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