U. S. SECURITIES AND EXCHANGE COMMISSION FORM 10-K
Washington, D. C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1997
Commission File Number: 0-27384
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CAPITAL CORP OF THE WEST
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0405791
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
550 WEST MAIN STREET, MERCED, CALIFORNIA 95340
(Address of principal executive offices) (Zip Code)
(209) 725-2269
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act (Title of Class):
COMMON STOCK, NO PAR VALUE.
The Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Company was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
X Yes No
- --- ----
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $62,443,144 (based on the $14.25 average of bid
and ask prices per common share on March 24, 1998). The number of shares
outstanding of the Registrant's common stock, no par value, as of March 24, 1998
was 4,381,975. No shares of preferred stock, no par value, were outstanding at
March 24, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement for the 1998 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A are incorporated by reference in Part II, Item 9
and Part III, Items 10 through 13 and portions of the Annual Report to
Shareholders for 1997 are incorporated by reference in Part II, Item 5 through
8.
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CAPITAL CORP OF THE WEST
Table of Contents
Page Reference
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PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . 3
ITEM 2. PROPERTIES . . . . . . . . . . . . . . 17
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 19 Proxy Statement
SECURITY HOLDERS . . . . . . . . . . . for 1998 Annual
Meeting
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK 19 1997 Annual Report
AND RELATED SECURITY HOLDER MATTERS. .
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . 19 1997 Annual Report
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 19
FINANCIAL CONDITION AND RESULTS OF 1997 Annual Report
OPERATIONS . . . . . . . . . . . . . .
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY 19
DATA . . . . . . . . . . . . . . . . . 1997 Annual Report
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH 19 Proxy Statement
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL for 1998 Annual
DISCLOSURE . . . . . . . . . . . . . . Meeting
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE 19 Proxy Statement
REGISTRANT . . . . . . . . . . . . . . for 1998 Annual
Meeting
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . 20 Proxy Statement
for 1998 Annual
Meeting
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 20 Proxy Statement
OWNERS AND MANAGEMENT. . . . . . . . . for 1998 Annual
Meeting
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 20 Proxy Statement
TRANSACTIONS . . . . . . . . . . . . . for 1998 Annual
Meeting
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K. . . . . . . . 20
Signatures . . . . . . . . . . . . . . . . . . . . 22
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE COMPANY
GENERAL Capital Corp of the West (the "Company" or "Capital Corp") is a bank
holding company incorporated under the laws of the State of California on
April 26, 1995. On November 1, 1995, the Company became registered as a
bank holding company and is the holder of all of the capital stock of County
Bank (the "Bank") and all of the capital stock of Town and Country Finance
and Thrift (the "Thrift"). The Company's primary asset is the Bank and the
Bank is the Company's primary source of income. The Company's securities
consist of 4,381,975 shares of Common Stock, no par value, and no shares of
Preferred Stock. As of March 24, 1998 there were 4,381,975 common shares
outstanding, held of record by approximately 2,800 shareholders. There were
no preferred shares outstanding at March 24, 1998. The Bank has two wholly
owned subsidiaries, Merced Area Investment & Development, Inc. ("MAID") and
County Asset Advisors ("CAA"). CAA is currently inactive.
INFORMATION ABOUT COMMERCIAL BANKING & GENERAL BUSINESS OF THE COMPANY AND ITS
SUBSIDIARIES
The Bank was organized on August 1, 1977, as County Bank of Merced, a
California state banking corporation. The Bank commenced operations in
1977. In November 1992, the Bank changed its legal name to County Bank. The
Bank's deposits are insured by the Federal Deposit Insurance Corporation
("FDIC"), up to applicable limits stated therein. The Bank is not a member
of the Federal Reserve System.
The Company acquired the Thrift on June 28, 1996 for a combination of cash and
stock with an aggregate value of approximately $5.8 million. The Thrift is an
industrial loan company with four offices. It specializes in direct loans to
the public and the purchase of financing contracts principally from automobile
dealerships and furniture stores. It was originally incorporated in 1957. Its
deposits (technically known as investment certificate or certificates of deposit
rather than deposits) are insured by the FDIC up to applicable limits.
INDUSTRY & MARKET AREA
The Bank engages in general commercial banking business primarily in Merced,
Madera, Mariposa, Tuolomne and Stanislaus Counties. The Bank has thirteen
branch offices; two in Merced with the branch located in north Merced
currently designated as the head office, and offices in Atwater, Turlock,
Hilmar, Sonora, Los Banos, and two offices in Modesto opened in late 1996.
In 1997, the Bank also opened an office in Madera and purchased three branch
offices from Bank of America in Livingston, Dos Palos and Mariposa. The
Company's administrative headquarters are located in Merced. The
administrative facilities also provides accommodations for the activities of
MAID, the Bank's wholly owned real estate development subsidiary. The Thrift
engages in general consumer lending business primarily in Stanislaus, Fresno
and Tulare Counties from its main office in Turlock. It has branch offices
located in Modesto, Visalia, and Fresno. (See "ITEM 2. PROPERTIES")
COMPETITION
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The Company's primary market area consists of Merced, Madera, Mariposa,
Tuolomne and Stanislaus Counties and nearby communities of adjacent counties.
The banking business in California generally, and specifically in the Company's
primary market area, is highly competitive with respect to both loans and
deposits. The banking business is dominated by a relatively small number of
major banks which have many offices operating over wide geographic areas. Many
of the major commercial banks offer certain services (such as international,
trust and securities brokerage services) which are not offered directly by the
Company or through its correspondent banks. By virtue of their greater total
capitalization, such banks have substantially higher lending limits than the
Company and substantial advertising and promotional budgets.
However, smaller independent financial institutions, savings and loans and
credit unions also represent a competitive force. To illustrate the Bank's
relative market share, based upon total deposits in the County of Merced,
California at June 30, 1996 (more recent data is not available), the Bank's
deposits represented approximately 16.7% of total deposits in all other
financial institutions in the county. Deposits in Stanislaus and Tuolomne
counties were not material as of that date.
In the past, an independent bank's principal competitors for deposits and loans
have been other banks (particularly major banks), savings and loan associations
and credit unions. To a lesser extent, competition was also provided by thrift
and loans, mortgage brokerage companies and insurance companies. Other
institutions, such as brokerage houses, credit card companies, and even retail
establishments have offered new investment vehicles, such as money-market funds,
which also compete with banks. The direction of federal legislation in recent
years seems to favor competition between different types of financial
institutions and to foster new entrants into the financial services market, and
it is anticipated that this trend will continue. It should be noted, however,
that savings and loan institutions have now been restricted in their ability to
make commercial loans under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") legislation.
To compete with major financial institutions in its service area, the Bank
relies upon specialized services, responsive handling of customer needs, local
promotional activity, and personal contacts by its officers, directors and
staff, as opposed to large multi-branch banks which compete primarily by rate
and location of branches. For customers whose loan demands exceed the Bank's
lending limits, the Bank seeks to arrange funding for such loans on a
participation basis with its correspondent banks or other independent commercial
banks. The Bank also assists customers requiring services not offered by the
Bank to obtain such services from its correspondent banks.
BANK'S SERVICES AND MARKETS
BANK
The Bank conducts a general commercial banking business including the
acceptance of demand (includes interest bearing), savings and time deposits.
The Bank also offers commercial, real estate, personal, home improvement,
home mortgage, automobile, credit card and other installment and term loans.
The Bank offers travelers' checks, safe deposit boxes, banking-by-mail,
drive-up facilities, 24-hour automated teller machines, and other customary
banking services to its customers. The Bank does not operate a trust
department nor does it offer these services through a correspondent banking
relationship to its customers.
The five general areas in which the Bank has directed its lendable assets are
(i) real estate mortgage loans, (ii) consumer loans, (iii) agricultural
loans, (iv) commercial loans, and (v) real estate construction loans. As of
December 31, 1997, these five categories accounted for approximately 32%,
26%, 20%, 16% and 6%, respectively, of the Bank's loan portfolio.
In 1990, the Bank entered into a cooperative agreement with Prudential
Agricultural Group to offer agricultural real estate loans to farmers in Merced,
Stanislaus, San Joaquin, Madera, Monterey, Santa Cruz and San Benito Counties.
The program is designed to have a select group of independent banks throughout
the United States generate farm real estate loans and process them within the
underwriting standards of the Farmer Mac program. The qualifying loans
are for the purchase or refinance of production oriented agricultural properties
4
and are secured by a first deed of trust on the property. Loan terms range from
5 to 20 years in length and loan amounts range from $500,000 to $3.0 million.
The Bank originates, packages and subsequently sells these loans to the
Prudential Agricultural Group and retains servicing rights on these loans. The
Bank is the only representative in Merced and Stanislaus Counties to offer this
program.
In addition in 1992, the Bank became a certified Farmers Home Administration
lender, now known as the Farm Service Agency. The Bank originates loans under
the guidelines of such program both to retain for the Bank's loan portfolio and
to sell in the secondary market. The Bank may also sell loans, in the $100,000
range, direct to Farmer Mac.
In 1994, the Bank organized a department to originate loans within the
underwriting standards of the U.S. Small Business Administration ("SBA".)
The Bank originates packages and subsequently sells these loans in the
secondary market and retains servicing rights on these loans.
The Bank's deposits are attracted primarily from individuals and small- and
medium-sized business-related sources. The Bank also attracts some deposits
from municipalities and other governmental agencies and entities. In connection
with the deposits of municipalities or other governmental agencies, the Bank is
generally required to pledge securities to secure such deposits, except when the
depositor signs a waiver with respect to the first $100,000 of such deposits,
which amount is insured by the FDIC.
The principal sources of the Bank's revenues are (I) interest and fees on loans,
(ii) interest on investment securities (principally U.S. Government securities,
mortgage-backed securities, collateralized mortgage obligations and municipal
bonds), and (iii) service charges on deposit accounts. For the year ended
December 31, 1997, these sources comprised approximately 68%, 16%, and 6%
respectively, of the Bank's total operating income.
Most of the Bank's business originates from individuals, businesses and
professional firms located in its service area. The Bank is not dependent
upon a single customer or group of related customers for a material portion
of its deposits, nor is a material portion of the Bank's loans concentrated
within a single industry or group of related industries. As of December 31,
1997, the largest industry within the Bank's loan portfolio is its real
estate mortgage loans at 32% of the loan portfolio. Agriculture loans are
20% including dairy loans of 11%. Thus, the quality of these Bank assets and
Bank earnings could be adversely affected by a downturn in the local economy,
including the dairy industry sector.
BANK'S REAL ESTATE SUBSIDIARY (MAID)
GENERAL
California state-chartered banks are allowed, under state law, to
engage in real estate development activities either directly or through
investment in a wholly-owned subsidiary. Pursuant to this authorization, the
Bank established MAID, its wholly-owned subsidiary, as a California
corporation in 1987. MAID engaged in real estate activities for
approximately seven years.
In late 1995, the Company wrote down the entire remaining investment in MAID in
the amount of $2,881,000. The uncertainty about the effect of the investment in
MAID on the results of future operations caused management to recognize the
complete write-down in 1995.
At December 31, 1997, MAID held two real estate projects including improved and
unimproved land in various stages of development. MAID continues to market
these projects, and any amounts realized upon sale or other disposition of these
assets above their current carrying value of zero will result in non-interest
income at the time of such sale or disposition. The following is a general
discussion of these properties:
(1) This project consists of 4 remaining improved lots and 117 additional
unimproved lots in Merced, California. MAID does not currently intend to
develop the subsequent three phases (117 lots) of this property.
5
(2) This project is comprised of 230 unimproved lots of which 50 are
remaining as of December 31, 1997. MAID does not currently intend to develop
the remaining property.
THE THRIFT
GENERAL
The Thrift is a licensed California industrial loan company specializing in
direct loans to the public and the purchase of financing contract principally
from car dealerships and furniture stores. The Thrift offers certain deposit
products including savings and time deposits which are technically referred to
as installment investment certificates and fully paid investment certificates.
An industrial loan company is prohibited by the Industrial Loan Company Law to
offer transaction accounts to its customers.
The Company has no present plans to introduce a new product or line of business
which would require the investment of a material amount of the Company's total
assets.
EMPLOYEES
As of December 31, 1997, the Company employed a total of 197 full-time
equivalent employees. The Company believes that employee relations are
excellent.
SEASONAL TRENDS IN THE COMPANY'S BUSINESS
Although the Company does experience some immaterial seasonal trends in deposit
growth and funding of its dairy and construction loan portfolios, in general the
Company's business is not seasonal.
OPERATIONS IN FOREIGN COUNTRIES
The Company conducts no operations in any foreign country.
REGULATION AND SUPERVISION
REGULATORY ENVIRONMENT
The banking and financial services industry is a heavily regulated one.
Statutes, regulations and policies affecting the industry are frequently under
review by Congress and state legislatures, and by the federal and state agencies
charged with supervisory and examination authority over banking institutions.
Changes in the
6
banking and financial services industry can be expected to occur in the future.
Some of the changes may create opportunities for Capital Corp and the Bank to
compete in financial markets with less regulation. However, these changes also
may create new competitors in geographic and product markets which have
historically been limited by law to bank institutions, such as the Bank. Changes
in the statutes, regulation, or policies that impact Capital Corp and the Bank
cannot necessarily be predicted and may have a material effect on their business
and earnings.
The operations of bank holding companies and their subsidiaries are affected by
the credit and monetary policies of the FRB. An important function of the FRB is
to regulate the national supply of bank credit. Among the instruments of
monetary policy used by the FRB to implement its objectives are open market
operations in U.S. government securities, changes in the discount rate on bank
borrowings and changes in reserve requirements on bank deposits. These
instruments of monetary policy are used in varying combinations to influence the
overall level of bank loans, investments and deposits, the interest rates
charged on loans and paid for deposits, the price of the dollar in foreign
exchange markets, and the level of inflation. The credit and monetary policies
of the FRB will continue to have a significant effect on the Bank and on Capital
Corp.
Set forth below is a summary of significant statutes, regulations and policies
that apply to the operation of banking institutions. This summary is qualified
in its entirety by reference to the full text of such statutes, regulations and
policies.
BANK HOLDING COMPANY ACT
As a bank holding company, Capital Corp is subject to regulation under the BHC
Act, and is registered as such with, and subject to examination by, the FRB.
Pursuant to the BHC Act, Capital Corp is subject to limitations on the kinds of
businesses in which it can engage directly or through subsidiaries. It may of
course manage or control banks. Generally, however, it is prohibited, with
certain exceptions, from acquiring direct or indirect ownership or control of
more than five (5) percent of any class of voting shares of an entity engaged in
nonbanking activities, unless the FRB finds such activities to be "so closely
related to banking" as to be deemed "a proper incident thereto" within the
meaning of the BHC Act. Removal of many of the activity limitations is currently
under review by Congress, but whether any legislation liberalizing permitted
bank holding company activities will be enacted is not known.
At present Capital Corp operates Town & Country Finance and Thrift, an
industrial loan company. Capital Corp has no present intention to engage in
any other such permitted activities. However, it might at some time determine
to engage in additional activities if it were in the best interests of the
Company.
Bank acquisitions by bank holding companies are also regulated. A bank holding
company may not acquire more than five (5) percent of the voting shares of any
domestic bank without the prior approval of (or, for "well managed"
companies, prior notice to) the FRB.
The BHC Act subjects bank holding companies to minimum capital requirements. See
"--Regulatory Capital Requirements." Regulations and policies of the FRB also
require a bank holding company to serve as a source of financial and managerial
strength to its subsidiary banks. It is the FRB's policy that a bank holding
company should stand ready to use available resources to provide adequate
capital funds to a subsidiary bank during periods of financial stress or
adversity and should maintain the financial flexibility and capital-raising
capacity to obtain additional resources for assisting a subsidiary bank. Under
certain conditions, the FRB may conclude that certain actions of a bank holding
company, such as a payment of a cash dividend, would constitute an unsafe and
unsound banking practice.
COUNTY BANK
County Bank is a California state-licensed bank. The Bank is a member of the
FDIC and thus is subject to the rules and regulations of the FDIC pertaining to
deposit insurance, including deposit insurance assessments. The Bank also is
subject to regulation and supervision by the California Department of
Financial Institutions (the "Department" or "DFI"). Applicable federal and
state regulations address many aspects of the Bank's business and activities,
including investments, loans, borrowings, transactions with affiliates,
branching, reporting and other areas. County Bank may acquire other banks or
branches of
7
other banks with approval of the FDIC and the Department. County Bank is subject
to examination by both the FDIC and the Department.
In response to regulatory concerns over the Bank's level of nonperforming
assets, in March 1997 the Board of Directors of County Bank adopted resolutions
under which the Bank committed to the following: (I) not to appoint a new
director or executive officer without prior written approval of the Department
and the FDIC; (ii) to eliminate from its books by charge-off or collection all
assets classified "Loss" as of December 2, 1996 that had not previously been
collected or charged off; (iii) to reduce loans classified "Substandard" and
"Doubtful" as of December 2, 1996 from $11.8 million to $8.6 million by June 30,
1997 and to maintain a ratio of shareholder's equity to total assets of 6.75%
(or 6.50% pursuant to the next clause); (iv) to reduce such "Substandard" and
"Doubtful" loans to $7.8 million by December 31, 1997, and thereafter to
maintain a ratio of shareholder's equity to total assets of 6.50%; (v) to
maintain an adequate allowance for loan losses, to conduct a review prior to and
at each quarter of the adequacy of the allowance and to document the basis for
changes in the allowance; (vi) not to pay cash dividends without the prior
written consent of the Department and the FDIC; and (vii) to furnish the
Department and the FDIC with a quarterly progress report on compliance with the
resolutions. Failure to comply with these commitments could result in the
imposition of regulatory restrictions or prohibitions on the Bank or its
management.
As of December 31, 1997, the Department and the FDIC conducted an annual
examination of the Bank. As a result of this joint examination, the Company
has been told that a supervisory agreement will be required with respect to
certain matters, including the maintenance of adequate reserves in the
future. The details of the supervisory agreement have not yet been disclosed
to the Company. As of December 31, 1997, management believes that the Bank
is in compliance with the resolutions discussed above.
TOWN & COUNTRY
Town & Country Finance and Thrift (the "Thrift") is a California industrial
loan company, commonly known as a thrift and loan, chartered under
California's Industrial Loan Law (alternatively known as the "Thrift and Loan
Law"). Effective July 1, 1997, regulation of the Thrift was transferred from
California's Department of Corporations to the Department. As an industrial
loan company, the Thrift issues investment or thrift certificates, which are
deposit-like obligations insured by the FDIC. California law requires
diversification of the loan portfolio in certain respects, including limits
on loans to one borrower and its affiliates, the aggregate amount of loans
secured in whole or in part by real estate or by the stock of one corporation
and the aggregate amount of loans with terms in excess of seven years. Thrift
and loan companies are generally limited to investments which are legal
investments for California commercial banks. A thrift is not permitted to
declare dividends on its capital stock unless it has at least $750,000 of
unimpaired capital plus additional capital of $50,000 for each branch office
maintained. It is also subject to capital and leverage requirements. At
December 31, the Thrift had assets of $34 million, net loans of $27 million
and deposits of $29 million (8%, 14% and 8% of the Company's assets, net
loans and deposits, respectively).
As a result of an examination of the Thrift by the FDIC conducted as of July
21, 1997 entered into a memorandum of understanding ("MOU") with the FDIC
regarding certain matters. The MOU requires the Thrift to (i) increase board
participation in the affairs of the Thrift; (ii) retain management acceptable
to the FDIC to include a qualified chief executive officer; (iii) submit a
revised mid-range strategic plan including a formal organizational chart;
(iv) develop, revise, adopt, and implement a written liquidity and asset
liability management policy; (v) eliminate and/or correct all internal
routine and control deficiencies and develop an internal audit program; (vi)
eliminate and/or correct all violations of law; (vii) furnish written
progress reports to the FDIC and DFI. In addition a separate MOU was
established for the information systems of the Thrift. The MOU required the
Thrift to (i) form an information systems steering committee; (ii) retain an
acceptable information system manager through the holding company; (iii)
establish a formal management reporting system to ensure adequate and
effective monitoring of the data processing activities; (iv) develop and
8
implement information system policies and procedures, appoint an officer to
monitor delivery and performance of such services, develop and implement a
plan to ensure the Thrift's computer systems are Year 2000 compliant, provide
training of appropriate personnel in information systems policies and
procedures, appoint a security officer and implement a security program; (v)
provide for a comprehensive information systems audit program; (vi) furnish
written progress repots to the FDIC and DFI. As of the date of this report,
Management believes the Thrift is in substantial compliance with the terms of
the agreement.
DIVIDENDS
A California corporation such as Capital Corp may make a distribution to its
shareholders if the corporation's retained earnings equal at least the amount
of the proposed distribution. In the event sufficient retained earnings are
not available for the proposed distribution, such a corporation may
nevertheless make a distribution to its shareholders if, after giving effect
to the distribution, the corporation's assets equal at least 125% of its
liabilities and certain other conditions are met. Since the 125% ratio
translates into a minimum capital ratio of 20%, most bank holding companies,
including Capital Corp based on its current capital ratios, are unable to
meet this last test.
The primary source of funds for payment of dividends by Capital Corp to its
shareholders is the receipt of dividends and management fees from the Bank
and, to a lesser extent, the Thrift. Capital Corp's ability to receive
dividends from County Bank is limited by applicable state and federal law. A
California state-licensed bank may not make a cash distribution to its
shareholders in excess of the lesser of the following: (I) the bank's
retained earnings, or (ii) the bank's net income for its last three fiscal
years, less the amount of any distributions made by the bank to its
shareholders during such period. However, with the approval of the
Commissioner of DFI (the "Commissioner"), a bank may pay dividends in an
amount not to exceed the greater of (i) a bank's retained earnings, (ii) its
net income for its last fiscal year, or (iii) its net income for the current
fiscal year.
The FDIC and the Commissioner have authority to prohibit a bank from engaging
in practices which are considered to be unsafe and unsound. Depending on the
financial condition of the Bank and upon other factors, the FDIC or the
Commissioner could determine that payment of dividends or other payments by
the Bank might constitute an unsafe or unsound practice. Finally, any
dividend that would cause a bank or a thrift and loan to fall below required
capital levels could also be prohibited. The Bank has committed to its
regulators for an indefinite period that it will not pay cash dividends
without the written consent of the regulators.
REGULATORY CAPITAL REQUIREMENTS
Each of the Company, the Bank and the Thrift is required to maintain a
minimum risk-based capital ratio of 8% (at least 4% in the form of Tier 1
capital) of risk-weighted assets and off-balance sheet items. "Tier 1"
capital consists of common equity, non-cumulative perpetual preferred stock
and minority interests in the equity accounts of consolidated subsidiaries
and excludes goodwill. "Tier 2" capital consists of cumulative perpetual
preferred stock, limited-life preferred stock, mandatory convertible
securities, subordinated debt and (subject to a limit of 1.25% of
risk-weighted assets) general loan loss reserves. In calculating the relevant
ratio, a bank's assets and off-balance sheet commitments are risk-weighted:
thus, for example, loans are included at 100% of their book value while
assets considered less risky are included at a percentage of their book value
(20%, for example, for interbank obligations, and 0% for vault cash and U.S.
Government and Government Agency securities).
Each of the subsidiaries is also subject to leverage ratio guidelines. The
leverage ratio guidelines require maintenance of a minimum ratio of 3% Tier 1
capital to total assets for the most highly rated organizations. Institutions
that are less highly rated, anticipating significant growth or subject to
other significant risks will be required to maintain capital levels ranging
from 1% to 2% above the 3% minimum.
9
Recent federal regulation established five tiers of capital measurement
ranging from "well capitalized" to "critically undercapitalized." Federal
bank regulatory authorities are required to take prompt corrective action
with respect to inadequately capitalized banks. If a bank does not meet the
minimum capital requirements set by its regulators, the regulators are
compelled to take certain actions, which may include a prohibition on payment
of dividends to a parent holding company and requiring adoption of an
acceptable plan to restore capital to an acceptable level. Failure to comply
will result in further sanctions, which may include orders to raise capital,
merge with another institution, restrict transactions with affiliates, limit
asset growth or reduce asset size, divest certain investments and /or elect
new directors. It is Capital Corp's intention to maintain risk-based capital
ratios for itself and for the Bank and the Thrift at above the minimum for
the "well capitalized" level (6% Tier 1 risk-based; 10% total risk-based) and
to maintain the leverage capital ratio for the Bank above the 5% minimum for
"well-capitalized" banks. At December 31, 1997, the Company's leverage, Tier
1 risk-based and total risk-based capital ratios were 8.58%, 12.22% and
13.47%, respectively, and the Bank's leverage, Tier 1 risk-based and total
risk-based capital ratios were 7.37%, 10.18% and 11.43%, respectively. No
assurance can be given that the Company or the Bank will be able to maintain
capital ratios in the "well capitalized" level in the future.
CROSS-INSTITUTION ASSESSMENTS
Any insured depository institution owned by Capital Corp can be assessed for
losses incurred by the FDIC in connection with assistance provided to, or the
failure of, any other depository institution owned by Capital Corp.
INSURANCE PREMIUMS AND ASSESSMENTS
The FDIC has authority to impose a special assessment on members of the Bank
Insurance Fund (the "BIF") to insure that there will be sufficient assessment
income for repayment of BIF obligations and for any other purpose which it
deems necessary. The FDIC is authorized to set semi-annual assessment rates
for BIF members at levels sufficient to increase the BIF's reserve ratio to a
designated level of 1.25% of insured deposits. The BIF achieved this level in
mid-1995. Congress is considering various proposals to merge the BIF with the
Savings Association Insurance Fund ("SAIF") or otherwise to require banks to
contribute to the insurance funds for savings associations. Adoption of any
of these proposals might increase the cost of deposit insurance for all
banks, including the Bank.
The FDIC has developed a risk-based assessment system, under which the
assessment rate for an insured depository institution will vary according to
the level of risk incurred in its activities. An institution's risk category
is based upon whether the institution is well capitalized, adequately
capitalized or less than adequately capitalized. Each insured depository
institution is also to be assigned to one of the following "supervisory
subgroups." Subgroup A, B or C. Subgroup A institutions are financially sound
institutions with few minor weaknesses; Subgroup B institutions are
institutions that demonstrate weaknesses which, if not corrected, could
result in significant deterioration; and Subgroup C institutions are
institutions for which there is a substantial probability that the FDIC will
suffer a loss in connection with the institution unless effective action is
taken to correct the areas of weakness. The FDIC assigns each member
institution an annual FDIC assessment rate which, as of the date of this
Prospectus, varies between 0.0% per annum with a $2,000 minimum (for well
capitalized Subgroup A institutions) and 0.27% per annum (for
undercapitalized Subgroup C institutions). Insured institutions are not
permitted to disclose their risk assessment classification.
Under recent legislation, the cost of carrying bonds issued by the Financing
Corporation ("FICO") to cover losses of failed savings associations will be
allocated between BIF-insured institutions and SAIF-- insured institutions,
with BIF-insured institutions paying twenty (20) percent of the amount paid
by SAIF--insured institutions. The FDIC recently estimated that to cover
these costs BIF institutions will pay an assessment of approximately $.0128
annually per $100 insured deposits, and SAIF institutions will pay
approximately $.0644 annually per $100 of insured deposits. Starting in the
year 2000, BIF and SAIF institutions will share the FICO
10
bond costs equally, with an estimated assessment of $.0243 annually per $100
of insured deposits.
This legislation will increase County Bank's premiums, as it will be required
to share in the cost of carrying the FICO bonds. The increase will be slight
until the year 2000, at which time it will increase.
AUDIT REQUIREMENTS
All depository institutions are required to have an annual, full-scope
on-site examination. Those depository institutions with assets greater than
$500 million are required to have annual independent audits and to prepare
all financial statements in accordance with generally accepted accounting
principles. Each institution is required to have an independent audit
committee comprised entirely of outside directors.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each bank to identify the
communities served by the bank's offices and to identify the types of credit
the bank is prepared to extend within such communities. It also requires the
bank's regulators to assess the bank's performance in meeting the credit
needs of its community and to take such assessment into consideration in
reviewing application for mergers, acquisitions and other transactions, such
as the Branch Acquisition. An unsatisfactory rating may be the basis for
denying such an application. The Bank completed a CRA examination as of
December 31, 1997. Management has been told that it will receive an outstanding
rating for this examination.
POTENTIAL ENFORCEMENT ACTIONS
Banks and their institution-affiliated parties may be subject to potential
enforcement actions by the bank regulatory agencies for unsafe or unsound
practices in conducting their businesses, or for violations of any law, rule
or regulation or provision, any consent order with any agency, any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver,
cease-and-desist orders and written agreements, the termination of insurance
of deposits, the imposition of civil money penalties and removal and
prohibition orders against institution-affiliated parties. For potential
enforcement actions against the Bank, see "--County Bank".
INTERSTATE BANKING
Riegle-Neal Interstate Banking and Branching Efficiency Act. The Riegle-Neal
Interstate Banking and Branching Efficiency Act (the "Riegle-Neal Act") was
enacted in 1994. Generally, provisions of the Riegle-Neal Act authorize
interstate banking and interstate branching, subject to certain state
options. The following is a summary of its provisions:
INTERSTATE BANKING AND BRANCHING
- Interstate acquisition of banks by holding companies was permitted in all
states on and after September 29, 1995. However, states may continue to prohibit
acquisition of banks that have been in existence less than five years and
interstate chartering of new banks.
- Interstate mergers of banks were permitted as of June 1, 1997, unless a
state adopted legislation before June 1, 1997 to "opt out" of interstate merger
authority. Individual states were permitted to enact legislation to permit
interstate mergers earlier than that date.
- Interstate acquisition of branches is permitted to a bank only if the law
of the state where the branch is located expressly permits interstate
acquisition of a branch without acquiring the entire bank.
- Interstate de novo branching is permitted to a bank only if a state
adopts legislation to "opt in" to interstate de novo branching authority.
LIMITATIONS ON CONCENTRATIONS. An interstate banking application may not
be approved if the applicant and its depository institution affiliates would
control more than 10% of insured deposits nationwide or more than 30% of insured
deposits in the state in which the bank to be acquired in located. These limits
do not apply to mergers solely between affiliates. States may waive the 30% cap
on a nondiscriminatory basis. Nondiscriminatory state caps on deposit market
share of a depository institution and its affiliates are not affected.
11
AGENCY AUTHORITY.
A bank subsidiary of a bank holding company is authorized to receive
deposits, renew time deposits, close loans, service loans and receive
payments on loans as an agent for a depository institution affiliate without
being deemed a branch of the affiliate. A bank is not permitted to engage, as
agent for an affiliate, in any activity as agent that it could conduct as a
principal, or to have an affiliate, as its agent, conduct any activity that
it could not conduct directly, under federal or state law.
HOST STATE REGULATION.
Out-of-state banks seeking to acquire or establish a branch are required to
comply with any nondiscriminatory filing requirements of the host state where
the branch is located. The host state may set notification and reporting
requirements for a branch of an out-of-state bank. A branch of an
out-of-state bank is subject to all of the laws of the host state regarding
intrastate branching, consumer protection, fair lending and community
reinvestment. A branch of a out-of-state bank is not permitted to conduct any
activities at the branch that are not permissible for a bank chartered by the
host state.
MEETING LOCAL CREDIT NEEDS.
CRA evaluations are required for each state in which an interstate bank has a
branch. Interstate banks are prohibited from using out-of-state branches
"primarily for the purpose of deposit production." Federal banking agencies
have adopted regulations to ensure that interstate branches are being
operated with a view to the needs of the host communities.
CALIFORNIA LAW.
In October 1995, California enacted state legislation in accordance
with authority under the Riegle-Neal Act. This law permits banks
headquartered outside California to acquire or merge with California banks
that have been in existence for at least five years, and thereby establish
one or more California branch offices. An out-of-state bank may not enter
California by acquiring one or more branches of a California bank or other
operations constituting less than the whole bank. The law authorizes waiver
of the 30% limit on state-wide market share for deposits as permitted by the
Riegle-Neal Act. This law also authorizes California state-licensed banks to
conduct certain banking activities (including receipt of deposits and loan
payments and conducting loan closings) on an agency basis on behalf of
out-of-state banks and to have out-of-state banks conduct similar agency
activities on their behalf.
CONCLUSIONS
It is impossible to predict with any degree of accuracy the competitive
impact the laws and regulations described above will have on commercial
banking in general and on the business of the Company in particular, or to
predict whether or when any of the proposed legislation and regulations will
be adopted. It is anticipated that the banking industry will continue to be
a highly regulated industry. Additionally, if experience is any indication,
there appears to be a continued lessening of the historical distinction
between the services offered by financial institutions and other businesses
offering financial services. Finally, the trend toward nationwide interstate
banking is expected to continue. As a result of these factors, it is
anticipated banks will experience increased competition for deposits and
loans and, possibly, further increases in their cost of doing business.
SELECTED STATISTICAL INFORMATION
The following tables present certain statistical information concerning the
business of the Company. This information should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" at ITEM 7, in the Company's 1997 Annual Report to Shareholders
incorporated herein by reference, and with the Bank's Consolidated Financial
Statements and the Notes thereto included in Item 14, in the Company's 1997
Annual Report to Shareholders incorporated herein by reference. Statistical
information below is generally based on average daily amounts.
INTEREST RATE SENSITIVITY
12
The interest rate gaps reported in the table arise when assets are funded with
liabilities having different repricing intervals. Since these gaps are actively
managed and change daily as adjustments are made in interest rate views and
market outlook, positions at the end of any period may not be reflective of the
Company's interest rate sensitivity in subsequent periods. Active management
dictates that longer-term economic views are balanced against prospects for
short-term interest rate changes in all repricing intervals. For purposes of
the analysis below, repricing of fixed-rate instruments is based upon the
contractual maturity of the applicable instruments. Actual payment patterns may
differ from contractual payment patterns.
INTEREST RATE SENSITIVITY
By Repricing Interval
------------------------------------------------------------------------------------------
After three After one
months, year,
Within three within one within five After five Noninterest-
months year years years bearing funds Total
------ ---- ----- ----- ------------- -----
(Dollar amounts in thousands)
ASSETS
Federal funds sold $ 2,400 $ - $ - $ - $ - $ 2,400
Time deposits at other institutions 599 - - - - 599
Investment securities 34,156 16 ,609 4,566 92,701 - 148,032
Loans 134,851 29,129 44,027 9,970 - 217,977
Noninterest-earning assets
and allowances for loan losses - - - - 52,386 52,386
Total Assets 172,006 45,738 48,593 102,671 52,386 421,394
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings, money market & NOW deposits 197,764 - - - - 197,764
Time deposits 22,307 59,443 18,045 - - 99,795
Other interest-bearing liabilities 18,645 104 - 3,300 - 22,049
Other liabilities and
Shareholders' equity - - - - 101,786 101,786
Total liabilities and shareholders' equity 238,716 59,547 18,045 3,300 101,786 421,394
Interest rate sensitivity
Gap ( 66,710) (13,809) 30,548 99,371 ( 49,400) -
Cumulative interest rate
Sensitivity Gap ( 66,710) ( 80,519) (49,971) 49,400 - -
SECURITIES AVAILABLE-FOR-SALE-FAIR VALUE AND MATURITY DISTRIBUTION
The Company does not own securities of a single issuer whose aggregate book
value is in excess of 10% of its total equity.
The following table sets forth the maturities of investment securities at
December 31, 1997 and the weighted average yields of such securities calculated
on the basis of the cost and effective yields based on the scheduled maturity of
each security. Maturities of mortgage-backed securities and collateralized
mortgage obligations are stipulated in their respective contracts, however,
actual maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call prepayment
penalties. Yields on municipal securities have not been calculated on a
tax-equivalent basis.
Within One Year One to Five Years Five to Ten Years Over Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield Total
Available for sale securities:
U.S. Treasury and U.S. government agencies $ - -% $ 1,505 6.40% $ -% $ 319 7.44% $ 1,824
State and politcial subdivisions 730 5.27% 1,363 6.21% 2,401 4.95% 5,146 5.15% 9,640
Mortgage-backed securities 10,962 6.59% 27,614 6.59% 14,317 6.79% 12,915 6.71% 68,809
Collaterized mortgage obligations 7,326 6.84% 23,319 6.67% 5,646 6.70% 15,583 6.93% 51,874
Equity securities - -% - - - -% 3,111 3.23% 3,111
------- ----- ------- ------ ------ ---- ------- ----- -------
22,018 6.63% 53,801 6.61% 22,364 6.57% 37,074 6.30% 135,257
Held to maturity:
Treasury and U.S. government agencies - -% 1,044 5.79% 5.99% 7.13% 2,392 7.17% 9,434
Mortgage-backed securities 31 7.35% 148 7.45% 253 7.35% 2,914 7.35% 3,346
------ ----- ------ ----- ------ ----- ----- ----- -----
31 7.35% 1,192 5.98% 6,251 7.14% 5,305 7.27% 12,780
Total Securities $22,049 6.63% $54,993 6.47% $28,615 6.69% $42,379 6.42% 148,037
------- ----- ------- ----- ------- ----- ------- ----- -------
------- ----- ------- ----- ------- ----- ------- ----- -------
13
Loan Portfolio
At December 31, 1997, the Company had approximately $55,238,000 in undisbursed
loan commitments of which approximately $11,049,645 related to real estate
construction loans. This compares with $46,159,000 at December 31, 1996 of
which $6,232,000 related to real estate construction loans. Standby letters of
credit were $3,243,000 and $3,231,000, respectively, at December 31, 1997 and
December 31, 1996. For further information about the composition of the
Company's loan portfolio see "ITEM 7--MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" section entitled
"Asset Quality" in the Company's 1997 Annual Report to Shareholders
incorporated herein by reference.
The Company seeks to mitigate the risks inherent in its loan portfolio by
adhering to certain underwriting practices. They include careful analysis of
prior credit histories, financial statements, tax returns and cash flow
projections of its potential borrowers as well as obtaining independent
appraisals on real property and chattel taken as collateral and audits of
accounts receivable or inventory pledged as security.
The Company also has an internal loan review system as well as periodic external
reviews. The results of these external reviews are assessed by the Company's
audit committee. Collection of delinquent loans is generally the responsibility
of the Company's credit administration staff. However, certain problem loans
may be dealt with by the originating loan officer. The Board of Directors
reviews the status of delinquent and problem loans on a monthly basis. In the
normal course of business, the Company's underwriting and review practices
notwithstanding, the Company expects to incur loan losses in the future.
The table that follows shows the maturity distribution of the portfolio of
commercial, financial, and agricultural loans and real estate construction loans
on December 31, 1997, as well as sensitivity to changes in interest rates:
LOAN MATURITY DISTRIBUTION AND SENSITIVITY TO CHANGES IN INTEREST RATES
December 31, 1997
--------------------------------------------------------
Within One to Over
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(Amounts in thousands)
COMMERCIAL, FINANCIAL AND AGRICULTURAL
Loans with floating rates $ 44,792 $ 16,249 $ 3,410 $ 64,451
Loans with predetermined rates 6,916 6,350 833 14,099
-------- -------- ------- --------
Subtotal 51,708 22,599 4,243 78,550
REAL ESTATE- CONSTRUCTION
Loans with floating rates 6,394 1,602 2,100 10,096
LOANS WITH PREDETERMINED RATES 1,433 989 139 2,561
-------- -------- ------- --------
Subtotal 7,827 2,591 2,239 12,657
REAL ESTATE-MORTGAGE
Loans with floating rates 7,654 39,776 23,319 70,749
Loans with predetermined rates - 53 - 53
-------- -------- ------- --------
Subtotal 7,654 39,829 23,319 70,802
INSTALLMENT 33,609 21,450 909 55,968
-------- -------- ------- --------
Total $100,798 $ 86,469 $ 30,710 $217,977
-------- -------- -------- --------
-------- -------- -------- --------
14
The following table summarizes a breakdown of the allowance for loan losses by
loan category and the percentage by loan category of total loans for the dates
indicated:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Amount % Amount % Amount % Amount % Amount %
Commercial, financial and
agricultural $1,868 48 $ 840 39 $ 944 49 $ 898 49 $ 974 51
Real estate - construction 640 17 1,421 8 708 9 218 10 317 9
Real estate - mortgage 1,058 28 219 31 - 31 376 31 296 31
Installment 267 7 312 22 49 11 129 10 160 9
------ --- ------ --- ------ --- ------ --- ------ ---
Total 3,833 100% $2,792 100% $1,701 100% $1,621 100% $1,747 100%
------ --- ------ --- ------ --- ------ --- ------ ---
------ --- ------ --- ------ --- ------ --- ------ ---
The following table relates to other interest bearing assets not disclosed above
for the dates indicated. This item consists of a salary continuation plan for
the Company's executive management and deferred retirement benefits for
participating board members. The plan is informally linked with universal life
insurance policies totaling $3,839,000 for the salary continuation plan.
OTHER INTEREST-BEARING ASSETS
December 31
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollar amounts in thousands)
Cash surrender value
of life insurance $3,839 $3,134 $1,290 $ 288 $ -
------ ------ ------ ------ ------
------ ------ ------ ------ ------
15
DEPOSITS
The following table sets forth the AVERAGE BALANCE and the average rate paid
for the major categories of deposits for the dates indicated:
Deposits
1997 1996 1995 1994
---- ---- ---- ----
(Amounts in thousands)
Amounts Yield Amounts Yield Amounts Yield Amounts Yield
------- ----- ------- ----- ------- ----- ------- -----
NonInterest-bearing demand deposits $ 38,023 - $ 30,549 - $ 26,478 - $ 25,326 -
Interest-bearing demand deposits 38,164 0.90% 29,376 0.91% 26,192 0.91% 25,126 0.94%
Savings deposits 117,357 4.11% 104,938 4.15% 91,509 4.60% 66,517 3.45%
Time deposits under $100,000 58,262 5.61% 34,408 5.26% 19,073 4.84% 27,579 3.82%
MATURITIES OF TIME CERTIFICATES OF DEPOSITS OF $100,000 OR MORE
Maturities of time certificates of deposits of $100,000 or more outstanding at
December 31, 1997 are summarized as follows:
DECEMBER 31, 1997
-----------------
(In thousands)
Remaining Maturity:
Three months or less $ 8,404
Over three through six months 7,799
Over six through twelve months 7,870
Over twelve months 6,188
------
Total $ 30,261
---------
---------
RETURN ON EQUITY AND ASSETS
The following table sets forth certain financial ratios for the periods
indicated (averages are computed using actual daily figures):
For the year ended
December 31
---------------------------------
1997 1996 1995
---- ---- ------
Return on average assets .13% 0.88% 0.18%
Return on average equity 1.46% 10.24% 11.05%
Dividend payout ratio - .05% -
Average equity to average assets 8.76% 7.96% 8.33%
16
ITEM 2. PROPERTIES
THE BANK
(1) NORTH MERCED OFFICE
The Bank's north Merced office is located at 490 West Olive Avenue in Merced
with approximately 5,600 square feet of interior floor space. This building was
constructed in 1978 at a cost of approximately $400,000 and is situated on a lot
of approximately 47,000 square feet, which the Bank purchased in 1977 for
approximately $186,000. Management believes that this facility will be adequate
to accommodate the operations of this branch for the foreseeable future.
(2) DOWNTOWN MERCED BRANCH
The Bank's downtown Merced Branch was located at 606 West 19th Street in Merced
until September 2, 1997. On that date, the Bank relocated its downtown Merced
branch to 550 West Main Street in Merced and it was re-designated as the main
branch of the Bank. The branch and certain centralized lending operations
occupy the first floor of the three story building, occupying approximately
9,200 square feet. Management believes that this facility will be adequate
to accommodate the operations of this branch for the foreseeable future.
(3) ATWATER BRANCH
On October 5, 1981, the Bank opened a branch office at 735 Bellevue Road,
Atwater. The building contains approximately 6,000 square feet of interior
floor space, and was built at a total cost of approximately $500,000. In 1994,
the Bank purchased the lot at a cost of $316,000. Management of the Bank
believes that this facility will be adequate to accommodate the operations of
this branch for the foreseeable future. The data processing and central service
support personnel and related equipment were relocated to the new facility in
downtown Merced, as discussed below in late 1997.
(4) ADMINISTRATIVE HEADQUARTERS
On September 2, 1997, the Company vacated its three previously leased
administrative facilities in Merced and relocated to 550 West Main Street in
Merced. The facility is a three story facility with a two story attached
parking facility and is approximately 29,000 square feet. Approximately 19,800
square feet is occupied by the administrative and central support functions or
is available for future expansion. The facility cost was approximately $5.1
million. Management believes that this facility will be adequate to accommodate
the operations of Company for the foreseeable future.
(5) LOS BANOS BRANCH
On August 15, 1989, the Bank opened a fourth branch office at 1341 East Pacheco
Boulevard, Los Banos, located in the Canal Farm Shopping Center. The Bank
entered into a five-year lease with a nonaffiliated third party, commencing on
August 1, 1989. In October of 1994, the Los Banos branch was relocated to 953
W. Pacheco Boulevard, Los Banos. The Bank entered into a ten-year lease with a
non-affiliated third party on the facility. The new facility contains 4,928
square feet of interior floor space. Remodeling and redecorating expenses were
approximately $355,000. Management believes that this facility will be adequate
to accommodate the operation of the branch for the foreseeable future.
(6) HILMAR BRANCH
On November 15, 1993, the Bank opened a fifth branch office at 8019 N. Lander
Avenue, Hilmar. The building was purchased at a cost of $328,000 and consists
of a single story building of approximately 4,456 square feet of interior floor
space. Remodeling and redecorating expenses were approximately $53,000.
Management believes that this facility will be adequate to accommodate the
operation of this branch for the foreseeable future.
(7) SONORA BRANCH
On January 12, 1996, the Bank received approval to open a full service banking
facility at the Crossroads Shopping Center and entered into a five-year lease
with a non-affiliated third party on January 12, 1996 for a 2,500 square foot
facility. The branch opened April 1, 1996. Management is currently reviewing
its options for relocating this branch to a larger facility and expects that
move to occur in late 1998.
(8) TURLOCK BRANCH
On September 1, 1995, the Bank opened a branch in Turlock, California. In May
1995 the Bank acquired 2 lots for $297,000 at 2001 Geer Road, Turlock. The Bank
completed the construction of a permanent facility in February 1997 at a cost of
approximately $694,000 and the facility is approximately 3,300 square feet.
(9) MODESTO BRANCHES
On January 24, 1996, the Bank received approval to open a full service banking
facility in Modesto and entered into a ten-year lease with a non-affiliated
third party on December 2, 1996 for an approximately 5,413 square foot building
at 3508 McHenry Avenue, Modesto. The branch opened for business on December 10,
1996. Management believes that this facility will be adequate to accommodate
the branch for the foreseeable future.
On September 26, 1996, the Bank received approval to open a second branch in
Modesto and entered into a four-year lease with a non-affiliated third party on
December 1, 1996 for an approximately 8,208 square foot building at 1003 12th
Street,
17
Modesto. The branch opened for business on December 31, 1996. Management
believes that this facility will be adequate to accommodate the banking
operation for the foreseeable future.
(10) ACQUIRED BRANCHES
On December 11, 1997, the Bank purchased the sites of three former branches of
Bank Of America. These facilities are located at 640 Main Street, Livingston
and 1507 Center Street, Dos Palos and 5121 Hwy 140, Mariposa. The branch in
Livingston was purchased at a cost of $251,000 and is a 5,699 square feet
facility. The Dos Palos branch was purchased at a cost of $296,000 and is a
8,274 square feet facility. The Mariposa branch was purchased for a cost of
$313,000 and is a 4,200 square feet facility. Management believes that
these facilities will be adequate to accommodate the banking operations for the
foreseeable future.
(11) MADERA BRANCH
In 1997, the Bank received approval to open a full service facility in Madera
and in November 1997 entered into a 6 month lease with a nonaffiliated third
party for an approximate 1,100 square foot facility. The Company plans to move
this branch to a permanent site in late 1998 or early 1999.
THE THRIFT
The Thrift currently operates with four branch offices. The main office is the
office in Turlock and the other branch offices are located in Modesto, Visalia
and Fresno. All branch offices are leased facilities with minimal leasehold
improvements which are anticipated to be adequate to serve the needs of the
Thrift in the foreseeable future.
18
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1997, the Company, is not a party to, nor is any of their
property the subject of, any material pending legal proceedings, nor are any
such proceedings known to be contemplated by government authorities, except
as discussed in "Regulation and Supervision--County Bank."
The Company is, however, also exposed to certain potential claims encountered in
the normal course of business. In the opinion of Management, the resolution of
these matters will not have a material adverse effect on the Company's
consolidated financial position or results of operations in the foreseeable
future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter
of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
For information concerning the market for the Company's common stock and
related shareholder matters, see section titled "Market for Company's Common
Stock and Related Shareholder Matters" in the Company's 1997 Annual Report to
Shareholders incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
For selected consolidated financial data concerning the Company, see section
titled "Consolidated Financial Data" in the Company's 1997 Annual Report to
Shareholders incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For management's discussion and analysis of financial condition and results
of operations, the Company's 1997 Annual Report to Shareholders incorporated
herein by reference.
ITEM 7A. MARKET RISK.
For management's discussion and analysis of market risk, see section titled
"Interest Rate Risk Management" in the Company's 1997 Annual Report to
Shareholders incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Audited Consolidated Balance Sheets as of December 31, 1997 and 1996 and
Audited Consolidated Statements of Income, Shareholders' Equity and Cash
Flows for the years ending December 31, 1997, 1995, and 1995 appear in the
Company's 1997 Annual Report to Shareholders incorporated herein by
reference. Notes to the Consolidated Financial Statements appear in the
Company's 1997 Annual Report to Shareholders incorporated herein by
reference. The Independent Auditors' Report appears in the Company's 1997
Annual Report to Shareholder Incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in and there were no disagreements with accountants on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
19
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
section of the Company's 1998 Proxy Statement titled "Election of Directors,"
which will filed on or before April 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION
As permitted by the Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
section titled "Election of Directors" for the Company's 1998 Proxy Statement
which will be filed on or before April 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
section titled "Security Ownership of Certain Beneficial Owners and
Management" of the Company's 1998 Proxy Statement, which will be filed on or
before April 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
Section titled "Certain Transactions" of the Company's 1998 Proxy Statement,
which will be filed on or before April 30, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES
An index of all financial statements and schedules filed as part of this
Form 10-K appears below and the pages of the Company's Annual Report to
Shareholders for the year ended December 31, 1997 listed, are incorporated
herein by reference in response to Item 8 of this report.
Financial Statement Schedules: Page
- ----------------------------- ----
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended 1997, 1996, and 1995
Consolidated Statements of Shareholders' Equity for the Years Ended 1997, 1996,
and 1995
Consolidated Statements of Cash Flows for the Years Ended 1997, 1996, and 1995
Notes to Consolidated Financials
(b) REPORTS ON FORM 8-K
There were no reports filed in the quarter ending December 31, 1997 on Form
8-K.
20
(c) EXHIBITS
The following is a list of all exhibits required by Item 601 of Regulation
S-K to be filed as part of this
Form 10-K:
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ------------
3.1 Articles of Incorporation (filed as Exhibit 3.1
of the Company's September 30, 1996 Form 10Q filed
with the SEC on or about November 14, 1996). *
3.2 Bylaws (filed as Exhibit 3.2 of the Company's
September 30, 1996 Form 10Q filed with the SEC on
or about November 14, 1996). *
10 Employment Agreement between Thomas T. Hawker and
Capital Corp.
10.1 Administration Construction Agreement (filed as
Exhibit 10.4 of the Company's 1995 Form 10K filed
with the SEC on or about March 31, 1996). *
10.2 Stock Option Plan (filed as Exhibit 10.6 of the
Company's 1995 Form 10K filed with the SEC on or
about March 31, 1996). *
10.3 401(k) Plan (filed as Exhibit 10.7 of the
Company's 1995 Form 10K filed with the SEC on or
about March 31, 1996). *
10.4 Employee Stock Ownership Plan (filed as Exhibit
10.8 of the Company's 1995 Form 10K filed with
the SEC on or about March 31, 1996). *
11 Statement Regarding the Computation of Earnings
Per Share is incorporated herein by reference
from Note 1 of the Company's Consolidated
Financial Statements.
13 Annual Report to Shareholders. *
(portions incorporated by reference)
24 Consent of KPMG PEAT MARWICK LLP
* Denotes documents which have been incorporated
by reference.
(d) FINANCIAL STATEMENT SCHEDULES
All other supporting schedules are omitted because they are not applicable,
not required, or the information required to be set forth therein is
included in the financial statements or notes thereto incorporated herein
by reference.
21
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, as amended, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the day of March,
1998
CAPITAL CORP OF THE WEST
By: /s/ THOMAS T. HAWKER
-------------------------------------
THOMAS T. HAWKER
(President and Chief Executive Officer
of Capital Corp of the West)
By: /s/ JANEY E. BOYCE
-------------------------------------
JANEY E. BOYCE
(Senior Vice President and Chief Financial Officer
of Capital Corp of the West)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ JERRY E. CALLISTER Chairman of the March 1998
- ---------------------- Board of Directors
JERRY E. CALLISTER
/s/ HENRY DUPERTUIS Director March 1998
- -------------------
HENRY DUPERTUIS
/s/ ROBERT E. HOLL Director March 1998
- ------------------
ROBERT E. HOLL
/s/ BERTYL W. JOHNSON Director March 1998
- ---------------------
BERTYL W. JOHNSON
/s/ DOROTHY L. BIZZINI Director March 1998
- ----------------------
DOROTHY L. BIZZINI
/s/ LLOYD H. ALHEM Director March 1998
- ------------------
LLOYD H. ALHEM
/s/ JAMES W. TOLLADAY Director March 1998
- ---------------------
JAMES W. TOLLADAY
/s/ JACK F. CAUWELS Director March 1998
- -------------------
JACK F. CAUWELS
22
/s/ THOMAS T. HAWKER Director/CEO and March 1998
- -------------------- Principal Operations
THOMAS T. HAWKER Officer
/s/ JOHN FAWCETT Director March 1998
- ----------------
JOHN FAWCETT
/s/ TAPAN MONROE Director March 1998
- ----------------
TAPAN MONROE
/s/ JANEY E. BOYCE Chief Financial & March 1998
- ------------------ Accounting Officer
JANEY E. BOYCE
CAPITAL CORP OF THE WEST
23