-----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, Up/s8We+0wQQn7THZcMPs62sypwCBsNr4+bdPILy93m3M9HrQS/TWOpBqq41db5v 6YDArQlKkG75MfsHTPChXA== 0000912057-01-505717.txt : 20010402 0000912057-01-505717.hdr.sgml : 20010402 ACCESSION NUMBER: 0000912057-01-505717 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 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-K SEC ACT: SEC FILE NUMBER: 000-27384 FILM NUMBER: 1586549 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-K 1 a2042933z10-k.txt FORM 10K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000 Commission File Number: 0-27384 [ ] TRANSITION REPORT PURSUANT TO SECIONT 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ________ to ________ - ------------------------------------------------------------------------------- CAPITAL CORP OF THE WEST (Exact name of registrant as specified in its charter) CALIFORNIA 77-0405791 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 550 WEST MAIN STREET, MERCED, CALIFORNIA 95340 (Address of principal executive offices) (Zip Code) (209) 725-2269 (Registrant's telephone number, including area code) Securities registered under Section 12(b) of the Act: NONE Securities registered under Section 12(g) of the Act (Title of Class): COMMON STOCK, NO PAR VALUE. The Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /X/ Yes / / No Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $54,348,351 (based on the $13.1875 average of bid and ask prices per common share on March 15, 2001). The number of shares outstanding of the Registrant's common stock, no par value, as of March 15, 2001 was 4,512,862. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive proxy statement for the 2001 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A are incorporated by reference in Part III, 1 Items 10 through 13 and portions of the Annual Report to Shareholders for 2000 are incorporated by reference in Part II, Item 5 through 8. CAPITAL CORP OF THE WEST Table of Contents
---------- ---------------------------- PAGE REFERENCE ---------- ---------------------------- PART I - ------------------ ----------------------------------------------------------- -------- ---------------------------- ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 3 - ------------------ ----------------------------------------------------------- -------- ---------------------------- ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 18 - ------------------ ----------------------------------------------------------- -------- ---------------------------- ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . 20 - ------------------ ----------------------------------------------------------- -------- ---------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . 20 - ------------------ ----------------------------------------------------------- -------- ---------------------------- PART II - ------------------ ----------------------------------------------------------- -------- ---------------------------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS . . . . . . . . . . . . . . . . . 21 Page 19 of 2000 Annual Report - ------------------ ----------------------------------------------------------- -------- ---------------------------- ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . 21 Page 9 of 2000 Annual Report - ------------------ ----------------------------------------------------------- -------- ---------------------------- - ------------------ ----------------------------------------------------------- -------- ---------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 21 Pages 10 through 20 of . . . . . . . . . . . . . . . . . . . . . . 2000 Annual Report - ------------------ ----------------------------------------------------------- -------- ---------------------------- - ------------------ ----------------------------------------------------------- -------- ---------------------------- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY Pages 22 through 44 of DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2000 Annual Report - ------------------ ----------------------------------------------------------- -------- ---------------------------- - ------------------ ----------------------------------------------------------- -------- ---------------------------- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . 21 - ------------------ ----------------------------------------------------------- -------- ---------------------------- PART III - ------------------ ----------------------------------------------------------- -------- ---------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE Proxy Statement for 2001 REGISTRANT. . . . . . . . . . . . . . . . . . . . . . . . 21 Annual Meeting - ------------------ ----------------------------------------------------------- -------- ---------------------------- - ------------------ ----------------------------------------------------------- -------- ---------------------------- ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . 21 Proxy Statement for 2001 Annual Meeting - ------------------ ----------------------------------------------------------- -------- ---------------------------- - ------------------ ----------------------------------------------------------- -------- ---------------------------- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 22 Proxy Statement for 2001 OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . . . Annual Meeting - ------------------ ----------------------------------------------------------- -------- ---------------------------- - ------------------ ----------------------------------------------------------- -------- ---------------------------- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED Proxy Statement for 2001 TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . 22 Annual Meeting - ------------------ ----------------------------------------------------------- -------- ---------------------------- PART IV - ------------------ ----------------------------------------------------------- -------- ---------------------------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . 22 - ------------------ ----------------------------------------------------------- -------- ---------------------------- SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2 PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF THE COMPANY GENERAL Capital Corp of the West (the "Company" or "Capital Corp") is a bank holding company incorporated under the laws of the State of California on April 26, 1995. On November 1, 1995, the Company became registered as a bank holding company and is the holder of all of the capital stock of County Bank (the "Bank"). During 1999, Town and Country Finance and Thrift (the "Thrift) was merged into County Bank. The Company's primary asset is the Bank and the Bank is the Company's primary source of income. As of December 31, 2000, the Company's securities consist of 4,552,042 shares of Common Stock, no par value, and no shares of Preferred Stock. As of March 15, 2001 there were 4,592,890 common shares outstanding, held by approximately 3,000 shareholders. There were no preferred shares outstanding at March 15, 2001. The Company has one wholly owned inactive nonbank subsidiary, Capital West Group ("CWG") at December 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 and the Bank's subsidiaries, unless the context otherwise requires. INFORMATION ABOUT COMMERCIAL BANKING & GENERAL BUSINESS OF THE COMPANY AND ITS SUBSIDIARIES The Bank was organized on August 1, 1977, as County Bank of Merced, a California state banking corporation. The Bank commenced operations in 1977. In November 1992, the Bank changed its legal name to County Bank. The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"), up to applicable limits. The Bank is a member of the Federal Reserve System. INDUSTRY & MARKET AREA The Bank engages in general commercial banking business primarily in Fresno, Madera, Mariposa, Merced, Stanislaus, Tulare and Tuolomne counties and operates a loan production office in San Francisco. The Bank has sixteen full service branch offices and one loan production office; two of which are located in Merced with the branch located in downtown Merced currently serving as both a branch and as administrative headquarters. There are offices in Atwater, Hilmar, Los Banos, Sonora, two offices in Modesto, two offices in Turlock and one office in Visalia. In 1997, the Bank also opened an office in Madera and purchased three branch offices from Bank of America in Livingston, Dos Palos and Mariposa. During 1999, the Bank opened its first office in Fresno, and in 2000 expanded our presence in Fresno by adding an additional office. On January 18, 2001 the Bank opened a loan production office in San Francisco. The Bank's administrative headquarters also provides accommodations for the activities of MAID, the Bank's wholly owned real estate development subsidiary. (See "ITEM 2. PROPERTIES") COMPETITION The Company's primary market area consists of Fresno, Madera, Mariposa, Merced, San Francisco, Stanislaus, Tulare, Tuolomne and Stanislaus Counties and nearby communities. The banking business in California generally, and specifically in the Company's primary market area, is highly competitive with respect to both loans and deposits. The banking business is dominated by a relatively small number of major banks which have many offices operating over wide geographic areas. Many of the major commercial banks offer certain services (such as international, trust and securities brokerage services) which are not offered directly by the Company or through its correspondent banks. By virtue of their greater total capitalization, such banks have substantially higher lending limits than the Company and substantial advertising and promotional budgets. Smaller independent financial institutions, savings and loans and credit unions also serve as competition in our service area. At June 30, 2000, the Bank maintained a market share of 32% of total FDIC insured deposits in the County of Merced, California. The Bank's market share of FDIC insured deposits in the counties of Mariposa, Stanislaus, Tuolumne and Madera, California was 37%, 3%, 3% and 2%, respectively. 3 The Bank's market share of total FDIC insured deposits in the counties of Fresno and Tulare, California were less than 1% of the total FDIC insured deposits in those counties. In the past, the Bank's principal competitors for deposits and loans have been other banks (particularly major banks), savings and loan associations and credit unions. To a lesser extent, competition was also provided by thrift and loans, mortgage brokerage companies and insurance companies. Other institutions, such as brokerage houses, credit card companies, and even retail establishments have offered new investment vehicles, such as money-market funds, which also compete with banks. The direction of federal legislation in recent years seems to favor competition between different types of financial institutions and to foster new entrants into the financial services market, and it is anticipated that this trend will continue. To compete effectively in our service area, the Bank relies upon specialized services, responsive handling of customer needs, local promotional activity, and personal contacts by its officers, directors and staff. For customers whose loan demands exceed the Bank's lending limits, the Bank seeks to arrange funding for such loans on a participation basis with its correspondent banks or other independent commercial banks. The Bank also assists customers requiring services not offered by the Bank to obtain such services from its correspondent banks. See also the discussion under "Regulation and Supervision - Financial Services Modernization Legislation." BANK'S SERVICES AND MARKETS BANK The Bank conducts a general commercial banking business including the acceptance of demand (includes interest bearing), savings and time deposits. The Bank also offers commercial, agriculture, real estate, personal, home improvement, home mortgage, automobile, credit card and other installment and term loans. The Bank offers travelers' checks, safe deposit boxes, banking-by-mail, drive-up facilities, 24-hour automated teller machines, and other customary banking services to its customers. The Bank does not operate a trust department nor does it offer these services through a correspondent banking relationship to its customers. The five general areas in which the Bank has directed its lendable assets are (i) real estate mortgage loans, (ii) consumer loans, (iii) agricultural loans, (iv) commercial loans, and (v) real estate construction loans. As of December 31, 2000, these five categories accounted for approximately 34%, 21%, 20%, 17% and 8%, respectively, of the Bank's loan portfolio. In 1994, the Bank organized a department to originate loans within the underwriting standards of the Small Business Administration ("SBA"). The Bank originates packages and subsequently sells these loans in the secondary market and retains servicing rights on these loans. The Bank's deposits are attracted primarily from individuals and small and medium-sized business-related sources. The Bank also attracts some deposits from municipalities and other governmental agencies and entities. In connection with the deposits of municipalities or other governmental agencies, the Bank is generally required to pledge securities to secure such deposits, except when the depositor signs a waiver with respect to the first $100,000 of such deposits, which amount is insured by the FDIC. The principal sources of the Bank's revenues are (i) interest and fees on loans, (ii) interest on investment securities (principally U.S. Government securities, mortgage-backed securities, collateralized mortgage obligations, corporate bonds and municipal bonds), and (iii) service charges on deposit accounts. For the year ended December 31, 2000, these sources comprised approximately 69%, 20%, and 6% respectively, of the Bank's total interest and noninterest income. Most of the Bank's business originates from individuals, businesses and professional firms located in its service area. The Bank is not dependent upon a single customer or group of related customers for a material portion of its deposits, nor is a material portion of the Bank's loans concentrated within a single industry or group of related industries. The quality of Bank assets and Bank earnings could be adversely affected by a downturn in the local economy, including the agricultural sector. 4 BANK'S REAL ESTATE SUBSIDIARY (MAID) GENERAL California state-chartered banks previously were allowed, under state law, to engage in real estate development activities either directly or through investment in a wholly-owned subsidiary. Pursuant to this authorization, the Bank established MAID, its wholly-owned subsidiary, as a California corporation on February 18, 1987. MAID engaged in real estate development activities for approximately seven years. Federal law now precludes banks from engaging in real estate development. The uncertainty about the effect of the investment in MAID on the results of future operations caused management to recognize a write-down equal to the total investment in MAID in late 1995. At December 31, 2000, MAID held no real estate investments. The last remaining real estate parcel held by MAID was sold during 2000. MAID does not currently intend to purchase or develop any new properties. EMPLOYEES As of December 31, 2000, the Company employed a total of 243 full-time equivalent employees. The Company believes that employee relations are excellent. SEASONAL TRENDS IN THE COMPANY'S BUSINESS Although the Company does experience some immaterial seasonal trends in deposit growth and funding of its agricultural and construction loan portfolios, in general the Company's business is not seasonal. OPERATIONS IN FOREIGN COUNTRIES The Company conducts no operations in any foreign country. 5 REGULATION AND SUPERVISION REGULATORY ENVIRONMENT The banking and financial services industry is heavily regulated. Regulations, statutes and policies affecting the industry are frequently under review by Congress and state legislatures, and by the federal and state agencies charged with supervisory and examination authority over banking institutions. Changes in the banking and financial services industry can be expected to occur in the future. Some of the changes may create opportunities for the Company and the Bank to compete in financial markets with less regulation. However, these changes also may create new competitors in geographic and product markets which have historically been limited by law to bank institutions, such as the Bank. Changes in the regulation, statutes or policies that impact the Company and the Bank cannot necessarily be predicted and may have a material effect on their business and earnings. The operations of bank holding companies and their subsidiaries are affected by the credit and monetary policies of the Federal Reserve Bank (FRB). An important function of the FRB is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the FRB to implement its objectives are open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements on bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments and deposits, the interest rates charged on loans and paid for deposits, the price of the dollar in foreign exchange markets, and the level of inflation. The credit and monetary policies of the FRB will continue to have a significant effect on the Bank and on the Company. Set forth below is a summary of significant statutes, regulations and policies that apply to the operation of banking institutions. This summary is qualified in its entirety by reference to the full text of such statutes, regulations and policies. BANK HOLDING COMPANY ACT As a bank holding company, Capital Corp is subject to regulation under the BHC Act, and is registered as such with, and subject to examination by, the FRB. Pursuant to the BHC Act, Capital Corp is subject to limitations on the kinds of businesses in which it can engage directly or through subsidiaries. It may of course manage or control banks. Generally, however, it is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than five (5) percent of any class of voting shares of an entity engaged in nonbanking activities, unless the FRB finds such activities to be "so closely related to banking" as to be deemed "a proper incident thereto" within the meaning of the BHC Act. Removal of many of the activity limitations is currently under review by Congress, but whether any legislation liberalizing permitted bank holding company activities will be enacted is not known. As a bank holding company, the Company may not acquire more than (5) percent of the voting shares of any domestic bank without the prior approval of (or, for "well managed" companies, prior written notice to) the FRB. The BHC Act subjects bank holding companies to minimum capital requirements. See "--Regulatory Capital Requirements." Regulations and policies of the FRB also require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the FRB's policy that a bank holding company should stand ready to use available resources to provide adequate capital funds to a subsidiary bank during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting a subsidiary bank. Under certain conditions, the FRB may conclude that certain actions of a bank holding company, such as a payment of a cash dividend, would constitute an unsafe and unsound banking practice. COUNTY BANK County Bank is a California state-licensed bank. The Bank is a member of the Federal Reserve Bank (FRB) and maintains deposits insured by the Federal Deposit Insurance Corporation (FDIC) and thus is subject to the rules and regulations of the FDIC pertaining to deposit insurance, including deposit insurance assessments. The Bank is subject to regulation and supervision by the FRB and the California Department of Financial Institutions (the "Department" or "DFI"). Applicable federal and state regulations address many aspects of the Bank's business and activities, including investments, loans, borrowings, transactions with affiliates, 6 branching, reporting and other areas. County Bank may acquire other banks or branches of other banks with approval of the FRB, FDIC and the Department. County Bank is subject to examination by both the FRB and the Department. DIVIDENDS The Company may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. In the event sufficient retained earnings are not available for the proposed distribution, such a corporation may nevertheless make a distribution to its shareholders if, after giving effect to the distribution, the corporation's assets equal at least 125% of its liabilities and certain other conditions are met. Since the 125% ratio translates into a minimum capital ratio of 20%, most bank holding companies, including the Company based on its current capital ratios, are unable to meet this last test. The primary source of funds for payment of dividends by the Company to its shareholders is the receipt of dividends from the Bank. The Company's ability to receive dividends from the Bank is limited by applicable state and federal law. A California state-licensed bank may not make a cash distribution to its shareholders in excess of the lesser of the following: (i) the bank's retained earnings, or (ii) the bank's net income for its last three fiscal years, less the amount of any distributions made by the bank to its shareholders during such period. However, with the approval of the Commissioner of Financial Institutions (the "Commissioner"), a bank may pay dividends in an amount not to exceed the greater of (i) a bank's retained earnings, (ii) its net income for its last fiscal year, or (iii) its net income for the current fiscal year. The FRB, FDIC and the Commissioner have authority to prohibit a bank from engaging in practices which are considered to be unsafe and unsound. Depending on the financial condition of the Bank and upon other factors, the FRB or the Commissioner could determine that payment of dividends or other payments by the Bank might constitute an unsafe or unsound practice. Finally, any dividend that would cause a bank to fall below required capital levels could also be prohibited. REGULATORY CAPITAL REQUIREMENTS The Company and the Bank are required to maintain a minimum risk-based capital ratio of 8% (at least 4% in the form of Tier 1 capital) of risk-weighted assets and off-balance sheet items. "Tier 1" capital consists of common equity, non-cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries and excludes goodwill. "Tier 2" capital consists of cumulative perpetual preferred stock, limited-life preferred stock, mandatory convertible securities, subordinated debt and (subject to a limit of 1.25% of risk-weighted assets) general loan loss reserves. In calculating the relevant ratio, a bank's assets and off-balance sheet commitments are risk-weighted: thus, for example, loans are included at 100% of their book value while assets considered less risky are included at a percentage of their book value (20%, for example, for interbank obligations, and 0% for vault cash and U.S. Government securities). The Company and the Bank are also subject to leverage ratio guidelines. The leverage ratio guidelines require maintenance of a minimum ratio of 3% Tier 1 capital to total assets for the most highly rated organizations. Institutions that are less highly rated, anticipating significant growth or subject to other significant risks will be required to maintain capital levels ranging from 1% to 2% above the 3% minimum. Federal regulation has established five tiers of capital measurement ranging from "well capitalized" to "critically undercapitalized." Federal bank regulatory authorities are required to take prompt corrective action with respect to inadequately capitalized banks. If a bank does not meet the minimum capital requirements set by its regulators, the regulators are compelled to take certain actions, which may include a prohibition on payment of dividends to a parent holding company and requiring adoption of an acceptable plan to restore capital to an acceptable level. Failure to comply will result in further sanctions, which may include orders to raise capital, merge with another institution, restrict transactions with affiliates, limit asset growth or reduce asset size, divest certain investments and /or elect new directors. It is Capital Corp's intention to maintain risk-based capital ratios for itself and for the Bank at above the minimum for the "well capitalized" level (6% Tier 1 risk-based; 10% total risk-based) and to maintain the leverage capital ratio for County Bank above the 5% minimum for "well-capitalized" banks. At December 31, 2000, the Company's leverage, Tier 1 risk-based and total risk-based capital ratios were 7.56%, 9.66% and 10.92%, and the Bank's leverage, Tier 1 risk-based and total risk-based capital ratios were 7.21%, 9.31% and 10.57%. No assurance can be given that the Company or the Bank will be able to maintain capital ratios in the "well capitalized" level in the future. 7 CROSS-INSTITUTION ASSESSMENTS Any insured depository institution owned by the Company can be assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other depository institution owned by the Company. INSURANCE PREMIUMS AND ASSESSMENTS The FDIC has authority to impose a special assessment on members of the Bank Insurance Fund (the "BIF") to ensure that there will be sufficient assessment income for repayment of BIF obligations and for any other purpose which it deems necessary. The FDIC is authorized to set semi-annual assessment rates for BIF members at levels sufficient to increase the BIF's reserve ratio to a designated level of 1.25% of insured deposits. The BIF achieved this level in mid-1995. Congress is considering various proposals to merge the BIF with the Savings Association Insurance Fund ("SAIF") or otherwise to require banks to contribute to the insurance funds for savings associations. Adoption of any of these proposals might increase the cost of deposit insurance for all banks, including the Bank. The FDIC has developed a risk-based assessment system, under which the assessment rate for an insured depository institution will vary according to the level of risk incurred in its activities. An institution's risk category is based upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also to be assigned to one of the following "supervisory subgroups": Subgroup A, B or C. Subgroup A institutions are financially sound institutions with few minor weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration; and Subgroup C institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. The FDIC assigns each member institution an annual FDIC assessment rate which, as of the date of this report, varies between 0.0% per annum with a $2,000 minimum (for well capitalized Subgroup A institutions) and 0.27% per annum (for undercapitalized Subgroup C institutions). Insured institutions are not permitted to disclose their risk assessment classification. The cost of carrying bonds issued by the Financing Corporation ("FICO") to cover losses of failed savings associations is allocated equally between BIF-insured institutions and SAIF-- insured institutions. The Bank's premiums during 2001 are being assessed at a rate of $.0196 per $100 of insured deposits. AUDIT REQUIREMENTS All depository institutions are required to have an annual, full-scope on-site examination. Those depository institutions with assets greater than $500 million are required to have annual independent audits, prepare financial statements in accordance with generally accepted accounting principles, and develop a management assertion letter addressing internal controls over financial reporting. Each institution is required to have an independent audit committee comprised entirely of outside directors. COMMUNITY REINVESTMENT ACT The Community Reinvestment Act ("CRA") requires each bank to identify the communities served by the bank's offices and to identify the types of credit the bank is prepared to extend within such communities. It also requires the bank's regulators to assess the bank's performance in meeting the credit needs of its community and to take such assessment into consideration in reviewing application for mergers, acquisitions and other transactions, such as the Branch Acquisition. An unsatisfactory rating may be the basis for denying such an application. The Bank completed a CRA examination as of January 2000, and received a "low satisfactory" rating. POTENTIAL ENFORCEMENT ACTIONS Banks and their institution-affiliated parties may be subject to potential enforcement actions by the bank regulatory agencies for unsafe or unsound practices in conducting their businesses, or for violations of any law, rule or regulation or provision, any consent order with any agency, any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, cease-and-desist orders and written agreements, the termination of insurance of 8 deposits, the imposition of civil money penalties and removal and prohibition orders against institution-affiliated parties. See " -- County Bank". INTERSTATE BANKING Riegle-Neal Interstate Banking and Branching Efficiency Act. The Riegle-Neal Interstate Banking and Branching Efficiency Act (the "Riegle-Neal Act") was enacted in 1994. Generally, provisions of the Riegle-Neal Act authorize interstate banking and interstate branching, subject to certain state options. The following is a summary of its provisions: INTERSTATE BANKING AND BRANCHING - Interstate acquisition of banks by holding companies was permitted in all states on and after September 29, 1995. However, states may continue to prohibit acquisition of banks that have been in existence less than five years and interstate chartering of new banks. - Interstate mergers of banks were permitted as of June 1, 1997, unless a state adopted legislation before June 1, 1997 to "opt out" of interstate merger authority. Individual states were permitted to enact legislation to permit interstate mergers earlier than that date. - Interstate acquisition of branches is permitted to a bank only if the law of the state where the branch is located expressly permits interstate acquisition of a branch without acquiring the entire bank. - Interstate de novo branching is permitted to a bank only if a state adopts legislation to "opt in" to interstate de novo branching authority. LIMITATIONS ON CONCENTRATIONS. An interstate banking application may not be approved if the applicant and its depository institution affiliates would control more than 10% of insured deposits nationwide or more than 30% of insured deposits in the state in which the bank to be acquired in located. These limits do not apply to mergers solely between affiliates. States may waive the 30% cap on a nondiscriminatory basis. Nondiscriminatory state caps on deposit market share of a depository institution and its affiliates are not affected. AGENCY AUTHORITY. A bank subsidiary of a bank holding company is authorized to receive deposits, renew time deposits, close loans, service loans and receive payments on loans as an agent for a depository institution affiliate without being deemed a branch of the affiliate. A bank is not permitted to engage, as agent for an affiliate, in any activity as agent that it could not conduct as a principal, or to have an affiliate, as its agent, conduct any activity that it could not conduct directly, under federal or state law. HOST STATE REGULATION. Out-of-state banks seeking to acquire or establish a branch are required to comply with any nondiscriminatory filing requirements of the host state where the branch is located. The host state may set notification and reporting requirements for a branch of an out-of-state bank. A branch of an out-of-state bank is subject to all of the laws of the host state regarding intrastate branching, consumer protection, fair lending and community reinvestment. A branch of an out-of-state bank is not permitted to conduct any activities at the branch that are not permissible for a bank chartered by the host state. MEETING LOCAL CREDIT NEEDS. CRA evaluations are required for each state in which an interstate bank has a branch. Interstate banks are prohibited from using out-of-state branches "primarily for the purpose of deposit production." Federal banking agencies have adopted regulations to ensure that interstate branches are being operated with a view to the needs of the host communities. CALIFORNIA LAW. In October 1995, California enacted state legislation in accordance with authority under the Riegle-Neal Act. This law permits banks headquartered outside California to acquire or merge with California banks that have been in existence for at least five years, and thereby establish one or more California branch offices. An out-of-state bank may not enter California by acquiring one or more branches of a California bank or other operations constituting less than the whole bank. The law authorizes waiver of the 30% limit on state-wide market share for deposits as permitted by the Riegle-Neal Act. This law also authorizes California state-licensed banks to conduct certain banking activities (including receipt of deposits and loan payments and conducting loan closings) on an agency basis on behalf of out-of-state banks and to have out-of-state banks conduct similar agency activities on their behalf. It is impossible to predict with any degree of accuracy the competitive impact the laws and regulations described above will have on commercial banking in general and on the business of the Company in particular, or to predict whether or when any of the proposed legislation and regulations will be adopted. It is anticipated that the banking industry will continue to be a highly regulated industry. Additionally, if experience is any indication, there appears to be a continued lessening of the historical distinction between the services offered by financial institutions and other businesses offering financial services. Finally, the trend 9 toward nationwide interstate banking is expected to continue. As a result of these factors, it is anticipated banks will experience increased competition for deposits and loans and, possibly, further increases in their cost of doing business. FINANCIAL SERVICES MODERNIZATION LEGISLATION The Gramm-Leach-Bliley Act of 1999 (the "Modernization Act"). The Modernization Act repeals two provisions of the Glass-Steagall Act: Section 20, which became effective March 11, 2000 restricts the affiliation of Federal Reserve member banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Modernization Act also expressly preempts any state law restricting the establishment of financial affiliations, primarily related to insurance. The law establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve, in conjunction with the Secretary of the Treasury, determine to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. In order for the Company to take advantage of the ability provided by the modernization Act to affiliate with other financial service providers, it must become a "Financial Holding Company." To do so, the Company would file a declaration with the Federal Reserve, electing to engage in activities permissible for Financial Holding companies and certifying that it is eligible to do so because its insured depository institution subsidiary (the Bank) is well-capitalized and well-managed. In addition, the Federal Reserve must also determine that an insured depository institution subsidiary has at least a "satisfactory" rating under the Community Reinvestment Act. The Company currently meets the requirements for Financial Holding Company status. The Company will continue to monitor its strategic business plan to determine whether, based on market conditions and other factors, the Company wishes to utilize any of its expanded powers provided in the modernization Act. The Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because California permits commercial banks chartered by the state to engage in any activity permissible for national banks, the Bank will be permitted to form subsidiaries to engage in the activities authorized by the Modernization Act to the same extent as a national bank. In order to form a financial subsidiary, the Bank must be well-capitalized, and the Bank would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks. [the Bank currently meets those requirements.] Under the Modernization Act, securities firms and insurance companies that elect to become Financial Holding Companies may acquire banks and other financial institutions. The Company does not believe that the Modernization Act will have a material adverse effect on its operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Company and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Company and the Bank. 10 SELECTED STATISTICAL INFORMATION The following tables on pages 11 through 17 present certain statistical information concerning the business of the Company. This information should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" at ITEM 7, pages 10 through 20 of the Company's 2000 Annual Report to Shareholders incorporated herein by reference, and with the Company's Consolidated Financial Statements and the Notes thereto included in Item 14, pages 22 through 44 of the Company's 2000 Annual Report to Shareholders incorporated herein by reference. The statistical information that follows is generally based on average daily amounts. INTEREST RATES AND MARGINS: Managing interest rates and margins is essential to the Company in order to maintain profitability. The following table presents, for the periods indicated, the distribution of average assets, liabilities and shareholder's equity, as well as the total dollar amount of interest income from average interest-earning assets and resultant yields and the dollar amounts of interest expense and average interest-bearing liabilities, expressed both in dollars and rates.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998 ------------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE (Dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE - ------------------------------------------------------------------------------------------------------------------------- ASSETS Federal funds sold $10,208 $ 650 6.37% $ 9,140 $ 443 4.85% $23,469 $ 1,253 5.34% Time deposits at other financial 635 39 6.14 2,691 156 5.80 1,040 57 5.48 institutions Nontaxable investment securities(1) 29,511 1,347 4.56 30,057 1,378 4.58 16,320 797 4.88 Taxable investment securities 145,707 10,209 7.01 114,402 7,129 6.23 121,728 7,348 6.66 Loans, gross (3) 369,367 38,643 10.46 303,463 30,255 9.97 242,989 25,159 10.35 -------- ------ ------- ------ ------- ------ Total interest-earning assets 555,428 50,888 9.16 459,753 39,361 8.56 405,546 34,614 8.54 Allowance for loan losses (7,121) (5,902) (4,158) Cash and noninterest-bearing deposits at other banks 23,753 24,579 19,610 Premises and equipment, net 13,036 13,146 13,390 Interest receivable and other assets 27,786 24,310 22,084 ------ ------ ------ Total assets $612,882 $515,886 $456,472 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Negotiable orders of withdrawal $ 74,663 503 .67% $68,134 458 .67% $57,602 503 .87% Savings deposits 178,279 7,095 3.98 174,301 5,752 3.30 156,956 5,696 3.63 Time deposits 198,183 11,642 5.87 141,497 7,074 5.00 112,555 6,143 5.46 Other borrowings 22,456 1,528 6.80 10,772 756 7.02 20,862 1,292 6.19 ------- ------ ------- ------- ----- Total interest-bearing liabilities 473,581 20,768 4.39 394,704 14,040 3.56 347,975 13,634 3.92 Noninterest-bearing deposits 86,706 74,979 63,243 Accrued interest, taxes and other liabilities 5,787 3,118 2,976 ------ ------- ------- Total liabilities 566,074 472,801 414,194 Total shareholders' equity 46,808 43,085 42,278 -------- -------- -------- Total liabilities and shareholders' $612,882 $515,886 $456,472 equity ======== ======== ======== NET INTEREST INCOME AND MARGIN (2) $30,120 5.42% $25,321 5.51% $20,980 5.17%
(1) INTEREST ON MUNICIPAL SECURITIES IS NOT COMPUTED ON TAX-EQUIVALENT BASIS. (2) NET INTEREST MARGIN IS COMPUTED BY DIVIDING NET INTEREST INCOME BY TOTAL AVERAGE INTEREST-EARNING ASSETS. (3) INTEREST ON NON-ACCRUAL LOANS IS RECOGNIZED INTO INCOME ON A CASH RECEIVED BASIS. The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities. It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and borrowed funds. The following table sets forth changes in interest 11 income and interest expense for each major category of interest-earning asset and interest-bearing liability and the amount of change attributable to volume and rate changes for the years indicated. The changes due to both rate and volume have been allocated to rate and volume in proportion to the relationship of the absolute dollar amount of the change in each.
(Dollars in thousands) 2000 COMPARED TO 1999 1999 COMPARED TO 1998 - ------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------- NET INTEREST INCOME VARIANCE ANALYSIS VOLUME RATE TOTAL VOLUME RATE TOTAL -------------------------------------------------------------------- INCREASE (DECREASE) IN INTEREST INCOME: Loans $ 6,835 $1,553 $ 8,388 $ 6,059 $ (963) $ 5,096 Taxable investment securities 2,118 962 3,080 (452) 233 (219) Nontaxable investment securities (25) (6) (31) 633 (52) 581 Federal funds sold 56 151 207 (704) (106) (810) Time deposit at other institutions (126) 9 (117) 96 3 99 ------- ------ ------- ------- ------ ------- Total 8,858 2,669 11,527 5,632 (885) 4,747 INCREASE (DECREASE) IN INTEREST EXPENSE: Interest-bearing demand deposits 44 1 45 83 (128) (45) Savings deposits 134 1,209 1,343 598 (542) 56 Time deposits 3,179 1,389 4,568 1,480 (549) 931 Other borrowings 796 (24) 772 (690) 154 (536) ------- ------ ------- ------- ------ ------- 4,153 2,575 6,728 1,471 (1,065) 406 ------- ------ ------- ------- ------ ------- INCREASE (DECREASE) IN NET INTEREST INCOME $ 4,705 $ 94 $ 4,799 $ 4,161 $ 180 $ 4,341 ======= ===== ======= ======= ===== =======
INVESTMENT PORTFOLIO MATURITIES The following table sets forth the maturities of debt securities at December 31, 2000 and the weighted average yields of such securities calculated on a book value basis using the weighted average yield 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.
Within One Year One to Five Years Five to Ten Years Over Ten Years -------------------------------------------------------------------------------------- (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Total Available for sale debt securities: U.S. Treasury and U.S. government agencies $ - -% $ 25,869 6.79% $ 10,070 7.17% $ - -% $35,939 State and political subdivisions - - - - 13,168 4.32 11,002 4.54 24,170 Mortgage-backed securities 7 7.86 31 9.31 432 6.98 53,939 6.73 54,409 Collateralized mortgage obligations - - - - - - 29,015 7.13 29,015 Corporate debt securities 1,008 6.09 3,642 6.50 - - 5,183 7.92 9,833 Held to maturity debt securities: U.S. Treasury and U.S. government agencies - - - - 4,595 6.70 - - 4,595 State and political subdivisions - - - - 1,342 5.13 3,033 5.14 4,375 Mortgage-backed securities - - - - - - 22,736 7.25 22,736 Collateralized mortgage obligations - - - - - - 3,516 7.76 3,516 ------- ---- -------- ---- -------- ---- -------- ---- -------- Total debt securities $ 1,015 6.10% $ 29,542 7.00% $ 29,607 5.73% $128,424 6.76% $188,588 ======= ==== ======== ==== ======== ==== ======== ==== ========
12 The Company does not own securities of a single issuer whose aggregate book value is in excess of 10% of its total equity. ASSET / LIABILITY REPRICING The interest rate gaps reported in the table below arise when assets are funded with liabilities having different repricing intervals. Since these gaps are actively managed and change daily as adjustments are made in interest rate views and market outlook, positions at the end of any period may not reflect the Company's interest rate sensitivity in subsequent periods. Active management dictates that longer-term economic views are balanced against prospects for short-term interest rate changes in all repricing intervals. For purposes of the analysis below, repricing of fixed-rate instruments is based upon the contractual maturity of the applicable instruments. Actual payment patterns may differ from contractual payment patterns.
BY REPRICING INTERVAL ---------------------------------------------------------------------------------- After three Within months, After one Noninterest- three Within year, within After bearing (Dollars in thousands) months one year five years five years Funds Total ---------------------------------------------------------------------------------- ASSETS Federal funds sold $ 1,415 $ - $ - $ - $ - $ 1,415 Time deposits at other institutions - 100 - - - 100 Investment securities 5,736 6,505 37,993 138,354 2,464 191,052 Loans 182,296 56,865 116,150 57,353 - 412,664 Noninterest-earning assets and allowance for loan losses - - - - 77,790 77,790 -------- --------- --------- --------- ---------- ---------- Total assets $ 189,447 $ 63,470 $ 154,143 $ 195,707 $ 80,254 $ 683,021 ======== ========= ========= ========= ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits $ - $ - $ - $ - $ 107,581 $ 107,581 Savings, money market & NOW deposits 268,594 268,594 - - - - Time deposits 94,979 100,173 30,171 - - 225,323 Other interest-bearing liabilities 13,272 6,000 - 3,155 - 22,427 Other liabilities and shareholders' equity - - - - 59,096 59,096 -------- --------- --------- --------- -------- --------- Total liabilities and shareholders' $ 376,845 $ 106,173 $ 30,171 $ 3,155 $ 166,677 $ 683,021 equity ========= ========= ========= ======== ======== ========= Interest rate sensitivity gap $(187,398) $ (42,703) $ 123,972 $ 192,552 $(86,423) $ - Cumulative interest rate sensitivity $(187,398) $(230,101) $(106,129) $ 86,423 $ - - gap
13 LOAN PORTFOLIO At December 31, 2000, the Company had approximately $144,480,000 in undisbursed loan commitments. This compares with $101,847,000 at December 31, 1999. Standby letters of credit were $1,320,000 and $2,674,000, at December 31, 2000 and December 31, 1999. For further information about the composition of the Company's loan portfolio see "ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" section entitled "Credit Risk Management and Asset Quality," pages 14 through 15 of the Company's 2000 Annual Report to Shareholders incorporated herein by reference. The following table shows the composition of the loan portfolio of the Company by type of loan on the dates indicated:
(Dollars in thousands) December 31, --------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------------------------------------------------------------------------------- AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT Commercial, financial and agricultural $ 155,952 $ 112,179 $ 87,245 $ 78,550 $ 71,786 Real estate -construction 30,133 11,926 13,840 12,657 13,923 Real estate - mortgage 141,575 120,978 96,957 70,802 57,098 Consumer installment 85,004 86,185 70,891 55,968 40,440 ------ ------ ------ ------ ------ Total $ 412,664 $ 331,268 $ 268,933 $ 217,977 $ 183,247 ========= ========= ========== ========== ==========
The table that follows shows the maturity distribution of the portfolio of commercial and agricultural, real estate construction, real estate mortgage and installment loans on December 31, 2000 by fixed and floating rate attributes:
December 31, 2000 ------------------------------------------------------------------- Within One to Over (Dollars in thousands) ONE YEAR FIVE YEARS FIVE YEARS TOTAL -------- ---------- ---------- ----- COMMERCIAL AND AGRICULTURAL Loans with floating rates $ 67,958 $ 28,095 $ 16,485 $ 112,538 Loans with predetermined rates 6,766 20,265 16,383 43,414 --------------- ------------- -------------- ------------- Subtotal 74,724 48,360 32,868 155,952 REAL ESTATE--CONSTRUCTION Loans with floating rates 20,931 1,822 4,325 27,078 Loans with predetermined rates 2,516 - 539 3,055 --------------- ------------- -------------- ------------- Subtotal 23,447 1,822 4,864 30,133 REAL ESTATE--MORTGAGE Loans with floating rates 7,158 18,456 72,005 97,619 Loans with predetermined rates 3,938 3,370 36,648 43,956 --------------- ------------- -------------- ------------- Subtotal 11,096 21,826 108,653 141,575 CONSUMER INSTALLMENT Loans with floating rates 14,034 8,520 - 22,554 Loans with predetermined rates 3,415 56,302 2,733 62,450 --------------- ------------- -------------- ------------- Subtotal 17,449 64,822 2,733 85,004 Total $ 126,716 $ 136,830 $ 149,118 $ 412,664 ========== ========= ========= =========
The Company seeks to mitigate the risks inherent in its loan portfolio by adhering to certain underwriting practices. They include analysis of prior credit histories, financial statements, tax returns and cash flow 14 projections of its potential borrowers as well as obtaining independent appraisals on real and personal property taken as collateral and audits of accounts receivable or inventory pledged as security. The Company also has an internal loan review process as well as periodic external reviews. The results of these reviews are assessed by the Company's audit committee. Collection of delinquent loans is generally the responsibility of the Company's credit administration staff. However, certain problem loans may be dealt with by the originating loan officer. The Directors Loan Committee reviews the status of delinquent and problem loans on a monthly basis. The Company's underwriting and review practices notwithstanding, in the normal course of business, the Company expects to incur loan losses in the future. NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS The following table summarizes nonperforming loans of the Company as of the dates indicated:
(Dollars in thousands) DECEMBER 31, -------------------------------------------------------------- 2000 1999 1998 1997 1996 AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT ------- ------- ------- ------- ------- Nonaccrual loans $ 2,243 $ 1,984 $ 1,164 $ 2,611 $ 4,968 Accruing loans past due 90 days or more ------------- ------------- ---------- --------- ------- 97 6 413 131 600 -- - --- --- --- Total nonperforming loans 2,340 1,990 1,577 2,742 5,568 Other real estate owned 248 247 60 60 1,466 ---------- ---------- ------------ ----------- Total nonperforming assets $ 2,588 $ 2,237 $ 1,637 $ 2,802 $ 7,034 ======= ======= ======= ======= ======= Nonperforming loans to total loans 0.57% 0.60% 0.59% 1.26% 3.04% Nonperforming assets to total assets 0.38% 0.40% 0.33% 0.66% 2.64%
Loans with significant potential problems or impaired loans are placed on nonaccrual status. Management defines impaired loans as those loans, regardless of past due status, in which management believes the collection of principal and interest is in doubt. The amount of gross interest income that would have been recorded in the periods then ended if the loans had been current in accordance with the original terms and had been outstanding throughout the period or since origination, if held for part of the period, was $224,000, $143,000, $91,000, $189,000 and $489,000 in 2000, 1999, 1998, 1997 and 1996. The amount of interest income on these loans that was included in net income was $79,000, $126,000, $134,000, $471,000 and $625,000 in 2000, 1999, 1998, 1997 and 1996. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The following table summarizes a breakdown of the allowance for loan losses by loan category and the percentage by loan category of total loans for the dates indicated:
(Dollars in thousands) December 31, ----------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------------------------------------------------------------------------------------- LOANS LOANS LOANS LOANS LOANS % TO % TO % TO % TO % TO TOTAL TOTAL TOTAL TOTAL TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Commercial, financial and agricultural $ 4,186 38% $ 3,365 34% $ 2,618 33% $ 1,868 36% $ 840 39% Real estate -construction 451 7 358 4 376 5 640 6 1,421 8 Real estate - mortgage 2,076 34 1,815 36 1,260 36 1,058 32 219 31 Installment 1,494 21 1,004 26 521 26 267 26 312 22 ------ --- ----- --- ------ --- ------- --- ------- --- Total $ 8,207 100% $ 6,542 100% $ 4,775 100% $ 3,833 100% $ 2,792 100% ======= === ======= === ======= === ======= === ======= ===
15 OTHER INTEREST-BEARING ASSETS The following table relates to other interest bearing assets not disclosed above for the dates indicated. This item consists of a salary continuation plan for the Company's executive management and a deferred compensation plan for participating board members. The plans are informally linked with universal life insurance policies containing cash surrender values as listed in the following table:
December 31 -------------------------------------------- (Dollars in thousands) 2000 1999 1998 ---- ---- ---- Cash surrender value of life insurance $ 6,075 $ 5,792 $ 4,104
ITEM V DEPOSITS The following table sets forth the average balance and the average rate paid for the major categories of deposits for the years indicated:
Deposits For the Year Ended December 31, -------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 ---- ---- ---- Amount Yield Amount Yield Amount Yield -------------------------------------------------------------- Noninterest-bearing demand deposits $ 86,706 -% $ 74,979 -% $63,243 -% Interest-bearing demand deposits 74,663 0.67 68,134 0.67 57,602 0.87 Savings deposits 178,279 3.98 174,301 3.30 156,956 3.63 Time deposits under $100,000 114,422 5.78 90,586 4.73 86,020 5.34 Time deposits $100,000 and over 83,761 6.00 50,911 5.48 26,535 5.84
MATURITIES OF TIME CERTIFICATES OF DEPOSITS OF $100,000 OR MORE Maturities of time certificates of deposits of $100,000 or more outstanding at December 31, 2000 are summarized as follows:
(Dollars in thousands) Remaining Maturity: Three months or less $ 45,233 Over three through six months 20,643 Over six through twelve months 16,526 Over twelve months 11,252 -------- Total $ 93,654 ========
16 ITEM VI RETURN ON EQUITY AND ASSETS The following table sets forth certain financial ratios for the periods indicated (averages are computed using actual daily figures):
RETURN ON AVERAGE EQUITY AND ASSETS For the year ended December 31, ------------------------------------------- 1999 1999 1998 ----- ----- ----- Return on average assets 1.09 % 0.99 % 0.60 % Return on average equity 14.33 11.86 6.48 Dividend payout ratio - - - Average equity to average assets 7.64 % 8.35 % 9.26 %
MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCK MATTERS The Company's stock is included for quotation on the Nasdaq National Market System with a stock quotation symbol of CCOW. The following table indicates the range of high and low bid prices for the period shown, based upon information provided by the Nasdaq National Market System. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions. There were approximately 3,000 CCOW shareholders as of December 31, 2000.
- ---------------- ----------------- ---------------- 2000 High Low - ---------------- ----------------- ---------------- 4th quarter $ 12.00 $ 10.63 3rd quarter 11.88 10.38 2nd quarter 10.75 8.13 1st quarter $ 10.75 $ 7.75 1999 High Low - ---------------- ----------------- ---------------- 4th quarter $ 12.00 $ 8.50 3rd quarter 13.88 12.00 2nd quarter 14.09 9.75 1st quarter $ 10.75 $ 8.50 - ---------------- ----------------- ----------------
17 ITEM 2. PROPERTIES THE BANK (1) NORTH MERCED OFFICE The Bank's north Merced office is located at 490 West Olive Avenue in Merced with approximately 5,600 square feet of interior floor space. This building was constructed in 1978 at a cost of approximately $400,000 and is situated on a lot of approximately 47,000 square feet, which the Bank purchased in 1977 for approximately $186,000. Management believes that this facility will be adequate to accommodate the operations of this branch for the foreseeable future. (2) DOWNTOWN MERCED BRANCH AND ADMINISTRATIVE HEADQUARTERS On September 2, 1997, the Bank relocated its downtown Merced branch to 550 West Main Street in Merced where it serves as the main branch of the Bank. The facility is a three story facility with a two story attached parking facility and is approximately 29,000 square feet. Approximately 19,800 square feet is occupied by the administrative and central support functions. The facility cost was approximately $5.1 million. Management believes that this facility will be adequate to accommodate the operations of Company for the foreseeable future. (3) ATWATER BRANCH On October 5, 1981, the Bank opened a branch office at 735 Bellevue Road, Atwater. The building contains approximately 6,000 square feet of interior floor space, and was built at a total cost of approximately $500,000. In 1994, the Bank purchased the lot at a cost of $316,000. Management of the Bank believes that this facility will be adequate to accommodate the operations of this branch for the foreseeable future. The data processing and central service support personnel and related equipment were relocated to the new facility in downtown Merced, as discussed above in late 1997. (4) LOS BANOS BRANCH In October of 1994, the Bank opened a full service banking facility relocated at 953 W. Pacheco Boulevard, Los Banos. The Bank entered into a ten-year lease with a non-affiliated third party on the facility. The new facility contains 4,928 square feet of interior floor space. Remodeling and redecorating expenses were approximately $355,000. Management believes that this facility will be adequate to accommodate the operation of the branch for the foreseeable future. (5) HILMAR BRANCH On November 15, 1993, the Bank opened a branch office at 8019 N. Lander Avenue, Hilmar. The building was purchased at a cost of $328,000 and consists of a single story building of approximately 4,456 square feet of interior floor space. Remodeling and redecorating expenses were approximately $53,000. Management believes that this facility will be adequate to accommodate the operation of this branch for the foreseeable future. (6) SONORA BRANCH On January 12, 1996, the Bank received approval to open a full service banking facility at the Crossroads Shopping Center and entered into a five-year lease with a non-affiliated third party on January 12, 1996 for a 2,500 square foot facility. The branch opened April 1, 1996. On August 28, 1998, the Bank relocated from the Crossroads Shopping Center to a larger facility of 3,131 square feet in a nearby shopping center. As part of the move the Bank entered into a ten-year lease with a non-affiliated third party. Management believes that this facility will be adequate to accommodate the operation of this branch for the foreseeable future. (7) TURLOCK BRANCHES On September 1, 1995, the Bank opened a branch in Turlock, California. In May 1995 the Bank acquired 2 lots for $297,000 at 2001 Geer Road, Turlock. The Bank completed the construction of a permanent facility in February 1997 at a cost of approximately $694,000 and the facility is approximately 3,300 square feet. Management believes that this facility will be adequate to accommodate the operation of this branch for the foreseeable future. 18 In November, 1999, the Bank received approval to convert the Turlock Town and Country branch into a full service County Bank branch. The current lease on this facility covers a two year term with a non-affiliated third party, was entered into on February 12, 2000, and is for an approximate 2,160 square feet located at 410 East Olive Avenue in Turlock. Management believes that this facility will be adequate to accommodate the operation of this branch for the foreseeable future. (8) MODESTO BRANCHES On January 24, 1996, the Bank received approval to open a full service banking facility in Modesto and entered into a ten-year lease with a non-affiliated third party on December 2, 1996 for an approximately 5,413 square foot building at 3508 McHenry Avenue, Modesto. The branch opened for business on December 10, 1996. Management believes that this facility will be adequate to accommodate the branch for the foreseeable future. On September 26, 1996, the Bank renewed the lease on the branch in downtown Modesto and entered into a four-year lease with a non-affiliated third party on December 1, 1996 for an approximately 8,208 square foot building at 1003 12th Street, Modesto. The branch opened for business on December 31, 1996. Management believes that this facility will be adequate to accommodate the banking operation for the foreseeable future. (9) ACQUIRED BRANCHES - DOS PALOS, LIVINGSTON, AND MARIPOSA On December 11, 1997, the Bank purchased the sites of three former branches of Bank of America. These facilities are located at 640 Main Street, Livingston, 1507 Center Street, Dos Palos and 5121 Hwy 140, Mariposa. The branch in Livingston was purchased at a cost of $251,000 and is a 5,699 square feet facility. The Dos Palos branch was purchased at a cost of $296,000 and is an 8,274 square feet facility. The Mariposa branch was purchased for a cost of $313,000 and is a 4,200 square feet facility. Management believes that these facilities will be adequate to accommodate the banking operation for the foreseeable future. (10) MADERA BRANCH In October, 1999, the Bank entered into a 3 year lease with a nonaffiliated third party for an approximate 4,000 square foot facility located at 413 Yosemite Avenue, Suite 101, Madera, California. The branch relocated to this larger facility on October 29, 1999 from a temporary facility that was rented on a month to month basis. Management believes the new facility will be adequate to accommodate the banking operation for the foreseeable future. (11) FRESNO BRANCHES In November, 1999, the Bank received approval to convert the Fresno Town and County branch into a full service County Bank office. The Bank relocated the previous Thrift office to a larger facility, entering into a 4 year lease with a nonaffiliated party for an approximate 5,200 square foot facility located at 2150 West Shaw Avenue, Fresno, California. The new lease agreement was entered into in August, 1999. Management believes the facility will be adequate to accommodate the banking operation for the foreseeable future. In September, 2000, the Bank opened a second full service office. The Bank entered into a 10 year lease with a nonaffiliated party for approximately a 4,755 square foot facility located at 1330 Ease Shaw Avenue, Fresno, California. The new lease became effective July 1, 2000. Management believes the facility will be adequate to accommodate the banking operation for the foreseeable future. (12) VISALIA BRANCH In November, 1999, the Bank received approval to convert the Visalia Town and Country branch into a full service County Bank office. The Town and Country lease signed in May, 1998 covered a five year term and was assumed by County Bank. The facility encompasses approximately 1,275 square feet located at 725 West Main Street, Visalia, California. During 2001, an application to close this branch was approved and the branch was closed effective March, 2001. The Bank is obligated to continue making lease payments on this building during the remainder of the lease term. 19 (13) SAN FRANCISCO BRANCH In January, 2001, the Bank opened a loan production office in San Francisco, California. The current facility is located at 130 Battery Street in San Francisco. Effective March 1, 2001, the Bank entered into a 5 year lease with a nonaffiliated party for approximately 2,880 square feet of office space. Management believes the facility will be adequate to accommodate the loan production operations in San Francisco for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS As of December 31, 2000, the Company, is not a party to, nor is any of it's property the subject of, any material pending legal proceedings, nor are any such proceedings known to be contemplated by government authorities. The Company is, however, exposed to certain potential claims encountered in the normal course of business. In the opinion of Management, the resolution of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations in the foreseeable future. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders in the quarter ended December 31, 2000. 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS For information concerning the market for the Company's common stock and related shareholder matters, see page 19 of the Company's 2000 Annual Report to Shareholders incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA For selected consolidated financial data concerning the Company, see page 9 of the Company's 2000 Annual Report to Shareholders incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For management's discussion and analysis of financial condition and results of operations, see pages 10 through 20 of the Company's 2000 Annual Report to Shareholders incorporated herein by reference. ITEM 7A. MARKET RISK For management's discussion and analysis of market risk and interest rate risk management, see pages 17 through 18 of the Company's 2000 Annual Report to Shareholders incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Audited Consolidated Balance Sheets as of December 31, 2000 and 1999 and Audited Consolidated Statements of Income and Comprehensive Income, Shareholders' Equity and Cash Flows for the fiscal years ending December 31, 2000, 1999, and 1998 appear on pages 22 through 25 of the Company's 2000 Annual Report to Shareholders incorporated herein by reference. Notes to the Consolidated Financial Statements appear on pages 26 through 44 of the Company's 2000 Annual Report to Shareholders incorporated herein by reference. The Independent Auditors' Report appears on page 21 of the Company's 2000 Annual Report to Shareholders incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in and there were no disagreements with accountants on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT As permitted by Securities and Exchange Commission's rules relating to Form 10-K, the information called for by this item is incorporated by reference from the section of the Company's 2000 Proxy Statement titled "Election of Directors," which is to be filed on or about March 15, 2001. ITEM 11. EXECUTIVE COMPENSATION As permitted by Securities and Exchange Commission, the information called for by this item is incorporated by reference from the section of the Company's 2000 Proxy Statement titled "Information Pertaining to Election of Directors," which is to be filed on or about March 15, 2001. 21 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As permitted by Securities and Exchange Commission's rules relating to Form 10-K, the information called for by this item is incorporated by reference from the Company's Proxy Statement, which is to be filed on or about March 15, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As permitted by Securities and Exchange Commission's rules relating to Form 10-K, the information called for by this item is incorporated by reference from the Company's Proxy Statement, which was filed on or about March 15, 2001. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) FINANCIAL STATEMENTS AND SCHEDULES An index of all financial statements and schedules filed as part of this Form 10-K appears below and the material which begins on the pages of the Company's Annual Report to Shareholders for the year ended December 31, 2000 listed, are incorporated herein by reference in response to Item 8 of this report.
- ----------------------------------------------------------------------------------------- ------------------- FINANCIAL STATEMENTS: PAGE - -------------------- ---- - ----------------------------------------------------------------------------------------- ------------------- - ----------------------------------------------------------------------------------------- ------------------- Independent Auditors' Report 21 - ----------------------------------------------------------------------------------------- ------------------- - ----------------------------------------------------------------------------------------- ------------------- Consolidated Balance Sheets as of December 31, 2000 and 1999 22 - ----------------------------------------------------------------------------------------- ------------------- - ----------------------------------------------------------------------------------------- ------------------- Consolidated Statements of Income and Comprehensive Income for the Years Ended 2000, 23 1999, and 1998 - ----------------------------------------------------------------------------------------- ------------------- - ----------------------------------------------------------------------------------------- ------------------- Consolidated Statements of Shareholders' Equity for the Years Ended 2000, 1999, and 1998 24 - ----------------------------------------------------------------------------------------- ------------------- - ----------------------------------------------------------------------------------------- ------------------- Consolidated Statements of Cash Flows for the Years Ended 2000, 1999, and 1998 25 - ----------------------------------------------------------------------------------------- ------------------- - ----------------------------------------------------------------------------------------- ------------------- Notes to Consolidated Financials 26 - ----------------------------------------------------------------------------------------- -------------------
(b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed in the quarter ending December 31, 2000. (c) EXHIBITS The following is a list of all exhibits required by Item 601 of Regulation S-K to be filed as part of this Form 10-K:
- --------------- ------------------------------------------------------------------------- ------------------- Sequentially Exhibit Numbered NUMBER EXHIBIT PAGE - --------------- ------------------------------------------------------------------------- ------------------- - --------------- ------------------------------------------------------------------------- ------------------- 3.1 Articles of Incorporation (filed as Exhibit 3.1 of the Company's September 30, 1996 Form 10-Q filed with the SEC on or about November 14, 1996). - --------------- ------------------------------------------------------------------------- ------------------- - --------------- ------------------------------------------------------------------------- ------------------- 3.2 Bylaws (filed as Exhibit 3.2 of the Company's September 30, 1996 Form 10-Q filed with the SEC on or about November 14, 1996) - --------------- ------------------------------------------------------------------------- ------------------- - --------------- ------------------------------------------------------------------------- ------------------- 10 Employment Agreement between Thomas T. Hawker and Capital Corp. of the West * - --------------- ------------------------------------------------------------------------- ------------------- - --------------- ------------------------------------------------------------------------- -------------------
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- --------------- ------------------------------------------------------------------------- ------------------- Sequentially Exhibit Numbered NUMBER EXHIBIT PAGE - --------------- ------------------------------------------------------------------------- ------------------- - --------------- ------------------------------------------------------------------------- ------------------- 10.1 Administration Construction Agreement (filed as Exhibit 10.4 of the Company's 1995 Form 10-K 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 10-K 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 10-K 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 10-K 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 10-K 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 10-K 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 10-K with the SEC in or about March 17, 2000). - --------------- ------------------------------------------------------------------------- ------------------- - --------------- ------------------------------------------------------------------------- ------------------- 11 Statement Regarding the Computation of Earnings Per Share is incorporated herein by reference from Note 1 of the Company's Consolidated Financial Statements. - --------------- ------------------------------------------------------------------------- ------------------- - --------------- ------------------------------------------------------------------------- ------------------- 13 Annual Report to Security Holders. - --------------- ------------------------------------------------------------------------- ------------------- - --------------- ------------------------------------------------------------------------- ------------------- 23 Independent Auditor's Consent Letter. - --------------- ------------------------------------------------------------------------- ------------------- - --------------- ------------------------------------------------------------------------- ------------------- * Denotes management contract or compensatory plan arrangement. - --------------- ------------------------------------------------------------------------- -------------------
(d) FINANCIAL STATEMENT SCHEDULES All other supporting schedules are omitted because they are not applicable, not required, or the information required to be set forth therein is included in the financial statements or notes thereto incorporated herein by reference. Consent of accountant (for incorporation by reference of report of accountants into form S-8 registration statement.) 23 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of March, 2001. CAPITAL CORP OF THE WEST By: /S/ THOMAS T. HAWKER ------------------------------ THOMAS T. HAWKER (President and Chief Executive Officer of Capital Corp of the West) By: /S/ R. DALE MCKINNEY ----------------------------------- R. DALE MCKINNEY (Executive Vice President and Chief Financial Officer of Capital Corp of the West) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE /S/ LLOYD H. ALHEM Director March 15, 2001 - ------------------- LLOYD H. ALHEM /S/ DOROTHY L. BIZZINI Director March 15, 2001 - ---------------------- DOROTHY L. BIZZINI /S/ JERRY E. CALLISTER Director March 15, 2001 - ---------------------- JERRY E. CALLISTER /S/ JOHN FAWCETT Director March 15, 2001 - ---------------- JOHN FAWCETT /S/ THOMAS T. HAWKER Director/CEO and March 15, 2001 - -------------------- THOMAS T. HAWKER Principal Operations Officer /S/ BERTYL W. JOHNSON Director March 15, 2001 - --------------------- BERTYL W. JOHNSON /S/ JAMES W. TOLLADAY Chairman of the March 15, 2001 - --------------------- JAMES W. TOLLADAY Board of Directors /S/ CURTIS RIGGS Director March 15, 2001 - ---------------- CURTIS RIGGS
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/S/ TOM A.L. VAN GRONINGEN Director March 15, 2001 - -------------------------- TOM A.L. VAN GRONINGEN
EX-10 2 a2042933zex-10.txt EX 10 EMPLOYMENT AGREEMENT DATE: September 12, 2000 - ---- PARTIES: CAPITAL CORP. OF THE WEST, A California Bank Holding Company, - ------- hereinafter referred to as "Employer"; and THOMAS T. HAWKER, herein after referred to as "Employee". RECITALS: - --------- 1. Employee is currently employed as the Chief Executive Officer of Employer under a written Employment Agreement dated March 11, 1997, which will expire at the close of business of December 31, 2000. 2. The Parties desire to enter into a new Employment Agreement for an additional one (1) year term on basically the same terms and conditions as the March 11, 1997 Employment Agreement. AGREEMENT: - ---------- Employer hereby agrees to extend the employment of Employee, and Employee hereby accepts said extension of employment with Employer, upon the terms and conditions hereinafter set forth. 1. DUTIES. ------ Employee is hereby employed as the President and Chief Executive Officer of Employer. Employee shall perform the customary duties of a Chief Executive Officer of a California bank holding company, including but not limited to, the supervision of Employer's business and all subsidiary corporations and businesses owned or related to Employer and such kindred duties as may from time to time be reasonably requested of Employee by the Board of Directors of Employer. As used herein the term "business of Employers" shall include the business of any of Employer's subsidiaries and related entities. 2. APPOINTMENT TO BOARD OF DIRECTOR. -------------------------------- Employer hereby agrees that Employee shall remain a member of the Board of Directors of Employer for so long as Employee is elected to a position on the board by the shareholders of Employer, or until this Agreement has been terminated. During the period of Employee's election to the Board of Directors, Employee shall serve as a member of any or all committees to which he is appointed, except the audit committee. Employee also hereby agrees to accept appointment to other boards of directors and committees f subsidiary and related organizations of Employer. Employee shall fulfill all of Employee's duties a s a board and committee member without additional compensation. Upon the termination of this Agreement by either Employee of Employer, Employee agrees to immediately resign from the Board of Directors, form all committees and from all corporate offices of Employer and from all of Employer's subsidiaries and related companies; further, all fringe benefits, such as insurance, shall be terminated on the last day of service of Employee, unless otherwise mandated by the terms of this Agreement, Employer's personnel policy, or any other benefit policies in effect at the time of such termination. 3. TERM. ---- Provided Employee is still employed by Employer through December 31, 2000, this Agreement shall be effective for a period of twelve (12) months thereafter, and employment under this agreement shall commence on January 1, 2001 and unless sooner terminated as provided herein, shall end on December 31, 2001 ("Term"). 4. EXTENT OF SERVICES. ------------------ Employee shall donate his full time, attention and energies to the business of Employer, and shall not during the Term of this Agreement by engaged in any other business activities, except personal investments, without the prior written consent of Employer. 5. REGULAR COMPENSATION. -------------------- In consideration for the services which Employee is to render under this Agreement, Employer shall pay to Employee a base salary ("Base Salary") of Two Hundred Thousand Dollars ($200,000.00). the Base Salary shall be payable to Employee in equal semi-monthly instalments on the fifteenth and last working day of each month during the period of employment. 6. DISCRETIONARY INCENTIVE COMPENSATION. ------------------------------------ Employee shall be entitled to participate in any incentive programs which may be adopted from time to time by Employer for Employee. Amounts awarded to Employee under any said incentive program shall be determined at the sole discretion of Employer, including the vesting of any incentive awards. 7. BUSINESS EXPENSES. ----------------- Employee shall be reimbursed for all ordinary and necessary, documented expenses reasonably incurred by Employee in connection with his employment associated with managing the business of Employer and other expenses which may be authorized from time to time by the Board of Directors of Employer, including expenses for club membership, entertainment, travel and similar items. Travel and other expenses for attendance at conventions and banking education programs that are approved by the Board of Directors shall also be reimbursed. Employer will pay for or will reimburse Employee for such expenses upon presentation by Employee from time to time of receipts evidencing such expenditures. 3. AUTOMOBILE. ---------- Employer shall provide an automobile for the use of Employee. Employer shall pay all fuel, operation, maintenance and insurance costs associated with such automobile. Employee shall be entitled to limited use of the automobile for personal use, but shall primarily use it for business purposes associated with his employment. 4. VACATION. -------- During the term of employment Employee shall be entitled to vacation leave at full salary at the discretion of Employee as time allows, so long as it is reasonable and does not jeopardize his responsibilities, of sixteen (16) days plus an additional four (4) bonus days if he receives a "satisfactory" or higher rating on his Annual Employee Performance Evaluation; provided that Employee shall take as a portion of his vacation leave at least ten (10) consecutive business days. 5. DISABILITY. ---------- If Employee becomes permanently disabled during the Term because of sickness, physical or mental disability, so that he is unable to perform his full duties hereunder, Employer agrees to continue the salary (i) ninety (90) days from commencement of the disability, (ii) until Employee is able to return to work, (iii) until payments commence under any disability insurance policy obtained by Employee, or (iv) when any payments commence to Employee under the separate Salary Continuation Agreement executed between the parties, whichever is less. 6. INSURANCE. --------- Employer shall provide to Employee, his wife and qualifying children, during the Term at Employer's expense the same medical insurance, dental insurance, and disability insurance coverage, if any, which may be offered to Employer's other full-time employees under any benefit plans as may be in effect from time to time. The parties acknowledge that Employee's Base Salary has been set high enough under this contract so that Employee may pay for life insurance. However, Employee shall have the right to determine whether to maintain life insurance and use part of his Base Salary to cover the premiums thereon, or to use the Base Salary for other purposed. Employer shall have no duty under this agreement to give Employee any additional compensation to cover life insurance premiums or to maintain any life insurance of Employee's life. 7. STOCK OPTIONS AND BONUSES. ------------------------- As part of the consideration for entering into the prior Employment Agreement dated March 11, 1997, Employer granted to Employee a stock option to purchase 8,000 shares of Employer's stock at a price equal to the fair market value of such stock. No additional options are granted as part of this Agreement although the final 20% of the 8,000 share option granted earlier shall vest in Employee on January 1, 2001 provided this Agreement is fully executed and Employee is still employed on said date. Employer may consider granting additional stock options and bonuses from time to time during the term, but shall not be obligated to do so. 8. RETIREMENT PLAN. --------------- Employer shall be entitled to participate in any retirement plans offered to other employees of Employer such as Employee's participation in Employer's 104 K plan and participation in Employer's Stock Option Plan (ESOP). In addition it is acknowledged that Employer and Employee have entered into a separate" Amended and Restated Salary Continuation Agreement" dated October 30, 1996, which provides for gradual vesting of retirement benefits to Employee based on his continued employment with Employer. The Parties to this agreement understand that the participation by employment of Employee under this Employment Agreement. 9. PRINTED MATERIAL. ---------------- All written, printed, visual or audio materials used by Employee in performing duties for Employer, other than Employee's personal notes and diaries, are and shall remain the property of Employer. Upon termination of employment on any basis, Employee shall return all such materials to Employer. 10. DISCLOSURE OF INFORMATION. ------------------------- In the course of employment, Employee may have access to confidential information and trade secrets relation to Employer's business. Except as required in the course of employment by Employer, Employee shall not, without Employer's prior written consent, directly of indirectly disclose to anyone any confidential information relating to Employer of any financial information, trade secrets or "know-how" which is germane to Employer's business and operations. Employee recognizes and acknowledges that any financial information concerning any of Employer's customers, as it may exist from time to time, is strictly confidential and is a valuable, special and unique asset of Employer's business. Employee shall not, either before or after termination of this Agreement, disclose to anyone said financial information, or any part thereof, for any reason or purposes whatsoever. 16. PROHIBITED ACTIVITIES AND INVESTMENTS. ------------------------------------- During the Term of this Agreement, Employee shall not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, principal stockholder (i.e., ten percent or more) or corporate officer, directly, or in any other individual or representative capacity, engage or participate in any banking business competitive with that of Employer. 17. SURETY BOND. ----------- Employee agrees to furnish all information and take any other steps necessary to enable Employer to obtain and maintain a fidelity bond conditional on the rendering of a true account by Employee of all moneys, goods, or other property which may come into the custody, charge, or possession of Employee during the Term of Employee's employment. The surety company issuing such bond and the amount of the bond must be acceptable to Employer. All premiums on the bond are to be paid by Employer. If Employee cannot personally qualify for a surety bond at any time during the Term of this Agreement, Employer shall have the option to terminate this Agreement immediately and said termination shall be deemed to be a termination for cause. 18. MORAL CONDUCT. ------------- Employee agrees to conduct himself at all times with due regard to public conventions and morals and to abide by and reflect in his personal actions all of the "core values" adopted by Employer and its subsidiaries from time to time. Employee further agrees not to do or commit any act that will reasonably tend to degrade him or to bring him into public hatred, contempt or ridicule, or that will reasonable tend to shock or offend any community in which Employer engages in business, or to prejudice Employer or the banking industry in general. 19. TERMINATION OF AGREEMENT. ------------------------ (a) TERMINATION FOR CAUSE. --------------------- Employer reserves the right to terminate this Agreement "for cause." Termination for cause shall include termination because of Employee's (i) personal dishonesty, (ii) incompetence, (iii) willful misconduct, (iv) breach of fiduciary duty involving personal profit, (v) material breach of any of the terms of this Agreement, (vi) intentional failure to perform assigned duties, (vii) willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or (viii) the willful or permanent breach by Employee of any obligations owed to Employer pursuant to this Agreement. In addition, Employer reserves the right to terminate this Agreement "for cause" in the event that actions are effected by any regulatory agency having jurisdiction to remove or suspend Employee from office, or upon the directive of any such regulatory agency that Employer must remove Employee as its Chief Executive Officer, regardless of whether such directive is given orally or in writing. (b) STATUTORY GROUNDS FOR TERMINATION. --------------------------------- Employee's employment under this Agreement shall terminate immediately upon the occurrence of any of the following events, which events are described in sections 2920 and 2921 of the California Labor Code: (1) The occurrence of circumstances that make it impossible or impractical for the business of Employer to be continued. (2) The death of Employee (3) The loss of Employee of legal capacity. This does not effect Employee's rights under Section 10 of this Agreement. (4) The loss by Employer of legal capacity to contract. (5) Subject to Section 10 of this Agreement, the continued incapacity on the part of Employee under this Agreement, unless waived by Employer. (c) TERMINATION FOR BANKRUPTCY. -------------------------- This Agreement may be terminated immediately by either party at the option of either party and without prejudice to any other remedy to which either party may be entitled at law, in equity or under this Agreement if either party: (1) Files a petition in bankruptcy court or is adjudicated a bankrupt; (2) Institutes or suffers to be instituted against it or him any procedure in bankruptcy court for reorganization or rearrangement of his financial affairs; (3) Has a receiver of his assets or property appointed because of insolvency; (4) Makes a general assignment for the benefit of creditors. (d) AUTOMATIC TERMINATION IN THE EVENT OF ACQUISITION OF ----------------------------------------------------- EMPLOYER. - --------- This Agreement shall automatically terminate upon the consummation of any event by which substantially all of the stock and/or assets of Employer are acquired by a person, a group of persons, a financial institution or other entity. At the closing of such acquisition, Employee shall receive an acquisition payment ("Acquisition Payment") in the amount equal to six (6) months Base Salary at the then current rate of compensation. In the event of any such acquisition of Employer and the consequent automatic termination of the Agreement, no provision contained in this Agreement should be construed to prevent Employee from negotiating a new employment agreement with either Employer or the acquiror of Employer, should the parties desire to do so. It is mutually agreed by the parties that the above-referenced Acquisition Payment shall be received by Employee in lieu of any and all claims and/or damages which may be sustained by Employee due to the acquisition of Employer and the termination of Employee's employment and will be accepted by Employee in full satisfaction of all such claims and damages. 20. SEVERANCE PAY. ------------- Upon early termination of this Agreement (i) pursuant to Section 19(d) of this Agreement, (ii) by Employee for any reason, (iii) by Employer "for cause" (pursuant to Section 19(a) of this Agreement), or (iv) because of the death, incapacity or disability of Employee, Employee shall not receive any Severance Payment of any sort or any bonus for the calendar year in which termination is effected. The parties acknowledge that it would be difficult to determine the damages which Employee would suffer if his employment is terminated by Employer without cause or on statutory grounds. Therefore it is agreed that if this agreement is terminated early by Employer on any basis other than those listed in the first paragraph of this Section 20, then Employee shall be entitled to receive a cash payment ("Severance Payment") in the amount equal to one year's Base Salary at the then current rate of compensation. It is mutually agreed by the parties that the payment of the cash Severance Payment set forth above shall be received by Employee in lieu of any and all claims and/or damages which may be sustained by Employee by reason of his early termination and will be accepted by Employee in full satisfaction of all such claims and damages and as payment in full for all benefits received from Employee's services. The parties understand and agree under no circumstances would Employee be entitled to receive both the Acquisition Payment and the Severance Payment. 21. NOTICES. ------- Any notice to Employer required or permitted under this Agreement shall be given in writing to Employer, either by personal service or by certified mail, postage prepaid, addressed to the chairman of the Board of Directors of Employer at its then principal place of Business. Any such notice to Employee shall be given in like manner and, if mailed, shall be addressed to Employee at Employee's home address then shown on Employer's files. For the purpose of determining compliance with any time limit in this Agreement, a notice shall be deemed to have been duly given (a) on the date of service, if personally served on the party to whom notice is to be given, or (b) the fifth business day after mailing, if mailed to the party to whom notice is to be given in the manner provided in this Section. 22. NONASSIGNABILITY. ---------------- Neither this Agreement nor any right or interest hereunder shall be assignable by Employee, his beneficiaries or legal representative without Employer's prior written consent; provided, however, that nothing in this Section 22 shall preclude (i) Employee from designation a beneficiary to receive any benefit payable hereunder upon his death, or (ii) the executors, administrators, or other legal representatives of Employee or his estate from assigning any rights hereunder to the person or persons entitled thereto. 23. NO ATTACHMENT. ------------- Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 24. BINDING EFFECT. -------------- This Agreement shall be binding upon, and inure to the benefit of, employee and Employer and their respective permitted successors and assigns. 25. MODIFICATION AND WAIVER. ----------------------- (a) AMENDMENT OF AGREEMENT ---------------------- This Agreement may not be modified or amended except by an istrument in writing signed by the parties hereto. (b) WAIVER. ------ No term or condition of this Agreement shall be deemed to have been waived nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition for the future or as to any act other than that specifically waived. No delay in exercising any rights shall be construed as a waiver, nor shall a waiver on one occasion operate as a waiver of such right on any future occasion. 26. ENTIRE AGREEMENT. ---------------- This agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of Employee by Employer. This Agreement contains all of the covenants and agreements between the parties with respect to such employment in any manner whatsoever. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement or promise not contained in this Agreement shall be valid and binding. 27. PARTIAL INVALIDITY. ------------------ If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force without being impaired or invalidated in any way. 28. GOVERNING LAW. ------------- This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 29. INJUNCTIVE RELIEF. ----------------- Employer and Employee acknowledge and agree that the services to be performed under this Agreement are of a special, unique, unusual, extraordinary and intellectual character which give them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law. Employer and Employee therefore expressly agree that Employer and Employee, in addition to any other rights or remedies which Employer and employee may possess, shall be entitled to injunctive and other equitable relief to prevent a breach of this Agreement by Employee and Employer. 30. BANK REGULATORY AGENCIES'. ------------------------- The obligations and rights of the parties hereunder are expressly conditioned upon the approval or non-disapproval of (i) this Agreement and/or (ii) Employee, in the event such approvals are required, by those regulatory agencies which have jurisdiction over Employer or any of its subsidiaries. 31. DUPLICATE ORIGINALS. ------------------- This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the day and year first above written. EMPLOYER: CAPITAL CORP OF THE WEST By: ----------------------------- James W. Tolladay Chairperson of the Board EMPLOYEE: ----------------------------- Thomas T. Hawker President/CEO EX-13 3 a2042933zex-13.txt EX 13 CAPITAL CORP OF THE WEST SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data) 2000 1999 1998 1997(1) 1996 - --------------------------------------------------------------------------------------------------------- SUMMARY INCOME DATA: Interest income $ 50,888 $ 39,361 $ 34,614 $ 25,912 $ 19,351 Interest expense 20,768 14,040 13,634 10,190 6,865 Net interest income 30,120 25,321 20,980 15,722 12,486 Provision for loan losses 3,286 2,659 3,903 5,825 1,513 Noninterest income 5,407 5,089 4,838 3,852 2,935 Noninterest expense 22,774 20,538 18,244 13,372 10,736 Income before provision for income taxes 9,467 7,213 3,671 377 3,172 Provision (benefit) for income taxes 2,761 2,104 930 (26) 1,163 Net income $ 6,706 $ 5,109 $ 2,741 $ 403 $ 2,009 SHARE DATA: Average common shares outstanding 4,529 4,562 4,602 3,467 2,485 Basic earnings per share $ 1.48 $ 1.12 $ 0.60 $ 0.12 $ 0.81 Diluted earnings per share 1.44 1.09 0.58 0.11 0.77 Cash dividends per share - - - - 0.03 Book value per share 11.74 9.71 9.29 8.74 7.66 Tangible book value per share $ 10.80 $ 8.59 $ 8.02 $ 7.30 $ 6.78 BALANCE SHEET DATA: Total assets $683,021 $563,550 $499,859 $421,394 $265,989 Total securities 191,052 147,368 154,867 148,032 43,378 Total loans 412,664 331,268 268,933 217,977 183,247 Total deposits 601,498 494,901 444,210 356,395 283,345 Stockholders' equity $ 53,451 $ 43,677 $ 42,804 $ 40,248 $ 20,974 OPERATING RATIOS: Return on average equity 14.33% 11.86% 6.48% 1.46% 10.24% Return on average assets 1.09 .99 .60 .13 .88 Average equity to average assets ratio 7.64 8.35 9.06 8.76 7.96 Net interest margin 5.42 5.51 5.17 5.64 6.12 CREDIT QUALITY RATIOS: Nonperforming loans to total loans(2) .57% .60% .54% 1.26% 3.71% Allowance for loan losses to total loans 1.99 1.97 1.78 1.76 1.52 Allowance for loan losses to nonperforming loans 350.66 328.83 310.87 139.79 50.14 CAPITAL RATIOS: Risk-based tier 1 capital 9.66% 9.99% 10.69% 11.60% 9.04% Total risk-based capital 10.92 11.24 11.94 12.78 10.20 Leverage ratio 7.56 7.50 7.58 8.58 7.37
(1) REFLECTS THE ACQUISITION OF THREE BRANCHES FROM BANK OF AMERICA IN DECEMBER, 1997. (2) NONPERFORMING LOANS CONSIST OF LOANS ON NONACCRUAL, LOANS PAST DUE 90 DAYS OR MORE AND RESTRUCTURED LOANS. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to Capital Corp of the West (the "Company"). The following discussion should be read in conjunction with the consolidated financial statements of the Company and the notes thereto. The consolidated financial statements of the Company include its subsidiaries, County Bank (the "Bank") and Capital West Group ("CWG"). It also includes the Bank's subsidiaries, Merced Area Investment Development, Inc. ("MAID") and County Asset Advisor, Inc. ("CAA"). In addition to historical information, this discussion and analysis includes certain 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 "expects", "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-K should not rely solely on forward-looking statements and should consider all uncertainties and risks discussed throughout this report. 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. 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. OVERVIEW: During 2000, earnings increased $1,597,000 or 31% to $6,706,000 which compares favorably to the $5,109,000 and $2,741,000 achieved in 1999 and 1998. Basic earnings per share were $1.48 in 2000 compared to $1.12 and $.60 in 1999 and 1998. Diluted earnings per share were $1.44 in 2000 compared to $1.09 and $0.58 10 in 1999 and 1998. The Company's return on average total assets was 1.09% in 2000 as compared with 0.99% and 0.60% in 1999 and 1998. The earnings improvement in 2000 was the result of strong growth in interest-earning assets and improvements in noninterest income when compared to the prior two years. In 2000, the provision for loan losses increased by $627,000 to $3,286,000 when compared to the $2,659,000 recorded in 1999. In 1998, the provision for loan losses totaled $3,903,000. The increase in the provision for loan losses in 2000 compared to 1999 was primarily due to increased charge-offs recorded in 2000 compared to 1999 and increases in the allowance for loan losses necessitated by growth achieved within the loan portfolio during the year ended December 31, 2000. Loan charge-off amounts decreased in 1999 when compared to 1998 levels. The size of the provision in 1998 was due to a high level of charge-off activity that occurred during that year which was primarily brought about by the charge-off of a single commercial relationship totaling $1,325,000. The Company achieved strong asset growth in 2000, reaching total assets at December 31, 2000 of $683,021,000, up $119,471,000 or 21% from $563,550,000 at December 31, 1999. Net loans grew to $404,457,000 at December 31, 2000, an increase of $79,731,000 or 25% from the $324,726,000 outstanding at December 31, 1999. Deposits grew to $601,498,000, an increase of $106,597,000 or 22% over the $494,901,000 outstanding as of December 31, 1999. Total shareholder's equity grew to $53,451,000, an increase of $9,774,000 or 22% over year end 1999 and the Company continues to be well capitalized by regulatory definitions. RESULTS OF OPERATIONS: Capital Corp of the West's earnings were a record $6,706,000 during 2000, driven primarily by an increase in net interest income. Net interest income increased by $4,799,000, or 19%, to $30,120,000 during 2000 as compared to $25,321,000 in 1999. The increase in earnings in 2000 as compared to 1999 is primarily due to an increase in the size of the Bank's loan portfolio. The improvement in earnings during 1999 compared to 1998 was achieved as a result of growth in interest-earning assets, improvements in noninterest income and a reduced amount of provision for loan losses. The Company's primary source of revenue is net interest income, which is the difference between interest income and fees derived from earning assets and interest paid on liabilities obtained to fund those assets. Total interest and fee income on earning assets increased from $39,361,000 in 1999 to $50,888,000, a $11,527,000 or 29% increase in 2000. During 1999, there was an increase of $4,747,000 or 14% to $39,361,000 compared to $34,614,000 in 1998. The level of interest income is affected by changes in the volume and the rates earned on interest-earning assets. During 2000, the increase in interest income is due to both an increase in the volume and rate of earning assets. Interest-earning assets consist primarily of loans, investment securities and federal funds sold. Average interest-earning assets in 2000 were $555,428,000 as compared with $459,753,000 in 1999, an increase of $95,675,000 or 21%. The average rate earned on interest earning assets was 9.16% in 2000, an increase of 60 basis points over the 8.56% earned in 1999. Interest expense is a function of the volume and rates paid for interest-bearing liabilities. Interest-bearing liabilities consist primarily of certain deposits and borrowed funds. Average interest bearing liabilities in 2000 were $473,581,000 as compared with $394,704,000 in 1999, an increase of $78,877,000 or 20%. Total interest expense increased $6,728,000 or 48% to $20,768,000 in 2000 as compared to $14,040,000 for 1999. Total interest expense in 1998 totaled $13,634,000. The Company's net interest margin, the ratio of net interest income to average interest-earning assets for 2000 was 5.42%. This is a decrease of 9 basis points compared to the 1999 margin of 5.51%. The decrease in net interest margin during 2000 was primarily the result of a larger increase in interest rates paid on interest bearing liabilities than the increase in interest rates received on interest earning assets during the year. The net interest margin increase of 34 basis points during 1999 from the 5.17% achieved in 1998 was primarily due to a change in the asset mix compared with the previous year. In 2000, loans comprised 67% of average interest-earning assets as compared with 68% and 60% in 1999 and 1998. Securities comprised 30% of average interest-earning in 2000 compared with 32% in 1999. The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities. It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds. The changes 11 due to both rate and volume have been allocated to rate and volume in proportion to the relationship of the absolute dollar amount of the change in each. The effects of tax-equivalent yields have not been considered because they are not considered significant. The increase in total interest income of $11,527,000 in 2000 is comprised of a $8,866,000 volume increase primarily attributable to an increase in average interest-earning assets of $95,675,000 between 2000 and 1999 coupled with a $2,661,000 rate increase during this same period. The increase in total interest expense of $6,728,000 in 2000 related to a $78,877,000 increase in average interest-bearing liabilities between 2000 and 1999 coupled with a $2,598,000 rate increase during this same period. The increase in total interest income of $4,747,000 in 1999 is comprised of a $5,632,000 volume increase associated with the $54,207,000 increase in average interest-earning assets between 1998 and 1999, and a $1,065,000 rate decrease. The increase in total interest expense of $406,000 in 1999 related to a $46,729,000 or 13% increase in average interest-bearing liabilities between 1998 and 1999 offset by a $1,065,000 rate decrease. PROVISION FOR LOAN LOSSES: 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. The provision for loan losses is charged against income and increases the allowance for loan losses. The provision for loan losses for the year ended December 31, 2000 was $3,286,000 compared to $2,659,000 in 1999 and $3,903,000 in 1998. The increased level of provision for loan losses in 2000 when compared to 1999 was primarily the result of an increased level of net charge-offs experienced during the year coupled with significant growth in the size of the loan portfolio. The reduced level of the provision for loan losses in 1999 is attributable to a reduced level of charge-offs experienced during the year. The level of the provision in 1998 is partly attributable to replenishing the allowance for loan losses following the charge-off of one commercial loan relationship totaling $1,325,000. The methodology used to determine the level of provision for loan losses that is needed each year includes an analysis of relevant risk factors within the entire loan portfolio, including nonperforming loans. The methodology is based, in part, on management's use of a loan grading and classification system. The Bank's management grades its loans through internal reviews and periodically subjects loans to external reviews. These external reviews are presented to and assessed by the Bank's audit committee. Credit reviews are performed quarterly and the quality grading process occurs on a monthly basis. The level of provision for loan losses in 2000, 1999, and 1998 also supports the general loan growth of the Company, as gross loans increased 25% in 2000, and 23% in 1999. OTHER INCOME: The following table summarizes other income for the years ended December 31,
(Dollars in thousands) 2000 1999 1998 - ---------------------------------------------------------------- OTHER INCOME: Deposit service charges $3,527 $3,254 $2,807 Income from real estate held for sale or development 381 260 540 Earnings on director and officer life insurance 311 288 201 Loan service fees 116 167 172 Gain on sale of loans 82 48 173 Retail investment commissions 78 139 156 Other 912 933 789 ------ ------ ------ Total other income $5,407 $5,089 $4,838 ====== ====== ======
Total noninterest income increased by $318,000 or 6% to $5,407,000 in 2000, compared to $5,089,000 and $4,838,000 in 1999 and 1998. Deposit service charges increased by $273,000 or 8% during 2000. The 2000 and 1999 increase in deposit service charges was primarily the result of an increase in demand deposit and NOW account balances. The increase in 1998 was in large part attributable to the purchase of the three branches of Bank of America and to the Bank's overall deposit growth. Other income decreased by $21,000 or 2% to $912,000 in 2000, compared to $933,000 and $789,000 in 1999 and 1998. The 1999 increase is due primarily to an increase in ancillary product income. The Company sold the last remaining real estate parcel that was owned by MAID during 2000. The carrying balance of land owned by MAID was completely written-off in 1995. OTHER EXPENSE: Total noninterest expense increased $2,236,000 or 11% to $22,774,000 in 2000 as compared with an increase of $2,294,000 or 13% to $20,538,000 in 1999. Noninterest expense totaled $18,244,000 in 1998. 12 Salaries and related benefits increased by $1,367,000 or 14% to $11,066,000 in 2000, compared with an increase of $1,741,000 or 22% to $9,699,000 in 1999. Salaries and related benefits totaled $7,958,000 in 1998. The salary increases were primarily due to an increase in full-time equivalent employees as well as normal merit increases and related benefit expenses. Premises and occupancy expenses increased $135,000 or 9% to $1,714,000 in 2000 compared with an increase of $254,000 or 19% to $1,579,000 in 1999. Premises and occupancy expense totaled $1,325,000 in 1998. The increases in 2000 and 1999 were caused primarily by increased spending on branch facility upgrades. Equipment expenses increased $414,000, or 19% to $2,558,000 in 2000 compared with a decrease of $11,000 in 1999. Equipment expenses were $2,155,000 in 1998. The increase in 2000 was primarily due to upgraded computer technology, additional branches and branch relocation expenses. The decrease during 1999 was the result of a slowdown in spending on technology during 1999. The Company's professional fees include legal, consulting, audit and accounting fees. These expenses increased by $41,000 or 4% to $1,101,000 in 2000 as compared with a decrease of $143,000 or 12% to $1,060,000 in 1999. Total professional fees were $1,203,00 in 1998. The increase in 2000 is attributable, in part, to the continued outsourcing of internal audits, legal fees due to regulatory matters, consultants used in conjunction with the Bank's strategic planning process and expenditures relating to earnings enhancement programs. The decrease in 1999 was due to a decreased use of outside professionals. Supplies increased by $109,000 or 20% to $660,000 in 2000 as compared with an decrease of $58,000 or 10% to $551,000 in 1999. Supplies expense totaled $609,000 in 1998. The increase in 2000 was primarily related to new branch openings. The decrease in 1999 were due to cost savings programs initiated during 1999. Marketing expenses increased by $182,000 or 26% to $890,000 in 2000 as compared with an increase of $52,000 or 8% to $708,000 in 1999. Marketing expenses totaled $656,000 in 1998. Marketing expenses have continued to increase over the past several years as the Company has actively promoted various deposit and loan products using television, newspaper, and other media sources to assist in attracting new and retaining existing customers. Other expenses decreased $12,000 to $3,993,000 in 2000. During 1999, other expenses increased $445,000 or 13%. The increase during 1999 related primarily to overall growth of the Company. In 1999, approximately $300,000 of other expense related to Y2K expenses. In 1998, other expenses totaling $179,000 were related to costs associated with the purchase of three Bank of America branch offices. PROVISION FOR INCOME TAXES: The Company's provision for income taxes was $2,761,000 in 2000 compared to a provision for income taxes of $2,104,000 and $930,000 in 1999 and 1998. The effective income tax rates (computed as income taxes as a percentage of income before income taxes) were 29%, 29%, and 25% for 2000, 1999, and 1998. In part, the effective tax rate was higher in 2000 and 1999 than in 1998 due to the Company experiencing a greater increase in income than the corresponding increase in tax credits and tax exempt income during those years. The tax rate during 2000, 1999, and 1998 was lower than the statutory rate due, in part, to tax credits earned from the investment of low-income housing partnerships that qualify for housing tax credits. Total housing tax credits for 2000, 1999 and 1998 were approximately $550,000, $375,000, and $426,000. In addition, during 2000, 1999 and 1998, the Company realized tax benefits of $390,000, $413,000, 239,000 from nontaxable interest income received from bank qualified municipal securities. FINANCIAL CONDITION: Total assets increased 21% to $683,021,000 at December 31, 2000, compared to $563,550,000 at December 31, 1999. Net loans grew to $404,457,000 at year end 2000, a 25% increase from the balance of $324,726,000 at December 31, 1999. Deposits grew by $106,597,000 or 22% in 2000 to $601,498,000 which compares to $494,901,000 at December 31, 1999. 13 SECURITIES: The following table sets forth the carrying amount (fair value) of available for sale securities at December 31,
(Dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------ U.S. Treasury and U.S. Government agencies $ 35,939 $ 16,756 $ 12,711 State and political subdivisions 24,170 23,371 30,192 Mortgage-backed securities 54,409 43,723 56,048 Collateralized mortgage obligations 29,015 20,341 29,264 Other securities 12,297 13,623 13,142 -------- -------- -------- Carrying amount and fair value $155,830 $117,814 $141,357 ======== ======== ========
The following table sets forth the carrying amount (amortized cost) and fair value of held to maturity securities at December 31,
(Dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------ U.S. Treasury and U.S. Government agencies $ 4,595 $ 1,004 $ 2,024 State and political subdivisions 4,375 4,389 - Mortgage-backed securities 22,736 24,161 11,486 Collateralized mortgage obligations 3,516 - - -------- -------- -------- Carrying amount (amortized cost) $ 35,222 $ 29,554 $ 13,510 ======== ======== ======== Fair value $ 35,412 $ 28,675 $ 13,584 ======== ======== ========
Available for sale securities increased $38,016,000 or 32% at December 31, 2000 over the comparable year-end in 1999. Held to maturity securities increased $5,668,000 or 19% to $35,222,000 at December 31, 2000 compared to $29,554,000 outstanding at December 31, 1999. The increases achieved within both segments of the securities portfolio were made possible by cash flows generated from the Company's expanding deposit base and the increased use of other borrowings. The single largest component of the Company's investment portfolio during the last three years has been mortgage-backed securities. These securities generally have stated maturities in excess of 10 years and are subject to substantial principal prepayments which may effectively accelerate actual maturities. At December 31, 2000 and 1999 the Company did not hold any structured notes. See Note 1 and 3 to the Company's Consolidated Financial Statements for further information concerning the securities portfolio. LOANS: Total loans increased 25% to $412,664,000 at December 31, 2000, compared to $331,268,000 at December 31, 1999. The increase in loan volumes in 2000 were due to the Company's strategic efforts to increase loan production coupled with the business development efforts by the Company's loan officers. The Company concentrates its lending activities in five principal areas: commercial, agricultural, real estate construction, real estate mortgage, and consumer loans. Interest rates charged for loans made by the Company vary with the degree of risk, the size and term of the loan, and borrowers' depository relationships with the Company and prevailing market rates. As a result of the Company's loan portfolio mix, the future quality of these assets could be affected by adverse trends in its region or in the broader community. These trends are beyond the control of the Company. CREDIT RISK MANAGEMENT AND ASSET QUALITY: The Company closely monitors the markets in which it conducts its lending operations and adjusts its strategy to control exposure to loans with higher credit risk. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades become "classified assets" which include all nonperforming assets and potential problem loans and receive an elevated level of attention to improve the likelihood of collection. The policy of the Company is to review each loan in the portfolio to identify problem credits. There are three classifications for problem loans: "substandard," "doubtful" and "loss." Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. A loan classified loss is considered uncollectible and its continuance as an asset is not warranted. 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 but still 14 accruing, 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, are deemed to be in the process of collection. Loans that are not 90 days past due may also be placed on nonaccrual status if management reasonably believes the borrower will not be able to comply to the contractual loan repayment terms and the collection of principal or interest is in question. Management defines impaired loans as those loans, regardless of past due status, in 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 of principal and interest process has been exhausted. At December 31, 2000 and 1999, impaired loans were measured based upon 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. The Company had nonperforming loans at December 31, 2000 of $2,340,000 as compared with $1,990,000 at December 31, 1999. The 2000 and 1999 totals contain no loans secured by first deeds of trust on real property. Impaired loans as of December 31, 2000 were $2,340,000, which had specific allowances for loan loss of $302,000 as compared with impaired loans of $1,990,000 as of December 31, 1999, which had specific allowance for loan losses of $497,000. Other forms of collateral, such as inventory, chattel and equipment, secure the remaining nonperforming loans as of each date. At December 31, 2000 and 1999 the Bank had $247,000 in real estate acquired through foreclosure. These balances are comprised of one residential and one commercial property. ALLOWANCE FOR LOAN LOSSES: In determining the adequacy of the allowance for loan losses, management takes into consideration the growth trend in the portfolio, examinations by financial institution supervisory authorities, internal and external credit reviews, prior loan loss experience of the Company, concentrations of credit risk, delinquency trends, general economic conditions and the interest rate environment. The allowance for loan losses 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 for loan losses. The balance in the allowance for loan losses was affected by the amounts provided from operations, amounts charged-off and recoveries of loans previously charged off. The Company had provisions to the allowance in 2000 of $3,286,000 as compared to $2,659,000 and $3,903,000 in 1999 and 1998. See "Results of Operations - Provision for Loan Losses." 15 The following table summarizes the loan loss experience of the Company for the years ended December 31,
(Dollars in thousands) 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Allowance for loan losses: Balance at beginning of year $ 6,542 $ 4,775 $ 3,833 $ 2,792 $ 1,701 Provision for loan losses 3,286 2,659 3,903 5,825 1,513 Allowance acquired through merger - - - - 148 Charge-offs: Commercial and agricultural 423 531 2,539 1,121 518 Real-estate - construction - - - 3,458 - Real-estate - mortgage - - 4 - - Consumer 1,971 1,323 983 471 140 -------- -------- -------- -------- -------- Total charge-offs 2,394 1,854 3,526 5,050 658 Recoveries: Commercial and agricultural 410 715 135 155 27 Real-estate - construction - - - 1 - Real-estate - mortgage - - 100 - - Consumer 363 247 330 110 61 -------- -------- -------- -------- -------- Total recoveries 773 962 565 266 88 -------- -------- -------- -------- -------- Net charge-offs 1,621 892 2,961 4,784 570 -------- -------- -------- -------- -------- Balance at end of year $ 8,207 $ 6,542 $ 4,775 $ 3,833 $ 2,792 ======== ======== ======== ======== ======== Loan outstanding at year-end $412,664 $331,268 $268,993 $217,997 $183,247 Average loans outstanding $369,367 $303,463 $242,989 $198,140 $157,098 Net charge-offs to average loans 0.44% 0.29% 1.22% 2.41% 0.36% Allowance for loan losses To total loans 1.99% 1.97% 1.78% 1.76% 1.52% To nonperforming loans 350.66% 328.74% 302.79% 139.79% 50.14% To nonperforming assets 317.12% 292.45% 291.69% 136.80% 39.69%
The Company's charge-offs, net of recoveries, were $1,621,000 in 2000 as compared with $892,000 and $2,961,000 in 1999 and 1998. This represents loan loss experience ratios of 0.44%, 0.29% and 1.22% in those respective years stated as a percentage of average loans outstanding for each year. The increase in charge-offs in 2000 when compared to 1999 is due to increased charge-offs within the indirect auto loan contract component of the consumer loan portfolio. As of December 31, 2000 the allowance for loan losses was $8,207,000 or 1.99% of total loans outstanding. This compares with an allowance for loan losses of $6,542,000 or 1.97% in 1999 and $4,775,000 or 1.78% in 1998. The decrease in net charge-offs in 1999 compared to 1998 was due to the complete write-off of a single commercial relationship and the complete write-off of one large commercial real estate loan during 1998. LIQUIDITY: To maintain adequate liquidity requires that sufficient resources be available at all times to meet cash flow requirements of the Company. 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 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, receipts of principal and interest on loans, available for sale investments and potential loan sales as sources of asset liquidity. Deposit growth and access to credit lines established with correspondent banks and market sources of funds are considered by the Company as sources of liquidity. The Company reviews its liquidity position on a regular basis based upon its current position and expected trends of loans and deposits. Management believes that the Company maintains adequate amounts of liquid assets to meet its liquidity needs. These assets include cash and deposits in other banks, available for sale securities and federal funds sold. The Company's liquid assets totaled $203,698,000 and 16 $168,886,000 at December 31, 2000 and 1999 and are 30% of total assets on those dates. Cash and noninterest-bearing deposits in other banks increased $4,771,000 or 11% to $46,353,000 at December 31, 2000, compared to $41,582,000 at December 31, 1999. The increase in the 2000 cash position when compared to 1999 was the result of larger volume of clearing deposits created by increased volumes of check deposits being processed on a daily basis for checking account customers. Liquidity is also affected by collateral requirements of its public agency deposits and certain borrowings. Total pledged securities were $124,396,000 at December 31, 2000 and $105,008,00 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 certain correspondent banks, the Federal Reserve Bank, and the Federal Home Loan Bank aggregating $49,608,000 of which $14,600,000 was outstanding as of December 31, 2000. This compares with lines of credit of $52,392,000 of which $12,600,000 was outstanding as of December 31, 1999. MARKET AND INTEREST RATE RISK MANAGEMENT: 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. Quarterly testing of the Company's assets and liabilities under both increasing and decreasing interest rate environments are performed to insure the Company does not assume a magnitude of risk that is outside approved policy limits. The Company's success is largely dependent upon its ability to manage interest rate risk. Interest rate risk can be defined as the exposure of the Company's net interest income to adverse movements in interest rates. Although the Company manages other risks, such as credit and liquidity risk in the normal course of its business, management considers interest rate risk to be its most significant market risk and could potentially have the largest material effect on the Company's financial condition and results of operations. Correspondingly, the overall strategy of the Company is to manage interest rate risk, through balance sheet structure, to be interest rate neutral. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk. Though such activities may be permitted with the approval of the Board of Directors, the Company does not intend to engage in such activities in the immediate future. The Company's interest rate risk management is the responsibility of the Asset/Liability Management Committee (ALCO), which reports to the Board of Directors. ALCO establishes policies that monitors and coordinates the Company's sources, uses and pricing of funds. ALCO is also involved in formulating the economic projections for the Company's budget and strategic plan. ALCO sets specific rate sensitivity limits for the Company. ALCO monitors and adjusts the Company's exposure to changes in interest rates to achieve predetermined risk targets that it believes are consistent with current and expected market conditions. Balance sheet management personnel monitor the asset and liability changes on an ongoing basis and provide report information and recommendations to the ALCO committee in regards to those changes. EARNINGS SENSITIVITY: The Company's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. The primary analytical tool used by the Company to gauge interest rate sensitivity is a net interest income simulation model used by many other 17 financial institutions. The model, which is updated quarterly, incorporates all of the Company's assets and liabilities and off-balance sheet funding commitments, together with assumptions that reflect the current interest rate environment. The Company does not utilize off-balance sheet derivative financial instruments such as interest rate swaps, futures contracts, or other financial hedging instruments in managing interest rate risk. The model projects changes in cash flows of the various interest earning assets and interest bearing liabilities in both rising and falling interest rate environments. Based on the current portfolio mix, this model is used to estimate the effects of changes in market rates on the Company's net interest income under interest rate conditions that simulate an immediate and sustained shift in the yield curve of up and down 2 percent, as well as the effect of immediate and sustained flattening or steepening of the yield curve. 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 liquidity. The estimated impact of immediate changes in interest rates at the specified levels at December 31, 2000 is presented in the following table:
Percentage Change in Change in change in Interest rates net interest net interest (In basis points) income(1) income - --------------------------------------------------- +200 $ (77,000) (0.24%) -200 $(374,000) (1.18%)
(1) THE AMOUNT IN THIS COLUMN REPRESENTS THE CHANGE IN NET INTEREST INCOME FOR 12 MONTHS IN A STABLE INTEREST RATE ENVIRONMENT VERSUS THE NET INTEREST INCOME IN THE VARIOUS RATE SCENARIOS. The Company's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company's net interest income and capital, while structuring the Company's asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk. Based upon the December 31, 2000 mix of interest sensitive assets and liabilities, given sustained increase in the federal funds rate of 2%, this model estimated the Company's cumulative net interest income over the next year would decrease by $77,000. This compares with a cumulative one year expected decrease in net interest income of $738,000 as of December 31, 1999. If prevailing market interest rates sustained a decrease of 2% at December 31, 2000, this model estimated the Company's cumulative one year expected decrease in net interest income would be $374,000. This compares with an expected cumulative one year increase in net interest income of $374,000 as of December 31, 1999. The model shows that at December 31, 2000 if interest rates increase, the Company has less downside interest rate risk than at December 31, 2000. Conversely, in a falling interest rate environment, at December 31, 2000 the Company has more downside interest rate risk than at December 31, 2000. The change in interest rate risk profile between 1999 and 2000 is primarily caused by a substantial increase in loan growth and the increased funding of variable rate loans that utilize a repricing index tied to prime rate. As the total measure of interest rate risk indicates, the Company is not subject to significant risk of change in its net interest margin as a result of changes in interest rates in the 2% range. CAPITAL RESOURCES: 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 effect on the Company's financial statements. Management believes, as of December 31, 2000, that the Company and the Bank meet all capital requirements to which they are subject. The Company's leverage capital ratio at December 31, 2000 was 7.56% as compared with 7.50% as of December 31, 1999. The Company's risk-based capital ratio at December 31, 2000 was 10.92% as compared to 11.24% as of December 31, 1999. Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet the Company's future needs. All ratios are in excess of the regulatory definitions of "well capitalized." Management believes that, under the current regulations, the Company will continue to meet its minimum capital requirements in the foreseeable future. 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 18 to pay any cash dividend, 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. Notwithstanding regulatory restrictions, in order for the Bank to maintain a 10% risk weighted capital ratio, the Bank has the ability to pay cash dividends at December 31, 2000 of $4,662,000. 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 noninterest expenses, has not been significant for the periods covered in this report. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCK MATTERS: The Company's stock is included for quotation on the NASDAQ National Market System with a stock quotation symbol of CCOW. The following table indicates the range of high and low sales prices for the period shown, based upon information provided by the NASDAQ National Market System.
2000 High Low - -------------------------------------------------------------- 4th quarter $12.00 $10.63 3rd quarter 11.88 10.38 2nd quarter 10.75 8.13 1st quarter $10.75 $ 7.75
1999 High Low - -------------------------------------------------------------- 4th quarter $12.00 $ 8.50 3rd quarter 13.88 12.00 2nd quarter 14.09 9.75 1st quarter $10.75 $ 8.50
Generally, the Company has retained earnings to support the growth of the Company and has not paid regular cash dividends. PROSPECTIVE ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which amends the disclosure requirements of Statement No. 52, "Foreign Currency Translations" and of 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." Under the provisions of SFAS 133, the Company is required to recognize all derivatives as either assets or liabilities in the statement of financial condition and measure 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, (b) a hedge of the exposure to cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting operation. Certain sections of SFAS No. 133 were amended in June 2000, when the FASB issued Statement No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133" (SFAS No. 138). SFAS No. 133, as amended by SFAS No. 138, also nullifies or modifies the consensuses reached in a number of issues addressed by the Emerging Issues Task Force. SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" and SFAS No. 138 are effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Initial application of these statement should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of these statements. Neither SFAS No. 133 nor SFAS No. 138 should be applied retroactively to financial statements of prior periods. The Company has a program in place to evaluate its financial instruments and purchase contracts. The Company adopted SFAS 133 on January 1, 2001. The adoption of this pronouncement had no impact on the Company's financial statements. On March 31, 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44, "Accounting for Certain 19 Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25" (FIN No. 44). This interpretation provides guidance for issues that have arisen in applying APB Opinion No. 25, "Accounting for Stock Issued to Employees." FIN 44 applies prospectively to new awards, exchanges of awards in a business combination, modifications to outstanding awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricing and the definition of an employee which apply to awards issued after December 31, 1998. The provisions related to modifications to fixed stock option awards are effective for awards modified after January 12, 2000. Management believes the effects of adopting FIN No. 44 will not have a significant impact on its results of operations or financial position. 20 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Capital Corp of the West: We have audited the accompanying consolidated balance sheets of Capital Corp of the West and subsidiaries (the Company) as of December 31, 2000 and 1999 and the related consolidated statements of income and comprehensive income, cash flows, and shareholders' equity for each of the years in the three year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capital Corp of the West and subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP San Francisco, California January 26, 2001 21 CAPITAL CORP OF THE WEST CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, --------------------------- (Dollars in thousands) 2000 1999 - ----------------------------------------------------------------------------------------- ASSETS Cash and noninterest-bearing deposits in other banks $ 46,353 $ 41,582 Federal funds sold 1,415 8,640 Time deposits at other financial institutions 100 850 Investment securities available for sale, at fair value 155,830 117,814 Investment securities held to maturity, at cost 35,222 29,554 Loans, net 404,457 324,726 Interest receivable 5,215 3,436 Premises and equipment, net 13,021 13,163 Goodwill and other intangible assets 4,277 5,069 Other assets 17,131 18,716 --------- --------- Total assets $ 683,021 $ 563,550 ========= ========= LIABILITIES Deposits: Noninterest-bearing demand $ 107,581 $ 87,564 Negotiable orders of withdrawal 84,521 72,788 Savings 184,073 164,158 Time, under $100,000 131,669 101,395 Time, $100,000 and over 93,654 68,996 --------- --------- Total deposits 601,498 494,901 Borrowed funds 22,427 20,814 Accrued interest, taxes and other liabilities 5,645 4,158 --------- --------- Total liabilities 629,570 519,873 SHAREHOLDERS' EQUITY Preferred stock, no par value; 10,000,000 shares authorized; none outstanding Common stock, no par value; 20,000,000 shares authorized; 4,552,042 and 4,496,201 issued and outstanding in 2000 and 1999 35,918 35,593 Retained earnings 17,449 10,743 Accumulated other comprehensive income (loss) 84 (2,659) --------- --------- Total shareholders' equity 53,451 43,677 --------- --------- Total liabilities and shareholders' equity $ 683,021 $ 563,550 ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22 CAPITAL CORP OF THE WEST CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, ------------------------------------ (Dollars in thousands, except per share data) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------ INTEREST INCOME: Interest and fees on loans $38,643 $30,255 $25,159 Interest on deposits with other financial institutions 39 156 57 Interest on investment securities held to maturity: Taxable 2,055 1,116 1,257 Non-taxable 223 190 - Interest on investment securities available for sale: Taxable 8,154 6,013 6,091 Non-taxable 1,124 1,188 797 Interest on federal funds sold 650 443 1,253 ------- ------- ------- Total interest income 50,888 39,361 34,614 INTEREST EXPENSE: DEPOSITS: Negotiable orders of withdrawal 503 458 503 Savings 7,095 5,752 5,696 Time, under $100,000 6,613 4,504 4,418 Time, $100,000 and over 5,029 2,570 1,725 ------- ------- ------- Total interest on deposits 19,240 13,284 12,342 Other borrowings 1,528 756 1,292 ------- ------- ------- Total interest expense 20,768 14,040 13,634 NET INTEREST INCOME 30,120 25,321 20,980 Provision for loan losses 3,286 2,659 3,903 ------- ------- ------- Net interest income after provision for loan losses 26,834 22,662 17,077 OTHER INCOME: Service charges on deposit accounts 3,527 3,254 2,807 Income from sale of real estate 390 260 540 Other 1,490 1,575 1,491 ------- ------- ------- Total other income 5,407 5,089 4,838 OTHER EXPENSES: Salaries and related benefits 11,066 9,699 7,958 Premises and occupancy 1,714 1,579 1,325 Equipment 2,558 2,144 2,155 Professional fees 1,101 1,060 1,203 Supplies 660 551 609 Marketing 890 708 656 Goodwill and intangible amortization 792 792 778 Other 3,993 4,005 3,560 ------- ------- ------- Total other expenses 22,774 20,538 18,244 Income before provision for income taxes 9,467 7,213 3,671 Provision for income taxes 2,761 2,104 930 ------- ------- ------- Net income $ 6,706 $ 5,109 $ 2,741 - ------------------------------------------------------------------------------------------------------ COMPREHENSIVE INCOME: Unrealized gain (loss) on securities arising during the period 2,424 (2,615) (112) Less: reclassification adjustment for losses (gains) Included in net income 319 (72) (55) ------- ------- ------- Comprehensive income $ 9,449 $ 2,422 $ 2,574 ======= ======= ======= - ------------------------------------------------------------------------------------------------------ Basic earnings per share $ 1.48 $ 1.12 $ 0.60 Diluted earnings per share $ 1.44 $ 1.09 $ 0.58
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23 CAPITAL CORP OF THE WEST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK Accumulated ----------------------- Other Number of Retained Comprehensive (Dollars in thousands) shares Amounts Earnings Income (Loss) Total - -------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 4,377 $ 33,928 $ 6,125 $ 195 $ 40,248 - -------------------------------------------------------------------------------------------------------- 5% stock dividend, including payment for fractional shares 219 3,226 (3,232) - (6) Exercise of stock options 11 109 - - 109 Net change in fair market value of available for sale investment securities, net of tax effect of ($106) - - - (167) (167) Adjustment - stock option plan - (121) - - (121) Net income - - 2,741 - 2,741 - -------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 4,607 $ 37,142 $ 5,634 $ 28 $ 42,804 - -------------------------------------------------------------------------------------------------------- Exercise of stock options 26 219 - - 219 Stock repurchases (137) (1,768) - - (1,768) Net change in fair market value of available for sale investment securities net of tax effect of ($1,824) - - - (2,687) (2,687) Net income - - 5,109 - 5,109 - -------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 4,496 $ 35,593 $ 10,743 $ (2,659) $ 43,677 - -------------------------------------------------------------------------------------------------------- Exercise of stock options 50 253 - - 253 Issuance of shares pursuant to 401K and ESOP plans 6 72 - - 72 Net change in fair market value of available for sale investment securities net of tax effect of ($1,768) - - - 2,743 2,743 Net income - - 6,706 - 6,706 - -------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 4,552 $ 35,918 $ 17,449 $ 84 $ 53,451 - --------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24 CAPITAL CORP OF THE WEST CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------- (Dollars in thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 6,706 $ 5,109 $ 2,741 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,286 2,659 3,903 Depreciation, amortization and accretion, net 2,291 2,763 3,374 (Benefit) provision for deferred income taxes (405) (1,090) 310 Gain on sale of real estate (390) (260) (540) Net increase in interest receivable & other assets (1,167) (2,820) 208 Net decrease in deferred loan fees (117) (699) (1,085) Net increase (decrease) in accrued interest payable & other liabilities 1,539 1,727 (763) - ----------------------------------------------------------------------------------------------- Net cash provided by operating activities 11,743 7,389 8,148 - ----------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Investment security purchases - available for sale securities (25,062) (20,272) (46,213) Investment security purchases - held to maturity securities (4,594) - - Investment security purchases mortgage-backed securities and collateralized mortgage obligations (42,301) (27,522) (27,863) Proceeds from maturities of available for sale investment securities 869 1,719 3,127 Proceeds from maturities of held to maturity investment securities 1,017 1,000 - Proceeds from maturities of mortgage-backed securities and collateralized mortgage obligations 11,933 26,279 35,752 Proceeds from sales of available for sale investment securities 8,188 13,777 9,088 Proceeds from sales of mortgage-backed securities and collateralized mortgage obligations 10,623 7,574 18,131 Net decrease (increase) in time deposits in other financial institutions 750 (250) (1) Proceeds from sales of commercial and real estate loans 3,397 1,023 6,826 Origination of loans (224,804) (227,590) (179,866) Proceeds from repayment of loans 138,718 163,982 119,730 Purchases of premises and equipment (1,804) (1,585) (2,090) Proceeds from sales of real estate held for sale or development 390 260 478 - ----------------------------------------------------------------------------------------------- Net cash used in investing activities (122,680) (61,605) (62,901) - ----------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net increase in demand, NOW and savings deposits 51,612 6,966 60,997 Net increase in certificates of deposit 54,933 43,777 26,818 Net increase (decrease) in other borrowings 1,613 10,348 (11,583) Issued shares for benefit plan purchases 72 - - Stock repurchases - (1,768) - Fractional shares purchased - - (6) Exercise of stock options, net 253 219 (12) - ----------------------------------------------------------------------------------------------- Net cash provided by financing activities 108,483 59,542 76,214 - ----------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (2,454) 5,326 21,461 Cash and cash equivalents at beginning of year 50,222 44,896 23,435 - ----------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 47,768 $ 50,222 $ 44,896 - ----------------------------------------------------------------------------------------------- Supplemental disclosure of non-cash investing and financing activities: Investment securities unrealized gains (losses), net of taxes $ 2,743 $ (2,687) $ (167) Interest paid 20,657 13,788 13,524 Income tax payments 2,880 2,827 1,564 Transfer of securities from available for sale to held to maturity - 4,499 9,636 Loans transferred to other real estate owned 443 187 478
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Capital Corp of the West (the "Company") is a registered bank holding company, which provides a full range of banking services to individual and business customers primarily in the Central San Joaquin Valley, through its subsidiaries. The following is a description of the more significant policies. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements of Capital Corp of the West include its subsidiaries: County Bank (the "Bank") and Capital West Group ("CWG"). Town and Country Finance and Thrift was acquired in June 1996 and merged into County Bank on November 23, 1999. CWG, a subsidiary formed in 1996, became inactive in 1997. All significant intercompany balances and transactions are eliminated. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and prevailing practices in the financial services industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates applied in the preparation of the consolidated financial statements. A material estimate that is particularly susceptible to change in the near term relates to the determination of the allowance for loan losses. CASH AND CASH EQUIVALENTS: The Company maintains deposit balances with various banks which are necessary for check collection and account activity charges. Cash in excess of immediate requirements is invested in federal funds sold or other short term investments. Generally, federal funds are sold for periods from one to thirty days. Cash, noninterest bearing deposits in other banks and federal funds sold are considered to be cash and cash equivalents for the purposes of the consolidated statements of cash flows. Banks are required to maintain minimum average reserve balances with the Federal Reserve Bank. The amount of those reserve balances was approximately $93,000 at December 31, 2000. INVESTMENT SECURITIES: Investment securities consist of U.S. treasury, federal agencies, state and county municipal securities, corporate bonds, mortgage-backed securities, collateralized mortgage obligations and equity securities. Investment securities are classified into one of three categories. These categories include trading, available for sale, and held to maturity. The category of each security is determined based on the Company's investment objectives, operational needs and intent. The Company has not purchased securities with the intent of actively trading them. Securities available for sale may be sold prior to maturity and are available for future liquidity requirements. These securities are carried at fair value. Unrealized gains and losses on securities available for sale are excluded from earnings and reported net of tax as a separate component of shareholders' equity until realized. Securities held to maturity are classified as such where the Company has the ability and positive intent to hold them to maturity. These securities are carried at cost, adjusted for amortization of premiums and accretion of discounts. Unrealized losses due to fluctuations in fair value of securities held to maturity or available for sale, are recognized through earnings when it is determined that a permanent decline in value has occurred. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available for sale or held to maturity, are included in earnings and are derived using the specific identification method for determining the cost of securities sold. LOANS: Loans are carried at the principal amount outstanding, net of unearned income, including deferred loan origination fees and costs. Nonrefundable loan origination and commitment fees and the direct costs associated with originating or acquiring the loans are deferred and amortized as an adjustment to interest income over the life of the related loan using a method that approximates the level yield method. Deferred loan origination costs totaled $1,741,000 and $1,878,000 at December 31, 2000 and 1999. 26 Deferred loan origination fees totaled $1,006,000 and $1,026,000 at December 31, 2000 and 1999. Interest income on loans is accrued based on contract interest rates and principal amounts outstanding. Loans which are more than 90 days delinquent, with respect to interest or principal, are placed on nonaccrual status, unless the outstanding principal and interest is adequately secured and, in the opinion of management, remains collectable. Uncollected accrued interest is reversed against interest income, and interest is subsequently recognized only as received until the loan is returned to accrual status. Interest accruals are resumed when such loans are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectable as to both principal and interest. A loan is considered impaired, if it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Any allowance for loan losses on impaired loans is measured based upon 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. Interest on impaired loans is recognized on a cash basis. In general, these statements are not applicable to large groups of small balance homogenous loans that are collectively evaluated for impairment, such as residential mortgage and consumer installment loans. Income recognition on impaired loans conforms to the method the Company uses for income recognition on nonaccrual loans. 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 when management believes the remaining principal balance is fully collectable. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at the level considered to be adequate for potential loan losses based on management's assessment of various factors affecting the loan portfolio, which include: growth trends in the portfolio, historical experience, concentrations of credit risk, delinquency trends, general economic conditions, and internal and external credit reviews. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgment of information available to them at the time of their examination. Additions to the allowance for loan losses, in the form of provision for loan losses, are reflected in current operating results, while charge-offs to the allowance for loan losses are made when a loss is determined to have occurred. Management uses the best information available on which to base estimates, however, ultimate losses may vary from current estimates. GAIN OR LOSS ON SALE OF LOANS AND SERVICING RIGHTS: The Company services both sold and retained portions of United States Small Business Administration (SBA) loans and a portfolio of mortgage loans. Accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities are based on consistent application of a financial components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Servicing assets and other retained interests in transferred assets are measured by allocating the previous carrying amount of the transferred assets between the assets sold, if any, and the retained interests, if any, based on their relative fair values at the date of transfer. Liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets are initially measured at fair value. Servicing assets and liabilities, which are carried at the lower of cost or market, are subsequently amortized in proportion to and over the period of, estimated net servicing income or loss and assessed for asset impairment or increased obligation based on fair value. The Bank recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold. The fair value of the servicing assets are estimated based upon the present value of the estimated expected future cash flows. The cash flows are calculated using a discount rate commensurate with the risk involved and include estimates of future revenues and expenses, including assumptions about defaults and prepayments. The Company measures the impairment of the servicing asset based on the difference between the carrying amount of the servicing asset and its current fair value. As of 27 December 31, 2000 and 1999, there was no impairment in mortgage servicing assets. Real estate mortgage loans held for sale are carried at the lower of cost or market at the balance sheet date. There were no loans held for sale as of December 31, 2000 and 1999. Gains or losses are recognized at the time of sale and are calculated based on the amounts received and the book value of the loans sold. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight line basis over the estimated useful life of each type of asset. Estimated useful lives range up to 35 years for buildings, up to the lease term for leasehold improvements, and 3 to 15 years for furniture and equipment. REAL ESTATE HELD FOR SALE OR DEVELOPMENT: Real estate held for sale or development is recorded at the lower of cost or net realizable value. Revenue recognition on the disposition of real estate is dependent upon the transaction meeting certain criteria relating to the nature of the property sold and the terms of the sale. Under certain circumstances, revenue recognition may be deferred until these criteria are met. OTHER REAL ESTATE: Other real estate is comprised of property acquired through foreclosure proceedings or acceptance of deeds-in-lieu of foreclosure. Losses recognized at the time of acquiring property in full or partial satisfaction of debt are charged against the allowance for loan losses. Other real estate is recorded at the lower of the related loan balance or fair value, less estimated disposition costs. Fair value of other real estate is generally based on an independent appraisal of the property. Any subsequent costs or losses are recognized as noninterest expense when incurred. INTANGIBLE ASSETS: Goodwill, representing the excess of purchase price paid over the fair value of net assets acquired in an acquisition, was generated with the purchase of the Thrift in June 1996. The Thrift's assets, including intangible assets, were subsequently merged into County Bank in November, 1999, and the Thrift's charter was eliminated. Goodwill associated with the purchase of the Thrift is being amortized over 18 years. Core deposit intangibles, representing the excess of purchase price paid over the fair value of net savings deposits acquired, were generated by the purchase of the Thrift in June 1996 and the purchase of three branches from the Bank of America in December, 1997. Core deposit intangibles are being amortized over 10 and 7 years, respectively. Intangible assets are reviewed on a periodic basis for impairment. If such impairment is indicated, recoverability of the asset is assessed based upon expected undiscounted net cash flows. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF: Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. DEFERRED COMPENSATION: The Company has purchased single premium universal life insurance policies in conjunction with implementation of salary continuation plans for certain members of management and a deferred compensation plan for certain members of the Board of Directors. The Company is the owner and beneficiary of these policies. The cash surrender value of the insurance policies is recorded in other assets and these values totaled $6,075,000 and $5,792,000 as of December 31, 2000 and 1999. Income from these policies is recorded in other income and the load, mortality and surrender charges have been recorded in other expenses. An accrued liability of $1,486,000 and $878,000 as of December 31, 2000 and 1999 was recorded to reflect the present value of the expected retirement benefits for the salary continuation plans and the deferred compensation benefits and was included in other liabilities. Deferred Compensation expense of $567,000 and $242,000 was recorded for the twelve months ending December 31, 2000 and 1999. INCOME TAXES: The Company files a consolidated federal income tax return and a combined state franchise tax return. The provision for income taxes includes federal income and state franchise taxes. 28 Income tax expense is allocated to each entity of the Company based upon the analysis of the tax consequences of each company on a stand alone basis. The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. INCOME TAX CREDITS: The Company has investments in limited partnerships which own low income affordable housing projects that generate tax benefits in the form of federal and state housing tax credits. As an investor in these partnerships, the Company receives tax benefits in the form of tax deductions from partnership operating losses and income tax credits. These income tax credits are earned over a 10 year period as a result of the investment meeting certain criteria and are subject to recapture over a 15 year period. The expected benefit resulting from the affordable housing income tax credits is recognized in the period in which the tax benefit is recognized in the Company's consolidated tax returns. These investments are accounted for using the cost method and are evaluated at each reporting period for impairment. The Bank had investments in these partnerships of $6,800,000 and $5,800,000 as of December 31, 2000 and 1999 which were included in other assets. STOCK OPTION PLAN: The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. EARNINGS PER SHARE: Basic earnings per share (EPS) includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity. COMPREHENSIVE INCOME: Comprehensive income consists of net income and unrealized gains (losses) on securities and is presented in the consolidated statements of income and comprehensive income. RECLASSIFICATIONS: Certain reclassifications have been made to the 1999 amounts to conform with the 2000 presentations. 29 NOTE 2. INVESTMENT SECURITIES The amortized cost and estimated market value of investment securities at December 31, are summarized below:
Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------- 2000 - --------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE SECURITIES: U.S. Treasury and U.S. Government agencies $ 35,413 $ 564 $ 38 $ 35,939 State & political subdivisions 24,631 74 535 24,170 Mortgage-backed securities 54,364 370 325 54,409 Collateralized mortgage obligations 29,237 102 324 29,015 Corporate debt securities 9,674 186 27 9,833 --------- ------- ------- --------- Total debt securities 153,319 1,296 1,249 153,366 Equity securities 2,464 - - 2,464 --------- ------- ------- --------- Total available for sale securities 155,783 1,296 1,249 155,830 --------- ------- ------- --------- HELD TO MATURITY SECURITIES: U.S. Treasury & U.S. government agencies 4,595 - - 4,595 State and political subdivisions 4,375 78 -- 4,453 Mortgage-backed securities 22,736 269 201 22,804 Collateralized mortgage obligations 3,516 44 - 3,560 --------- ------- ------- --------- Total held to maturity securities 35,222 391 201 35,412 --------- ------- ------- --------- - --------------------------------------------------------------------------------------------------------------- 1999 - --------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE SECURITIES: U.S. Treasury & U.S. Government agencies $ 17,113 $ - $ 357 $ 16,756 State & political subdivisions 25,421 15 2,065 23,371 Mortgage-backed securities 45,253 42 1,572 43,723 Collateralized mortgage obligations 20,847 - 506 20,341 Corporate debt securities 9,681 67 88 9,660 --------- ------- ------- --------- Total debt securities 118,315 124 4,588 113,851 Equity securities 3,963 - - 3,963 --------- ------- ------- --------- Total available for sale securities 122,278 124 4,588 117,814 --------- ------- ------- --------- HELD TO MATURITY SECURITIES: U.S. Treasury & U.S. government agencies 1,004 - 3 1,001 State and political subdivisions 4,389 - 230 4,159 Mortgage-backed securities 24,161 - 646 23,515 --------- ------- ------- --------- Total held to maturity securities 29,554 - 879 28,675 --------- ------- ------- ---------
At December 31, 2000 and 1999, investment securities with carrying values of approximately $124,396,000 and $105,008,000, respectively, were pledged as collateral for deposits of public funds, government deposits, the Bank's use of the Federal Reserve Bank's discount window and Federal Home Loan Bank line of credit. The Bank is a member of the Federal Reserve Bank and the Federal Home Loan Bank. The Bank carried balances, stated at cost, of $1,223,000 and $2,378,000 of Federal Home Loan Bank stock and $886,000 and $1,229,000 of Federal Reserve Bank stock as of December 31, 2000 and 1999. The Company recognized gross gains on the sale of securities of $0, $0, and $13,000, in 2000, 1999, and 1998. Gross losses of $235,000, $118,000 and $16,000 were recognized in 2000, 1999, and 1998. In February 1999, state and political subdivision securities with a market value of $4,499,000 were transferred from the available for sale portfolio to the held to maturity portfolio at market value. The unrealized holding gain at the date of transfer is reported as a separate component of shareholders' equity, and is amortized over the remaining life of the securities as an adjustment of yield in a manner consistent with the amortization of a premium or discount. 30 The carrying and estimated fair values of debt securities at December 31, 2000 by contractual maturity, are shown on the following table. Actual maturities may differ from contractual maturities because issuers generally have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated (Dollars in thousands) Cost Fair Value - ------------------------------------------------------------------------------------- AVAILABLE FOR SALE DEBT SECURITIES: One year or less $ 1,019 $ 1,008 One to five years 29,281 29,511 Five to ten years 23,201 23,238 Over ten years 16,217 16,185 Mortgage-backed securities and CMOs 83,601 83,424 --------- --------- Total available for sale debt securities $ 153,319 $ 153,366 ========= ========= HELD TO MATURITY DEBT SECURITIES: One year or less $ - $ - One to five years - - Five to ten years 5,937 5,951 Over ten years 3,033 3,097 Mortgage-backed securities and CMOs 26,252 26,364 --------- --------- Total held to maturity debt securities $ 35,222 $ 35,412 ========= =========
NOTE 3. LOANS Loans at December 31 consisted of the following:
(Dollars in thousands) 2000 1999 - ------------------------------------------------------------------------------------- Commercial $ 71,920 $ 53,932 Agricultural 84,032 58,247 Real estate - mortgage 141,575 120,978 Real estate - construction 30,133 11,926 Consumer 85,004 86,185 --------- --------- Gross loans 412,664 331,268 Less allowance for loan losses 8,207 6,542 --------- --------- Net loans $ 404,457 $ 324,726 ========= =========
These loans are net of deferred loan costs of $1,006,000 and $1,026,000 and deferred loan costs of $1,741,000 and $1,878,000 as of December 31, 2000 and 1999. Nonaccrual loans totaled $2,243,000 and $1,984,000 at December 31, 2000 and 1999. Foregone interest on nonaccrual loans was approximately $224,000, $143,000 and $91,000 for the years ended December 31, 2000, 1999 and 1998. Impaired loans are loans for which it is probable that the Company will not be able to collect all amounts due. At December 31, 2000 and 1999, the recorded investment in impaired loans of $2,340,000 and $1,990,000 which had a related allowance for loan losses of $302,000 and $497,000 in 2000 and 1999. The average outstanding balance of impaired loans for the years ended December 31, 2000, 1999 and 1998 was $2,165,000, $2,215,000, and $1,876,000, on which $79,000, $126,000 and $134,000, was recognized as interest income on a cash basis. 31 At December 31, 2000 and 1999, the collateral value method was used to measure impairment for all loans classified as impaired. The following table shows the recorded investment in impaired loans by loan category at December 31:
(Dollars in thousands) 2000 1999 - ------------------------------------------------- Commercial $ 734 $ 635 Agricultural 1,423 921 Consumer and other 183 434 ------- ------- $ 2,340 $ 1,990 ======= =======
The following is a summary of changes in the allowance for loan losses during the years ended December 31:
(Dollars in thousands) 2000 1999 1998 - ------------------------------------------------------ Balance at beginning of year $ 6,542 $ 4,775 $ 3,833 Loans charged-off (2,394) (1,854) (3,526) Recoveries of loans previously charged- off 773 962 565 Provision for loan losses 3,286 2,659 3,903 -------- -------- -------- Balance at end of year $ 8,207 $ 6,542 $ 4,775 ======== ======== ========
In the ordinary course of business, the Company, through its subsidiaries, has made loans to certain directors and officers and their related businesses. In management's opinion, these loans are granted on substantially the same terms, including interest rates and collateral, as those prevailing on comparable transactions with unrelated parties, and do not involve more than the normal risk of collectibility. Activity in loans to, or guaranteed by, directors and executive offices and their related businesses at December 31, are summarized as follows:
(Dollars in thousands) 2000 1999 - ------------------------------------------------------ Balance at beginning of year $ 562 $ 280 Loan advances and renewals 1,777 328 Loans matured or collected (96) (8) Other changes (17) (38) ------- ----- Balance at end of year $ 2,226 $ 562 ======= =====
Other changes in 2000 and 1999 represent loans to former directors and executive officers of the Company who are no longer related parties. NOTE 4. PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31:
(Dollars in thousands) 2000 1999 - ---------------------------------------------------- Land $ 1,349 $ 1,349 Buildings 8,544 8,339 Leasehold improvements 1,605 1,176 Furniture and equipment 11,863 10,693 -------- -------- Subtotal 23,361 21,557 Less accumulated depreciation and amortization 10,340 8,394 -------- -------- Premises and equipment, net $ 13,021 $ 13,163 ======== ========
Included in the totals above is construction in progress of $207,000 and $154,000 at December 31, 2000 and 1999 respectively. Depreciation expense totaled $1,946,000, $1,741,000 and $1,716,000 in 2000, 1999 and 1998. NOTE 5. BORROWED FUNDS At December 31, 2000 and 1999 the Company's borrowed funds consisted of the following:
(Dollars in thousands) 2000 1999 - ------------------------------------------------- Treasury tax loan, dated December 31, 2000; variable rate of 6.25%; rate reprices monthly based on the federal funds rate; payable on January 5, 2001 $ 4,672 $ 5,000 FHLB loan, dated February 11, 2000; variable rate of 6.65%; rate reprices monthly based on the 1 month LIBOR; payable February 12, 2001 3,000 - FHLB loan, dated February 11, 2000; fixed rate of 6.73%; payable on February 11, 2005; fixed rate of 5.75% as of December 31, 1999 1,000 5,000
32
(Dollars in thousands) 2000 1999 - ------------------------------------------------- FHLB loan, dated February 11, 2000; fixed rate of 6.36%; payable on February 11, 2005; fixed rate of 5.75% as of December 31, 1999 1,000 5,000 FHLB loan, dated February 16, 2000; variable rate of 6.62%; rate reprices monthly based on the 1 month LIBOR; payable on February 16, 2001 5,600 2,600 FHLB loan, dated February 16, 2000; fixed rate of 6.48%; payable on February 16, 2005 1,000 - FHLB loan, dated February 16, 2000; fixed rate of 6.83%; payable on February 16, 2005 1,000 - FHLB loan, dated March 20, 2000; fixed rate of 6.55%; payable on March 21, 2005 2,000 - Long-term mortgage note from unaffiliated bank dated December 11, 1997; fixed rate of 7.80%; principal and interest payable monthly at $15,017; payments calculated as fully amortizing over 15 years with a 10 year call 3,155 3,214 -------- -------- Total borrowed funds $ 22,427 $ 20,814 ======== ========
The Company maintains a secured line of credit with the Federal Home Loan Bank of San Francisco (FHLB). Based on the FHLB stock requirements at December 31, 2000, this line provided for maximum borrowings of $49,608,000 of which $14,600,000 was outstanding, leaving $35,008,000 available. At December 31, 2000 this borrowing line is collateralized by securities with a market value of $52,219,000. At December 31, 1999, the line of credit collateralized by securities totaled $52,392,000 of which $12,600,000 was outstanding. Interest expense related to FHLB borrowings totaled $951,000, $375,000, and $906,000 in 2000, 1999, and 1998. The Company had additional unused, lines of credit secured my mortgage notes of $7,000,000 at December 31, 2000 and 1999. In addition, the Company had an unused, unsecured line of credit of $2,000,000 as of December 31, 2000. The Company incurred interest expense of $249,000, $273,000, and $260,000 in 2000, 1999, and 1998, related to the notes with unaffiliated banks. The long-term note dated December 11, 1997 is secured by Company land and buildings. Interest expense related to federal funds purchased was $16,000, $80,000, and $2,000 in 2000, 1999 and 1998. Compensating balance arrangements are not significant to the operations of the Company. Principal payments required to service the Company's borrowings during the next five years are:
(Dollars in thousands) - ------------------------------------------------ 2001 $ 13,327 2002 61 2003 66 2004 71 2005 6,077 Thereafter 2,825 -------- Total borrowed funds $ 22,427 ========
NOTE 6. REAL ESTATE OPERATIONS As of December 31, 2000, MAID had no real estate holdings. During 2000, the last remaining real estate parcel held by MAID was sold. 33 Summarized below is condensed financial information of MAID:
CONDENSED BALANCE SHEETS DECEMBER 31, (Dollars in thousands) 2000 1999 - --------------------------------------------------- ASSETS: Cash on deposit with County Bank $ 51 $ 114 Notes receivable and other assets - 28 ---- ----- Total assets $ 51 $ 142 ==== ===== LIABILITIES AND SHAREHOLDER'S EQUITY: Accounts payable and other $ 50 $ 27 Shareholder's equity 1 115 ---- ----- Total liabilities and shareholder's equity $ 51 $ 142 ==== =====
CONDENSED STATEMENT OF YEARS ENDED OPERATIONS DECEMBER 31, (Dollars in thousands) 2000 1999 1998 - -------------------------------------------------------- Revenues $ 381 $ 10 $ 354 Expenses 15 66 22 ----- ----- ----- Income before income taxes $ 366 $ (56) $ 332 ===== ===== =====
NOTE 7. INCOME TAXES The provision for income taxes for the years ended December 31 is comprised of the following:
(Dollars in thousands) Federal State Total - ------------------------------------- 2000 Current $ 2,612 $ 554 $ 3,166 Deferred (597) 192 (405) ------- ----- -------- $ 2,015 $ 746 $ 2,761 ======= ===== ======== - -------------------------------------------------------- 1999 Current $ 2,248 $ 946 $ 3,194 Deferred (772) (318) (1,090) ------- ----- -------- $ 1,476 $ 628 $ 2,104 ======= ===== ======== - -------------------------------------------------------- 1998 Current $ 567 $ 53 $ 620 Deferred 223 87 310 ------- ----- -------- $ 790 $ 140 $ 930 ======= ===== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 consists of the following:
(Dollars in Thousands) 2000 1999 - ------------------------------------------------- DEFERRED TAX ASSETS: Real estate subsidiary $ - $ 939 Allowance for loan losses 2,675 1,788 Deferred compensation 612 362 Intangible amortization 301 - Nonaccrual interest 92 125 State franchise taxes 99 - Tax Credits - 253 Investment securities unrealized loss - 1,739 Other 70 430 ------- ------- Total gross deferred tax assets 3,849 5,636 Less valuation allowance (20) (20) ------- ------- Deferred tax assets $ 3,829 $ 5,616 ======= ======= DEFERRED TAX LIABILITIES: Fixed assets $ 125 $ 358 State franchise taxes - 286 Investment securities unrealized gain 55 - Investment in partnerships 116 26 Other 82 106 ------- ------- Total gross deferred tax liabilities 378 776 ------- ------- Net deferred tax assets $ 3,451 $ 4,840 ======= =======
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2000 and 1999. 34 A reconciliation of the provision for income taxes to the statutory federal income tax rate follows:
(Dollars in thousands) 2000 1999 1998 - ------------------------------------------------------- Statutory (34%) federal income tax rate due $ 3,218 $ 2,452 $ 1,248 State franchise tax, net of federal income tax benefit 504 516 263 Tax exempt interest income, net (390) (413) (239) Housing tax credits (550) (375) (426) Intangible amortization 43 43 33 Cash surrender value life insurance (106) (98) (69) Other 42 (21) 120 ------- ------- ------- Provision for income taxes $ 2,761 $ 2,104 $ 930 ======= ======= =======
NOTE 8. REGULATORY MATTERS The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. First, a bank must meet a minimum Tier I (as defined in the regulations) capital ratio ranging from 3% to 5% based upon the bank's CAMEL ("capital adequacy, asset quality, management, earnings and liquidity") rating. Second, a bank must meet minimum total risk based capital to risk weighted assets ratio of 8%. Risk based capital and asset guidelines vary from Tier I capital guidelines by redefining the components of capital, categorizing assets into different risk classes, and including certain off-balance sheet items in the calculation of the capital ratio. The effect of the risk based capital guidelines is that banks with high exposure will be required to raise additional capital while institutions with low risk exposure could, with the concurrence of regulatory authorities, be permitted to operate with lower capital ratios. In addition, a bank must meet minimum Tier I capital to average assets ratio of 4%. Management believes, as of December 31, 2000 that the Company and the Bank meet all capital adequacy requirements to which they are subject, including the ratio test for a well capitalized bank under the regulatory framework for prompt corrective action. The most recent notification from the FRB categorized the Company and the Bank as well capitalized under the FDICIA regulatory framework for prompt corrective action. Subsequent to this notification, there are no conditions or events that management believes have changed the risk based capital category of the Company and the Bank. To be categorized as well capitalized, the Bank must meet minimum ratios. 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 from the Bank. There are certain regulatory limitations on the payment of cash dividends by banks. 35 Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the following table). The Company's and Bank's actual capital amounts and ratios as of December 31, 2000 are as follows:
TO BE WELL CAPITALIZED UNDER PROMPT FOR CAPITAL CORRECTIVE ADEQUACY ACTION (DOLLARS IN THOUSANDS) ACTUAL PURPOSES PROVISIONS - ----------------------------------------------------------------------------------------------------------------- THE COMPANY: Amount Ratio Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------------------------------- Total capital (to risk weighted assets) $ 55,462 10.92% $ 40,640 8.0% $ 50,800 10.0% Tier I capital (to risk weighted assets) 49,089 9.66 20,320 4.0 30,480 6.0 Leverage ratio(1) 49,089 7.56 25,973 4.0 32,467 5.0 - ----------------------------------------------------------------------------------------------------------------- THE BANK: - ----------------------------------------------------------------------------------------------------------------- Total capital (to risk weighted assets) 52,701 10.57 39,902 8.0 49,878 10.0 Tier I capital (to risk weighted assets) 46,442 9.31 19,951 4.0 29,927 6.0 Leverage ratio(1) $ 46,442 7.21% $ 25,759 4.0% $ 32,192 5.0%
(1) THE LEVERAGE RATIO CONSISTS OF TIER I 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's and Bank's actual capital amounts and ratios as of December 31, 1999 are as follows:
To Be Well Capitalized For Capital Under Prompt Adequacy Corrective (Dollars in thousands) Actual Purposes Action Provisions - ----------------------------------------------------------------------------------------------------------------- THE COMPANY: Amount Ratio Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------------------------------- Total capital (to risk weighted assets) $ 46,448 11.24% $ 33,058 8.0% $ 41,322 10.0% Tier I capital (to risk weighted assets) 41,266 9.99 16,529 4.0 24,793 6.0 Leverage ratio(1) 41,266 7.50 21,999 4.0 27,498 5.0 - ----------------------------------------------------------------------------------------------------------------- THE BANK: - ----------------------------------------------------------------------------------------------------------------- Total capital (to risk weighted assets) 43,714 10.73 32,605 8.0 40,756 10.0 Tier I capital (to risk weighted assets) 38,602 9.47 16,302 4.0 24,453 6.0 Leverage ratio(1) $ 38,602 7.09% $ 21,785 4.0% $ 27,231 5.0%
(1) THE LEVERAGE RATIO CONSISTS OF TIER I 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. 36 NOTE 9. COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK At December 31, 2000, the Company has operating lease rental commitments for remaining terms of one to ten years. The Company has options to renew one of its leases for a period of 15 years. The minimum future commitments under noncancelable lease agreements having terms in excess of one year at December 31, 2000 are as follows:
(Dollars in thousands) - ------------------------------------------------ 2001 $ 610 2002 609 2003 581 2004 507 2005 464 Thereafter 1,499 ------- Total minimum lease payments $ 4,270 =======
Rent expense was approximately $598,000, $477,000, and $619,000 for the years ended December 31, 2000, 1999 and 1998. In the ordinary course of business, the Company enters into various types of transactions which involve financial instruments with off-balance sheet risk. These instruments include commitments to extend credit and standby letters of credit and are not reflected in the accompanying balance sheet. These transactions may involve, to varying degrees, credit and interest risk in excess of the amount, if any, recognized in the balance sheet. The Company's off-balance sheet credit risk exposure is the contractual amount of commitments to extend credit and standby letters of credit. The Company applies the same credit standards to these contracts as it uses in its lending process. Additionally, commitments to extend credit and standby letters of credit bear similar credit risk characteristics as outstanding loans. Financial instruments whose contractual amount represents risk:
AS OF DECEMBER 31 --------------------- (Dollars in thousands) 2000 1999 - ------------------------------------------------- Commitments to extend credit $ 144,480 $ 101,847 Standby letters of credit 1,320 2,674
Commitments to extend credit are agreements to lend to customers. These commitments have specified interest rates and generally have fixed expiration dates, but may be terminated by the Company if certain conditions of the contract are violated. Although currently subject to drawdown, many of these commitments are expected to expire or terminate without funding. Therefore, the total commitment amounts do not necessarily represent future cash requirements. Collateral held relating to these commitments varies, but may include securities, equipment, inventory and real estate. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of the customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held for standby letters of credit is based on an individual evaluation of each customer's credit worthiness, but may include cash, equipment, inventory and securities. The Company because of the nature of its business, is subject to various threatened or filed legal cases. The Company, based on the advice of legal counsel, does not expect such cases will have a material, adverse effect on its financial position or results of operations. NOTE 10. TIME DEPOSITS At December 31, 2000 the aggregate maturities for time deposits are as follows:
(Dollars in thousands) - ------------------------------------------------ 2001 $195,110 2002 25,358 2003 3,802 2004 30 2005 775 Thereafter 248
NOTE 11. CONCENTRATIONS OF CREDIT RISK The Bank's business activity is with customers located primarily in the counties of Fresno, Madera, Mariposa, Merced, Stanislaus, Tulare and Tuolumne. The Bank is diversified into retail and wholesale lending. Retail lending represents approximately 30% of the total loan portfolio and consists of consumer lending, loans to small 37 businesses, credit cards and the purchase of financing contracts principally from automobile dealers. Individual loans and lines are made in a variety of ways. In many cases collateral such as real estate, automobiles and equipment are used to support the extension of credit. Repayment, however, is largely dependent upon the borrower's personal cash flow. Loans to businesses and agricultural communities make up nearly 80% of the Bank's loan portfolio. Wholesale activities are spread across a wide spectrum including commercial loans to businesses, construction and permanent real estate financing, short and long term agricultural loans for production and real estate purposes and SBA financing. Where appropriate, collateral is taken to secure and reduce the Bank's credit risk. Each loan is submitted to an individual risk grading process but the borrowers' ability to repay is dependent, in part, upon factors affecting the local and national economies. NOTE 12. EMPLOYEE AND DIRECTOR BENEFIT PLANS The Company has a noncontributory employee stock ownership plan ("ESOP") and an employee savings plan covering substantially all employees. During 2000, 1999, and 1998, the Company contributed approximately $288,000, $217,000, and $193,000, to the ESOP and $95,000, $70,000, and $70,000, to the employee savings plan. Under provisions of the ESOP, the Company can make discretionary contributions to be allocated based on eligible individual annual compensation, as approved by the Board of Directors. Contributions to the ESOP are recognized as compensation expense. For the years December 31, 2000, 1999, and 1998, the ESOP owned 164,800, 154,305, and 130,441 shares of the Company's stock. ESOP shares are included in the weighted average number of shares outstanding for earnings per share computations. The employee savings plan allowed participating employees to contribute up to $10,500 each in 2000. The Company matched 25% of the employees' elective contribution, as defined, not to exceed 10% of eligible annual compensation. The Company maintains a non-qualified salary continuation plan for certain senior executive officers of the Company and the Bank. Under the plan, the Company has agreed to pay these executives retirement benefits for a ten to fifteen year period after their retirement so long as they meet certain length of service vesting requirements. The plan is informally linked to several single premium universal life insurance policies that provide life insurance on certain senior executive officers with the Company named as the owner and beneficiary of these policies. Salary continuation expense totaled $595,000, $341,000 and $244,000 in 2000, 1999 and 1998. The Company also maintains a non-qualified deferred compensation plan for members of the board of directors of the Company and the Bank. Under the deferred compensation plan, members of the board of directors have the ability to defer compensation they receive as directors until they reach retirement age, so long as they meet certain length of service vesting requirements. Upon reaching retirement age, the Company has agreed to pay these directors retirement benefits over a ten year period. The plan is informally linked to several single premium universal life insurance policies that provide life insurance on certain directors with the Company named as the owner and beneficiary of these policies. Deferred compensation expense totaled $63,000, $58,000 and $60,000 in 2000, 1999 and 1998. NOTE 13. STOCK OPTION PLAN In 1992, shareholders approved the adoption of an incentive stock option plan for bank management and a nonstatutory stock option plan for directors. The maximum number of shares issuable under the plans was 126,000. Options are available for grant under the plans at prices that approximate fair market value at the date of grant. Options granted under both plans become exercisable 25% at the time of grant and 25% each year thereafter and expire 10 years from the date of grant. In 1995, shareholders approved an amendment to the stock option plans increasing the number of authorized but unissued shares available for future grant of the Company's common stock to 450,000. 38 A summary of the status of the Company's stock options as of and for the years ended December 31, 2000, 1999, and 1998, and changes during the years ended on those dates, follows:
2000 1999 1998 ---------------------------- ---------------------------- ---------------------------- Weighted Weighted Weighted Number of Average Number of Average Number of Average Shares Exercise Price Shares Exercise Price Shares Exercise Price - ----------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 351,573 $ 7.59 325,806 $ 7.25 297,370 $ 6.65 Granted 64,500 10.43 68,000 10.45 39,000 13.56 Exercised (49,068) 9.82 (26,609) 8.09 (11,402) 7.51 Forfeited (3,407) 11.84 (15,624) 12.09 (14,620) 10.96 Stock dividend declared - - 15,458 6.65 ------- ------- ------- Outstanding at end of year 363,598 $ 8.40 351,573 $ 7.59 325,806 $ 7.25 ======= ======= ======= Options exercisable at end of year 274,717 $ 7.67 276,170 $ 6.58 267,395 $ 6.16
The following table summarizes information about options outstanding at December 31, 2000:
OPTIONS OPTIONS OUTSTANDING EXERCISABLE - -------------------------------------------------------------------------------------------------------- Range of Number Weighted Weighted Weighted Exercise Of Shares Remaining Average Number Average Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - -------------------------------------------------------------------------------------------------------- $ 3 - 6 141,053 1.40 Years $ 4.46 141,053 $ 4.46 6 - 9 35,741 6.07 7.88 27,116 7.60 9 - 16 186,804 8.08 11.49 106,298 11.94 ------- ------- $ 3 - 16 363,598 5.46 Years $ 8.40 274,467 $ 7.67 ======= =======
39 The number of shares and exercise price per share has been adjusted for stock dividends and stock splits during the period. The per share weighted average fair value of stock options granted during 2000, 1999 and 1998 was $3.45, $4.01, and $5.20 on the date of grant using the Black Scholes option pricing model with the following weighted average assumptions: 2000-1998 expected dividend yield 0%; 2000-1998 expected volatility of 26 percent, risk free interest rate of 5.05%, 6.41%, and 4.64%; and, an expected life of 7 years. The Company applies APB Opinion No. 25 in accounting for its plan and, accordingly, no compensation cost has been recognized for its stock options in the accompanying consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's net income would have been reduced to the proforma amounts indicated as follows:
(Dollars in thousands) 2000 1999 1998 - ----------------------------------------------------- Net income As reported...... $ 6,706 $ 5,109 $ 2,741 Proforma......... 6,592 5,018 2,504 BASIC EARNINGS PER SHARE As reported...... 1.48 1.12 0.60 Proforma......... 1.45 1.10 0.54 DILUTED EARNINGS PER SHARE As reported...... 1.44 1.09 0.58 Proforma......... 1.41 1.07 0.52
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company in estimating its fair value disclosures for financial instruments used the following methods and assumptions: FINANCIAL ASSETS: CASH AND CASH EQUIVALENTS: For these assets, the carrying amount is a reasonable estimate for fair value. INVESTMENTS: Fair values for available for sale and held to maturity investment securities are based on quoted market prices where available. If quoted market prices were not available, fair values were based upon quoted market prices of comparable instruments. NET LOANS: The fair value of loans is estimated by utilizing discounted future cash flow calculations using the interest rates currently being offered for similar loans to borrowers with similar credit risks and for the remaining or estimated maturities considering prepayments. The carrying value of loans is net of the allowance for loan losses and unearned loan fees. FINANCIAL LIABILITIES: DEPOSITS: The fair values disclosed for deposits generally paid upon demand (i.e. noninterest bearing and interest-bearing demand) savings and money market accounts are considered equal to their respective carrying amounts as reported on the consolidated balance sheets. The fair value of fixed rate certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. BORROWINGS: For these instruments, the fair value is estimated using rates currently available for similar loans with similar credit risk and for the remaining maturities. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: The Company has not estimated the fair value of commitments to extend credit and standby letters of credit. Because of the uncertainty in attempting to assess the likelihood and timing of a commitment being drawn upon, coupled with the lack of an established market for these financial instruments, the Company does not believe it is meaningful or practicable to provide an estimate of fair value.
(Dollars in thousands) Carrying 2000 Amount Fair Value - ------------------------------------------------- FINANCIAL ASSETS: Cash and cash equivalents.......... $ 47,768 $ 47,768 Time deposits at other Financial institutions... 100 100 Available for sale investment securities........... 155,830 155,830
40
(Dollars in thousands) Carrying 2000 Amount Fair Value - ------------------------------------------------- Held to maturity investment securities........... 35,222 35,412 Net loans.............. 404,457 398,059 FINANCIAL LIABILITIES Noninterest bearing demand............... 107,581 107,581 Interest bearing demand............... 84,521 84,521 Savings and money market............... 184,073 184,073 Time deposits.......... 225,323 225,838 Borrowings............. $ 22,427 $ 22,888
(Dollars in thousands) Carrying 1999 Amount Fair Value - ------------------------------------------------- FINANCIAL ASSETS: Cash and cash equivalents.......... $ 50,222 $ 50,222 Time deposits at other financial institutions......... 850 850 Available for sale investment securities........... 117,814 117,814 Held to maturity investment securities........... 29,554 28,675 Net loans.............. 324,726 323,851 FINANCIAL LIABILITIES Noninterest bearing demand............... 87,564 87,564 Interest bearing demand............... 72,788 72,788 Savings and money market............... 164,158 164,158 Time deposits.......... 170,391 170,680 Borrowings............. $ 20,814 $ 20,704
NOTE 15. RECONCILIATION OF BASIC AND DILUTED NET EARNINGS PER SHARE
(Dollars in YEAR ENDED DECEMBER 31, thousands 2000 except per share ------------------------------- amounts) Income Shares Per-Share - ------------------------------------------------------ Basic EPS Income available to common shareholders....... $ 6,706 4,529 $ 1.48 ====== Effect of dilutive securities: Stock options........ - 131 ------- ------
(Dollars in YEAR ENDED DECEMBER 31, thousands 2000 except per share ------------------------------- amounts) Income Shares Per-Share - ------------------------------------------------------ Diluted EPS Income available to common shareholders plus assumed conversions........ $ 6,706 4,660 $ 1.44 ======= ====== ======
(Dollars in YEAR ENDED DECEMBER 31, thousands except 1999 per share ------------------------------- amounts) Income Shares Per-Share - ------------------------------------------------------ Basic EPS Income available to common shareholders....... $ 5,109 4,562 $ 1.12 ====== Effect of dilutive securities: Stock options........ - 128 ------- ------ Diluted EPS Income available to common shareholders plus assumed conversions........ $ 5,109 4,690 $ 1.09 ======= ====== ======
(Dollars in YEAR ENDED DECEMBER 31, thousands except 1998 per share ------------------------------- amounts) Income Shares Per-Share - ------------------------------------------------------ Basic EPS Income available to common shareholders....... $ 2,741 4,602 $ 0.60 ====== Effect of dilutive securities: Stock options........ - 123 ------- ------ Diluted EPS Income available to common shareholders plus assumed conversions........ $ 2,741 4,725 $ 0.58 ======= ====== ======
41 NOTE 16. PARENT COMPANY ONLY FINANCIAL INFORMATION This information should be read in conjunction with the other notes to the consolidated financial statements. The following are the condensed balance sheets of the Company as of December 31, 2000 and 1999 and the condensed statements of income and cash flows for the years ended December 31, 2000, 1999 and 1998: CONDENSED BALANCE SHEETS
DECEMBER 31, --------------------- (Dollars in thousands) 2000 1999 - ------------------------------------------------- ASSETS Cash and short-term investments............. $ 960 $ 654 Investment in County Bank.................... 50,765 40,960 Net premises and equipment............... 5,931 6,101 Other assets.............. 918 345 -------- -------- Total assets.......... $ 58,574 $ 48,060 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY LIABILITIES Borrowed funds............ $ 3,155 $ 3,214 Capitalized lease......... 931 800 Other liabilities......... 1,037 369 -------- -------- Total liabilities..... 5,123 4,383 SHAREHOLDERS' EQUITY Common stock.......... 35,918 35,593 Accumulated other comprehensive (loss) income.............. 84 (2,659 Retained earnings..... 17,449 10,743 -------- -------- Total shareholders' equity.......... 53,451 43,677 -------- -------- Total liabilities and shareholders' equity.... $ 58,574 $ 48,060 ======== ========
42
Condensed statements of income Year Ended December 31, - -------------------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------- INCOME Dividends from subsidiaries $ - $ 1,243 $ - Interest 1 19 102 Lease income 502 502 503 Management fees from subsidiaries 4,918 2,101 2,299 ------- ------- ------- Total income 5,421 3,865 2,904 EXPENSES Interest on borrowings 282 273 274 Capitalized lease interest 80 71 42 Salaries and related benefits 2,975 2,340 1,299 Other noninterest expense 2,650 1,820 1,469 ------- ------- ------- Total other expenses 5,987 4,504 3,084 Loss before taxes and equity in undistributed earnings (566) (639) (180) Income tax benefit 211 219 72 Equity in undistributed income of subsidiaries 7,061 5,529 2,849 ------- ------- ------- Net income $ 6,706 $ 5,109 $ 2,741 ======= ======= =======
December 31, - -------------------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 6,706 $ 5,109 $ 2,741 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (7,061) (5,529) (2,849) Decrease in other assets 56 379 446 Increase (decrease) in other liabilities 668 171 (312) Net cash provided by operating activities 369 130 26 INVESTING ACTIVITIES: Capital contribution to subsidiary bank - - (600) Purchase of premises and equipment (459) (278) (1,366) Dividends from subsidiaries - 1,243 - -------- ------- -------- Net cash (used in) provided by investing activities (459) 965 (1,966) FINANCING ACTIVITIES: Net increase (decrease) in other borrowings 71 (262) 690 Issuance of common stock related to exercise of stock options and employee benefit plans 325 219 (12) Repurchase of common stock - (1,768) - Cash dividends and fractional shares - - (6) -------- ------- -------- Net cash provided by (used in) financing activities 396 (1,811) 672 Increase (decrease) in cash and cash equivalents 306 (716) (1,268) Cash and cash equivalents at beginning of year 654 1,370 2,638 -------- ------- -------- Cash and cash equivalents at end of year $ 960 $ 654 $ 1,370 ======== ======= ========
43 NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
2000 Quarter Ended - ------------------------------------------------------------------------------------------------------- (Dollars in thousands) Dec 31 Sept 30 June 30 Mar 31 - ------------------------------------------------------------------------------------------------------- Interest income $ 13,995 $ 13,299 $ 12,361 $ 11,233 Interest expense 5,831 5,592 5,041 4,304 Net interest income 8,164 7,707 7,320 6,929 Provision for loan losses 963 792 768 763 Other income 1,276 1,340 1,644 1,147 Other expenses 6,088 5,888 5,655 5,143 Income before income taxes 2,389 2,367 2,541 2,170 Income taxes 643 721 741 656 Net income $ 1,746 $ 1,646 $ 1,800 $ 1,514 - ------------------------------------------------------------------------------------------------------- Basic earnings per share (1) $ .38 $ .36 $ .40 $ .34 - ------------------------------------------------------------------------------------------------------- Diluted earnings per share (1) $ .37 $ .35 $ .39 $ .33 - -------------------------------------------------------------------------------------------------------
1999 Quarter Ended - ------------------------------------------------------------------------------------------------------- (Dollars in thousands) Dec 31 Sept 30 Mar 31 June 30 - ------------------------------------------------------------------------------------------------------- Interest income $ 10,874 $ 10,106 $ 9,438 $ 8,943 Interest expense 4,008 3,558 3,268 3,206 Net interest income 6,866 6,548 6,170 5,737 Provision for loan losses 887 672 593 507 Other income 1,162 1,207 1,224 1,379 Other expenses 5,183 5,295 5,147 4,796 Income before income taxes 1,958 1,788 1,654 1,813 Income taxes 501 492 449 662 Net income $ 1,457 $ 1,296 $ 1,205 $ 1,151 - ------------------------------------------------------------------------------------------------------- Basic earnings per share (1) $ .32 $ .28 $ .26 $ .25 - ------------------------------------------------------------------------------------------------------- Diluted earnings per share (1) $ .32 $ .28 $ .25 $ .24
(1) BASIC AND DILUTED EARNINGS PER SHARE CALCULATIONS ARE BASED UPON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING EACH PERIOD. FULL YEAR WEIGHTED AVERAGE SHARES DIFFER FROM QUARTERLY WEIGHTED AVERAGE SHARES AND, THEREFORE, ANNUAL EARNINGS PER SHARE MAY NOT EQUAL THE SUM OF THE QUARTERS. 44 EX-23 4 a2042933zex-23.txt EX 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Capital Corp of the West: We consent to the incorporation by reference in the registration statement (No. 333-41440) on Form S-8 of Capital Corp of the West of our report dated January 26, 2001, relating to the consolidated balance sheets of Capital Corp of the West and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income and comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000, which report appears in the three-year period ended December 31, 2000, which report appears in the December 31, 2000, annual report on Form 10-K of Capital Corp of the West. /s/ KPMG San Francisco, California March 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----