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, 1998 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
incorporation or organization) Identification No.)
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
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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 $39,857,944 (based on the $9.50 average of bid and
ask prices per common share on March 24, 1999). The number of shares outstanding
of the Registrant's common stock, no par value, as of March 18, 1999 was
4,607,102. No shares of preferred stock, no par value, were outstanding at March
18, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement for the 1999 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A are incorporated by reference Part III, Items 10 through 13 and
portions of the Annual Report to Shareholders for 1998 are incorporated by
reference in Part II, Item 5 through 8.
1
CAPITAL CORP OF THE WEST
Table of Contents
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Page Reference
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PART I
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ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 3
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ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 15
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ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . 18
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF Proxy Statement for 1999
SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . 18 Annual Meeting
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PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED Page 22 of 1998 Annual
SECURITY HOLDER MATTERS . . . . . . . . . . . . . . . . . 19 Report
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ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . 19 Page 11 of 1998 Annual
. Report
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 19 Pages 12 through 24 of
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 1998 Annual Report
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . 19 Pages 27 through 48 of
1998 Annual Report
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON Proxy Statement for 1999
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . 19 Annual Meeting
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . 19 Proxy Statement for 1999
Annual Meeting
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ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . 19 Proxy Statement for 1999
Annual Meeting
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 20 Proxy Statement for 1999
MANAGEMENT. . . . . . . . . . . . . . . . . . Annual Meeting
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . 20 Proxy Statement for 1999
Annual Meeting
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PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K . . . . . . 20
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SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE COMPANY
GENERAL
Capital Corp of the West (the "Company" or "Capital Corp") is a bank holding
company incorporated under the laws of the State of California on April 26,
1995. On November 1, 1995, the Company became registered as a bank holding
company and is the holder of all of the capital stock of County Bank (the
"Bank") and all of the capital stock of Town and Country Finance and Thrift (the
"Thrift"). 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 4,607,102 shares
of Common Stock, no par value, and no shares of Preferred Stock. As of March 18,
1999 there were 4,607,102 common shares outstanding, held of record by
approximately 3,000 shareholders. There were no preferred shares outstanding at
March 18, 1999. The Bank has two wholly owned subsidiaries, Merced Area
Investment & Development, Inc. ("MAID") and County Asset Advisors ("CAA"). CAA
is currently inactive. All references herein to the "Company" include the Bank,
the Bank's subsidiaries, and the Thrift, unless the context otherwise requires.
INFORMATION ABOUT COMMERCIAL BANKING & GENERAL BUSINESS OF THE COMPANY
AND ITS SUBSIDIARIES
The Bank was organized on August 1, 1977, as County Bank of Merced, a
California state banking corporation. The Bank commenced operations in 1977.
In November 1992, the Bank changed its legal name to County Bank. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"),
up to applicable limits. The Bank is not a member of the Federal Reserve
System.
The Company acquired the Thrift on June 28, 1996 for a combination of cash
and stock with an aggregate value of approximately $5.8 million. The Thrift
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 certificates 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 downtown 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
The Company's primary market area consists of Merced, Madera, Mariposa, Tuolomne
and Stanislaus Counties and nearby communities. The banking business in
California generally, and specifically in the Company's primary market area, is
highly competitive with respect to both loans and deposits. The banking business
is dominated by a relatively small number of major banks which have many offices
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.
3
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, 1998, the Bank's deposits represented approximately 26% of total
deposits in all 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, 1998, these five categories accounted for approximately 36%,
26%, 19%, 14% and 5%, respectively, of the Bank's loan portfolio.
In 1990, the Bank entered into a cooperative agreement with Prudential
Agricultural Group to offer agricultural real estate loans to farmers in
Merced, Stanislaus, San Joaquin, Madera, Monterey, Santa Cruz and San Benito
Counties. The program is designed to have a select group of independent banks
throughout the United States generate farm real estate loans and process them
within the underwriting standards of the Federal Agricultural Mortgage
Corporation ("Farmer Mac") program. The qualifying loans are for the purchase
or refinance of production oriented agricultural properties and are secured
by a first deed of trust on the property. Loan terms range from 5 to 20 years
in length and loan amounts range from $500,000 to $3.0 million. The Bank
originates, packages and subsequently sells these loans to the Prudential
Agricultural Group and retains servicing rights on these loans. The Bank is
the only representative in Merced and Stanislaus Counties to offer this
program.
In 1992, the Bank became a certified Farmers Home Administration lender, now
known as the Farm Service Agency. The Bank originates loans under the
guidelines of such program both to retain for the Bank's loan portfolio and
to sell in the secondary market. The Bank may also sell loans, in the
$100,000 range, directly to Farmer Mac.
4
In 1994, the Bank organized a department to originate loans within the
underwriting standards of Small Business Administration ("SBA"). The Bank
originates packages and subsequently sells these loans in the secondary
market and retains servicing rights on these loans.
The Bank's deposits are attracted primarily from individuals and small and
medium-sized business-related sources. The Bank also attracts some deposits
from municipalities and other governmental agencies and entities. In
connection with the deposits of municipalities or other governmental
agencies, the Bank is generally required to pledge securities to secure such
deposits, except when the depositor signs a waiver with respect to the first
$100,000 of such deposits, which amount is insured by the FDIC.
The principal sources of the Bank's revenues are (i) interest and fees on
loans, (ii) interest on investment securities (principally U.S. Government
securities, mortgage-backed securities, collateralized mortgage obligations
and municipal bonds), and (iii) service charges on deposit accounts. For the
year ended December 31, 1998, these sources comprised approximately 64%, 21%,
and 7% respectively, of the Bank's total interest and noninterest income.
Most of the Bank's business originates from individuals, businesses and
professional firms located in its service area. The Bank is not dependent
upon a single customer or group of related customers for a material portion
of its deposits, nor is a material portion of the Bank's loans concentrated
within a single industry or group of related industries. The quality of Bank
assets and Bank earnings could be adversely affected by a downturn in the
local economy, including the agricultural sector.
BANK'S REAL ESTATE SUBSIDIARY (MAID)
GENERAL
California state-chartered banks previously were allowed, under state
law, to engage in real estate development activities either directly or through
investment in a wholly-owned subsidiary. Pursuant to this authorization, the
Bank established MAID, its wholly-owned subsidiary, as a California corporation
on February 18, 1987. MAID engaged in real estate activities for approximately
seven years.
Federal law now precludes banks from engaging in real estate development. The
uncertainty about the effect of the investment in MAID on the results of
future operations caused management to recognize a write-down equal to the
total investment in MAID in late 1995.
At December 31, 1998, MAID held one real estate project of unimproved land
and a single family improved lot. MAID does not currently intend to develop
the remaining properties. MAID continues to market these properties, and any
amounts realized upon sale or other disposition of these assets above their
current carrying value of zero will result in noninterest income at the time
of such sale or disposition.
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.
EMPLOYEES
As of December 31, 1998, the Company employed a total of 211 full-time
equivalent employees. The Company believes that employee relations are
excellent.
5
SEASONAL TRENDS IN THE COMPANY'S BUSINESS
Although the Company does experience some immaterial seasonal trends in
deposit growth and funding of its agricultural and construction loan
portfolios, in general the Company's business is not seasonal. However,
during the 1997-1998 crop season, unusually heavy rain attributed to El Nino
caused a delay in crop planting. This delay also caused a short term decline
in loan demand and deposits.
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 banking and financial services industry can be expected to occur
in the future. Some of the changes may create opportunities for the Company and
the Bank to compete in financial markets with less regulation. However, these
changes also may create new competitors in geographic and product markets which
have historically been limited by law to bank institutions, such as the Bank.
Changes in the statutes, regulation, or policies that impact the Company and the
Bank cannot necessarily be predicted and may have a material effect on their
business and earnings.
The operations of bank holding companies and their subsidiaries are affected
by the credit and monetary policies of the FRB. An important function of the
FRB is to regulate the national supply of bank credit. Among the instruments
of monetary policy used by the FRB to implement its objectives are open
market operations in U.S. government securities, changes in the discount rate
on bank borrowings and changes in reserve requirements on bank deposits.
These instruments of monetary policy are used in varying combinations to
influence the overall level of bank loans, investments and deposits, the
interest rates charged on loans and paid for deposits, the price of the
dollar in foreign exchange markets, and the level of inflation. The credit
and monetary policies of the FRB will continue to have a significant effect
on the Bank and on the Company.
Set forth below is a summary of significant statutes, regulations and
policies that apply to the operation of banking institutions. This summary is
qualified in its entirety by reference to the full text of such statutes,
regulations and policies.
BANK HOLDING COMPANY ACT
As a bank holding company, Capital Corp is subject to regulation under the BHC
Act, and is registered as such with, and subject to examination by, the FRB.
Pursuant to the BHC Act, Capital Corp is subject to limitations on the kinds of
businesses in which it can engage directly or through subsidiaries. It may of
course manage or control banks. Generally, however, it is prohibited, with
certain exceptions, from acquiring direct or indirect ownership or control of
more than five (5) percent of any class of voting shares of an entity engaged in
nonbanking activities, unless the FRB finds such activities to be "so closely
related to banking" as to be deemed "a proper incident thereto" within the
meaning of the BHC Act. Removal of many of the activity limitations is currently
under review by Congress, but whether any legislation liberalizing permitted
bank holding company activities will be enacted is not known.
At present the Company operates Town & Country Finance and Thrift, an
industrial loan company. The Company 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.
6
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
other banks with approval of the FDIC and the Department. County Bank is subject
to examination by both the FDIC and the Department.
As of December 31, 1997, the Department and the FDIC conducted a joint
examination of the Bank. As a result of this examination, the Bank entered
into a Memorandum of Understanding which requires the following:
1. Conduct a comprehensive management review of the Bank's executive
management to maintain a management structure suitable to its needs in
light of its recent rapid growth.
2. Have and retain qualified management with qualifications and
experience commensurate with their duties and responsibilities at the
bank.
3. Develop a plan to reduce the Bank's economic value of equity exposure
to loss from interest rate changes to acceptable levels.
4. Formulate, adopt and implement a comprehensive risk management process
that will strengthen management expertise and improve securities
portfolio management and management information and measurement
systems.
5. Establish and maintain an adequate allowance for loan losses and
develop and revise, adopt and implement a comprehensive policy to
ensure the adequacy of the allowance for loan losses.
6. Develop, adopt and implement a plan to control overhead and restore
the Bank's profitability.
7. Correct deficiencies relating to the Year 2000 project.
8. Furnish written progress reports.
A Memorandum of Understanding is an enforceable agreement. Failure to comply
with its terms can lead to further enforcement action by bank regulators,
including cease-and-desist orders, imposition of a receiver or conservator,
termination of deposit insurance, imposition of civil money penalties and
removal and prohibition orders against institution-affiliated parties.
As of the date of this report, the Bank believes it is in substantial
compliance with all the terms of the agreement.
TOWN & COUNTRY
Town & Country 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 all
thrifts was transferred from California's Department of Corporations to the
Department. As an industrial loan company, Town & Country issues investment or
thrift certificates, which
7
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, 1998, Town & Country had assets of $42 million, net loans of $38
million and deposits of $36 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 the Thrift entered into a Memorandum of Understanding with the FDIC
regarding certain matters of the Thrift. The Memorandum of Understanding
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 Memorandum of Understanding was established for
the information systems of the Thrift. The Memorandum of Understanding
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 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 Memorandum of Understanding.
DIVIDENDS
The Company may make a distribution to its shareholders if the
corporation's retained earnings equal at least the amount of the proposed
distribution. In the event sufficient retained earnings are not available for
the proposed distribution, such a corporation may nevertheless make a
distribution to its shareholders if, after giving effect to the distribution,
the corporation's assets equal at least 125% of its liabilities and certain
other conditions are met. Since the 125% ratio translates into a minimum capital
ratio of 20%, most bank holding companies, including the Company based on its
current capital ratios, are unable to meet this last test.
The primary source of funds for payment of dividends by the Company to its
shareholders is the receipt of dividends and management fees from the Bank
and, to a lesser extent, the Thrift. The Company's ability to receive
dividends from the Bank is limited by applicable state and federal law. A
California state-licensed bank may not make a cash distribution to its
shareholders in excess of the lesser of the following: (I) the bank's
retained earnings, or (ii) the bank's net income for its last three fiscal
years, less the amount of any distributions made by the bank to its
shareholders during such period. However, with the approval of the
Commissioner of Financial Institutions (the "Commissioner"), a bank may pay
dividends in an amount not to exceed the greater of (i) a bank's retained
earnings, (ii) its net income for its last fiscal year, or (iii) its net
income for the current fiscal year.
The 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.
8
REGULATORY CAPITAL REQUIREMENTS
Each of the Company, the Bank and Town & Country 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.
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 Town & Country at above the minimum
for the "well capitalized" level (6% Tier 1 risk-based; 10% total risk-based)
and to maintain the leverage capital ratio for County Bank above the 5%
minimum for "well-capitalized" banks. At December 31, 1998, the Company's
leverage, Tier 1 risk-based and total risk-based capital ratios were 7.58%,
10.69% and 11.94%, and the Bank's leverage, Tier 1 risk-based and total
risk-based capital ratios were 6.73%, 9.86% and 11.11%. 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
9
effective action is taken to correct the areas of weakness. The FDIC assigns
each member institution an annual FDIC assessment rate which, as of the date
of this Prospectus, varies between 0.0% per annum with a $2,000 minimum (for
well capitalized Subgroup A institutions) and 0.27% per annum (for
undercapitalized Subgroup C institutions). Insured institutions are not
permitted to disclose their risk assessment classification.
Under recent legislation, the cost of carrying bonds issued by the Financing
Corporation ("FICO") to cover losses of failed savings associations will be
allocated between BIF-insured institutions and SAIF-- insured institutions,
with BIF-insured institutions paying twenty (20) percent of the amount paid
by SAIF--insured institutions. The FDIC recently estimated that to cover
these costs BIF institutions will pay an assessment of approximately $.0128
annually per $100 insured deposits, and SAIF institutions will pay
approximately $.0644 annually per $100 of insured deposits. Starting in the
year 2000, BIF and SAIF institutions will share the FICO bond costs equally,
with an estimated assessment of $.0243 annually per $100 of insured deposits.
This legislation will increase the Bank's premiums, as it will be required to
share in the cost of carrying the FICO bonds. The increase will be slight
until the year 2000, at which time it will increase.
AUDIT REQUIREMENTS
All depository institutions are required to have an annual, full-scope on-site
examination. Those depository institutions with assets greater than $500 million
are required to have annual independent audits and to prepare all financial
statements in accordance with generally accepted accounting principles. Each
institution is required to have an independent audit committee comprised
entirely of outside directors.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each bank to identify the
communities served by the bank's offices and to identify the types of credit the
bank is prepared to extend within such communities. It also requires the bank's
regulators to assess the bank's performance in meeting the credit needs of its
community and to take such assessment into consideration in reviewing
application for mergers, acquisitions and other transactions, such as the Branch
Acquisition. An unsatisfactory rating may be the basis for denying such an
application. The Bank completed a CRA examination as of December 1997, and
received an "outstanding" rating.
POTENTIAL ENFORCEMENT ACTIONS
Banks and their institution-affiliated parties may be subject to potential
enforcement actions by the bank regulatory agencies for unsafe or unsound
practices in conducting their businesses, or for violations of any law, rule or
regulation or provision, any consent order with any agency, any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver,
cease-and-desist orders and written agreements, the termination of insurance of
deposits, the imposition of civil money penalties and removal and prohibition
orders against institution-affiliated parties. See " -- County Bank" and " --
Town and Country."
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.
10
- Interstate de novo branching is permitted to a bank only if a state adopts
legislation to "opt in" to interstate de novo branching authority.
LIMITATIONS ON CONCENTRATIONS. An interstate banking application may not be
approved if the applicant and its depository institution affiliates would
control more than 10% of insured deposits nationwide or more than 30% of insured
deposits in the state in which the bank to be acquired in located. These limits
do not apply to mergers solely between affiliates. States may waive the 30% cap
on a nondiscriminatory basis. Nondiscriminatory state caps on deposit market
share of a depository institution and its affiliates are not affected.
AGENCY AUTHORITY. A bank subsidiary of a bank holding company is
authorized to receive deposits, renew time deposits,
close loans, service loans and receive payments on loans as an agent for a
depository institution affiliate without being deemed a branch of the affiliate.
A bank is not permitted to engage, as agent for an affiliate, in any activity as
agent that it could conduct as a principal, or to have an affiliate, as its
agent, conduct any activity that it could not conduct directly, under federal or
state law.
HOST STATE REGULATION. Out-of-state banks seeking to acquire or
establish a branch are required to comply with any nondiscriminatory filing
requirements of the host state where the branch is located. The host state may
set notification and reporting requirements for a branch of an out-of-state
bank. A branch of an out-of-state bank is subject to all of the laws of the host
state regarding intrastate branching, consumer protection, fair lending and
community reinvestment. A branch of an out-of-state bank is not permitted to
conduct any activities at the branch that are not permissible for a bank
chartered by the host state.
MEETING LOCAL CREDIT NEEDS. CRA evaluations are required for each state in
which an interstate bank has a branch. Interstate
banks are prohibited from using out-of-state branches "primarily for the purpose
of deposit production." Federal banking agencies have adopted regulations to
ensure that interstate branches are being operated with a view to the needs of
the host communities.
CALIFORNIA LAW. In October 1995, California enacted state legislation in
accordance with authority under the Riegle-Neal Act. This law
permits banks headquartered outside California to acquire or merge with
California banks that have been in existence for at least five years, and
thereby establish one or more California branch offices. An out-of-state bank
may not enter California by acquiring one or more branches of a California bank
or other operations constituting less than the whole bank. The law authorizes
waiver of the 30% limit on state-wide market share for deposits as permitted by
the Riegle-Neal Act. This law also authorizes California state-licensed banks to
conduct certain banking activities (including receipt of deposits and loan
payments and conducting loan closings) on an agency basis on behalf of
out-of-state banks and to have out-of-state banks conduct similar agency
activities on their behalf.
It is impossible to predict with any degree of accuracy the competitive
impact the laws and regulations described above will have on commercial
banking in general and on the business of the Company in particular, or to
predict whether or when any of the proposed legislation and regulations will
be adopted. It is anticipated that the banking industry will continue to be a
highly regulated industry. Additionally, if experience is any indication,
there appears to be a continued lessening of the historical distinction
between the services offered by financial institutions and other businesses
offering financial services. Finally, the trend toward nationwide interstate
banking is expected to continue. As a result of these factors, it is
anticipated banks will experience increased competition for deposits and
loans and, possibly, further increases in their cost of doing business.
SELECTED STATISTICAL INFORMATION
The following tables in pages 12 through 15 present certain statistical
information concerning the business of the Company. This information should
be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" at ITEM 7, pages 12 through 24
of the Company's 1998 Annual Report to Shareholders incorporated herein by
reference, and with the Company's Consolidated Financial Statements and the
Notes thereto included in Item 14, pages 27 through 48 of the Company's 1998
Annual Report to Shareholders incorporated herein by reference. The
statistical information that follows is generally based on average daily
amounts.
11
INTEREST RATE SENSITIVITY
The interest rate gaps reported in the table below arise when assets are
funded with liabilities having different repricing intervals. Since these
gaps are actively managed and change daily as adjustments are made in
interest rate views and market outlook, positions at the end of any period
may not reflect the Company's interest rate sensitivity in subsequent
periods. Active management dictates that longer-term economic views are
balanced against prospects for short-term interest rate changes in all
repricing intervals. For purposes of the analysis below, repricing of
fixed-rate instruments is based upon the contractual maturity of the
applicable instruments. Actual payment patterns may differ from contractual
payment patterns.
BY REPRICING INTERVAL
---------------------------------------------------------------------------------------
After three
Within months, After one Noninterest-
three within year, within After bearing
(Dollars in thousands) months one year five years five years funds Total
---------------------------------------------------------------------------------------
ASSETS
Federal funds sold $ 19,125 $ - $ - $ - $ - $ 19,125
Time deposits at other institutions 600 - - - - 600
Investment securities 9,033 20,397 42,130 83,307 - 154,867
Loans 150,078 49,010 59,561 10,284 - 268,933
Noninterest-earning assets and
allowance for loan losses - - - - 56,334 56,334
--------- --------- --------- --------- ------- --------
Total assets $ 178,836 $ 69,407 $ 101,691 $ 93,591 $56,334 $499,859
========= ========= ========== ========= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings, money market & NOW deposits $ 317,597 $ - $ - $ - $ - $317,597
Time deposits 41,585 68,685 16,343 - - 126,613
Other interest-bearing liabilities 7,100 103 - 3,263 - 10,466
Other liabilities and shareholders'
equity - - - - 45,183 45,183
--------- --------- --------- --------- ------- --------
Total liabilities and shareholders'
equity $ 366,282 $ 68,788 $ 16,343 $ 3,263 $45,183 $499,859
========= ========= ========== ========= ======= ========
Interest rate sensitivity gap $(187,446) $ 619 $ 85,348 $ 90,328 $11,151 $ -
Cumulative interest rate sensitivity
gap $(187,446) $(186,827) $(101,479) $(11,151) $ - -
12
The following table sets forth the maturities of investment securities at
December 31, 1998 and the weighted average yields of such securities
calculated on the basis of the amortized 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
-----------------------------------------------------------------------------------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Total
Available for sale
securities:
U.S. Treasury and U.S.
government agencies $ 500 5.72% $ 5,123 5.71% $ - -% $ 7,008 5.74% $ 12,631
State and political
subdivisions 415 5.09 1,305 5.65 1,667 4.49 26,790 4.57 30,177
Mortgage-backed securities 42 6.12 136 9.25 1,663 5.30 54,373 6.29 56,214
Collateralized mortgage
obligations - - - - - - 29,305 6.31 29,305
Corporate debt securities - - 4,330 6.08 - - 5,388 6.40 9,718
Held to maturity
U.S. Treasury and U.S.
government agencies - - - - 1,024 5.79 1,000 7.07 2,024
Mortgage-backed securities - - - - - - 11,486 6.45 11,486
------ ---- -------- ---- ------ ---- -------- ---- --------
Total Securities $ 957 5.46% $ 10,894 5.89% $4,354 5.11% $135,350 5.95% $151,555
------ ---- -------- ---- ------ ---- -------- ---- --------
------ ---- -------- ---- ------ ---- -------- ---- --------
The Company does not own securities of a single issuer whose aggregate book
value is in excess of 10% of its total equity.
Loan Portfolio
At December 31, 1998, the Company had approximately $80,210,000 in
undisbursed loan commitments of which approximately $12,514,000 related to
real estate construction loans. This compares with $55,238,000 at December
31, 1997 of which approximately $11,049,000 related to real estate
construction loans. Standby letters of credit were $2,694,000 and $3,243,000,
respectively, at December 31, 1998 and December 31, 1997. For further
information about the composition of the Company's loan portfolio see "ITEM
7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" section entitled "Credit Risk Management and Asset Quality,"
pages 18 through 20 of the Company's 1998 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 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 and personal property 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 reviews are assessed by the Company's
audit committee. Collection of delinquent loans is generally the
responsibility of the Company's credit administration staff. However, certain
problem loans may be dealt with by the originating loan officer. The Board of
Directors review the status of delinquent and problem loans on a monthly
basis. The Company's underwriting and review practices notwithstanding, in
the normal course of business, the Company expects to incur loan losses in
the future.
13
The table that follows shows the maturity distribution of the portfolio of
commercial and agricultural loans, real estate construction, real estate
mortgage and installment loans on December 31, 1998, as well as sensitivity
to changes in interest rates:
December 31, 1998
-------------------------------------------------------------------
Within One to Over
(Dollars in thousands) One Year Five Years Five Years Total
-------- ---------- ---------- -----
COMMERCIAL AND AGRICULTURAL
Loans with floating rates $ 49,843 $ 18,195 $ 3,818 $ 71,856
Loans with predetermined rates 7,405 6,993 991 15,389
--------- --------- --------- ---------
Subtotal 57,248 25,188 4,809 87,245
REAL ESTATE--CONSTRUCTION
Loans with floating rates 5,974 1,454 1,963 9,391
Loans with predetermined rates 2,590 1,618 241 4,449
--------- --------- --------- ---------
Subtotal 8,564 3,072 2,204 13,840
REAL ESTATE--MORTGAGE
Loans with floating rates 9,006 50,770 24,041 83,817
Loans with predetermined rates 51 13,089 - 13,140
--------- --------- --------- ---------
Subtotal 9,057 63,859 24,041 96,957
INSTALLMENT 40,570 29,054 1,267 70,891
--------- --------- --------- ---------
Total $ 115,439 $ 121,173 $ 32,321 $ 268,933
--------- --------- --------- ---------
--------- --------- --------- ---------
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The following table summarizes a breakdown of the allowance for loan losses
by loan category and the percentage by loan category of total loans for the
dates indicated:
(Dollars in thousands) December 31,
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ --- ------ ---
Commercial, financial
and agricultural $ 2,618 55% $ 1,868 48% $ 840 39% $ 944 49% $ 898 49%
Real estate -construction 376 8 640 17 1,421 8 708 9 218 10
Real estate - mortgage 1,260 26 1,058 28 219 31 - 31 376 31
Installment 521 11 267 7 312 22 49 11 129 10
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total $ 4,775 100% $ 3,833 100% $ 2,792 100% $ 1,701 100% $ 1,621 100%
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Loans with significant potential problems or impaired loans are placed on
nonaccrual status. Management defines impaired loans as those loans,
regardless of past due status, in which management believes the collection of
principal and interest process has been exhausted. Nonaccrual loans totaled
$1,032,000, $2,611,000, $4,968,000, $4,626,000, and $ 653,000 in 1998, 1997,
1996, 1995, and 1994.
14
OTHER INTEREST-BEARING ASSETS
The following table relates to other interest bearing assets not disclosed
above for the dates indicated. This item consists of a salary continuation
plan for the Company's executive management and deferred retirement benefits
for participating board members. The plan is informally linked with universal
life insurance policies totaling $4,104,000 for the salary continuation plan.
December 31
-----------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Cash surrender value of life insurance $ 4,104 $ 3,839 $ 3,134 $ 1,290 $ 288
ITEM V DEPOSITS
The following table sets forth the average balance and the average rate paid
for the major categories of deposits for the years indicated:
Deposits
For the Year Ended December 31,
------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Amount Yield Amount Yield Amount Yield
------------------------------------------------------------------
Noninterest-bearing demand deposits $63,243 - % $38,023 - % $30,549 - %
Interest-bearing demand deposits 57,602 0.87 38,164 0.90 29,376 0.91
Savings deposits 156,956 3.63 117,357 4.11 104,938 4.15
Time deposits under $100,000 86,020 5.14 58,262 5.61 34,408 5.26
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, 1998 are summarized as follows:
(Dollars in thousands)
Remaining Maturity:
Three months or less $ 17,136
Over three through six months 10,028
Over six through twelve months 8,205
Over twelve months 7,233
---------
Total $ 42,602
---------
---------
ITEM VI RETURN ON EQUITY AND ASSETS
The following table sets forth certain financial ratios for the periods
indicated (averages are computed using actual daily figures):
RETURN ON AVERAGE EQUITY AND ASSETS
For the year ended
December 31,
----------------------------------
1998 1997 1996
---- ---- ----
Return on average assets 0.60% 0.13% 0.88%
Return on average equity 6.48 1.46 11.05
Dividend payout ratio - - 0.05
Average equity to average assets 9.26 8.76 7.96
15
MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCK MATTERS
The Company's stock is included for quotation on the Nasdaq National Market
System with a stock quotation symbol of CCOW. The following table indicates
the range of high and low sales prices for the period shown, based upon
information provided by the Nasdaq National Market System.
- ---------------------------------------------------
1998 High Low
- ---------------------------------------------------
4th quarter $12.00 $9.38
3rd quarter 13.37 9.81
2nd quarter 15.35 12.75
1st quarter $14.28 $11.67
1997 High Low
- ---------------------------------------------------
4th quarter $ 14.00 $ 10.33
3rd quarter 14.50 12.25
2nd quarter 14.13 10.75
1st quarter $ 11.08 $ 8.50
- ---------------------------------------------------
ITEM 2. PROPERTIES
THE BANK
(1) NORTH MERCED OFFICE
The Bank's north Merced office is located at 490 West Olive Avenue in Merced
with approximately 5,600 square feet of interior floor space. This building
was constructed in 1978 at a cost of approximately $400,000 and is situated
on a lot of approximately 47,000 square feet, which the Bank purchased in
1977 for approximately $186,000. Management believes that this facility will
be adequate to accommodate the operations of this branch for the foreseeable
future.
(2) DOWNTOWN MERCED BRANCH
The Bank's downtown Merced Branch was located at 606 West 19th Street in
Merced until September 2, 1997. On that date, the Bank relocated its downtown
Merced branch to 550 West Main Street in Merced and it was re-designated as
the main branch of the Bank. The branch and certain centralized lending
operations occupy the first floor of the three story building, occupying
approximately 9,200 square feet. The Bank will continue to lease the
previously occupied building through June, 1999. Management believes that the
new facility will be adequate to accommodate the operations of this branch
for the foreseeable future.
(3) ATWATER BRANCH
On October 5, 1981, the Bank opened a branch office at 735 Bellevue Road,
Atwater. The building contains approximately 6,000 square feet of interior
floor space, and was built at a total cost of approximately $500,000. In
1994, the Bank purchased the lot at a cost of $316,000. Management of the
Bank believes that this facility will be adequate to accommodate the
operations of this branch for the foreseeable future. The data processing and
central service support personnel and related equipment were relocated to the
new facility in downtown Merced, as discussed above in late 1997.
(4) ADMINISTRATIVE HEADQUARTERS
On September 2, 1997, the Company vacated its three previously leased
administrative facilities in Merced and relocated to 550 West Main Street in
Merced. The facility is a three story facility with a two story attached
parking facility and is approximately 29,000 square feet. Approximately
19,800 square feet is occupied by the administrative and central support
functions. The facility cost was approximately $5.1 million. Management
believes that this facility will be adequate to accommodate the operations of
Company for the foreseeable future.
16
(5) LOS BANOS BRANCH
On August 15, 1989, the Bank opened a branch office at 1341 East Pacheco
Boulevard, Los Banos, located in the Canal Farm Shopping Center. The Bank
entered into a five-year lease with a nonaffiliated third party, commencing
on August 1, 1989. In October of 1994, the Los Banos branch was relocated to
953 W. Pacheco Boulevard, Los Banos. The Bank entered into a ten-year lease
with a non-affiliated third party on the facility. The new facility contains
4,928 square feet of interior floor space. Remodeling and redecorating
expenses were approximately $355,000. Management believes that this facility
will be adequate to accommodate the operation of the branch for the
foreseeable future.
(6) HILMAR BRANCH
On November 15, 1993, the Bank opened a branch office at 8019 N. Lander
Avenue, Hilmar. The building was purchased at a cost of $328,000 and consists
of a single story building of approximately 4,456 square feet of interior
floor space. Remodeling and redecorating expenses were approximately $53,000.
Management believes that this facility will be adequate to accommodate the
operation of this branch for the foreseeable future.
(7) SONORA BRANCH
On January 12, 1996, the Bank received approval to open a full service banking
facility at the Crossroads Shopping Center and entered into a five-year lease
with a non-affiliated third party on January 12, 1996 for a 2,500 square foot
facility. The branch opened April 1, 1996. On August 28, 1998, the Bank
relocated from the Crossroads Shopping Center to a larger facility of 3,131
square feet in a nearby shopping center. As part of the move the Bank entered
into a ten-year lease with a non-affiliated third party. Management believes
that this facility will be adequate to accommodate the operation of this branch
for the foreseeable future.
(8) TURLOCK 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.
Management believes that this facility will be adequate to accommodate the
operation of this branch for the foreseeable future.
(9) MODESTO BRANCHES
On January 24, 1996, the Bank received approval to open a full service banking
facility in Modesto and entered into a ten-year lease with a non-affiliated
third party on December 2, 1996 for an approximately 5,413 square foot building
at 3508 McHenry Avenue, Modesto. The branch opened for business on December 10,
1996. Management believes that this facility will be adequate to accommodate the
branch for the foreseeable future.
On September 26, 1996, the Bank received approval to open a second branch in
Modesto and entered into a four-year lease with a non-affiliated third party on
December 1, 1996 for an approximately 8,208 square foot building at 1003 12th
Street, Modesto. The branch opened for business on December 31, 1996. Management
believes that this facility will be adequate to accommodate the banking
operation for the foreseeable future.
(10) ACQUIRED BRANCHES
On December 11, 1997, the Bank purchased the sites of three former branches of
Bank of America. These facilities are located at 640 Main Street, Livingston,
1507 Center Street, Dos Palos and 5121 Hwy 140, Mariposa. The branch in
Livingston was purchased at a cost of $251,000 and is a 5,699 square feet
facility. The Dos Palos branch was purchased at a cost of $296,000 and is an
8,274 square feet facility. The Mariposa branch was purchased for a cost of
$313,000 and is a 4,200 square feet facility. Management believes that these
facilities will be adequate to accommodate the banking 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 Bank has been on a
month to month rent agreement since May, 1998. The Company plans to move this
branch to a permanent site in late 1999.
17
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.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1998, 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 a Regulation and Supervision --- County Bank."
The Company is, however, also exposed to certain potential claims encountered in
the normal course of business. In the opinion of Management, the resolution of
these matters will not have a material adverse effect on the Company's
consolidated financial position or results of operations in the foreseeable
future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not commit any matters to a vote of security holders in the
quarter ended December 31, 1998.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
For information concerning the market for the Company's common stock and related
shareholder matters, see page 20 of the Company's 1998 Annual Report to
Shareholders incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
For selected consolidated financial data concerning the Company, see page 11 of
the Company's 1998 Annual Report to Shareholders incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For management's discussion and analysis of financial condition and results of
operations, see pages 12 through 24 of the Company's 1998 Annual Report to
Shareholders incorporated herein by reference.
ITEM 7A. MARKET RISK
For management's discussion and analysis of market risk and interest rate risk
management, see pages 20 through 21 of the Company's 1998 Annual Report to
Shareholders incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Audited Consolidated Balance Sheets as of December 31, 1998 and 1997 and Audited
Consolidated Statements of Income and Comprehensive Income, Shareholders' Equity
and Cash Flows for the fiscal years ending December 31, 1998, 1997, and 1996
appear on pages 28 through 31 of the Company's 1998 Annual Report to
Shareholders incorporated herein by reference. Notes to the Consolidated
Financial Statements appear on pages 32 through 48 of the Company's 1998 Annual
Report to Shareholders incorporated herein by reference. The Independent
Auditors' Report appears on page 27 of the Company's 1998 Annual Report to
Shareholders incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in and there were no disagreements with accountants on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
section of the Company's 1998 Proxy Statement titled "Election of Directors,"
which is to be filed on or about March 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
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 1997 Proxy Statement titled "Information Pertaining
to Election of Directors," which is to be filed on or about March 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
Company's 1998 Proxy Statement, which is to be filed on or about March 31,
1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As permitted by Securities and Exchange Commission Regulation 14A, the
information called for by this item is incorporated by reference from the
Company's 1998 Proxy Statement, which was filed on or about March 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ONFORM 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, 1998 listed, are incorporated
herein by reference in response to Item 8 of this report.
- -------------------------------------------------------------------------------------------------------------
Financial Statement Schedules: Page
----
- -------------------------------------------------------------------------------------------------------------
Independent Auditor's Report 27
- -------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets as of December 31, 1998 and 1997 28
- -------------------------------------------------------------------------------------------------------------
Consolidated Statements of Income and Comprehensive Income for the Years Ended 1998, 29
1997, and 1996
- -------------------------------------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity for the Years Ended 1998, 1997, and 1996 30
- -------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows for the Years Ended 1998, 1997, and 1996 31
- -------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financials 32
- -------------------------------------------------------------------------------------------------------------
(b) REPORTS ON FORM 8-K
There were no reports filed in the quarter ending December 31, 1998 on
Form 8-K.
(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:
20
- -------------------------------------------------------------------------------------------------------------
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).
- -------------------------------------------------------------------------------------------------------------
10.5 Purchase agreement for three branches from Bank of America is *
incorporated herein by reference from Exhibit 2.1 Registration Statement
on Form S-2 filed July 14, 1997, File No. 333-31193.
- -------------------------------------------------------------------------------------------------------------
11 Statement Regarding the Computation of Earnings Per Share is
incorporated herein by reference from Note 1 of the Company's
Consolidated Financial Statements.
- -------------------------------------------------------------------------------------------------------------
13 Annual Report to Security Holders.
- -------------------------------------------------------------------------------------------------------------
* Denotes documents which have been incorporated by reference.
- -------------------------------------------------------------------------------------------------------------
(d) FINANCIAL STATEMENT SCHEDULES
All other supporting schedules are omitted because they are not applicable,
not required, or the information required to be set forth therein is
included in the financial statements or notes thereto incorporated herein by
reference.
21
Consent of accountant (for incorporation by reference of report of
accountants into form S-8 registration statement.)
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 31st day of
March, 19992
CAPITAL CORP OF THE WEST
By: /s/ THOMAS T. HAWKER
-------------------------------------
THOMAS T. HAWKER
(President and Chief Executive Officer
of Capital Corp of the West)
By: /s/ R. DALE MCKINNEY
-------------------------------------
R. DALE MCKINNEY
(Senior Vice President and Chief
Financial Officer of Capital Corp
of the West)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ LLOYD H. ALHEM Chairman of the March 1999
- ------------------------ Board of Directors
LLOYD H. ALHEM
/s/ HENRY DUPERTUIS Director March 1999
- ------------------------
HENRY DUPERTUIS
/s/ ROBERT E. HOLL Director March 1999
- ------------------------
ROBERT E. HOLL
/s/ BERTYL W. JOHNSON Director March 1999
- ------------------------
BERTYL W. JOHNSON
/s/ DOROTHY L. BIZZINI Director March 1999
- ------------------------
DOROTHY L. BIZZINI
/s/ JERRY E. CALLISTER Director March 1999
- ------------------------
JERRY E. CALLISTER
22
/s/ JAMES W. TOLLADAY Director March 1999
- ------------------------
JAMES W. TOLLADAY
/s/ JACK F. CAUWELS Director March 1999
- ------------------------
JACK F. CAUWELS
/s/ THOMAS T. HAWKER Director/CEO and March 1999
- ------------------------ Principal Operations
THOMAS T. HAWKER Officer
/s/ JOHN FAWCETT Director March 1999
- ------------------------
JOHN FAWCETT
/s/ TAPAN MONROE Director March 1999
- ------------------------
TAPAN MONROE
/s/ R. DALE MCKINNEY Chief Financial & March 1999
- ------------------------ Accounting Officer
R. DALE MCKINNEY
CAPITAL CORP OF THE WEST
23