-----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, QF++euEAiJFtnky3JmUf3E5ZPjjdbVlzuIxVLVF72ksShPR/4Nj4vu5qu29jE1VH QqTfy1Y3H3GiWb+Yh1ITgw== 0000912057-00-024471.txt : 20000516 0000912057-00-024471.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024471 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: SEC FILE NUMBER: 000-27384 FILM NUMBER: 632629 BUSINESS ADDRESS: STREET 1: 550 W MAIN STREET CITY: MERCED STATE: CA ZIP: 95340 BUSINESS PHONE: 2097252200 MAIL ADDRESS: STREET 1: 550 W MAIN STREET STREET 2: 550 W MAIN STREET CITY: MERCED STATE: CA ZIP: 95340 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [_X_] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended March 31, 2000 or [___] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from _____________ to ___________ 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 IRS Employer ID Number incorporation or organization) 550 West Main, Merced, CA 95340 ---------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (209) 725-2200 Former name, former address and former fiscal year, if changed since last report: Not Applicable Indicate by check mark whether the registrant (1) 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the registrant's common stock, no par value, as of March 31, 2000 was 4,525,982. No shares of preferred stock, no par value, were outstanding at March 31, 2000. 1 CAPITAL CORP OF THE WEST Table of Contents PART I. -- FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income and Comprehensive Income 4 Consolidated Statement of Changes in Stockholders Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 30 PART II. -- OTHER INFORMATION Item 1. Legal Proceedings 30 Item 2. Changes in Securities 30 Item 3. Defaults Upon Senior Securities 30 Item 4. Submission of matters to a vote of Security Holders 30 Item 5. Other Information 30 Item 6. Exhibits and Reports on Form 8-K 31 SIGNATURES 32
2 Capital Corp of the West Consolidated Balance Sheets (Unaudited)
03/31/00 12/31/99 -------- -------- (Dollars in thousands) ASSETS Cash and noninterest-bearing deposits in other banks $ 24,614 $ 41,582 Federal funds sold 11,440 8,640 Time deposits at other financial institutions 850 850 Investment securities available for sale, at fair value 134,561 117,814 Investment securities held to maturity at cost, fair value of $33,155,000, and $28,675,000 at March 31, 2000 and December 31, 1999, respectively 33,945 29,554 Loans, net of allowance for loan losses of $6,792,000 and $6,542,000 at March 31, 2000 and December 31, 1999, respectively 340,938 324,726 Interest receivable 3,851 3,436 Premises and equipment, net 13,071 13,163 Intangible assets 4,871 5,069 Other assets 18,744 18,716 -------- -------- Total assets $586,885 $563,550 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing demand $ 79,424 $ 87,564 Negotiable orders of withdrawal 72,923 72,788 Savings 177,365 164,158 Time, under $100,000 100,546 101,395 Time, $100,000 and over 81,670 68,996 -------- -------- Total deposits 511,928 494,901 Short term borrowings 16,200 17,600 Long term borrowings 9,195 3,214 Accrued interest, taxes and other liabilities 4,298 4,158 -------- -------- Total liabilities 541,621 519,873 Preferred Stock, no par value; 10,000,000 shares authorized; None outstanding - - Common stock, no par value; 20,000,000 shares authorized; 4,525,982 and 4,496,201 issued & outstanding at March 31, 2000 and December 31, 1999 35,743 35,593 Retained earnings 12,257 10,743 Accumulated other comprehensive loss (2,736) (2,659) -------- -------- Total shareholders' equity 45,264 43,677 -------- -------- Total liabilities and shareholders' equity $586,885 $563,550 ======== ========
See accompanying notes 3 Capital Corp of the West Consolidated Statements of Income and Comprehensive Income (Unaudited)
For the three months ended March 31, 2000 1999 ------- ------ (Dollars in thousands, except per share amounts) INTEREST INCOME: Interest and fees on loans $ 8,479 $6,712 Interest on deposits with other financial institutions 12 10 Interest on investments held to maturity: Taxable 491 184 Non-taxable 56 22 Interest on investments available for sale: Taxable 1,836 1,533 Non-taxable 285 324 Interest on federal funds sold 74 158 ------- ------ Total interest income 11,233 8,943 INTEREST EXPENSE: Interest on negotiable orders of withdrawal 121 110 Interest on savings deposits 1,514 1,358 Interest on time deposits, under $100,000 1,323 1,064 Interest on time deposits, $100,000 and over 990 537 Interest on other borrowings 356 137 ------- ------ Total interest expense 4,304 3,206 Net interest income 6,929 5,737 Provision for loan losses 763 507 ------- ------ Net interest income after provision for loan losses 6,166 5,230 NONINTEREST INCOME: Service charges on deposit accounts 813 733 Income from real estate held for sale or development - 250 Other 334 396 ------- ------ Total noninterest income 1,147 1,379 NONINTEREST EXPENSES: Salaries and related benefits 2,506 2,214 Premises and occupancy 406 330 Equipment 590 491 Professional fees 161 331 Marketing 228 166 Goodwill and intangible amortization 198 198 Supplies 128 140 Other 926 926 ------- ------ Total noninterest expenses 5,143 4,796 Income before income taxes 2,170 1,813 Provision for income taxes 656 662 ------- ------ Net income $ 1,514 $1,151 - ------------------------------------------------------------------------------------- Comprehensive Income: Unrealized loss on securities arising during the period (77) (159) Comprehensive Income $ 1,437 $ 992 ======= ====== - ------------------------------------------------------------------------------------- Basic earnings per share $ 0.34 $ 0.25 Diluted earnings per share $ 0.33 $ 0.24
See accompanying notes 4 Capital Corp of the West Consolidated Statement of Changes in Shareholders' Equity (Unaudited) (Amounts in thousands except number of shares)
Common Stock Accumulated --------------------------- other Number of Retained comprehensive shares Amounts earnings income Total --------- ------- -------- -------------- ------- Balance, December 31, 1999 4,496 $35,593 $10,743 $(2,659) $43,677 Exercise of stock options 30 150 0 0 150 Net Change in fair market value of investment securities, net of tax effect of $(34) 0 0 0 (77) (77) Net income 0 1,514 1,514 ----- ------- ------- ------- ------- Balance, March 31, 2000 4,526 $35,743 $12,257 $(2,736) $45,264 ===== ======= ======= ======= =======
See accompanying notes 5 Capital Corp of the West Consolidated Statements of Cash Flows (Unaudited)
3 months ended 3 months ended 03/31/00 03/31/99 -------------- -------------- (Dollars in thousands) OPERATING ACTIVITIES: Net income $ 1,514 $ 1,151 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan losses 763 507 Depreciation, amortization and accretion, net 534 803 Gain on sale of real estate held for sale 0 250 Net decrease in interest receivable & other assets (411) (3,951) Net increase (decrease) in deferred loan fees 36 (313) Net decrease in accrued interest payable & other liabilities 192 1,318 -------- -------- Net cash provided by (used in) operating activities 2,628 (235) INVESTING ACTIVITIES: Investment securities purchases (24,090) (243) Proceeds from maturities of investment securities 2,074 13,030 Proceeds from sales of AFS investment securities 721 - Net increase in time deposits in other financial institutions - (1,250) Proceeds from sales of commercial and real estate loans 528 304 Net increase in loans (17,341) (13,044) Purchases of premises and equipment (394) (281) Proceeds from sales of real estate held for sale - 250 -------- -------- Net cash used in investing activities (38,502) (1,234) FINANCING ACTIVITIES: Net increase (decrease) in demand, NOW and savings deposits 5,149 (3,188) Net increase in certificates of deposit 11,826 1,706 Net proceeds (repayments) from other borrowings 4,581 (6,712) Exercise of stock options 150 - -------- -------- Net cash provided by (used in) financing activities 21,706 (8,194) Net decrease in cash and cash equivalents (14,168) (9,663) Cash and cash equivalents at beginning of period 50,222 44,896 -------- -------- Cash and cash equivalents at end of period $ 36,054 $ 35,233 ======== ======== CASH PAID DURING THE QUARTER: Interest paid 4,252 3,195 Income tax payments 1,100 - SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Investment securities net unrealized (losses) gains; net of tax $ (77) $ (159) Transfer of securities from available for sale to held to maturity - 4,327 Loans transferred to other real estate owned 143 -
See accompanying notes 6 Capital Corp of the West Notes to Consolidated Financial Statements March 31, 2000 and December 31, 1999 (Unaudited) GENERAL - COMPANY 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 a holder of all of the capital stock of County Bank (the "Bank"). During 1998, the Company formed Capital West Group, a subsidiary that engages in the financial institution advisory business but is currently inactive. The Company's primary asset is the Bank and the Bank is the Company's primary source of income. The Company's securities consist of 20,000,000 shares of Common Stock, no par value, and 10,000,000 shares of Authorized Preferred Stock. As of March 31, 2000 there were 4,525,982 common shares outstanding, held of record by approximately 2,200 shareholders. There were no preferred shares outstanding at March 31, 2000. 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 Capital West Group, unless context otherwise requires. 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 by the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits stated therein. Like most state-chartered banks of its size in California, it is not a member of the Federal Reserve System. During the fourth quarter of 1999, Town and Country Finance and Thrift (the "Thrift") was merged into County Bank. INDUSTRY AND MARKET AREA The Bank engages in general commercial banking business primarily in Fresno, Madera, Mariposa, Merced, Tulare, Toulumne and Stanislaus counties. The Bank has fifteen branch offices: two in Merced with one branch centrally located in Merced and the other in downtown Merced within the Bank's administrative office building, two in Modesto, two in Turlock and single offices in Atwater, Dos Palos, Hilmar, Los Banos, Livingston, Madera, Mariposa, Sonora and Visalia. OTHER FINANCIAL NOTES All adjustments which in the opinion of Management are necessary for a fair presentation of the Company's financial position at March 31, 2000 and December 31, 1999 and the results of operations for the three month period ended March 31, 2000 and 1999, and the statements of cash flows for the three months ended March 31, 2000 and 1999 have been included. The interim results for the three months ended March 31, 2000 and 1999 are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and the notes included in the Company's Annual Report for the year ended December 31, 1999. 7 The accompanying unaudited financial statements have been prepared on a basis consistent with the generally accepted accounting principles and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Basic earnings per share (EPS) is computed by dividing net income available to shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period plus potential common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The following table provides a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation of the three month periods ending March 31, 2000 and 1999:
For The Three Months Ended March 31, -------------------- (Dollars in thousands, except per share data) 2000 1999 -------- -------- Basic EPS computation: Net income $ 1,514 $ 1,151 ======== ======== Average common shares outstanding 4,507 4,607 ======== ======== Basic EPS $ 0.34 $ .25 ======== ======== Diluted EPS Computations: Net income $ 1,514 $ 1,151 ======== ======== Average common shares outstanding 4,507 4,607 Stock options 125 135 -------- -------- 4,632 4,742 ======== ======== Diluted EPS $ 0.33 $ 0.24 ======== ========
8 Prospective Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which amends the disclosure requirements of Statement No. 52, FOREIGN CURRENCY TRANSLATIONS and Statement No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. SFAS 133 supersedes Statements No. 80 ACCOUNTING FOR FUTURE CONTRACTS, No. 105 DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK and No. 119, DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other assets or liabilities on the balance sheet and measurement of those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (a fair value hedge) or (b) a hedge of the exposure to variable cash flows of a forecasted transaction (a cash flow hedge). In June 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF SFAS NO. 133. SFAS No. 137 defers the effective date of SFAS No. 133 from all fiscal quarters of fiscal years beginning after June 15, 1999 to all fiscal quarters of fiscal years beginning after June 15, 2000. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the company. This could cause results or performance to differ materially from those expressed in our forward-looking statements. Words such as "experts", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers of the Company's Form 10-Q should not rely solely on forward- looking statements and should consider all uncertainties and risks discussed throughout this report, as well as those discussed in the Company's 1999 Annual Report on Form 10-K filed March 17, 2000. These statements are representative only on the date hereof, and the Company undertakes no obligation to update any forward-looking statements made. Some possible events or factors that could occur that may cause differences from expected results include the following: the Company's loan growth is dependent on economic conditions, as well as various discretionary factors, such as decisions to sell, or purchase certain loans or loan portfolios; participations of loans and the management of borrower, industry, product and geographic concentrations and the mix of the loan portfolio. The rate of charge-offs and provision expense can be affected by local, regional and international economic and market conditions, concentrations of borrowers, industries, products and geographical conditions, the mix of the loan portfolio and management's judgements regarding the collectibility of loans. Liquidity requirements may change as a result of fluctuations in assets and liabilities and off-balance sheet exposures, which will impact the capital and debt financing needs of the Company and the mix of funding sources. Decisions to purchase, hold, or sell securities are also dependent on liquidity requirements and market volatility, as well as on and off-balance sheet positions. Factors that may impact interest rate risk include local, regional and international economic conditions, levels, mix, maturities, yields or rates of assets and liabilities and the wholesale and retail funding sources of the Company. Factors that may cause actual noninterest expense to differ from estimates include the ability of third parties with whom the Company has business relationships to fully accommodate uncertainties related to the Company's efforts to prepare its technology systems and non-information technology systems for the Year 2000, as well as uncertainties relating to the ability of third parties with whom the Company has business relationships to address the Year 2000 issue in an adequate manner. The Company is also exposed to the potential of losses arising from adverse changes in market rates and prices which can adversely impact the value of financial products, including securities, loans, and deposits. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation and state regulators, whose policies and regulations could affect the Company's results. Other factors that may cause actual results to differ from the forward-looking statements include the following: competition with other local and regional banks, savings and loan associations, credit unions and other nonbank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, mutual funds and insurance companies, as well as other entities which offer financial services; interest rate, market and monetary fluctuations; inflation; market volatility; general economic conditions; introduction and acceptance of new banking-related products, services and enhancements; fee pricing strategies, mergers and acquisitions and their integration into the Company and management's ability to manage these and other risks. 10 The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and its subsidiaries' financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1999 OVERVIEW. For the three months ended March 31, 2000 the Company reported record net income of $1,514,000. This compares to $1,151,000 for the same period in 1999 and represents an increase of $363,000 or 32%. Basic and fully diluted earnings per share were $.34 and $.33 for the three months ending March 31, 2000. This compares to basic and fully diluted earnings per share of $.25 and $.24 for the three months ending March 31, 1999 and represents an increase of $0.09 per share for both basic and fully diluted earnings per share. The annualized return on average assets was 1.08% and .94% for the first three months of 2000 and 1999. The Company's annualized return on average equity was 13.73% and 10.56% for the three months ended March 31, 2000 and 1999. NET INTEREST INCOME. The Company's primary source of income is net interest income and is determined by the difference between interest income and fees derived from earning assets and interest paid on interest bearing liabilities. Net interest income for the three months ended March 31, 2000 totaled $6,929,000 and represented an increase of $1,192,000 or 21% when compared to the $5,737,000 achieved during the three months ended March 31, 1999. Total interest and fees on earning assets were $11,233,000 for the three months ended March 31, 2000, an increase of $2,290,000 or 26% from the $8,943,000 for the same period in 1999. The level of interest income is affected by changes in volume of and rates earned on interest-earning assets. Interest-earning assets consist primarily of loans, investment securities and federal funds sold. The increase in interest income for the three months ended March 31, 2000 was primarily the result of an increase in the volume of interest-earning assets. Average interest-earning assets for the three months ended March 31, 2000 were $505,773,000 compared with $434,811,000 for the three months ended March 31, 1999, an increase of $70,962,000 or 16%. Interest expense is a function of the volume of and the rates paid on interest-bearing liabilities. Interest-bearing liabilities consist primarily of certain deposits and borrowed funds. Total interest expense was $4,304,000 for the three months ended March 31, 2000, compared with $3,206,000 for the three months ended March 31, 1999, an increase of $1,098,000 or 34%. This increase was primarily the result of an increase in the rates of interest-bearing liabilities. Average interest-bearing liabilities were $436,329,000 for the three months ended March 31, 2000 compared with $373,814,000 for the same three months in 1999, an increase of $62,515,000 or 17%. Average interest rates paid on interest-bearing liabilities were 3.95% for the three months ending March 31, 2000 compared with 3.43% for the same three months of 1999, an increase in interest rates paid of 52 basis points or 15%. The increase in interest-earning assets and interest-bearing liabilities is primarily the result of increased market penetration within our target markets. The Company has not expanded the branch network locations since the purchase of three branches of Bank of America in December 1997. The Company's net interest margin, the ratio of net interest income to average interest-earning assets, was 5.48% for the three months ended March 31, 2000 compared with 5.28% for the same period in 1999. Net interest margin provides a measurement of the Company's ability to employ funds profitably during the period being measured. The Company's increase in net interest margin was 11 primarily attributable to a moderate change in the mix of interest-earning assets. Loans as a percentage of average interest-earning assets were 66% for the three months ended March 31, 2000 compared to 63% for the three months ended March 31, 1999. 12 AVERAGE BALANCES AND RATES EARNED AND PAID. The following table presents condensed average balance sheet information for the Company, together with interest rates earned and paid on the various sources and uses of its funds for each of the periods indicated. Nonaccruing loans are included in the calculation of the average balances of loans, but the nonaccrued interest on such loans is excluded. AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS
Three months ended Three months ended March 31, 2000 March 31, 1999 Average Average Balance Interest Yield/rate Balance Interest Yield/rate (Dollars in thousands) ASSETS Federal funds sold $ 5,268 $ 74 5.62 % $ 12,917 $ 158 4.89 % Time deposits at other financial institutions 850 12 5.65 706 10 5.67 Taxable investment securities: 134,249 2,327 6.93 115,332 1,717 5.95 Nontaxable investment securities (1) 29,806 341 4.58 30,147 346 4.59 Loans, gross: (2) 335,600 8,479 10.11 275,709 6,712 9.74 -------- ------- ----- -------- ------- ----- Total interest-earning assets: 505,773 11,233 8.88 434,811 8,943 8.23 Allowance for loan losses (6,724) (4,852) Cash and due from banks 22,678 20,789 Premises and equipment, net 13,169 13,212 Interest receivable and other assets 26,949 26,395 -------- -------- Total assets $561,845 $490,355 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Negotiable order of withdrawal $ 71,850 $ 121 0.67 $ 66,033 $ 110 0.67 Savings deposits 170,994 1,514 3.54 172,237 1,358 3.15 Time deposits 171,804 2,313 5.39 127,679 1,601 5.02 Other borrowings 21,681 356 6.57 7,865 137 6.97 -------- ------- ----- -------- ------- ----- Total interest-bearing liabilities 436,329 4,304 3.95 373,814 3,206 3.43 Noninterest-bearing deposits 76,905 69,818 Accrued interest, taxes and other liabilities 4,515 3,107 -------- -------- Total liabilities 517,749 446,739 Total shareholders' equity 44,096 43,616 -------- -------- Total liabilities and shareholders' equity $561,845 $490,355 ======== ======== Net interest income and margin (3) $ 6,929 5.48 % $ 5,737 5.28 % ======= ===== ======= =====
(1) Interest on nontaxable securities is not computed on a tax-equivalent basis. (2) Amounts of interest earned includes loan fees of $135,971 and $193,000 for March 31, 2000 and 1999 respectively. (3) Net interest margin is computed by dividing net interest income by total average interest-earning assets. 13 NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE. The following table sets forth, for the periods indicated, a summary of the changes in average asset and liability balances and interest earned and interest paid resulting from changes in average asset and liability balances (volume) and changes in average interest rates and the total net change in interest income and expenses. The changes in interest due to both rate and volume have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each. Net Interest Income Variance Analysis:
Three months ended March 31, 2000 compared to March 31, 1999 VOLUME RATE TOTAL (Dollar in thousands) Increase (decrease) in interest income: Federal funds sold $ 21 $ (105) $ (84) Time deposits at other financial - 2 2 institutions Taxable investment securities 488 122 610 Tax-exempt investment securities (1) (4) (5) Loans 262 1,767 1,505 ------- ------- ------- Total: $ 770 $ 1,520 $ 2,290 ======= ======= ======= Increase (decrease) interest expense: Interest bearing demand $ 1 $ 10 $ 11 Savings deposits 166 (10) 156 Time deposits 125 587 712 Other borrowings (8) 227 219 ------- ------- ------- Total: $ 284 $ 814 $ 1,098 ======= ======= ======= Increase in net interest income $ 486 $ 706 $ 1,192 ======= ======= =======
PROVISION FOR LOAN LOSSES. The provision for loan losses for the three months ended March 31, 2000 was $763,000 compared with $507,000 for the three months ended March 31, 1999, an increase of $256,000 or 50%. See "Allowance for Loan Losses" contained herein. As of March 31, 2000 the allowance for loan losses was $6,792,000 or 1.95% of total loans. At March 31, 2000, nonperforming assets totaled $2,704,000 or .46% of total assets, nonperforming loans totaled $2,314,000 or .67% of total loans and the allowance for loan losses totaled 294% of nonperforming loans. No assurance can be given that nonperforming loans will not increase or that the allowance for loan losses will be adequate to cover losses inherent in the loan portfolio. NONINTEREST INCOME. Noninterest income decreased by $232,000 or 17% to $1,147,000 for the three months ended March 31, 2000 compared with $1,379,000 in the same period in 1999. Service charges on deposit accounts increased by $80,000 or 11% to $813,000 for the three months ended March 31, 2000 compared with $733,000 for the same period in 1999. Income from the sale of real estate held for sale or development decreased by $250,000 from 1999 levels, and other income decreased by $62,000 or 16% for the three month period ended March 31, 2000 when compared to the same period in 1999. The decrease in income from the sale of real estate recorded during the first quarter of 2000 resulted from a lack of a real estate sale, compared to the sale of 1 real estate parcel that was sold in 1999. Subsequent to March 31, 2000, the Bank received $438,000 in proceeds from the sale of a parcel of land that was classified as other real estate owned. The land parcel had a recorded book value of $0. Estimated gain on sale from this parcel of land, after reserves for continuing liabilities, if any, will be recorded in the second quarter of 2000. NONINTEREST EXPENSE. Noninterest expenses increased by $347,000 or 7% to $5,143,000 for the three months ended March 31, 2000 compared with $4,796,000 for the same period in 1999. The primary components of noninterest expenses were salaries and employee benefits, furniture and 14 equipment expenses, occupancy expenses, professional fees, marketing supplies, and other operating expenses. For the three months ended March 31, 2000, salaries and related benefits increased by $292,000 or 13% to $2,506,000 from the $2,214,000 recorded for the same period in 1999. Premises and occupancy expenses increased by $76,000 or 23% to $406,000 for the three months ending March 31, 2000 from $330,000 during the same period in 1999. The primary reason for the increase in occupancy costs in 2000 is related to relocation and retrofit charges related to branch facilities in Fresno, Madera, and Modesto. Equipment expenses increased by $99,000 or 20% to $590,000 during the three months ended March 31, 2000 from the $491,000 experienced during the same period in 1999. When comparing the results of the three months ending March 31, 2000 to three months ending March 31, 1999, professional fees decreased by $170,000 or 51%, marketing expenses increased by $62,000 or 37%, goodwill and intangible amortization expense did not change from 1999 levels, supplies expense decreased by $12,000 or 9%, and other expenses did not change from 1999 levels. The salary expense increases were primarily the result of increased staffing levels and normal salary progression. Decreased professional fees were the result of decreased use of consultants to identify and develop profitability enhancement strategies, and increased marketing expenditures designed to provide greater market penetration within our existing markets were incurred. PROVISION FOR INCOME TAXES. The Company recorded a decrease of $6,000 or 1% in the income tax provision to $656,000 for the three months ended March 31, 2000 compared to the $662,000 recorded for the same period in 1999. During the first quarter of 2000, the Company experienced an effective tax rate of 30.2% compared to 36.5% recorded for the same period in 1999. The decrease in income taxes during the first quarter of 2000 is primarily related to increased utilization of federal low income housing credits that were obtained from investments in limited partnerships in low-income affordable housing projects, and increased investments in bank qualified municipal bonds. The Company had net investments in affordable housing projects of $5,306,000 as of March 31, 2000 and $5,736,000 as of March 31, 1999, resulting in tax credits of $140,000 and 80,000 respectively. INTEREST RATE RISK Interest rate risk is an integral part of managing a banking institution's primary source of income, net interest income. The Company 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 interest rates. The Company considers its rate-sensitive assets to be those which either contain a provision to adjust the interest rate periodically or mature within one year. These assets include certain loans and investment securities and federal funds sold. Rate-sensitive liabilities are those which allow for periodic interest rate changes within one year and include maturing time certificates, certain savings deposits and interest-bearing demand deposits. The difference between the aggregate amount of assets and liabilities that reprice at various time frames is called the "gap." Generally, if repricing assets exceed repricing liabilities in a time period the Company would be deemed to be asset-sensitive. If repricing liabilities exceed repricing assets in a time period the Company would be deemed to be liability-sensitive. Generally, the Company seeks to maintain a balanced position whereby there is no significant asset or liability sensitivity within a one-year period 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. 15 The following tables set forth the interest rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities as of March 31, 2000, using the interest rate sensitivity gap ratio. For purposes of the following table, an asset or liability is considered rate-sensitive within a specified period when it can be repriced or matures within its contractual terms.
AT MARCH 31, 2000 -------------------------------------------------------------------------- AFTER 3 AFTER 1 BUT YEAR BUT WITHIN WITHIN WITHIN AFTER NONINTEREST- 3 MONTHS 12 MONTHS 5 YEARS 5 YEARS BEARING TOTAL --------- --------- -------- -------- ------------ -------- (DOLLARS IN THOUSANDS) ASSETS Time deposits at other banks $ 850 $ - $ - $ - $ - $ 850 Federal funds sold 11,440 - - - - 11,440 Investment securities 5,702 7,166 59,219 93,143 3,276 168,506 Loans 147,032 44,851 111,077 44,770 - 347,730 --------- --------- -------- -------- -------- -------- Total earning assets 165,024 52,017 170,296 137,913 $ 3,276 528,526 Noninterest-earning assets and allowances for loan losses - - - - 58,359 58,359 --------- --------- -------- -------- -------- -------- Total assets $ 165,024 $ 52,017 $170,296 $137,913 $ 61,635 $586,885 LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits $ - $ - $ - $ - $ 79,424 $ 79,424 Savings, money market and NOW deposits 250,288 - - - - 250,288 Time deposits 38,562 92,183 18,597 - - 182,216 Other interest-bearing liabilities 10,200 6,000 6,000 3,195 - 25,395 Other liabilities and shareholders' equity - - - - 49,562 49,562 --------- --------- -------- -------- -------- -------- Total liabilities and shareholders' equity 331,924 98,183 24,597 3,195 128,986 $586,885 Incremental gap (166,900) (46,166) 145,699 134,718 (67,351) Cumulative gap $(166,900) $(213,066) $(67,367) $ 67,351 $ - Cumulative gap as a % of earning assets (31.60)% (40.31)% (12.74)% 12.74%
The Company was liability-sensitive with a negative cumulative one-year gap of $213,066,000 or (40.31)% of interest-earning assets at March 31, 2000. In general, based upon the Company's mix of deposits, loans and investments, increases in interest rates would be expected to result in a decrease in the Company's net interest margin. The interest rate gaps reported in the tables arise when assets are funded with liabilities having different repricing intervals. Since these gaps are actively managed and change daily as adjustments are made in interest rate views and market outlook, positions at the end of any period may not be reflective of the Company's interest rate sensitivity in subsequent periods. Active management dictates that longer-term economic views are balanced against prospects for short-term interest rate changes in all repricing intervals. For purposes of the analysis above, repricing of fixed-rate instruments is based upon the contractual maturity of the applicable instruments. Actual payment patterns may differ from contractual payment patterns. The change in net interest income may not always follow the general expectations of an asset-sensitive or liability-sensitive balance sheet during periods of changing interest rates, because interest rates earned or paid may change by differing increments and at different time intervals for each type of interest-sensitive asset and liability. As a result of these factors, at any given time, the Company may be more sensitive or less sensitive to changes in interest rates than indicated in 16 the above tables. Greater sensitivity would have a more adverse effect on net interest margin if market interest rates were to increase, and a more favorable effect if rates were to decrease. An additional measure of interest rate sensitivity that the Company monitors through a detailed model is its expected change in net interest income. This model's estimate of interest rate sensitivity takes into account the differing time intervals and differing rate change increments of each type of interest-sensitive asset and liability. It then measures the projected impact of changes in market interest rates on the Company's net interest income. Based upon the March 31, 2000 mix of interest-sensitive assets and liabilities, given an immediate and sustained increase in the market interest rates of 2%, this model estimates the Company's net interest income over the next year would decrease by $585,000 or 2% of net interest income. No assurance can be given that the actual net interest income would not decrease by more than $585,000 or 2% in response to a 2% increase in market interest rates or that actual net interest income would not decrease substantially if market interest rates increased by more than 2%. During the second quarter of 1999, the Company contracted with interest rate sensitivity consultants to provide additional expertise in the interest rate sensitivity modeling process and has updated the model it uses for interest rate risk analysis. The estimates stated above were derived from this updated model. FINANCIAL CONDITION Total assets at March 31, 2000 were $586,885,000, an increase of $23,335,000 or 4% compared with total assets of $563,550,000 at December 31, 1999. Net loans were $340,938,000 at March 31, 2000, an increase of $16,212,000 or 5% compared with net loans of $324,726,000 on December 31, 1999. Deposits were $511,928,000 at March 31, 2000, an increase of $17,027,000 or 3% compared with deposits of $494,901,000 at December 31, 1999. The increase in total assets of the Company from December 31, 1999 to March 31, 2000 was primarily the result of an increase in leverage that was maintained in the Company's investment portfolio and an increase in investments derived from increased certificates of deposit. Total shareholders' equity was $45,264,000 at March 31, 2000, an increase of $1,587,000 or 4% from $43,677,000 at December 31, 1999. The growth in shareholders' equity from December 31, 1999 to March 31, 2000 was achieved through the retention of accumulated earnings. INVESTMENT PORTFOLIO. The following table sets forth the carrying amount (fair value) of available for sale investment securities as of March 31, 2000 and December 31, 1999.
MARCH 31 DECEMBER 31 -------------------------- 2000 1999 -------- ----------- (Dollars in thousands) AVAILABLE FOR SALE SECURITIES: U.S. Treasury and U.S. Government agencies $ 26,610 $ 16,756 State and political subdivisions 23,522 23,371 Mortgage-backed securities 46,306 43,723 Collateralized mortgage obligations 25,137 20,341 Corporate debt securities 9,710 9,660 Equity securities 3,276 3,963 -------- -------- Carrying amount and fair value $134,561 $117,814 ======== ========
17 The following table sets forth the carrying amount (amortized cost) and fair value of held to maturity securities at March 31, 2000 and December 31, 1999.
MARCH 31 DECEMBER 31 ------------------------- 2000 1999 -------- ----------- (Dollars in thousands) HELD TO MATURITY SECURITIES: U.S. Treasury and U.S. Government agency $ 1,000 $ 1,004 State and political subdivisions 4,322 4,389 Mortgage-backed securities 23,705 24,161 Collateralized Mortgage Obligations $ 4,918 - ------- ------- Carrying amount (amortized cost) $33,945 $29,554 ======= ======= Fair value $33,155 $28,675 ======= =======
The following table sets forth the maturities of the Company's debt security investments at March 31, 2000 and the weighted average yields of such securities calculated on a book value basis using the weighted average yields within each scheduled maturity grouping. 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.
AT MARCH 31, 2000 --------------------------------------------------------------------------------------- WITHIN ONE YEAR ONE TO 5 YEARS FIVE TO TEN YEARS OVER TEN YEARS --------------- ----------------- ----------------- --------------- TOTAL AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT ------ ----- ------- ----- ------- ----- ------ ----- -------- (Dollars in thousands) Available for Sale Securities: Treasury and U.S. Government agency $ - -% $22,259 6.48% $ - -% $ 4,351 6.42% $ 26,610 State and political 509 7.80 - - 3,328 4.28 19,685 4.45 23,522 Mortgage-backed securities - - 1,028 6.76 677 7.61 44,601 6.61 46,306 Collateralized mortgage obligations 94 6.31 5,106 6.60 7,763 6.73 12,174 6.99 25,137 Corporate debt securities - - 4,101 6.32 - - 5,609 7.20 9,710 -------------------------------------------------------------------------------------- Carrying amount and fair value 603 7.57 32,494 6.49 11,768 6.09 86,420 6.20 131,285 -------------------------------------------------------------------------------------- Held to maturity securities: Treasury and U.S. Government agency - - 1,000 7.95 - - - - 1,000 State and political - - - - 1,345 5.05 2,977 5.19 4,322 Mortgage-backed securities - - 3,590 7.15 14,457 7.23 5,658 7.02 23,705 Collateralized mortgage obligations - - 4,918 7.85 - - - - 4,918 Carrying amount (amortized cost) - - 9,508 7.60 15,802 7.04 8,635 6.39 33,945 -------------------------------------------------------------------------------------- Total securities $603 7.57% $42,002 6.74% $27,570 6.64% $95,055 6.22% $165,230 ==== ==== ======= ==== ======= ==== ======= ==== ========
In the above table, mortgage-backed securities and collateralized mortgage obligations are shown repricing at the time of maturity rather than in accordance with their principal amortization 18 schedules. 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. The following table shows the composition of the Company's loan portfolio at the dates indicated.
AT MARCH 31, AT DECEMBER 31, ------------------------------------------------------ 2000 1999 ------------------------- ------------------------- PERCENT PERCENT DOLLAR AMOUNT OF LOANS DOLLAR AMOUNT OF LOANS ------------- -------- ------------- -------- (Dollars in thousands) Loan Categories: Commercial $ 61,973 18% $ 53,932 16% Agricultural 67,321 19 58,247 17 Real estate construction 9,696 3 11,926 4 Real estate mortgage 121,803 35 120,978 37 Consumer 86,937 25 86,185 26 -------- --- -------- --- Total 347,730 100% 331,268 100% -------- === -------- === Less allowance for loan losses (6,792) (6,542) -------- -------- Net loans $340,938 $324,726 ======== ========
The table that follows shows the maturity distribution of the portfolio of commercial, agricultural, real estate construction, real estate mortgage, and consumer loans at March 31, 2000:
AT MARCH 31, 2000 ------------------------------------------------------------ AFTER 1 BUT (Dollars in thousands) WITHIN 1 YEAR WITHIN 5 YEARS AFTER 5 YEARS TOTAL ------------------------------------------------------------ COMMERCIAL AND AGRICULTURAL Loans with floating interest rates $43,276 $ 21,243 $ 26,202 $ 90,721 Loans with fixed interest rates 5,983 15,763 16,827 38,573 ------- -------- -------- -------- Subtotal 49,259 37,006 43,029 129,294 REAL ESTATE CONSTRUCTION Loans with floating interest rates 2,742 911 3,779 7,432 Loans with fixed interest rates 1,621 - 643 2,264 ------- -------- -------- -------- Subtotal 4,363 911 4,422 9,696 REAL ESTATE MORTGAGE Loans with floating interest rates 8,050 20,654 53,188 81,892 Loans with fixed interest rates 5,400 4,665 29,846 39,911 ------- -------- -------- -------- Subtotal 13,450 25,319 83,034 121,803 CONSUMER INSTALLMENT Loans with floating interest rates 11,747 7,713 - 19,460 Loans with fixed interest rates 3,648 62,478 1,351 67,477 ------- -------- -------- -------- Subtotal 15,395 70,191 1,351 86,937 ------- -------- -------- -------- Total $82,467 $133,427 $131,836 $347,730 ======= ======== ======== ========
19 The table that follows shows the maturity distribution of the portfolio of commercial, agricultural, real estate construction, real estate mortgage, and consumer loans at December 31, 1999:
December 31, 1999 -------------------------------------------------------- Within One to Over (Dollars in thousands) One year Five Years After 5 years Total -------------------------------------------------------- COMMERCIAL AND AGRICULTURAL Loans with floating rates $ 45,955 $ 27,877 $17,535 $ 95,367 Loans with predetermined rates 8,605 6,016 6,191 16,812 -------- -------- ------- -------- Subtotal 54,560 33,893 23,726 112,179 REAL ESTATE--CONSTRUCTION Loans with floating rates 4,730 1,169 1,578 7,477 Loans with predetermined rates 2,738 1,711 - 4,449 -------- -------- ------- -------- Subtotal 7,468 2,880 1,578 11,926 REAL ESTATE--MORTGAGE Loans with floating rates 7,027 68,770 24,041 99,838 Loans with predetermined rates 4,232 16,908 - 21,140 -------- -------- ------- -------- Subtotal 11,259 85,678 24,041 120,978 CONSUMER INSTALLMENT Loans with floating rates 19,186 9,593 - 28,779 Loans with predetermined rates 23,129 33,301 976 57,406 -------- -------- ------- -------- Subtotal 42,315 42,894 976 86,185 Total $115,602 $165,345 $50,321 $331,268 ======== ======== ======= ========
OFF-BALANCE SHEET COMMITMENTS. The following table shows the distribution of the Company's undisbursed loan commitments at the dates indicated.
MARCH 31, DECEMBER 31, (Dollars in thousands) 2000 1999 --------- ------------ Letters of credit $ 2,674 $ 2,674 Commitments to extend credit 120,865 101,847 -------- -------- Total $123,539 $104,521 ======== ========
20 OTHER INTEREST-EARNING ASSETS. The following table relates to other interest-earning assets not disclosed previously 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 for the salary continuation plan. Income from these policies is reflected in noninterest income.
AT MARCH 31, AT DECEMBER 31, (Dollars in thousands) 2000 1999 ------------ --------------- Cash surrender value of life insurance $5,877 $5,792 ====== ======
NONPERFORMING ASSETS. Nonperforming assets include nonaccrual loans, loans 90 days or more past due, restructured loans and other real estate owned. Nonperforming loans are those which the borrower fails to perform in accordance with the original terms of the obligation and include loans on nonaccrual status, loans past due 90 days or more and restructured loans. The Company generally places loans on nonaccrual status and accrued but unpaid interest is reversed against the current year's income when interest or principal payments become 90 days or more past due unless the outstanding principal and interest is adequately secured and, in the opinion of management, is deemed in the process of collection. Interest income on nonaccrual loans is recorded on a cash basis. Payments may be treated as interest income or return of principal depending upon management's opinion of the ultimate risk of loss on the individual loan. Cash payments are treated as interest income where management believes the remaining principal balance is fully collectible. Additional loans not 90 days past due may also be placed on nonaccrual status if management reasonably believes the borrower will not be able to comply with the contractual loan repayment terms and collection of principal or interest is in question. A "restructured loan" is a loan on which interest accrues at a below market rate or upon which certain principal has been forgiven so as to aid the borrower in the final repayment of the loan, with any interest previously accrued, but not yet collected, being reversed against current income. Interest is reported on a cash basis until the borrower's ability to service the restructured loan in accordance with its terms is established. The Company had no restructured loans as of the dates indicated in the above table. The following table summarizes nonperforming assets of the Company at March 31, 2000 and December 31, for the years indicated:
March 31, December 31, 2000 1999 --------- ------------ (Dollars in thousands) Nonaccrual loans $1,609 $1,984 Accruing loans past due 90 days or more 705 6 ------ ------ Total nonperforming loans 2,314 1,990 Other real estate owned 390 247 ------ ------ Total nonperforming assets $2,704 $2,237 ====== ====== Nonperforming loans to total loans .67% .60% Nonperforming assets to total assets .46% .40%
21 Contractual accrued interest income on loans on nonaccrual status as of March 31, 2000 and 1999, that would have been recognized if the loans had been current in accordance with their original terms was approximately $258,000 and $235,000, respectively. At March 31, 2000, nonperforming assets represented .46% of total assets, an increase of .06% of total assets compared to the .40% at December 31, 1999. Nonperforming loans represented .67% of total loans at March 31, 2000, an increase of 7 basis points compared to the .60% at December 31, 1999. Nonperforming loans that were secured by first deeds of trust on real property were $0 at March 31, 2000 and December 31, 1999. Other forms of collateral such as inventory and equipment secured the remaining nonperforming loans as of each date. No assurance can be given that the collateral securing nonperforming loans will be sufficient to prevent losses on such loans. The increase in nonperforming loans and nonperforming assets as of March 31, 2000 compared with their levels as of December 31, 1999, was due primarily to a slight increase in delinquent agricultural, commercial, and consumer installment loans. At March 31, 2000, the Company had $390,000 invested in three properties acquired through foreclosure. Each property is carried at the lower of its estimated market value, as evidenced by an independent appraisal, or the recorded investment in the related loan, less estimated selling expenses. At foreclosure, if the fair value of the real estate is less than the Company's recorded investment in the related loan, a charge is made to the allowance for loan losses. The Company expects to sell most of these properties within a twelve month period. No assurance can be given that the Company will sell such properties during 2000 or at any time or the amount for which such property might be sold. In addition to property acquired through foreclosure, the Company has investments in residential real estate lots in various stages of development in Merced County through MAID. MAID held one property for sale or development at March 31, 2000. This investment was completely written off in 1995, although County Bank still retains title to this property. During the first three months of 2000, no lots were sold. On May 3, 2000 the last remaining MAID land parcel was sold. Sales proceeds totaled $438,000. A gain entry for net sales proceeds less remaining costs related to certain obligations of MAID and the Company will be recorded in the second quarter of 2000. Management defines impaired loans, regardless of past due status on loans, as those on which principal and interest are not expected to be collected under the original contractual loan repayment terms. An impaired loan is charged off at the time management believes the collection process has been exhausted. At March 31, 2000 and December 31, 1999, impaired loans were measured based on the present value of future cash flows discounted at the loan's effective rate, the loan's observable market price or the fair value of collateral if the loan is collateral-dependent. Impaired loans at March 31, 2000 were $2,314,000 (all of which were also nonaccrual loans), on account of which the Company had made provisions to the allowance for loan losses of $575,000. Except for loans that are disclosed above, there were no assets as of March 31, 2000, where known information about possible credit problems of borrower causes management to have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may become nonperforming assets. Given the magnitude of the Company's loan portfolio, however, it is always possible that current credit problems may exist that may not have been discovered by management. 22 ALLOWANCE FOR LOAN LOSSES The following table summarizes the loan loss experience of the Company for the three months ended March 31, 2000 and 1999, and for the year ended December 31, 1999.
MARCH 31 ----------------------- DECEMBER 31 2000 1999 1999 -------- -------- ----------- (Dollars in thousands) ALLOWANCE FOR LOAN LOSSES: Balance at beginning of period $ 6,542 $ 4,775 $ 4,775 -------- -------- -------- Provision for loan losses 763 507 2,659 Charge-offs: Commercial and agricultural 207 123 531 Real estate construction 0 - - Consumer 400 297 1,323 -------- -------- -------- Total charge-offs 607 420 1,854 -------- -------- -------- Recoveries Commercial and agricultural 5 430 715 Real estate-mortgage - - - Consumer 89 91 247 -------- -------- -------- Total recoveries 94 521 962 Net charge-offs (recoveries) 513 (101) 892 -------- -------- -------- Balance at end of period $ 6,792 $ 5,383 $ 6,542 ======== ======== ======== Loans outstanding at period-end $347,730 $281,822 $331,268 ======== ======== ======== Average loans outstanding $335,600 $275,709 $303,463 ======== ======== ======== Net charge-offs (recoveries) to average 0.15% (0.04%) 0.29% loans Allowance for loan losses To total loans 1.95% 1.91% 1.97% To nonperforming assets 251.18% 219.22% 292.45%
The Company maintains an allowance for 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 loan losses, management takes into consideration growth trends in the portfolio, examination of financial institution supervisory authorities, prior loan loss experience for the Company, concentrations of credit risk, delinquency trends, general economic conditions, the interest rate environment and internal and external credit reviews. In addition, the risks management considers vary depending on the nature of the loan. The normal risks considered by management with respect to agricultural loans include the fluctuating value of the collateral, changes in weather conditions and the availability of adequate water resources in the Company's local market area. The normal risks considered by management with respect to real estate construction loans include fluctuation in real estate values, the demand for improved commercial and industrial properties and housing, the availability of permanent financing in the Company's market area and borrowers' ability to obtain permanent financing. The normal risks considered by management with respect to real estate mortgage loans include fluctuations in the value of real estate. Additionally, the Company relies on data obtained through independent appraisals for significant properties to determine loss exposure on nonperforming loans. The balance in the allowance is affected by the amounts provided from operations, amounts charged off and recoveries of loans previously charged off. The Company recorded provisions for loan losses in the first three months of 2000 of $763,000 compared with $507,000 in the same period of 1999. The increase in loan loss provisions in 2000 was recorded primarily to support the general loan growth of the Company that has occurred during 2000. 23 The Company's charge-offs, net of recoveries, were $513,000 for the three months ended March 31, 2000 compared with $(101,000) for the same three months in 1999. The increase in net charge-offs for the first quarter of 2000 was primarily due to increased charge-offs that occurred within the consumer installment segment of the loan portfolio during the first three months of 2000. The increased charge-offs in this segment of the portfolio are primarily attributable to the strong loan growth that has occurred in this segment over the last several quarters. As of March 31, 2000, the allowance for loan losses was $6,792,000 or 1.95% of total loans outstanding, compared with $6,542,000 or 1.97% of total loans outstanding as of December 31, 1999 and $5,383,000 or 1.91% of total loans outstanding as of March 31, 1999. During the first quarter of 2000, the allowance for loan loss increased $250,000 or 4% compared to December 31, 1999 levels. The Company uses a method developed by management for determining the appropriate level of its allowance for loan losses. This method applies relevant risk factors to the entire loan portfolio, including nonperforming loans. The methodology is based, in part, on the Company's loan grading and classification system. The Company grades its loans through internal reviews and periodically subjects loans to external reviews which then are assessed by the Company's audit committee. Credit reviews are performed on a monthly basis and the quality grading process occurs on a quarterly basis. Risk factors applied to the performing loan portfolio are based on the Company's past loss history considering the current portfolio's characteristics, current economic conditions and other relevant factors. General reserves are applied to various categories of loans at percentages ranging up to 1.8% based on the Company's assessment of credit risks for each category. Risk factors are applied to the carrying value of each classified loan: (i) loans internally graded "Watch" or "Special Mention" carry a risk factor from 1.0% to 2.0%; (ii) "Substandard" loans carry a risk factor from 15% to 40% depending on collateral securing the loan, if any; (iii) "Doubtful" loans carry a 50% risk factor; and (iv) "Loss" loans are charged off 100%. In addition, a portion of the allowance is specially allocated to identified problem credits. The analysis also includes reference to factors such as the delinquency status of the loan portfolio, inherent risk by type of loans, industry statistical data, recommendations made by the Company's regulatory authorities and outside loan reviewers, and current economic environment. Important components of the overall credit rating process are the asset quality rating process and the internal loan review process. 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 Company's borrowers, and thereby cause loan losses to exceed the current allowance. In addition, there can be no assurance that future economic or other factors will not adversely affect the Company's borrowers, or that the Company's asset quality may not deteriorate through rapid growth, failure to enforce underwriting standards, failure to maintain appropriate underwriting standards, failure to maintain an adequate number of qualified loan personnel, failure to identify and monitor potential problem loans or for other reasons, and thereby cause loan losses to exceed the current allowance. 24 The following table summarizes a breakdown of the allowance for loan losses by loan category and the allocation in each category as a percentage of total loan allowance at the dates indicated:
MARCH 31, DECEMBER 31, 2000 1999 ------------------ ------------------ LOANS LOANS % % TO TOTAL TO TOTAL (Dollars in thousands) AMOUNT LOANS AMOUNT LOANS ------ -------- ------ -------- Commercial and agricultural $3,395 37% $3,365 34% Real estate - construction 372 3 358 4 Real estate - mortgage 1,883 35 1,815 36 Consumer 1,142 25 1,004 26 ------ --- ------ --- Total $6,792 100% $6,542 100% ====== === ====== ===
The allocation of the allowance to loan categories is an estimate by management of the relative risk characteristics of loans in those categories. No assurance can be given that losses in one or more loan categories will not exceed the portion of the allowance allocated to that category or even exceed the entire allowance. EXTERNAL FACTORS AFFECTING ASSET QUALITY. As a result of the Company's loan portfolio mix, the future quality of its assets could be affected by adverse economic trends in its region or in the agricultural community. These trends are beyond the control of the Company. California is an earthquake-prone region. Accordingly, a major earthquake could result in material loss to the Company. At times the Company's service area has experienced other natural disasters such as floods and droughts. The Company's properties and substantially all of the real and personal property securing loans in the Company's portfolio are located in California. The Company faces the risk that many of its borrowers face uninsured property damage, interruption of their businesses or loss of their jobs from earthquakes, floods or droughts. As a result these borrowers may be unable to repay their loans in accordance with their terms and the collateral for such loans may decline significantly in value. The Company's service area is a largely agricultural region and therefore is highly dependent on a reliable supply of water for irrigation purposes. The area obtains nearly all of its water from the run-off of melting snow in the mountains of the Sierra Nevada to the east. Although such sources have usually been available in the past, water supply can be adversely affected by light snowfall over one or more winters or by any diversion of water from its present natural courses. Any such natural disaster could impair the ability of many of the Company's borrowers to meet their obligations to the Company. Parts of California have experienced significant floods in the late 1990s. No assurance can be given that future flooding will not have an adverse impact on the Company and its borrowers and depositors. LIQUIDITY. In order to maintain adequate liquidity, the Company must have sufficient resources available at all times to meet its cash flow requirements. 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. The Company may achieve desired liquidity from both assets and liabilities. The Company 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 and access to 25 credit lines established with correspondent banks and market sources of funds are considered by the Company as sources of liability liquidity. The Company reviews its liquidity position on a regular basis based upon its current position and expected trends of loans and deposits. These assets include cash and deposits in other banks, available-for-sale securities and federal funds sold. The Company's liquid assets totaled $171,465,000 and $168,886,000 on March 31, 2000 and December 31, 1999, respectively, and constituted 30% of total assets on those dates. Liquidity is also affected by the collateral requirements of its public deposits and certain borrowings. Total pledged securities were $120,935,000 at March 31, 2000 compared with $105,008,000 at December 31, 1999. Although the Company's primary sources of liquidity include liquid assets and a stable deposit base, the Company maintains lines of credit with the Federal Reserve Bank of San Francisco, Federal Home Loan Bank of San Francisco and Pacific Coast Bankers' Bank aggregating $57,822,000 of which $17,200,000 was outstanding as of March 31, 2000 and $12,600,000 was outstanding as of December 31, 1999. Funds received causing an increase in outstanding short term borrowings during the first quarter of 2000 were used to purchase securities within the investment portfolio. Management believes that the Company maintains adequate amounts of liquid assets to meet its liquidity needs. The Company's liquidity might be insufficient if deposit withdrawals were to exceed anticipated levels. Deposit withdrawals can increase if a company experiences financial difficulties or receives adverse publicity for other reasons, or if its pricing, products or services are not competitive with those offered by other institutions. 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 $1,587,000 or 4% from December 31, 1999 to March 31, 2000. The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a material adverse effect on the Company's financial statements. Management believes, as of March 31, 2000, that the Company, the Bank and the Thrift met all capital requirements to which they are subject. The Company's leverage capital ratio at March 31, 2000 was 7.74% as compared with 7.50% as of December 31, 1999. The Company's total risk based capital ratio at March 31, 2000 was 11.14% as compared to 11.24% as of December 31,1999. 26 The Company's and Bank's actual capital amounts and ratios met all regulatory requirements as of March 31, 2000 and were summarized as follows:
To Be Well Capitalized For Capital Under Prompt Actual Adequacy Purposes Corrective Dollars in thousands Action Provisions: - ---------------------------------------------------------------------------------------------------------------------------- Consolidated Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------------------------- As of March 31, 2000 Total capital (to risk weighted assets) $ 48,599 11.14 % $ 34,908 8.0 % $ 43,636 10.0 % Tier 1 capital (to risk weighted assets) 43,128 9.88 17,454 4.0 26,181 6.0 Leverage ratio* 43,128 7.74 22,279 4.0 27,849 5.0 The Bank: - ---------------------------------------------------------------------------------------------------------------------------- As of March 31, 2000 Total capital (to risk weighted assets) $ 45,782 10.62 % $ 34,479 8.0 % $ 43,099 10.0 % Tier 1 capital (to risk weighted assets) 40,378 9.37 17,239 4.0 25,859 6.0 Leverage ratio* 40,378 7.32 22,051 4.0 27,563 5.0 - ----------------------------------------------------------------------------------------------------------------------------
* The leverage ratio consists of Tier 1 capital divided by quarterly average assets. The minimum leverage ratio is 3 percent for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality and in general, are considered top-rated banks. The Company has no formal dividend policy, and dividends are issued solely at the discretion of the Company's Board of Directors, subject to compliance with regulatory requirements. In order to pay any cash dividends, the Company must receive payments of dividends or management fees from the Bank. There are certain regulatory limitations on the payment of cash dividends by banks and thrift and loan companies. On May 23, 2000 the Company's Board of Directors authorized management to repurchase up to 200,000 shares or $2,300,000 of the Company's common stock. As of March 31, 2000 the Company had repurchased 137,000 shares for $1,768,000 in open market transactions. Management's authorization to repurchase Company common stock will continue until withdrawn by the Board of Directors. DEPOSITS. Deposits are the Company's primary source of funds. At March 31, 2000, the Company had a deposit mix of 41% in savings deposits, 29% in time deposits, 16% in interest-bearing checking accounts and 16% in noninterest-bearing demand accounts. Noninterest-bearing demand deposits enhance the Company's net interest income by lowering its costs of funds. The Company obtains deposits primarily from the communities it serves. No material portion of its deposits has been obtained from or is dependent on any one person or industry. The Company's business is not seasonal in nature. The Company accepts deposits in excess of $100,000 from customers. These deposits are priced to remain competitive. At March 31, 2000, the Company had brokered deposits of $13,648,000. 27 Maturities of time certificates of deposits of $100,000 or more outstanding at March 31, 2000 and December 31, 1999 are summarized as follows:
MARCH 31, 2000 DECEMBER 31, 1999 (DOLLARS IN THOUSANDS) Three months or less $32,907 $21,157 Over three to six months 22,077 20,655 Over six to twelve months 25,415 16,901 Over twelve months 1,271 10,283 ------- ------- Total $81,670 $68,996 ======= =======
BORROWED FUNDS At March 31 2000 and December 31, 1999, the Company's borrowed funds consisted of the following:
(Dollars in thousands) MARCH 31 DECEMBER 31 2000 1999 Treasury tax loan, dated March 31, 2000; variable rate of 6%; rate reprices monthly based on the federal funds rate; payable April 1, 2000 $ 5,000 $ 5,000 FHLB loan, dated June 17, 1999; variable rate of 5.94%; rate reprices monthly based on the 1 month LIBOR; payable on June 19, 2000 2,600 2,600 FHLB loan, dated February 16, 2000; variable rate of 5.92%; rate reprices monthly based on the 1 month LIBOR; payable on February 16, 2001 6,000 - FHLB loan, dated March 20, 2000; variable rate of 6.02%; rate reprices monthly based on the 1 month LIBOR; payable on March 20, 2001 2,600 - FHLB loan, dated February 16, 2000; fixed rate of 6.60%; payable on February 16, 2005 4,000 5,000 FHLB loan, dated March 20, 2000; fixed rate of 6.55% payable on March 21, 2005 2,000 5,000 Long-term note from unaffiliated bank dated December 22, 1997; fixed rate of 7.80%; principal and interest payable monthly at $25,047; payments calculated as fully amortizing over 25 years with a 10 year call 3,195 3,214 -------- -------- Total $ 25,395 $ 20,814 ======== ========
The increase in other borrowings during the first quarter of 2000 was primarily due to the implementation of a leveraged investment strategy that uses additional FHLB borrowings to fund purchases of investment securities within the Bank's investment portfolio. 28 RETURN ON EQUITY AND ASSETS
Three months ended Three months ended Year ended March 31 March 31 December 31 2000 1999 1999 ---- ---- ---- Annualized return on average assets 1.08% 0.94% 0.99% Annualized return on average equity 13.73% 10.56% 11.86% Average equity to average assets 7.85% 8.89% 8.35%
IMPACT OF INFLATION The primary impact of inflation on the Company is its effect on interest rates. The Company's primary source of income is net interest income which is affected by changes in interest rates. The Company attempts to limit inflation's impact on its net interest margin through management of rate sensitive assets and liabilities and the analysis of interest rate sensitivity. The effect of inflation on premises and equipment, as well as on interest expenses, has not been significant for the periods covered in this report. REAL ESTATE DEVELOPMENT ACTIVITIES California law allows state-chartered banks to engage in real estate development activities. The Bank established MAID in 1987 pursuant to this authorization. After changes in federal law effectively required that these activities be divested as prudently as possible but in any event before 1997, MAID reduced its activities and embarked on a plan to liquidate its real estate holdings. In 1995, the uncertainty about the effect of the investment in MAID on the results of future operations caused management to write off its remaining investment of $2,881,000 in real property development. At March 31, 2000, MAID held one real estate project including improved and unimproved land in various stages of development. MAID continues to develop this project, and any amounts realized upon sale or other disposition of this asset above its current carrying value of zero will result in noninterest income at the time of such sale or disposition. During the first three months of 1999, no lots were sold. Although the Company expects that the sale or disposition of its remaining project will result in some positive contribution to noninterest income at some time in the future, no assurance can be given as to whether or when such sale or disposition will be completed or that the amount, if any, that the Company will ultimately realize on such asset or whether such amount will exceed the future expenses required to hold and complete development of the project. The Company's regulatory deadline for completing its divestiture of this asset is December 31, 2000. The last remaining parcel of land held by MAID was sold on May 3, 2000 for net proceeds of $438,000 which will result in gain on sale of real estate, less any outstanding liabilities and warranties, during the second quarter of 2000. 29 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the Company is exposed to market risk which includes both price and liquidity risk. Price risk is created from fluctuations in interest rates and the mismatch in repricing characteristics of assets, liabilities, and off balance sheet instruments at a specified point in time. Mismatches in interest rate repricing among assets and liabilities arise primarily through the interaction of the various types of loans versus the types of deposits that are maintained as well as from management's discretionary investment and funds gathering activities. Liquidity risk arises from the possibility that the Company may not be able to satisfy current and future financial commitments or that the Company may not be able to liquidate financial instruments at market prices. Risk management policies and procedures have been established and are utilized to manage the Company's exposure to market risk. On March 31, 2000, the interest rate position of the Company was relatively neutral as the impact of a gradual parallel 100 basis-point rise or fall in interest rates over the next 12 months was estimated to be approximately 1-2% of net interest income when compared to stable rates. See "BUSINESS - Selected Statistical Information - Interest Rate Sensitivity" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk Management." PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to routine litigation in the ordinary course of its business. In the opinion of management, pending and threatened litigation is not likely to have a material adverse effect on the financial condition or results of operations of the Company. Also see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Memorandum of Understanding." contained herein. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. None. 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. 30 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits.
EXHIBITS DESCRIPTION OF EXHIBITS 3.1 Articles of Incorporation, incorporated by reference from (filed as Exhibit * 3.1 of the Company's March 31, 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 March 31, 1996 Form 10Q filed * with the SEC on or about November 14, 1996.) 10 Employment agreement between Thomas T. Hawker and Capital Corp. (Filed as * Exhibit 10 of the Company's 1996 form 10K filed with the SEC on or about March 31, 1997) 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. 10.6 Change-in-Control Agreement between R. Dale McKinney and Capital Corp of the * West (filed as Exhibit 10.6 of the Company's 1999 Form 10K with the SEC on or about March 17, 2000). 10.7 Deferred Compensation Agreement between members of the board of directors * and Capital Corp of the West (filed as Exhibit 10.7 of the Company's 1999 Form 10K with the SEC on or about March 17, 2000). 10.8 Executive Salary Continuation Agreement between certain members of executive * management and Capital Corp of the West (filed as Exhibit 10.8 of the Company's 1999 Form 10K with the SEC on or about March 17, 2000).
(b) REPORTS ON FORM 8-K None * DENOTES DOCUMENTS WHICH HAVE BEEN INCORPORATED BY REFERENCE. 31 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, thereunto duly authorized. CAPITAL CORP OF THE WEST (Registrant) By /s/ THOMAS T. HAWKER --------------------------------------- Thomas T. Hawker President and Chief Executive Officer By /s/ R. DALE MCKINNEY --------------------------------------- R. Dale McKinney Chief Financial Officer 32 EX-27 2 EXHIBIT 27
9 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 24,614 850 11,440 0 134,561 33,945 33,155 347,730 6,792 586,885 511,928 16,200 4,298 9,195 0 0 35,743 9,521 586,885 8,479 2,668 86 11,233 3,948 4,304 6,929 763 0 5,143 2,170 1,514 0 0 1,514 0.34 0.33 5.48 1,609 705 0 0 6,542 607 94 6,792 6,792 0 0
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