his termination, relinquish rights he
had to options to purchase shares of the Bank's Common Stock, and release the
Bank and its affiliates from certain liabilities and obligations including those
that arose out of his employment by the Bank, termination of that employment,
and related matters. The Bank, in turn, among other things, agreed to pay to
Mr. King a one-time severance payment of $150,000 on April 15, 1994, his out-
placement assistance until he secures a full-time position, his costs of health
insurance until the earlier of August 15, 1994, or the date he becomes eligible
for health insurance benefits offered by a future employer, and, provided that
he provides the consulting services described in the Severance Agreement for the
time period described therein, to continue to pay to him his regular base salary
of $12,500 through August 15, 1994. The Bank also agreed to release Mr. King
from certain liabilities and obligations including those that arose out of his
employment by the Bank, termination of that employment, and related matters.
Employment Contract with Thayer T. Prentice
- - -------------------------------------------
The Bank is expected to enter into a five-year employment agreement with Thayer
T. Prentice, Vice Chairman and Chief Executive Officer, which will provide for a
base salary of $150,000 per year. In addition, the agreement is expected to
provide that Mr. Prentice is entitled to participate in the Bank's stock option
plan and other employee benefit plans, is eligible to receive up to 40% of his
annual base salary in the form of an incentive bonus based upon the achievement
of certain performance goals and is to receive a $500,000 term life insurance
policy and an automobile allowance of $500 per month. The agreement is also
expected to provide that Mr. Prentice will be entitled to severance compensation
equal to twelve months base salary if he is terminated without cause. On March
30, 1994, Mr. Prentice was granted options to purchase 125,000 shares of the
Bank's common stock at a price of $1.50 per share. Mr. Prentice's options have
a term of ten years from the date of grant and become exercisable as to 25% of
the shares underlying the options immediately and as to the remaining 75% of the
shares, in equal installments on March 30, 1995, 1996, 1997 and 1998, subject to
earlier vesting in the event Mr. Prentice's employment is terminated without
cause or upon certain reorganizations.
Employment Contract with William T. Martin
- - ------------------------------------------
The Bank is expected to enter into a five-year employment agreement with William
J. Martin, President and Chief Operating Officer, which will provide for a base
salary of $125,000 per year. In addition, the agreement is expected to provide
that Mr. Martin is entitled to participate in the Bank's stock option plan
-57-
and other employee benefit plans, is eligible to receive up to 40% of his annual
base salary in the form of an incentive bonus based upon the achievement of
certain performance goals and is to receive a $500,000 term life insurance
policy and an automobile allowance of $500 per month. The agreement is also
expected to provide that Mr. Martin will be entitled to severance compensation
equal to twelve months base salary if he is terminated without cause. On April
4, 1994, Mr. Martin was granted options to purchase 104,167 shares of the Bank's
common stock at a price of $ 1.50 per share. Mr. Martin's options have a term of
ten years from the date of grant and become exercisable as to 25% of the shares
underlying the options immediately and as to the remaining 75% of the shares, in
equal installments on April 4, 1995, 1996, 1997 and 1998, subject to earlier
vesting in the event Mr. Martin's employment is terminated without cause or upon
certain reorganizations.
Transactions with Management
- - ----------------------------
The Bank has had and expects to continue to have banking transactions with some
of its directors (and their affiliates). Loans by the Bank to any director (or
affiliate) have been made in the ordinary course of business on substantially
the same terms, including interest rates, collateral and repayment terms, as
those prevailing at the time for comparable transactions with other persons. In
the opinion of management of the Bank, such loans have not involved more than
the normal risk of collectibility or presented other unfavorable features.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
- - --------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Bank's
directors and executive officers, and any person who owns more than ten percent
of the Bank's common stock, to file with the FDIC initial reports of ownership
and reports of changes in ownership of common stock of the Bank. Directors,
executive officers and greater than ten-percent shareholders, if any, are
required by FDIC regulations to furnish the Bank with copies of all Section
16(a) forms they file. To the Bank's knowledge, based solely on review of the
copies of such reports furnished to the Bank and written representations that no
other reports were required, during the fiscal year ended December 31, 1993, all
directors and executive officers of the Bank were in compliance with the
applicable Section 16(a) filing requirements, except as follows: Director Louis
G. Fifer purchased 500 shares of common stock in 1993. The purchase was not
reported on a Form F-8, however, an FDIC Form F-8A disclosing the purchase was
filed with the FDIC four days after the Form F-8A filing deadline of February
14, 1993. Florence Bellacosa, Vice President and Trust Department Manager, was
late in filing a Form F-7.
ITEM 11. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM F-3
----------------------------------------------------------------
(a) Contents. The following documents are filed as a part of this report:
--------
(1) Financial Statements for the Periods Ended:
. Financial Highlights
December 31, 1993, 1992 and 1991.
-58-
. Consolidated Balance Sheets
December 31, 1993 and 1992.
. Consolidated Statements of Operations
December 31, 1993, 1992 and 1991.
. Consolidated Statements of Changes in Stockholders' Equity
December 31, 1993, 1992 and 1991.
. Consolidated Statements of Cash Flows December 31, 1993, 1992
and 1991.
. Notes to the Consolidated Financial Statements.
. Report of Independent Public Accountants.
(2) Financial Statement Schedules:
Tables required to be filed by item 7 of this form:
--------------------------------------------------
. Table I - Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rates and Interest
Differentials - December 31, 1993, 1992 and 1991.
. Table II - Investment Portfolio - December 31, 1993 and 1992.
. Table III - Loan Portfolio - December 31, 1993 and 1992.
. Table IV - Analysis of the Allowance for Loan Losses -
December 31, 1993 and 1992.
. Table V - Deposits - December 31, 1993 and 1992.
. Table VI - Return on Equity and Assets - December 31, 1993,
1992 and 1991.
. Table VII - Short-Term Borrowings - December 31, 1993, 1992
and 1991.
Schedules required to be filed according to FDIC rules and
----------------------------------------------------------
regulations, section 335.627:
----------------------------
. Schedule I - Securities.
. Schedule II - Loans to officers, directors, principal security
holders, and any associates of the foregoing persons.
. Schedule III - Loans and lease financing receivables.
-59-
. Schedule IV - Fixed Assets.
. Schedule V - Investments in, income from dividends, and equity
in earnings or losses of subsidiaries and associated
companies.
. Schedule VI - Allowance for loan losses.
(b) Reports on Form F-3.
-------------------
. The Bank filed a Current Report on Form F-3 on March 9, 1994,
regarding the termination of a Memorandum of Understanding
entered into between the Bank and the FDIC and State Banking
Department on February 24, 1993.
(c) Exhibits. The following exhibits are filed as a part of this report:
--------
(1) Articles of Incorporation and Bylaws.*
(2) Instruments defining the rights of security holders, including
indentures. (Not filed, as not applicable).
(3.1) CapitolBank Sacramento 1992 Stock Option Plan.*
(3.2) Thomas E. King Employment Agreement.
(3.3) Thomas E. King Severance Agreement.
(3.4) Lease - West Sacramento.**
(3.5) Lease - 300 Capitol Mall.***
(4) Statement regarding computation of per share earnings.
(Incorporated by reference to consolidated Statement of
Operations of the Bank - Note 9, Page 46).
(5) Statement regarding computation of ratios. (Not filed, as not
applicable).
(6) Annual report to security holders. (Not filed, as not
applicable).
(7) Letter regarding change in accounting principles. (Not filed,
as not applicable).
(8) Previously unfiled documents. (Not filed, as not applicable).
(9) List of all subsidiaries of the Bank. (Exhibit 9).
* Incorporated by reference from the exhibits included with the
Bank's Form F-2, for the year ended December 31, 1992.
-60-
** Incorporated by reference from the exhibits included with the
Bank's Form F-2, for the year ended December 31, 1990.
*** Incorporated by reference from the exhibits included with the
Bank's Form F-2, for the year ended December 31, 1987.
-61-
EXHIBIT 9
LIST OF ALL SUBSIDIARIES OF THE BANK
Percentage of
Outstanding Shares State of Year of
Name of Subsidiary Owned by the Bank Incorporation Incorporation Nature of Business
- - --------------------------------------------------------------------------------------------------------------
Commerce Corporation 100% California 1977 Acts as Trustee for Trust
Deeds held by the Bank
Capitol Commerce Develop- 100% California 1983 Real estate investment and
ment Corporation VI* development
Capitol Commerce 100% California 1983 Real estate investment and
Development development
Corporation VII*
Capitol Commerce 100% California 1977 Dormant
Corporation
- - ----------
* Although incorporated in 1983, no shares of the Corporation were acquired
by the Bank until 1984.
The financial statements of all subsidiaries are consolidated with the
financial statements of the Bank.
-62-
SIGNATURE
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Bank has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 14, 1994 CAPITOLBANK SACRAMENTO
By /s/ Thayer T. Prentice
--------------------------
Thayer T. Prentice
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: April 14, 1994 /s/ Thayer T. Prentice
--------------------------------------
Thayer T. Prentice
CEO & Director
(Principal Executive Officer)
Dated: April 14, 1994 /s/ Mary D. Roper
--------------------------------------
Mary D. Roper
(Controller)
Dated: April 14, 1994 /s/ Ralph Andersen
--------------------------------------
Ralph Andersen, Director
Dated: April 14, 1994 /s/ Louis G. Fifer
--------------------------------------
Louis G. Fifer, Director
Dated: April 14, 1994 /s/ Thomas J. Hammer, Jr.
--------------------------------------
Thomas J. Hammer, Jr., Director
Dated: April 14, 1994 /s/ Robert T. Jenkins
--------------------------------------
Robert T. Jenkins, Director
Dated: April 14, 1994 /s/ William J. Martin
--------------------------------------
William J. Martin, Director*
Dated: April 14, 1994 /s/ Thayer T. Prentice
--------------------------------------
Thayer T. Prentice, Director
Dated: April 14, 1994 /s/ Carolyn G. Reid
--------------------------------------
Carolyn G. Reid, Director
-63-
Dated: April 14, 1994 /s/ J. Al Wickland, Jr.
--------------------------------------
J. Al Wickland, Jr., Director
Dated: April 14, 1994 /s/ John A. Wickland, III
--------------------------------------
John A. Wickland, III, Director
__________
* Mr. Martin will become a director effective April 15, 1994.
-64-
Table I--Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differentials
Average Balances, Yields and Rates
(Dollar amounts in thousands)
1993 1992 1991
----------------------------- ----------------------------- -----------------------------
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expenses Paid
----------------------------- ----------------------------- -----------------------------
ASSETS
Federal funds sold $ 5,910 $ 162 2.74% $ 4,683 $ 147 3.14% $ 4,121 $ 248 6.02%
Interest-bering deposits with
other financial institutions 3,023 121 4.00% 5,706 377 6,61% 8,490 620 7.30%
Investment securities:
U.S. Treasury securities 24,375 1,548 6.35% 23,241 1,575 6.78% 21,729 1,660 7.64%
U.S. Government Agencies 6,045 390 6.45% 5,728 445 7.77% 10,507 904 8.60%
Other securities 1,323 50 3.78% 6,385 247 3.88% 3,378 174 5,15%
Loans 69,954 6,680 9.55% 66,018 6,334 9.59% 75,638 8,882 11.74%
-------- ------ -------- ------ -------- -------
Total Interest-Earning Assets 110,630 8,951 8.09% 111,761 9,125 8.17% 123,863 12,488 10.08%
------ ------ -------
Cash and due from banks 8,587 8,664 7,302
Furniture, fixtures and equipment 1,636 1,928 2,157
Interest receivable and other assets 2,508 3,536 3,700
Reserve for loan losses (1,268) (1,400) (1,306)
-------- -------- --------
Total Assets $122,093 $124,543 $135,716
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing transaction accounts 63,781 1,869 2.93% 62,670 2,090 3.33% 60,234 2,971 4.93%
Savings accounts 4,133 128 3.10% 4,216 154 3.65% 2,196 115 5.24%
Time accounts 16,324 634 3.88% 21,498 996 4.63% 31,897 2,164 6.78%
Other borrowed funds 1,614 40 2.48% 1,092 41 3.75% 2,084 87 4.17%
-------- ------ -------- ------ -------- -------
Total Interest-Bearing Liabilities 85,852 2,671 3.11% 89,476 3,281 3.67% 96,411 5,337 5.53%
Demand accounts 26,889 25,444 27,685
Accrued expenses and other liabilities 527 1,017 781
Shareholders' equity 8,825 8,606 10,839
-------- -------- --------
Total Liabilities and
Shareholders' Equity $122,093 $124,543 $135,716
======== ======== ========
NET INTEREST INCOME $6,280 $5,844 $ 7,151
====== ====== =======
NET INTEREST MARGIN 5.68% 5.23% 5.77%
NOTE: Loan fees are included in interest income for loans. Non-accrual loans
have been included in average loan balances.
-65-
ACCOMPANYING INFORMATION
TABLE II--INVESTMENT PORTFOLIO
DECEMBER 31, 1993
- - -----------------------------------------------------------------------------------------
Principal Book Value Market Average
Type of Maturity Grouping Amount Value(1) Value Yields
- - -----------------------------------------------------------------------------------------
U.S. Treasury Securities:
Within 1 year $ 3,000,000 $ 3,004,434 $ 3,088,740 3.48%
After 1 but within 5 years 21,000,000 21,141,214 21,850,230 4.30%
After 5 but within 10 years 1,000,000 1,017,180 1,054,680 5.22%
----------------------------------------------------------
Total: $ 25,000,000 $ 25,162,828 $ 25,993,650 4.24%
==========================================================
Securities of Other U.S.
Government Agencies and
Corporations:
Within 1 year $ 0 $ 0 $ 0 0.00%
After 1 but within 5 years 3,613,095 3,677,347 3,739,407 5.55%
After 5 but within 10 years 1,000,000 993,033 1,039,370 5.52%
After 10 years 4,000,000 4,007,107 3,941,410 5.73%
----------------------------------------------------------
Total: $ 8,613,095 $ 8,677,487 $ 8,720,187 5.68%
==========================================================
Other Bonds, Notes and
Debentures: $ 500,000 $ 501,981 $ 503,518 4.62%
==========================================================
$ 34,113,095 $ 34,342,296 $ 35,217,355 4.95%
==========================================================
- - ----------
(1) Book value reflects cost, adjusted for accumulated amortization and
accretion. No securities are less than investment grade.
-66-
ACCOMPANYING INFORMATION
TABLE II--INVESTMENT PORTFOLIO
DECEMBER 31, 1992
- - ---------------------------------------------------------------------------------
Principal Book Value Market Average
Type of Maturity Grouping Amount Value(1) Value Yields
- - ---------------------------------------------------------------------------------
U.S. Treasury Securities:
Within 1 year $ 2,000,000 $ 2,001,587 $ 2,026,560 7.66%
After 1 but within 5 years 24,000,000 24,303,515 25,073,360 6.42%
After 5 but within 10 years 1,000,000 1,020,282 999,370 5.99%
--------------------------------------------------
Total: $27,000,000 $27,325,384 $28,099,290 6.49%
==================================================
Securities of Other U.S.
Government Agencies and
Corporations:
Within 1 year $ 1,000,000 $ 1,009,280 $ 1,011,250 4.10%
After 1 but within 5 years 2,692,578 2,728,383 2,848,446 7.66%
After 5 but within 10 years 1,626,605 1,620,794 1,641,621 7.30%
After 10 years 1,000,000 1,000,000 1,042,530 8.13%
--------------------------------------------------
Total: $ 6,319,183 $ 6,358,457 $ 6,543,847 7.08%
==================================================
Municipal Bonds:
After 1 but within 5 years $ 250,000 $ 254,957 $ 252,580 5.50%
==================================================
Other Bonds, Notes and
Debentures: $ 250,000 $ 250,000 $ 250,000 6.25%
==================================================
$33,819,183 $34,188,798 $35,145,717 6.59%
==================================================
- - ----------
(1) Book value reflects cost, adjusted for accumulated amortization and
accretion. No securities are less than investment grade.
-67-
ACCOMPANYING INFORMATION
TABLE III--LOAN PORTFOLIO
The following table shows the composition of loans of CapitolBank Sacramento by
type of loan on December 31:
(dollars in thousands) 1993 1992
------- -------
Real Estate Construction $21,189 $12,440
Real Estate Mortgages 30,685 27,410
Commercial and Agricultural 21,637 21,437
Individual Consumer 2,197 2,863
Other 1,041 688
------- -------
76,749 64,838
Less: Unearned Discount (13) (16)
Allowance for Loan Losses (1,406) (1,170)
Deferred Loan Fees (826) (425)
------- -------
(2,245) (1,611)
Loans, Net $74,504 $63,227
======= =======
There were no concentrations of loans exceeding 10% of total loans which were
not otherwise disclosed at a category of in the above table.
NON-PERFORMING LOANS December 31,
(dollars in thousands) 1993 1992
------ ------
Non-accrual loans:
Real Estate $ 67 $1,209
Commercial and Agricultural 71 942
------ ------
Total 138 2,151
Accruing loans past due 30 days or more:
Real Estate 1,119 3
Commercial and Agricultural 0 170
------ ------
Total 1,119 173
Total Non-Performing Loans $1,257 $2,324
====== ======
Other Real Estate Owned $ 70 $ 963
====== ======
Non-performing loans as a percent of total loans 1.64% 3.58%
====== ======
Allowance for loan losses as a percent of total loan 1.83% 1.80%
====== ======
-68-
ACCOMPANYING INFORMATION
TABLE IV--ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
1993 1992 1991
------- ------- --------
(dollar amounts in thousands)
Balance at beginning of year $1,170 $1,122 $1,161
Provision charged to expense 436 520 1,067
Charge-Offs:
Real Estate 136 0 388
Commercial 226 680 762
------ ------ ------
Total: 362 680 1,150
Recoveries:
Real Estate 5 1 4
Commercial 156 207 40
------ ------ ------
Total: 161 208 44
Net Charge-Offs (201) (472) (1,106)
Balance at end of year* $1,405 $1,170 $1,122
====== ====== ======
Ratio: Net charge-offs to average loans 0.27% 0.73% 1.49%
====== ====== ======
- - ----------
* Allowance for loan losses is unallocated.
-69-
ACCOMPANYING INFORMATION
TABLE V--DEPOSITS
The following table sets forth, by time remaining to maturity, the time deposits
of CapitolBank Sacramento in amounts of $100,000 or more as of December 31: (in
thousands)
1993 1992
------ ------
Time deposits of $100,000 or more:
Three months or less $4,713 $5,764
Over three months through six months 1,201 1,509
Over six months through twelve months 1,305 1,159
Over twelve months 1,105 1,200
------ ------
Total $8,324 $9,632
====== ======
Note: Refer to Average Balances and Rate Schedules for information on separate
deposit categories.
-70-
ACCOMPANYING INFORMATION
TABLE VI--RETURN ON EQUITY AND ASSETS
December 31,
1993 1992 1991
------ ------ ------
Return on Average Assets 0.26% -1.50% 0.16%
Return on Average Equity 3.57% -21.65% 1.95%
Equity to Assets Ratio 7.47% 7.42% 7.25%
-71-
ACCOMPANYING INFORMATION
TABLE VII--SHORT-TERM BORROWINGS
The following table shows balances outstanding as of December 31:
Average Average
Interest Interest
(dollars in thousands) 1993 Rate 1992 Rate
-------- -------- -------- --------
Repurchase Agreements $ 150 2.70% $ 205 3.00%
Federal Funds Purchased 0 0.00% 0 0.00%
Treasury, Tax and Loan 2,584 2.70% 2,315 2.65%
Other Borrowings 0 0.00% 0 0.00%
-------- -------- -------- --------
$ 2,734 2.70% $ 2,520 2.68%
======== ======== ======== ========
Repurchase agreements: Generally for a term of less than thirty days.
Federal funds purchased: Overnight.
Treasury, tax and loan: Note option.
The following table shows average amounts outstanding and average yields
thereon:
Average Average
Interest Interest
(dollars in thousands) 1993 Rate 1992 Rate
-------- -------- -------- --------
Repurchase Agreements $ 510 2.55% $ 252 3.55%
Federal Funds Purchased 0 0.00% 8 4.64%
Treasury, Tax and Loan 1,104 2.45% 1,092 2.96%
Other Borrowings 0 0.00% 21 0.00%
-------- -------- -------- --------
$ 1,614 2.48% $ 1,373 3.04%
======== ======== ======== ========
-72-
SCHEDULE I--SECURITIES
DECEMBER 31, 1993
- - -----------------------------------------------------------------------------------------
Book Market
Value Value
- - -----------------------------------------------------------------------------------------
1. U.S. Treasury securities $ 25,162,828 $ 25,993,650
2. U.S. Government agency and corporate obligations:
a. All holdings of U.S. Government-issued
or guaranteed certificates of participation
in pools of residential mortgages 5,643,687 5,586,137
b. All other 3,033,800 3,134,050
3. Securities issued by states and political
subdivisions in the U.S. 251,981 253,518
4. Other domestic securities (debt and equity):
a. All holdings of private (i.e., non-
government-issued or guaranteed)
certificates of participation in pools
of residential mortgages -0- -0-
b. All other -0- -0-
5. Foreign securities (debt and equity) 250,000 250,000
------------ ------------
6. Total (sum of items 1 through 5) $ 34,342,296 $ 35,217,355
============ ============
7. Pledged securities $ 12,416,000 $ 13,063,000
============ ============
-73-
SCHEDULE I--SECURITIES
DECEMBER 31, 1992
- - -----------------------------------------------------------------------------------------
Book Market
Value Value
- - -----------------------------------------------------------------------------------------
1. U.S. Treasury securities $ 27,325,384 $ 28,099,290
2. U.S. Government agency and corporate obligations:
a. All holdings of U.S. Government-issued
or guaranteed certificates of participation
in pools of residential mortgages 2,327,394 2,407,000
b. All other 4,031,063 4,136,847
3. Securities issued by states and political
subdivisions in the U.S. 254,957 252,580
4. Other domestic securities (debt and equity):
a. All holdings of private (i.e., non-
government-issued or guaranteed)
certificates of participation in pools
of residential mortgages -0- -0-
b. All other -0- -0-
5. Foreign securities (debt and equity) 250,000 250,000
------------ ------------
6. Total (sum of items 1 through 5) $ 34,188,798 $ 35,145,717
============ ============
7. Pledged securities $ 11,438,000 $ 12,017,386
============ ============
-74-
SCHEDULE II--LOANS TO OFFICERS, DIRECTORS,
PRINCIPAL SECURITY HOLDERS, AND ANY
ASSOCIATES OF THE FOREGOING PERSONS
DECEMBER 31, 1993
- - --------------------------------------------------------------------------------
Deductions:
Balance at Balance
Name of beginning Amounts Amounts end of
Borrower of period Additions Collected Charged-Off Period
- - --------------------------------------------------------------------------------
None
-75-
SCHEDULE II--LOANS TO OFFICERS, DIRECTORS,
PRINCIPAL SECURITY HOLDERS, AND ANY
ASSOCIATES OF THE FOREGOING PERSONS
DECEMBER 31, 1992
- - --------------------------------------------------------------------------------
Deductions:
Balance at Balance
Name of beginning Amounts Amounts end of
Borrower of period Additions Collected Charged-Off Period
- - --------------------------------------------------------------------------------
None
-76-
SCHEDULE III--LOANS AND LEASE FINANCING RECEIVABLES
DECEMBER 31, 1993
Book
Value
--------
1. Loans secured by real estate:
a. Construction and land development $ 19,859
b. Secured by farmland 0
c. Secured by 1-4 family residential properties
(1.) Revolving, open-end loans secured by 1-4 residential
properties and extended residential properties and
extended under lines of credit 2,197
(2.) All other loans secured by 1-4 family residential
properties:
(a.) Secured by first liens 4,470
(b.) Secured by junior liens 148
d. Secured by multifamily (5 or more) residential properties 0
e. Secured by nonfarm nonresidential properties 28,963
2. Loans to depository institutions:
a. To commercial banks in the U.S.:
(1.) To U.S. branches and agencies of foreign banks 0
(2.) To other commercial banks in the U.S. 0
b. To other depository institutions in the U.S. 0
c. To banks in foreign countries:
(1.) To foreign branches of other U.S. banks 0
(2.) To other banks in foreign countries 0
3. Loans to finance agricultural production and other loans to
farmers 0
4. Commercial and industrial loans:
a. To U.S. addressees (domicile) 19,538
b. To non-U.S. addressees (domicile) 0
5. Acceptances of other banks 0
6. Loans to individuals for household, family, and other personal
expenditures (ie., consumer loans) (includes purchased paper):
a. Credit cards and related plans (includes check credit 846
and other revolving credit plans)
b. Other (includes single payment, installment,
and all student loans) 532
7. Loans to foreign governments and official institutions
(including Foreign central banks) 0
8. Obligations (other than securities and leases) of
states and political subdivisions in the U.S. (includes
nonrated industrial development obligations):
a. Taxable obligations 0
b. Tax-exempt obligations 0
9. Other loans
a. Loans for purchasing or carrying securities
(secured or unsecured) 0
b. All other loans (exclude consumer loans) 195
10. Lease financing receivables (net of unearned income) 0
11. LESS: Any unearned income on loans reflected in items
1-9 above 839
--------
12. Total loans and leases, net of unearned income
(sum of items 1 through 10 minus item 11) $ 75,909
========
-77-
SCHEDULE III--LOANS AND LEASE FINANCING RECEIVABLES
DECEMBER 31, 1992
Book
Value
--------
1. Loans secured by real estate:
a. Construction and land development $ 12,440
b. Secured by farmland 0
c. Secured by 1-4 family residential properties
(1.) Revolving, open-end loans secured by 1-4 residential
properties and extended residential properties and
extended under lines of credit 2,756
(2.) All other loans secured by 1-4 family residential
properties:
(a.) Secured by first liens 4,935
(b.) Secured by junior liens 178
d. Secured by multifamily (5 or more) residential properties 0
e. Secured by nonfarm nonresidential properties 25,624
2. Loans to depository institutions:
a. To commercial banks in the U.S.:
(1.) To U.S. branches and agencies of foreign banks 0
(2.) To other commercial banks in the U.S. 0
b. To other depository institutions in the U.S. 0
c. To banks in foreign countries:
(1.) To foreign branches of other U.S. banks 0
(2.) To other banks in foreign countries 0
3. Loans to finance agricultural production and other loans to
farmers 0
4. Commercial and industrial loans:
a. To U.S. addressees (domicile) 17,957
b. To non-U.S. addressees (domicile) 0
5. Acceptances of other banks 0
6. Loans to individuals for household, family, and other personal
expenditures (ie., consumer loans) (includes purchased paper):
a. Credit cards and related plans (includes check credit
and other revolving credit plans) 669
b. Other (includes single payment, installment, and all
student loans) 261
7. Loans to foreign governments and official institutions
(including Foreign central banks) 0
8. Obligations (other than securities and leases) of states
and political subdivisions in the U.S. (includes nonrated
industrial development obligations):
a. Taxable obligations 0
b. Tax-exempt obligations 0
9. Other loans
a. Loans for purchasing or carrying securities
(secured or unsecured) 0
b. All other loans (exclude consumer loans) 19
10. Lease financing receivables (net of unearned income) 0
11. LESS: Any unearned income on loans reflected in items 1-9 above 441
--------
12. Total loans and leases, net of unearned income
(sum of items 1 through 10 minus item 11) $ 64,398
========
-78-
SCHEDULE IV--FIXED ASSETS
DECEMBER 31, 1993
- - -----------------------------------------------------------------------------
Accumulated Amount at
Gross depreciation and which carried on
Classification Book Value amortization balance sheet
- - -----------------------------------------------------------------------------
Personal property $ 61,789 $ 44,719 $ 17,070
Furniture, fixtures
and equipment 1,992,316 1,633,490 358,826
Leasehold
improvements 1,955,240 846,803 1,108,437
---------------------------------------------------
Totals $ 4,009,345 $ 2,525,012 $ 1,484,333
===================================================
-79-
SCHEDULE IV--FIXED ASSETS
DECEMBER 31, 1992
- - -----------------------------------------------------------------------------
Accumulated Amount at
Gross depreciation and which carried on
Classification Book Value amortization balance sheet
- - -----------------------------------------------------------------------------
Personal property $ 42,438 $ 27,571 $ 14,867
Furniture, fixtures
and equipment 1,948,988 1,403,272 545,716
Leasehold
improvements 1,955,967 731,704 1,224,263
------------------------------------------------------
Totals $ 3,947,393 $ 2,162,547 $ 1,784,846
======================================================
-80-
SCHEDULE V--INVESTMENTS IN INCOME FROM
DIVIDENDS, AND EQUITY IN EARNINGS OR LOSSES
OF SUBSIDIARIES AND ASSOCIATED COMPANIES
DECEMBER 31, 1993
- - --------------------------------------------------------------------------------------------------------------
Equity in Bank's
% of underlying proportionate
Voting net assets part of earnings
Stock Total at balance Amount of or loss for
Name of Issuer Owned Investment sheet date Dividends the period
- - --------------------------------------------------------------------------------------------------------------
Commerce Corporation 100% $ 50,618 $ 50,618 $ 0 41,867
Capitol Commerce Development
Corporation VI 100% 61,549 61,549 0 (2,617)
Capitol Commerce Development
Corporation VII 100% 447,926 447,926 0 43,527
The financial statements of all subsidiaries are consolidated with the financial
statements of the Bank.
-81-
SCHEDULE V--INVESTMENTS IN INCOME FROM
DIVIDENDS, AND EQUITY IN EARNINGS OR LOSSES
OF SUBSIDIARIES AND ASSOCIATED COMPANIES
DECEMBER 31, 1992
- - --------------------------------------------------------------------------------------------------------------
Equity in Bank's
% of underlying proportionate
Voting net assets part of earnings
Stock Total at balance Amount of or loss for
Name of Issuer Owned Investment sheet date Dividends the period
- - --------------------------------------------------------------------------------------------------------------
Commerce Corporation 100% $ 800,000 $ 399,752 $ 0 114,222
Capitol Commerce Development
Corporation VI 100% 780,700 (716,534) 0 (1,060,803)
Capitol Commerce Development
Corporation VII 100% 400,000 1,392,410 0 122,727
The financial statements of all subsidiaries are consolidated with the financial
statements of the Bank.
-82-
SCHEDULE VI--ALLOWANCE FOR LOAN LOSSES
DECEMBER 31, 1993
Amount
------
Balance end of previous period $1,170
Recoveries credited to allowance 161
Changes incident to mergers and absorptions 0
Provision for loan losses 436
Less: Losses charged to allowance 361
Foreign currency translation adjustment 0
------
Balance end of period $1,406
======
-83-
SCHEDULE VI--ALLOWANCE FOR LOAN LOSSES
DECEMBER 31, 1992
Amount
------
Balance end of previous period $1,122
Recoveries credited to allowance 208
Changes incident to mergers and absorptions 0
Provision for loan losses 520
Less: Losses charged to allowance 680
Foreign currency translation adjustment 0
------
Balance end of period $1,170
======
-84-
EXHIBIT 3.2
[Letterhead of CapitolBank Sacramento]
CapitolBank
Sacramento
April 3, 1992
Mr. Thomas E. King
24735 Senda Pajaro
Calabasas Park, California 91302
Dear Tom,
On behalf of the Search Committee for the Board of Directors of CapitolBank
Sacramento, I would like to express our excitement regarding your acceptance of
the position of President and Chief Executive Officer of CapitolBank Sacramento.
The Committee is enthusiastically convinced you have the ability to build upon
our organization and lead it forward to become the premier business bank in the
greater Sacramento area. We enthusiastically endorse your suggested mission
statement and believe you are the one to make it happen.
The following are the terms of employment we have agreed upon:
1. A base salary of $150,000 per year.
2. Eligible to receive up to 50% of your annual base salary in the form of an
incentive compensation payment based on achieving certain performance
benchmarks in our strategic five-year plan (see attached). For
compensation purposes, your incentive plan-year will coincide with the
Bank's fiscal year.
3. A front-end bonus of $30,000 to be payable at the start of employment to
cover all relocation, moving and temporary living expenses.
4. An automobile allowance of $500 per month plus a mileage allowance per the
current Bank plan.
5. Participation in a stock option plan to be formed within twelve months of
employment allowing you options on no less than 2 1/2% of the Bank's common
stock. Said option rights should be spread equally over the first five
years of the plan. Each option right should remain available to exercise
for a determinant period of time thereafter, such as two years. The option
price is to be based on the market value of CapitolBank stock as of the
first day of your employment.
(If the Bank is either acquired by or merged with another bank, your rights
to exercise the stock will immediately vest.) Such a plan needs to be
reviewed and approved by the Shareholders at the April 29 Shareholders
annual meeting.
6. A severance payment which pays twelve months base pay should the Board
decide to terminate your employment for reasons other than serious
misbehavior or malfeasance. Said severance shall remain at that level for
the entire first year after which time, on your first anniversary date, it
will be reduced by 20%. It is to remain at that reduced level for your
second twelve-months of employment. Commencing with your second
anniversary date, it shall thereafter decrease each month in equal amounts
over the next 36-months, at which point it becomes zero. In the event the
Bank is either acquired by or merged with another bank without providing
you with comparable earnings opportunity, you will be entitled to one-
year's base pay as a severance.
7. All other fringe benefits to which all Bank employees are entitled and
which are enumerated in the Bank's Policy Manual.
8. At the pleasure of the Shareholders, a seat on the Board of Directors.
9. Employment to commence on or about April 15, 1992.
If this letter covers the basis of our understanding, acknowledge with your
signature in the appropriate place on one of the duplicate originals and return
to me. We look forward to a long and beneficial arrangement for all involved.
Yours truly,
/s/ John A. Wickland, III
John A. Wickland, III
Chairman, Search Committee
Attachments
JAW/lml
cc: Directors, CapitolBank Sacramento
ACCEPTED BY: /s/ Thomas E. King
-------------------------
DATE: April 3, 1992
--------------------------------
CAPITOLBANK SACRAMENTO
CEO INCENTIVE COMPENSATION PERFORMANCE PLAN
1992
----
PERFORMANCE CHARACTERISTICS % OF BASE SALARY
- - --------------------------- ------------------------------------------------------------------------
10% 20% 30% 40%
-------------- ---------------- ---------------- --------------------
(GREEN) (BLUE)
(1) LOAN PORTFOLIO QUALITY [1].. (less than)4% (greater than)4% (greater than)3% (greater than)2-1/2%
(2) TOTAL ASSETS (000).......... 152,000 154,000 156,800 161,000
(3) TOTAL LOANS (000)........... 103,740 105,105 107,061 109,883
(4) NET INCOME (000) [2]........ 1,350 1,380 1,410 1,430
(5) RETURN ON AVERAGE EQUITY.... 11.00% 1.50% 11.89% 12.05%
MULTIPLIER BASED ON INTANGIBLES [3]
LOW: 75% OF ABOVE LEVEL
AVE: 100% OF ABOVE LEVEL
HIGH: 125% OF ABOVE LEVEL
[1] SUMMARY OF TOTAL NON ACCRUAL LOANS AND/OR DELINQUENCY STATUS
[2] BEFORE PRESIDENT'S INCENTIVE
[3] THE BOARD WILL SELECT THE APPROPRIATE LEVEL BASED ON ITS SUBJECTIVE
EVALUATION OF PERFORMANCE IN THE FOLLOWING AREAS:
-MORALE AND ENTHUSIASM OF ORGANIZATION
-REPUTATION IN COMMUNITY
-PERCEIVED EFFECTIVENESS OF PRESIDENT IN LEADERSHIP ISSUES
-DECISIVENESS
STEPS TO CALCULATING
- - --------------------
(1) IDENTIFY THE LEVEL OF PERFORMANCE OF EACH OF THE PERFORMANCE
CHARACTERISTICS.
(2) DISCARD THE PERFORMANCE CHARACTERISTIC WITH THE POOREST LEVEL OF
PERFORMANCE.
(3) IDENTIFY THE HIGHEST "% OF BASE SALARY" WHICH CONTAINS ALL REMAINING FOUR
LEVELS OF PERFORMANCE.
(4) MULTIPLY THE "% OF BASE SALARY" PERCENTAGE BY THE INTANGIBLE MULTIPLIER AND
APPLY THE RESULTING % TO THE APPROPRIATE BASE SALARY.
[Letterhead of CapitolBank Sacramento]
CapitolBank
Sacramento
August 26, 1993
Thomas E. King, President
CapitolBank Sacramento
300 Capitol Mall
Post Office Box 2311
Sacramento, California 95814
Re: Modification to April 3, 1992 employment letter
Dear Tom,
In response to your letter dated February 26, 1993, the Executive Compensation
Committee has met to review your proposal; suggested a counter-proposal to which
you have verbally agreed; and submitted the agreed-upon modification to the
Board of Directors, who approved it at the August 18, 1993 board meeting.
The modification to the February 5, 1992 letter which we have all agreed to, is
as follows:
CapitolBank agrees, in the event of a termination as anticipated in
Paragraph 6 of the April 3 letter, to guarantee that upon liquidation of
the stock you purchased, or had a right to purchase pursuant to your Stock
Option Agreement, you will realize a before-tax gain of $150,000. To the
extent your gain is less, based on the then-current market price, the Bank
will pay you the balance as your severance payment. In the event the
amount you realize exceeds $150,000, the Bank has no additional obligation.
Should this language adequately express the modification to the subject letter,
please sign and return one of the two copies I have provided you. The second
copy is for your records.
Very truly yours, Agreed upon by,
/s/ John A. Wickland, III /s/ Thomas E. King
- - ------------------------------------ --------------------------------------
John A. Wickland, III Thomas E. King
Chairman President
Executive Compensation Committee CapitolBank Sacramento
CapitolBank Sacramento
Dated: August 30, 1993
cc: Board of Directors,
CapitolBank Sacramento
EXHIBIT 3.3
[Letterhead of CapitolBank Sacramento]
CapitolBank
Sacramento
April 7, 1994
Thomas E. King
CapitolBank Sacramento
Post Office Box 2311
Sacramento, California 95814
Dear Tom,
This letter will memorialize the agreement between you and CapitolBank
Sacramento regarding the termination of your employment with the Bank. In that
regard, you and the Bank agree as follows:
1. Your signature below constitutes your termination from the offices of
President and Chief Executive Officer and as an employee of the Bank and
your resignation as a director of the Bank, effective as of the close of
business on April 15, 1994.
2. Through August 15, 1994 (the "Termination Date"), you will provide such
consulting services to the Bank as may from time to time be assigned to you
by the Chairman of the Board, Chief Executive Officer, or President of the
Bank, which services will be similar to those performed by you prior to
your termination of employment. In your capacity as a consultant to the
Bank, you will be available to the Bank by telephone or mail. It is
understood that it shall not be a breach of this agreement should you
obtain other employment within the four-month consulting period described
in this Section.
3. The Bank will pay to you a one-time severance payment of $150,000 on April
15, 1994 and, provided that you provide the consulting services described
above for the time period described above, will (a) continue to pay to you
your regular base salary of $12,500 per month in accordance with the Bank's
standard payroll practices through the Termination Date; and (b) will pay
your costs of health insurance, as elected by you under Consolidated
Omnibus Reconciliation Act ("COBRA"), until the earlier of the Termination
Date, or the date you become eligible for health insurance benefits offered
by a future employer. The Bank will also pay for your out-placement
assistance at the agency of your choice until you secure a full-time
position. The Bank may withhold from or on account of benefits hereunder
all federal, state, city or other taxes as may be required by all
applicable federal, state, city or other tax laws, regulations or rulings.
4. Effective April 15, 1994: (a) you will no longer be entitled to
participate in any employee benefit or health or other insurance plans of
the Bank or its affiliates and will no longer accrue any vacation, personal
or similar time; (b) you agree that your stock option arrangements with the
Bank will have terminated effective April 4, 1994, and any employment
agreements between you and the Bank (including, without limitation, the
letter agreement dated April 3, 1992, as
amended by the letter agreement dated August 26, 1993), will immediately
terminate and be of no further force or effect, and you hereby waive and
relinquish any rights you have or claim to have under such arrangements or
agreements; and (c) you hereby waive and relinquish any rights you have or
claim to have to any form of compensation that accrued prior to your
termination of employment with the Bank, except accrued vacation time or
payment in respect thereof.
5. As a material inducement to the Bank to enter into this agreement, you
hereby irrevocably and unconditionally release, acquit, and forever
discharge the Bank and each of the Bank's owners, stockholders,
predecessors, successors, assigns, agents, directors, officers, employees,
accountants, representatives, attorneys, divisions, subsidiaries,
affiliates (and agents, directors, officers, employees, representatives,
independent accountants and attorneys of such divisions, subsidiaries and
affiliates), and all persons acting by, through, under or in concert with
any of them (collectively "Releasees"), or any of them, from any and all
charges, complaints, claims, liabilities, obligations, promises,
agreements, damages, actions, causes of action, suits, rights, demands,
costs, losses, debts and expenses (including attorneys' fees and costs
actually incurred), of any nature known or unknown ("claim" or "claims"),
arising or which may have existed prior to the date hereof or in connection
with your termination of employment (excluding accrued vacation time or
payment in respect thereof), including, but not limited to, any and all
claims arising out of your employment by the Bank, termination of that
employment, alleged or actual violations of any employment-related
contracts, express or implied, any covenant of good faith and fair dealing,
express or implied, any tort, any federal, state or municipal statute,
regulation or ordinance, including, but not limited to, Title VII of the
Civil Rights Act of 1964, the Age Discrimination in Employment Act, and the
California Fair Employment and Housing Act, and/or employee benefits
arising from your employment (including, without limitation, any rights you
have or claim to have to incentive awards or bonuses and any rights you
have or claim to have under your stock option arrangements with the Bank,
but excluding your right to accrued vacation time or payment in respect
thereof).
The Bank, on its own behalf and on behalf of all companies affiliated with
the Bank, hereby irrevocably and unconditionally releases, acquits, and
forever discharges you, from any and all claims (as defined above), arising
or which may have existed prior to the date hereof or in connection with
your termination of employment, including, but not limited to, any and all
claims arising out of your employment by the Bank, the termination of that
employment, alleged or actual violations of any employment-related
contracts, express or implied, any covenant of good faith and fair dealing,
express or implied, or any tort, or any federal, state or municipal
statute, regulation or ordinance.
It is understood and agreed that as to the claims or potential claims
enumerated in this section, this is a full and final release covering all
unknown, undisclosed and unanticipated losses, wrongs, injuries, debts,
claims or damages to the parties which may have arisen, or may arise from
any act or omission prior to the date hereof or in connection with your
termination of employment arising out of or related, directly or
indirectly, to the matters released above, as well as any and all claims,
causes of action, suits, debts, demands, costs, expenses, attorneys' fees,
contracts, agreements, payments, compensation, liabilities or obligations,
contingent or fixed, liquidated or unliquidated, material or immaterial, of
every nature, known or unknown, arising or which may have existed prior to
the date hereof or in connection with your termination of employment.
Therefore, each party hereby waives and relinquishes all rights and
benefits afforded by Section 1542 of the Civil Code of the State of
California, and do so understanding
and acknowledging the significance and consequence of such specific
waiver of Section 1542. Section 1542 of the Civil Code of the State of
California states:
"A general release does not extend to claims which creditor does not
know or suspect to exist in his favor at time of executing release,
which if known by him must have materially affected his settlement
with debtor."
Thus, notwithstanding provisions of Section 1542, and for the purpose of
implementing a full and complete release and discharge of all parties, you
and the Bank expressly acknowledge that this agreement is intended to
include in its effect, without limitation, all claims which you and the
Bank do not know or suspect to exist in your or the Bank's favor at the
time of execution hereof, and that this agreement contemplates
extinguishment of any such claim or claims.
6. You agree on or before the close of business, Friday, April 15, 1994, to
return to the Bank office keys, company-issued credit cards, and all
records, manuals, books, reports, documents, personal property and related
matters and copies thereof which are the property of the Bank or which
relate in any way to the business, products, practices or techniques of the
Bank which are in your possession or under your control. You also
understand and agree that you have a continuing obligation to preserve as
confidential and refrain from using or disclosing trade secrets and
confidential information concerning the Bank, including without limitation,
the business, business plans, financial information, products, practices,
marketing methods, customer and depositor lists and techniques of the Bank,
and agree to refrain from acts that would reduce the value of such trade
secrets and confidential information to the Bank.
7. It is understood and agreed that you will have seven (7) days after signing
this agreement to revoke it ("Revocation Period") and that this agreement
will not become effective and enforceable until the Revocation Period has
expired. You also acknowledge that you have been afforded twenty-one (21)
days to consider this agreement, its benefits, and its consequences.
8. This agreement, which shall be governed and construed in accordance with
California law, reflects the entire agreement between the Bank and you, and
fully supersedes any and all prior agreements or understandings pertaining
to the subject matter hereof.
9. You agree that you will keep the terms, amount and fact of this agreement
completely confidential, and will not hereafter disclose any information
concerning this agreement to anyone, including but not limited to any past,
present, or prospective employees or applicants for employment with the
Bank. You understand, however, that the Bank may disclose the terms,
amount and fact of this agreement in regulatory filings and otherwise, and
agree to cooperate with the Bank on the wording of a press release relating
hereto.
After you have reviewed the contents of this letter, please sign the
acknowledgment and consent form below and return the signed copy of the
letter to me.
Very truly yours,
CapitolBank Sacramento
/s/ John A. Wickland, III
- - -------------------------
by John A. Wickland, III
Director
ACKNOWLEDGMENT AND CONSENT
I hereby acknowledge that I have thoroughly read and understand this letter, the
scope of the release contained therein and the scope of my continuing
obligations to the Bank with respect to trade secrets and confidential
information and agree that this letter fairly sets forth the terms of my
severance arrangement with the Bank.
Executed by Thomas E. King as of the date first written above.
/s/ Thomas E. King
------------------------------------------
Thomas E. King