-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RCjExASW+3IDCdo7Y6pF+o5wNbQL72YtpD5/bNvflzq+/rH3JK0aTJ/MD3d82xf2 hXLwzYwByHGZ5EXrlGuFlw== 0000912057-96-009872.txt : 19960517 0000912057-96-009872.hdr.sgml : 19960517 ACCESSION NUMBER: 0000912057-96-009872 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL CORP OF THE WEST CENTRAL INDEX KEY: 0001004740 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770405791 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27384 FILM NUMBER: 96566184 BUSINESS ADDRESS: STREET 1: 1160 W OLIVE AVE STREET 2: STE A CITY: MERCED STATE: CA ZIP: 95348 BUSINESS PHONE: 2097252200 MAIL ADDRESS: STREET 1: 1160 W OLIVE AVENUE STREET 2: SUITE A CITY: MERCED STATE: CA ZIP: 95348 10-Q 1 10-Q U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Period Ended March 31, 1996 Commission File Number: 0-27384 ________________________________________________________________________________ CAPITAL CORP OF THE WEST (Exact name of registrant as specified in its charter) CALIFORNIA 77-0405791 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 1160 WEST OLIVE AVENUE, SUITE A MERCED, CALIFORNIA 95348-1952 (Address of principal executive offices) (Zip Code)
(209) 725-2200 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) 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 Bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes ___ No The number of shares outstanding of the Registrant's common stock, no par value, as of March 31, 1996 was 1,335,831. No shares of preferred stock, no par value, were outstanding at March 31, 1996. CAPITAL CORP OF THE WEST Table of Contents PART I--FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets 2 Consolidated Statements of Income 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 PART II--OTHER INFORMATION Item 1. Legal Proceedings 11 Item 2. Changes in Securities 11 Item 3. Defaults Upon Senior Securities 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 12 Exhibit 2.1 13 Exhibit 2.2 15 CAPITAL CORP OF THE WEST CONSOLIDATED BALANCE SHEETS (UNAUDITED) 3/31/96 12/31/95 ---------- ---------- (IN THOUSANDS) ASSETS Cash & noninterest-bearing deposits in other banks $18,784 $18,967 Federal funds sold - - Investment securities available for sale at market 44,199 45,302 Mortgage loans held for sale 2,315 501 Loans, net of allowance for loan losses of $1,860,000 at March 31, 1996 136,483 132,035 and $1,701,000 at December 31, 1995 Interest receivable 1,830 1,860 Bank premises and equipment, net 4,333 4,138 Other assets 6,568 6,230 ---------- ---------- Total Assets $214,512 $209,033 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing demand $34,979 $39,726 Negotiable orders of withdrawal 27,388 29,019 Savings 101,220 95,537 Time, under $100,000 23,969 21,917 Time, $100,000 and over 6,943 6,402 ---------- ---------- Total Deposits 194,499 192,601 Accrued interest, taxes and other liabilities 4,770 1,339 ---------- ---------- Total Liabilities 199,269 193,940 Common stock, no par value 2,500,000 shares authorized; 1,335,831 issued & outstanding at March 31, 1996 9,880 9,870 and 1,334,956 issued & outstanding at December 31, 1995 Investment securities unrealized gains/(losses), net (50) 312 Retained earnings 5,413 4,911 ---------- ---------- Total Shareholders' Equity 15,243 15,093 ---------- ---------- Total Liabilities and Shareholders' Equity $214,512 $209,033 ---------- ---------- ---------- ---------- See accompanying notes. 2 CAPITAL CORP OF THE WEST CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended 3/31/96 3/31/95 ---------- ---------- (In Thousands Except For Per Share Data) INTEREST INCOME Interest and fees on loans $3,419 $2,988 Interest on investment securities Taxable 716 465 Non-taxable 59 97 Interest on federal funds sold 56 86 ---------- ---------- Total Interest Income 4,250 3,636 Interest Expense Deposits Negotiable orders of withdrawal 64 60 Savings 1,036 1,049 Time, under $100,000 306 202 Time, $100,000 and over 94 48 Other 12 1 ---------- ---------- Total Interest Expense 1,512 1,360 Net Interest Income 2,738 2,276 Provision for loan losses 160 39 ---------- ---------- Net interest income after provision for loan losses 2,578 2,237 Other Income Service charges on deposit accounts 474 215 Income from real estate held for sale or development 85 10 Other 12 130 ---------- ---------- Total Other Income 571 355 Other Expenses Salaries and related benefits 1,186 972 Bank premises and occupancy 157 136 Equipment 232 166 Bank assessments 10 95 Professional fees 178 71 Marketing 90 71 Other 500 383 ---------- ---------- Total Other Expenses 2,353 1,894 Income before income taxes 796 698 Provision for income taxes 295 277 ---------- ---------- Net Income 501 421 ---------- ---------- ---------- ---------- Net Income Per Share $0.38 $0.32 ---------- ---------- ---------- ----------
See accompanying notes 3 CAPITAL CORP OF THE WEST STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED) 3 MONTHS ENDED 3 MONTHS ENDED 3/31/95 3/31/95 -------------- -------------- (IN THOUSANDS) Operating activities Net income $ 501 $ 421 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 160 39 Depreciation, amortization and accretion, net 368 112 Provision for deferred income taxes - 317 Net decrease in accrued interest receivable & other assets 71 234 Net (increase) in mortgage loans held for sale (1,814) (1,874) Net increase in deferred loan fees 61 21 Net increase (decrease) in accrued interest pay. & other liab. 3,431 (92) Provision for loss on real estate held for sale or development - 50 Net (gains) on sale of assets (80) (65) -------------- -------------- Net cash provided/(used) by operating activities 2,698 (837) Investing activities Investment security purchases (7,699) (4,847) Proceeds from maturities of investment securities 2,000 2,571 Proceeds from sales of investment securities 6,242 - Proceeds from sales of commercial and real estate loans 591 1,145 Net (increase) in loans (5,185) (1,303) Purchases of bank premises and equipment (369) (406) Purchases from sale of real estate held for sale or development (369) (62) Proceeds from sale of real estate held for sale or development - 196 --------------- -------------- Net cash (used) by investing activities (4,789) (2,706) Financing activities Net increase (decrease) in demand, now and savings deposits (695) 8,419 Net increase (decrease) in certificates of deposit 2,593 (1,333) Exercise of stock options 11 - -------------- -------------- Net cash provided by financing activities 1,909 7,086 Net (decrease) increase in cash and cash equivalents (183) 3,543 Cash and cash equivalents at beginning of year 18,967 16,490 -------------- -------------- Cash and cash equivalents at end of quarter $ 18,784 $ 20,033 -------------- -------------- -------------- -------------- Supplemental Disclosure of noncash investing and financing activities: Investment securities unrealized losses 362 266
See accompanying notes 4 PART 1--FINANCIAL INFORMATION (CONTINUED) NOTES TO CONSOLIDATED FINANCIAL STATEMENT March 31, 1996, December 31, 1995 AND March 31, 1995 (UNAUDITED) GENERAL-COMPANY Capital Corp of the West (the "Company") is a bank holding company which was organized as a corporation under the laws of the State of California on April 26, 1995. On November 1, 1995 the Company became a federally chartered bank holding company and the holder of all of the capital stock of County Bank (the "Bank"). 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 one class of Common Stock, no par value and one class of Preferred Stock. As of February 29, 1996 there were 1,335,831 common shares outstanding, held of record by approximately 1,200 shareholders. There were no preferred shares outstanding at March 31, 1996. In April 1996 the Company formed Capital West Group, a new subsidiary that intends to engage in the financial institutions advisory business, subject to Regulatory approval. The Bank has one wholly owned subsidiary, Merced Area Investment & Development, Inc. ("MAID"). All references herein to the "Company" include the Bank and the Bank's subsidiary, unless the context otherwise requires. ACQUISITION In March 1996, the Company entered into an agreement for the acquisition of Town & Country Finance and Thrift Company (the "Thrift"). As of the date of this report, no assurances can be given that the Company will receive the required regulatory and shareholder approvals for the acquisition. GENERAL-BANK The Bank was organized on August 1, 1977, as County Bank of Merced, a California state banking corporation. The Bank commenced operations on December 22, 1977. In November 1992, the Bank changed its legal name to County Bank. The Bank's securities consist of one class of Common Stock, no par value and is wholly owned by the Company. The Bank's deposits are insured under the Federal Deposit Insurance Act, up to applicable limits stated therein. Like most state- chartered banks of its size in California, it is not a member of the Federal Reserve System. BANK'S INDUSTRY & MARKET AREA The Bank engages in general commercial banking business primarily in Merced, Stanislaus and Tuolumne Counties from its main office, located at 490 West Olive Avenue, Merced, California 95341; and full-service branch offices located at 735 Bellevue Road, Atwater, California 95301; 606 West 19th Street, Merced, California 95340; 953 West Pacheco Boulevard, Los Banos, California 93635; 8019 N. Lander Avenue, Hilmar, California 95365;2001 Geer Road, Turlock, California 95382; and the Crossroads Shopping Center, Sonora, California. The Bank has a loan production office at 909 14th Street in Modesto, California. The Bank's administrative headquarters are located at 1160 West Olive, Suite A, Merced, California 95348, and its real estate department is located at 1170 West Olive, Suite I, Merced, California 95348. The latter has also been approved to be a full service branch banking office, although at present it is only being used to serve real estate loan customers with construction financing and permanent home mortgages. It also provides accommodations for the activities of Merced Area Investment and Development ("MAID"), the Bank's wholly owned real estate development subsidiary. Although approved to be a full service branch banking office, the administrative headquarters facility is presently used solely as the Company's corporate headquarters. OTHER FINANCIAL NOTES All adjustments, in the opinion of Management, which are necessary for a fair presentation of the Company's financial position at March 31, 1996, and at December 31, 1995 and the results of operations and statements of cash flows for the three month periods ended March 31, 1996 and 1995, have been included. These interim statements are not necessarily indicative of the results for a full year. 5 The accompanying unaudited financial statements have been prepared on a basis consistent with the generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Per share information is based on weighted average number of shares of common stock outstanding during each three month period after giving retroactive effect for the 15% stock dividend in June, 1995. The weighted average number of shares outstanding were 1,335,177 for the three month period ended March 31, 1996 and 1,333,869 for March 31, 1995. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW--For the three months ended March 31, 1996, consolidated net income was $501,000 compared to $421,000 for the three month period ended March 31, 1995, a $80,000 (19%) increase. Earnings per share were $.38 and $.32, respectively. The annualized return on average assets was .99% for the first three months of 1996 as compared with .96% for the same three month period in 1995. The Company's annualized return on beginning equity was 13.3% and 12.1%, respectively. Total assets at March 31, 1996 were $214,512,000, an increase of $5,479,000 or 2.6% compared to December 31, 1995. Net loans were $138,798,000 at March 31, 1996, an increase of $6,763,000 or 5.1% and deposits were $194,499,000, an increase of $1,898,000 or 1%. Total shareholders' equity grew to $15,243,000, a 1% increase from December 31, 1995. LIQUIDITY--To maintain adequate liquidity requires that sufficient resources be available at all times to meet cash flow requirements of the Bank. The need for liquidity in a banking institution arises principally to provide for deposit withdrawals, the credit needs of its customers and to take advantage of investment opportunities as they arise. A bank may achieve desired liquidity from both assets and liabilities. The Bank considers cash and deposits held in other banks, federal funds sold, other short term investments, maturing loans and investments, payments of principal and interest on loans and investments and potential loan sales as sources of asset liquidity. Deposit growth, access to credit lines established with correspondent banks and market sources of funds are considered by the Bank as sources of liability liquidity. The Bank reviews its liquidity position on a regular basis based upon its current position and expected trends of loans and deposits. Management believes that the Bank maintains adequate amounts of liquid assets to meet its liquidity needs. These assets include cash and deposits in other banks, certain investment securities and federal funds sold. The Bank's liquid assets totalled $62,983,000 and $64,269,000 on March 31, 1996 and December 31, 1995, respectively, and constituted 29.4% and 30.7%, respectively, of total assets on those dates. In analyzing liquidity for the Bank, consideration is also taken for the market value and pledging requirements of the Bank's investment securities. As of March 31, 1996 and December 31, 1995, the Bank's investment portfolio had market values of approximately $44,199,000 and $45,302,000, respectively. Total pledged securities as of March 31, 1996 totalled $19,328,000 as compared to $18,157,000 at December 31, 1995. Although the Bank's primary sources of liquidity include liquid assets and a stable deposit base, the Bank maintains lines of credit with certain correspondent banks and Federal Reserve Bank aggregating $5,648,000 of which $3,506,000 was outstanding as of March 31, 1996 and $107,000 was outstanding as of December 31, 1995. CAPITAL RESOURCES--Capital serves as a source of funds and helps protect depositors against potential losses. The primary source of capital for the Company has been internally generated capital through retained earnings. The Company's shareholders' equity increased by $150,000 (1%) since December 31, 1995. This increase was the result of net income of $501,000 for the three month period ended March 31, 1996 offset by a decrease of $362,000 in investment securities unrealized gains, net of taxes. The Bank had unrealized losses, net of taxes, in its securities classified as available-for-sale of $50,000 as of March 31, 1996, compared to unrealized gains of $312,000 as of December 31, 1995. Capital levels for the Bank continue to remain above established regulatory capital requirements. The Bank is subject to FDIC guidelines governing capital adequacy. Federal regulations 6 establish guidelines for calculating "risk-adjusted" capital ratios. These guidelines establish a systematic approach of assigning risk weights to bank assets and commitments making capital requirements more sensitive to differences in risk profiles among banking organizations. Under these new regulations, banks are required to maintain a risk-based capital ratio of 8.0% by December 31, 1992 (with Tier One capital constituting at least 50% of total qualifying capital). As of March 31, 1996 and December 31, 1995 the Bank had risk-based capital ratios of 10.2% and 10.3% respectively (Tier One capital ratios equaled 9.1% and 9.2%, respectively). Additionally, in 1991 the Comptroller of the Currency, the Federal Reserve Board and the FDIC adopted a new minimum leverage capital ratio standard which replaced the existing primary capital standards. These requirements are designed to ensure that all banks, irrespective of their risk profile, maintain minimum levels of core capital which by definition excludes the allowance for loan losses. These minimum standards for top rated banks may be as low as 3%, however, the FDIC has stated that most banks should maintain ratios at least 1 to 2 percentage points above the 3% minimum. As of March 31, 1996 and December 31, 1995, the Bank's leverage capital ratio equalled 7.4% for both periods. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996--Net income for the three month period ended March 31, 1996 totaled $501,000, a increase of $80,000 (19%) over the same three month period in 1995. The increase in earnings in 1996 resulted primarily from strong asset growth, an improvement in the Bank's net interest income of $461,000 (20.2%) and improvements in fee income of $167,000 (41.3%) offset by increased loan loss provisions of $121,000 and an increase in noninterest expenses of $439,000 (23.2%). The increase in noninterest income is primarily the result of an increase in fees generated from asset management of $43,000, and service charges of $67,000. The increase in noninterest expense is primarily from a $214,000 increase in salary and benefit costs and additional premises, occupancy and marketing costs of $106,000. Many of the expense increases are the result of the addition of a Loan Production Office (LPO) and two full service branch offices in late 1995 and early 1996. On average, full time equivalent employees increased by 12 (11%) for the three months ended March 31, 1996 as compared with the same three month period in 1995. When evaluating the performance of banking organizations, two measures of profitability commonly used are return on average assets and return on beginning equity. Return on average assets measures a bank's ability to profitably employ its resources. Annualized return on average assets for the three month period ended March 31, 1996 was .99%. This compares with .96% for the same three month period in 1995. Return on beginning equity is a measure of a bank's ability to generate income on the capital invested in the company by its shareholders. Annualized return on beginning equity was 13.3% for the three month period ended March 31, 1996 compared with 12.1% for the same three month period in 1995. NET INTEREST INCOME--The Bank's primary source of income is the difference between interest income and fees derived from earning assets and interest paid on liabilities obtained to fund those assets. The difference between the two is referred to as net interest income. Net interest income for the three months ended March 31, 1996 totalled $2,738,000 compared to $2,277,000 for the same period in 1995, a $461,000 (20.2%) increase. Total interest and fees on earning assets increased to $4,250,000 for the first quarter of 1996, an increase of $615,000 (16.9%) over the same three month period in 1995. The level of interest income is affected by changes in volume (growth) and the rates earned on interest-earning assets. Interest-earning assets consists primarily of loans, investment securities and federal funds sold. Of the $615,000 increase in interest income, $558,000 was the result of increases in volume of interest-earning assets and $57,000 as the result of increased yields on those assets. Average interest-earning assets for the first three months of 1996 were $183,943,000 as compared with $159,756,000 for the first three months of 1995, a $21,083,000 (12.9%) increase. Interest expense is a function of the volume of and the rates paid for interest- bearing liabilities. Interest-bearing liabilities consist primarily of certain deposits and borrowed funds. Total interest expense increased to $1,512,000 in 1996 or an increase of $154,000 (11.3%) over the same period in 1995. Of the $154,000 increase, $177,000 was the result of increases in the volume of liabilities which was partially offset by $23,000 as a result of lower rates paid on those liabilities. Average interest-bearing liabilities were $186,349,000 for the first three months of 1996 as compared with $164,521,000 for the same three month period in 1995, a $21,828,000 (13.3%) increase. 7 The Bank's net interest margin, the ratio of net interest income expressed as a percent of average interest-earning assets was 5.95% for the three month period ended March 31, 1996 compared with 5.70% for the same period in 1995. This provides a measurement of the Bank's ability to purchase and employ funds profitably during the period being measured. The increase in net interest margin is primarily attributable to growth of interest bearing assets. ASSET AND LIABILITY MANAGEMENT--Asset and liability management is an integral part of managing a bank's primary source of income, net interest income. The Bank manages the balance between rate-sensitive assets and rate-sensitive liabilities being repriced in any given period with the objective of stabilizing net interest income during periods of fluctuating rates. The Bank considers its rate-sensitive assets to be those which contain a provision to adjust the interest rate periodically or mature within one year. These assets include certain loans, investment securities and federal funds sold. Rate-sensitive liabilities are those which allow for periodic interest rate changes and include maturing time certificates of deposits and certain savings and interest-bearing transaction account deposits. The difference between the amount of assets and liabilities that are repricing in various time frames is called the "gap". Generally, if repricing assets exceed repricing liabilities in a time period the Bank would be "asset-sensitive" and if repricing liabilities exceed repricing assets in a time period the Bank would be "liability-sensitive". The Bank generally seeks to maintain a balanced position whereby there is no significant "asset or liability sensitivity" to ensure net interest margin stability in times of volatile interest rates. This is accomplished through maintaining a significant level of loans, investment securities and deposits available for repricing within one year. The Bank was moderately "liability-sensitive" with a negative cumulative one year gap of $26,871,000 or 12.5% of total assets as of March 31, 1996. This compares with the Bank being moderately "liability-sensitive" with a negative cumulative one year gap of $14,718,000 or 7% of total assets as of December 31, 1995. In general, based upon the Bank's mix of deposits, loans and investments, declines in interest rates would be expected to moderately increase the Bank's net interest margin. Increases in interest rates would be expected to have the opposite effect. The change in net interest income may not, however, always follow the general expectations of an "asset-sensitive" or "liability-sensitive" balance sheet during periods of changing interest rates. This results from interest rates paid changing by differing increments and at different time intervals for each type of rate-sensitive asset and liability. An additional measure of interest rate sensitivity that the Bank monitors is its expected change in earnings. This model's estimate of interest rate sensitivity takes into account an estimate of the differing time intervals and interest rate change increments for each type of rate-sensitive asset and liability. It then measures the projected impact of changes in market interest rates on the Bank's return on equity. Based upon the March 31, 1996 mix of rate-sensitive assets and liabilities, given an immediate and sustained increase in the federal funds rate of 1%, this model estimates the Bank's cumulative return on equity over the next year would decrease by less than 1%. This compares with a cumulative one year expected decrease in return on equity of less than 1% as of December 31, 1995. While no assurance can be made, both of these measures of interest rate risk indicate that the Bank appears not to be subject to significant risk of change in its net interest margin as a result of changes in interest rates. ALLOWANCE AND PROVISION FOR LOAN LOSSES--The Bank maintains an allowance for possible loan losses at a level considered by Management to be adequate to cover the inherent risks of loss associated with its loan portfolio under prevailing and anticipated economic conditions. In determining the adequacy of the allowance for possible loan losses, Management takes into consideration the overall growth trend in the portfolio, examinations of bank supervisory authorities, internal and external credit reviews, prior loan loss experience for the Bank, concentrations of credit risk, delinquency trends, general economic conditions and the interest rate environment. The allowance is based on estimates and ultimate future losses may vary from current estimates. It is always possible that future economic or other factors may adversely affect the Bank's borrowers, and thereby cause loan losses to exceed the current allowance. The balance in the allowance is affected by the amounts provided from operations, amounts charged off and recoveries of loans previously charged off. The Bank recorded loss provisions in the first three month period of 1996 of $160,000 as compared to $39,000 in the same period in 1995. The Bank's charge offs, net of recoveries, were $1,000 for the three month period ended March 31, 1996 as compared with $10,000 for the same three month period in 1995. As of March 31, 1996 the allowance for loan losses was $1,860,000 or 1.3% of total gross loans outstanding. This compares with an allowance for loan losses of $1,701,000 or 1.3% of total loans outstanding as of December 31, 1995. 8 ASSET QUALITY--Management recognizes the importance of asset quality as a key ingredient to the successful financial performance of a bank. The level of nonperforming loans and real estate acquired through foreclosure are two indicators of asset quality. Nonperforming loans are those in which the borrower fails to perform under the original terms of the obligation and are categorized as loans past due 90 days or more, loans on nonaccrual status and restructured loans. Loans are generally placed on nonaccrual status and accrued but unpaid interest is reversed against current year income when interest or principal payments become 90 days past due unless the outstanding principal and interest is adequately secured and, in the opinion of Management, is in process of collection. Additional loans which are not 90 days past due may also be placed on nonaccrual status if Management believes the borrower will not be able to comply with the contractual loan repayment terms and the collection of principal interest is in question. The Bank had nonperforming loans at March 31, 1996 of $5,540,000 as compared with $4,673,000 at December 31, 1995. Included in the March 31, 1996 totals, $4,511,000 were loans on nonaccrual status and $635,000 were loans 90 day past due that were not on nonaccrual status. Of the total nonperforming loans as of that date, $3,292,000 were loans that are secured by first deeds of trust on real property. Other forms of collateral such as inventory and equipment secure the remaining nonperforming loans as of that date. Included in the non- performing loans is a large real estate loan that has recently been restructured but is still shown as a non-performing loan and a large agriculture loan that is in the process of liquidation. It is anticipated that a majority of the liquidation of the agriculture loan will be completed without material loss by June 30, 1996. In addition, the Bank has purchased a portfolio of lease receivables in 1994 that as of March 31, 1996 totaled $1,793,000. The company which packages and sells these leases to financial institutions filed a Chapter 11 reorganization in April 1996 and its chief financial officer has been charged by the Securities and Exchange Commission with participating in securities fraud. More that 360 banks nationwide have acquired similar lease receivable contracts. The Bank has retained counsel jointly with other California banks and is currently analyzing its position to ascertain the extent of loss, if any, the Bank may incur. The bankruptcy court has released approximately $500,000 in lease receivables from the effect of the bankruptcy proceeding. Because the bankruptcy proceedings are likely to delay the regular payments under the leases, the Bank placed $1,200,000 of these receivables on non-accrual status on May 3, 1996. This amount is not included in non-performing assets as of March 31, 1996. The Bank has no information that would lead it to conclude that the leases are not genuine. The Bank is in possession of what appear to be originals of the leases and filed the necessary documentation to perfect its interest in those leases. The bankruptcy trustee has advised the bankruptcy court that he will make an early investigation of the general position of the creditor banks, including County Bank, and will take appropriate action upon making his determination. As further information becomes available, the bank will re-evaluate its position and, if necessary, make appropriate provisions if any loss is expected in connection with the leases. Additionally as of March 31, 1996 and December 31, 1995, the Bank had $416,000 and $47,000 in real estate acquired through foreclosure, respectively. Such properties are carried at the lower of their estimated market value, as evidenced by independent appraisals, or the recorded investment in the related loan. At foreclosure, if the fair value of the real estate is less than the Bank's recorded investment in the related loan, a charge is made to the allowance for possible loan losses. Total nonperforming loans represented 30.4% of the allowance for loan losses and total equity capital as of March 31, 1996. This compares with nonperforming loans of 27.7% of the allowance for loan losses and total equity capital as of December 31, 1995. The Bank's loan portfolio consists primarily of commercial loans, agriculture loans, real estate mortgage loans, real estate construction loans and consumer installment loans. The composition of the portfolio as of March 31, 1996 was as follows: commercial loans (13.4%), agriculture loans (30.6%), real estate construction loans (8%), real estate mortgage loans (34.5%) and consumer loans comprised 13.5% of the portfolio. The largest segment within the agriculture portfolio is the Bank's dairy loans. Dairy loans comprised 25.9% of the loan portfolio as March 31, 1995. The above referenced loan portfolio mix has not materially changed from the end of the prior year. MERCED AREA INVESTMENT DEVELOPMENT, INC. "MAID."-- In late 1995, the Company and Bank 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 9 management to recognize the complete write-down in 1995. Furthermore, the general local real estate market has experienced declines in value over the last several years, especially in real estate values associated with the type of development in which MAID is involved. The decline in the general real estate market in the Merced area is in part attributable to the closure of a large military facility and is exaggerated by the general extended downturn in the states economic condition. The Bank has also noted that other financial institutions in its area has taken a similar course of action in the write-down of similar properties. Although the FRB did not require that the bank write-off MAID, the FRB does not consider real estate development to be an activity closely related to banking and the Bank had previously committed itself to divesting its real estate development assets by the end of 1996, as required by FDICIA regulations discussed above. At December 31, 1995, 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. As mentioned above the bank still retains title to two properties. The following is a general discussion of these properties: (1) This project consists of 13 remaining improved lots and 117 additional unimproved lots. In 1995, MAID sold 6 homes. For the aforementioned reasons, provisions for the write-off of this property of $1,255,000 were recorded in 1995. MAID does not intend to develop the subsequent three phases (117 lots) of this property. (2) This project is comprised of 230 unimproved lots of which 183 are remaining. A bulk sale of 47 lots occurred in 1995 in which an agreement was made with the purchaser of the lots for an option to acquire additional 47 lots over the next eighteen months. For the aforementioned reasons, provisions for the write-off of this property of $1,626,000 were recorded in 1995. Beginning in December, 1992, FDICIA required that state banks and their subsidiaries could not engage, as principal, in activities not permissible to national banks and their subsidiaries, unless the FDIC determines the activity poses no significant risk to the BIF and the state bank is and continues to be adequately capitalized. Generally, national banks may not engage in real estate development or investment. In December 1995 the Bank was granted regulatory approval to extend its plan for divestiture of its existing real estate development activities for an additional five years from December 19, 1996 or until the end of the year 2001. NONINTEREST INCOME--Total noninterest income increased by $167,000 (41.3%) for the three month period ended March 31, 1996 as compared with the same period in 1995. Service charges on deposit accounts increased by $66,000 (30.7%), income from the sale of loans and real estate held for sale or development decreased by $32,000 (49%) and other income increased by $118,000 (157%). In addition the Bank did not provide provisions for the possible loss on the sale of real estate held for sale or development in 1996 as compared with $50,000 in provisions in the same three month period in 1995. The Bank recognized $97,000 in gains on the sale of loans and real estate held for sale or development for the three months ended March 31, 1996. This amount consists primarily of the sale of SBA loans. This compares with gains of $65,000 for that same three month period in 1995 which primarily consisted of SBA loans and the sale of 2 MAID residential properties. The Bank records its investment in real estate held for sale or development at the lower cost or net realizable value, as evidenced by independent appraisals. As a result of Management's evaluation of current and potential future market conditions in the local market area, the Bank provided $50,000 for future possible losses on the sale of certain real estate projects in the first quarter of 1995. There are no write downs in the same quarter for 1996 due to the complete write down of all MAID properties at the end of 1995. 10 NONINTEREST EXPENSE--Noninterest expenses increased by $439,000 (23.2%) for the three month period ended March 31, 1996 as compared with the same period in 1995. Salaries and related benefits increased by $214,000 (22%), occupancy expenses increased $21,000 (15.4%), equipment expenses increased $66,000 (39.8%), marketing expenses increased by $19,000 or (26.8%) and other expenses increased by $139,000 (25.3%). Many of the expense increases are the result of the addition of a Loan Production Office (LPO) and two full service branch offices in late 1995 and early 1996. On average, full time equivalent employees increased by 12 (11%) for the three months ended March 31, 1996 as compared with the same three month period in 1995. PROVISION FOR INCOME TAXES--The Bank's provision for income taxes was $295,000 for the three month period ended March 31, 1996 as compared with $277,000 for the same three month period in 1995. Effective tax rates were 39% for both years. OTHER FINANCIAL INFORMATION--The Company has entered into an agreement to relocate its administrative office and its Downtown Branch to the corner of M & Main Street in downtown Merced, California. Central administrative support and certain loan departments will be relocated to this site as well. Construction is expected to commence Summer 1996 with completion of the facility by Spring 1997. Anticipated costs of this project are currently estimated at $4,800,000. The facility is a three story building of approximately 29,000 square feet. PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the opinion of management, there is no additional information relating to these periods being reported which warrants inclusion in the report. ITEM 2. CHANGES IN SECURITIES In the opinion of management, there is no additional information relating to these periods being reported which warrants inclusion in the report. ITEM 3. DEFAULTS UPON SENIOR SECURITIES In the opinion of management, there is no additional information relating to these periods being reported which warrants inclusion in the report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS In the opinion of management, there is no additional information relating to these periods being reported which warrants inclusion in the report. ITEM 5. OTHER INFORMATION In the opinion of management, there is no additional information relating to these periods being reported which warrants inclusion in the report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBIT NUMBER DESCRIPTION 2.1 Form 8-K filed with Securities and Exchange Commission on January 30, 1996 2.2 Form 8-K filed with Securities and Exchange Commission on April 19, 1996 27 Financial Data Schedules
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be 11 signed on its behalf by the undersigned thereunto duly authorized. Capital Corp of the West /s/ Thomas T. Hawker ------------------------------------------- Thomas T. Hawker President & Chief Executive Officer /s/ Janey Boyce ------------------------------------------- Janey Boyce Vice President & Chief Financial Officer Dated: May 12, 1996 12 EX-2.1 2 EXHIBIT 2.1 EXHIBIT 2.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT: January 30, 1996 EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER: Capital Corp of the West STATE OR OTHER JURISDICTION OF INCORPORATION: California COMMISSION FILE NUMBER: 0-27384 I.R.S. EMPLOYER IDENTIFICATION NUMBER: 77-0405791 ADDRESS OF PRINCIPAL EXECUTIVE OFFICE: 1160 West Olive Avenue, Suite A Merced, California ZIP CODE: 95348 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (209) 725-2200 ITEM 5. OTHER EVENTS: See the attached press release, which is incorporated by reference. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: January 30, 1996 Capital Corp of the West By: /s/ Janey Boyce ---------------------------------- Janey Boyce Vice President/Chief Financial Officer 13 EXHIBIT 2.1 AVAILABLE FOR IMMEDIATE RELEASE JANUARY 16, 1996 CONTACT: JANEY BOYCE 209-725-2205 CAPITAL CORP OF THE WEST AND TOWN & COUNTRY FINANCE & THRIFT ENTER INTO ACQUISITION NEGOTIATIONS Capital Corp of the West (Capital Corp), the newly formed bank holding company for County Bank, and Town & Country Finance and Thrift (Town & Country) announced today that they have signed a letter of intent to pursue a proposed acquisition of all the outstanding common stock (Stock) of Town & Country by Capital Corp. The proposed transaction would result in Town & Country becoming a wholly owned subsidiary of Capital Corp. Town & Country would join County Bank as Capital Corp's second financial institution subsidiary. Town & Country would continue to operate under its current President, Mr. D. Dale Pinkney and staff and continue to offer its existing products and services. The proposed purchase price for the Stock to be paid by Capital Corp will be one and fifty-seven hundredths (1.57) times the tangible equity of Town & Country at the closing of the transaction. The parties will strive to close the transaction by June 30, 1996. The proposed purchase price will be a combination of cash and common stock of Capital Corp. The exchange of stock is expected to result in Town & Country owning approximately 20% of the common stock of Capital Corp and current shareholders of Capital Corp owning approximately 80% of the common stock of Capital Corp. The proposed acquisition is subject to numerous conditions such as a thorough due diligence review by both parties of the operations of the other party. Upon satisfactory completion of such reviews, a definitive agreement between parties which will define the final terms and conditions of the agreement would be prepared and signed. The transaction will also be subject to receipt of approvals by the shareholders of each company and regulatory agencies. Capital Corp is a federally chartered bank holding company which was established November 1, 1995. It is the parent company for County Bank, formed in 1977, Merced County's only locally owned and independently managed bank. County Bank currently has six branch offices in Merced, Atwater, Hilmar, Los Banos and Turlock, and loan production offices in Sonora and Modesto. County Bank offers a full range of commercial and personal banking products and services. Capital Corp is now listed on NASDAQ national stock exchange with the ticker symbol of CCOW. As of December 31, 1995, Capital Corp reported assets on a consolidated basis totaling $209 million and year to date income of $335,000 or $.25 per share. These reported earnings include a one-time write-off of Capital Corp's remaining investment in real estate held by its real estate investment subsidiary. This write-off reduced after tax earnings by approximately $1.8 million. Earnings exclusive of this write-off were $2.1 million or $1.57 per share. Shareholders' equity totaled $15 million or $11.31 per share. Town & Country is a licensed California thrift and loan company which specializes in consumer loans and consumer financing. It has been in operation since 1957 and currently has three offices in Turlock, Visalia and Modesto. As of December 31, 1995, Town & Country total assets were $26 million and year to date earnings were $209,000 or $1.24 per share. Shareholders' equity totaled $3.6 million or $21.41 per share. In a joint statement, Tom Hawker, Chief Executive Officer for Capital Corp, and Dale Pinkney, President of Town & Country, said, "THE UNION OF CAPITAL CORP AND TOWN & COUNTRY SHOULD BE ADVANTAGEOUS TO BOTH COMPANIES. THE LARGER FOUNDATION AND GROWTH OF CAPITAL CORP WILL IN TURN AFFORD TOWN & COUNTRY GROWTH OPPORTUNITIES. THE DISTINCTIVE PRODUCT LINE OF TOWN & COUNTRY WILL ALLOW CAPITAL CORP TO EXPAND THE TYPES OF CLIENTS IT CURRENTLY SERVES AND EXPAND INTO NEW MARKETS. THIS UNION IS CONSISTENT WITH THE STRATEGIC OBJECTIVES OF BOTH COMPANIES." 14 EX-2.2 3 EXHIBIT 2.2 EXHIBIT 2.2 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT: April 19, 1996 EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER: Capital Corp of the West STATE OR OTHER JURISDICTION OF INCORPORATION: California COMMISSION FILE NUMBER: 0-27384 I.R.S. EMPLOYER IDENTIFICATION NUMBER: 77-0405791 ADDRESS OF PRINCIPAL EXECUTIVE OFFICE: 1160 West Olive Avenue, Suite A Merced, California ZIP CODE: 95348 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (209) 725-2200 ITEM 5. OTHER EVENTS: See the attached press release, which is incorporated by reference. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: April 19, 1996 Capital Corp of the West By: /s/ Janey Boyce ---------------------------------- Janey Boyce Vice President/Chief Financial Officer 15 EXHIBIT 2.2 PRESS RELEASE AVAILABLE FOR IMMEDIATE PUBLICATION CONTACT: JO LINDA THOMPSON/TOM HAWKER (209)725-2200 CAPITAL CORP OF THE WEST EXPANDS! Tom Hawker, President and CEO of Capital Corp of the West, County Bank's holding company, announced plans to form a new company, CAPITAL WEST GROUP, INC., "A FULL SERVICE FINANCIAL INSTITUTIONS ADVISORY FIRM." Once the investment banking company is established, it will serve as a resource to support independent financial institutions located throughout the eleven Western States. Capital West Group, Inc. will assist independent institutions in meeting the performance challenges of today's banking industry, including issues relating to acquisitions and mergers. EDWARD E. SCHMIDT, former Co-Director of The Findley Group financial industry consultants, has been appointed as President and Chief Executive Officer of Capital West Group, Inc. He has over twenty-five years experience in developing seasoned insight into creating and implementing successful business solutions. As a veteran corporate designer, negotiator and marketer with an extensive record of achievement and practical experience, Mr. Schmidt is well prepared to assist and direct institutions in positioning themselves for success in the aggressive, competitive banking industry of the 20th century and beyond. Mr. Schmidt stated, "THE CURRENT ENVIRONMENT OF NEW BANK FORMATIONS, MERGERS, ACQUISITIONS AND CONSOLIDATIONS OFFERS CAPITAL WEST GROUP, INC. AN OPPORTUNITY TO PROVIDE EXPANDED INVESTMENT BANKING AND CORRESPONDENT FINANCIAL SERVICES THOUGH THE BANK HOLDING COMPANY STRUCTURE OF CAPITAL CORP OF THE WEST." Additionally, Mr. Schmidt noted that expansion of shareholder value is key to the successful continuation of independent banks, and he will direct considerable energy into working with Boards of Directors in meeting this challenge. Other consulting services available through Capital West Group, Inc., will include implementation of renewal processes, formalizing of strategic intent, providing fairness opinions, valuations and direct special projects for both Boards and Management of client institutions. The investment banking firm will join other companies under the umbrella of Capital Corp of the West, which currently includes COUNTY BANK, COUNTY ASSET ADVISORS, and upon regulatory and shareholder approval, TOWN AND COUNTRY FINANCE AND THRIFT. The Town and Country Finance and Thrift acquisition is expected to be completed by June 30, 1996. Capital West Group, Inc. will be based at 1170 W. Olive Avenue, Suite B in Merced. For more information, please contact Tom Hawker or Edward E. Schmidt at (209)725-2269. 16 EX-27 4 EXHIBIT 27
5 0001004740 CAPITAL CORP OF THE WEST 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 18,784 44,199 140,658 (1,860) 0 8,398 8,189 (3,856) 214,512 199,269 0 0 0 9,880 5,363 214,512 0 4,821 0 0 2,353 160 1,512 796 295 0 0 0 0 501 .38 0
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