-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N+OgR8gMVyamjz18dkxUEZ/7bGZez2SgixrnQk+qrYc4IeYz2je87NPsJ45u+ebY 84j2QvF9Esowc76MvGTatg== 0000912057-99-005521.txt : 19991117 0000912057-99-005521.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-005521 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL CORP OF THE WEST CENTRAL INDEX KEY: 0001004740 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770405791 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27384 FILM NUMBER: 99751618 BUSINESS ADDRESS: STREET 1: 550 W MAIN STREET CITY: MERCED STATE: CA ZIP: 95340 BUSINESS PHONE: 2097252200 MAIL ADDRESS: STREET 1: 550 W MAIN STREET STREET 2: 550 W MAIN STREET CITY: MERCED STATE: CA ZIP: 95340 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30,1999 or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from ______________ to ______________ Commission File Number: 0-27384 CAPITAL CORP OF THE WEST ------------------------------------------------------ (Exact name of registrant as specified in its charter) California 77-0405791 ------------------------------- -------------------------- (State or other jurisdiction of IRS Employer ID Number incorporation or organization) 550 West Main, Merced, CA 95340 ---------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (209) 725-2200 Former name, former address and former fiscal year, if changed since last report: Not applicable Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the registrant's common stock, no par value, as of September 30, 1999 was 4,483,483. No shares of preferred stock, no par value, were outstanding at September 30, 1999. 1 CAPITAL CORP OF THE WEST Table of Contents PART I. - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income and Comprehensive Income 4 Consolidated Statements of Changes in Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation 10 Item 3. Quantitative and Qualitative Disclosure about Market Risk 33 PART II. - OTHER INFORMATION Item 1. Legal Proceedings 33 Item 2. Changes in Securities 33 Item 3. Defaults Upon Senior Securities 33 Item 4. Submission of matters to a vote of Security Holders 34 Item 5. Other Information 34 Item 6. Exhibits and Reports on Form 8-K 34 SIGNATURES 35
2 Capital Corp of the West Consolidated Balance Sheets (Unaudited)
09/30/99 12/31/98 -------- -------- (In thousands) ASSETS Cash and noninterest-bearing deposits in other banks $ 32,593 $ 25,771 Federal funds sold 2,300 19,125 Time deposits at other financial institutions 7,201 600 Investment securities available for sale, at fair value 120,622 141,357 Investment securities held to maturity at cost, fair value of $29,740,000, and $13,584,000 at September 30, 1999 and December 31, 1998 30,329 13,510 Loans, net of allowance for loan losses of $6,016,000, and $4,775,000 at September 30, 1999 and December 31, 1998 317,350 264,158 Interest receivable 3,403 3,272 Premises and equipment, net 12,899 13,319 Intangible assets 5,267 5,865 Other assets 17,351 12,882 -------- -------- Total assets $549,315 $499,859 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing demand $ 78,315 $ 80,290 Negotiable orders of withdrawal 67,508 71,526 Savings 173,999 165,781 Time, under $100,000 98,201 84,011 Time, $100,000 and over 54,477 42,602 -------- -------- Total deposits 472,500 444,210 Short term borrowings 27,100 7,203 Long term borrowings 3,230 3,263 Accrued interest, taxes and other liabilities 3,819 2,379 -------- -------- Total liabilities 506,649 457,055 Preferred Stock, no par value; 10,000,000 shares authorized; None outstanding Common stock, no par value; 20,000,000 shares authorized; 4,483,483 and 4,607,102 issued & outstanding at September 30, 1999, and December 31, 1998 35,495 37,142 Retained earnings 9,286 5,634 Accumulated other comprehensive (loss) income, net (2,115) 28 -------- -------- Total shareholders' equity 42,666 42,804 -------- -------- Total liabilities and shareholders' equity $549,315 $499,859 -------- -------- -------- --------
See accompanying notes 3 Capital Corp of the West Consolidated Statements of Income and Comprehensive Income (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, 1999 1998 1999 1998 ---- ---- ---- ---- (In thousands) (In thousands) Interest Income: Interest and fees on loans $ 7,881 $6,708 $ 21,898 $18,488 Interest on deposits with other financial institutions 45 16 84 50 Interest on investments held to maturity: Taxable 300 182 667 551 Non-taxable 56 - 134 - Interest on investments available for sale: Taxable 1,499 1,642 4,463 4,996 Non-taxable 288 216 901 483 Interest on federal funds sold 37 257 340 907 ------- ------ -------- ------- Total interest income 10,106 9,021 28,487 25,475 Interest expense: Interest on negotiable orders of withdrawal 117 131 339 372 Interest on savings deposits 1,501 1,436 4,285 4,316 Interest on time deposits, under $100,000 1,148 1,063 3,289 3,314 Interest on time, $100,000 and over 599 497 1,696 1,158 Interest on other borrowings 193 321 423 977 ------- ------ -------- ------- Total interest expense 3,558 3,448 10,032 10,137 Net interest income 6,548 5,573 18,455 15,338 Provision for loan losses 672 700 1,772 1,690 ------- ------ -------- ------- Net interest income after provision for loan losses 5,876 4,873 16,683 13,648 Other income: Service charges on deposit accounts 846 734 2,383 2,072 Income from real estate held for sale - 56 250 419 Other 361 430 1,177 1,176 ------- ------ -------- ------- Total other income 1,207 1,220 3,810 3,667 Other Expenses: Salaries and related benefits 2,545 2,055 7,163 5,929 Premises and occupancy 418 330 1,141 980 Equipment 539 581 1,547 1,625 Professional fees 228 381 921 746 Marketing 188 173 540 463 Goodwill and intangible amortization 198 195 594 584 Branch purchase - - - 101 Supplies 126 143 419 455 Other 1,053 993 2,913 2,669 ------- ------ -------- ------- Total other expenses 5,295 4,851 15,238 13,552 Income before income taxes 1,788 1,242 5,255 3,763 Provision for income taxes 492 248 1,603 1,076 ------- ------ -------- ------- Net income $ 1,296 $ 994 $ 3,652 $ 2,687 - ------------------------------------------------------------------------------------------------------------- Comprehensive Income: Unrealized (loss) gains on securities arising during the (547) 467 (2,071) 482 period, Less: reclassification adjustment for gains included in net income, net (93) - (72) (55) ------- ------ -------- ------- Comprehensive income, net $ 656 $1,461 $ 1,509 $ 3,114 ------- ------ -------- ------- ------- ------ -------- ------- Basic earnings per share $ 0.28 $ .22 $ .80 $ 0.58 Diluted earnings per share $ 0.28 $ .21 $ .77 $ 0.56 - -------------------------------------------------------------------------------------------------------------
See accompanying notes 4 Capital Corp of the West Consolidated Statement of Changes in Shareholders' Equity (Unaudited) (Amounts in thousands except number of shares)
Common Stock Accumulated ------------ other Number Retained comprehensive of shares Amounts earnings (loss) income, net Total --------- ------- -------- ------------------ ------- Balance, December 31, 1998 4,607,102 $37,142 $5,634 $28 $42,804 Stock repurchases (137,510) (1,768) - - (1,768) Exercise of stock options 13,891 121 - - 121 Net change in fair market value of investment securities, net of tax effect of $(1,445) - - - (2,143) (2,143) Net income - - 3,652 - 3,652 --------- ------- ------ ------- ------- Balance, September 30, 1999 4,483,483 $35,495 $9,286 $(2,115) $42,666 --------- ------- ------ ------- ------- --------- ------- ------ ------- -------
See accompanying notes 5 Capital Corp of the West Consolidated Statements of Cash Flows (Unaudited)
9 months ended 9 months ended 09/30/99 09/30/98 (In thousands) OPERATING ACTIVITIES: Net income $ 3,652 $ 2,687 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,772 1,690 Depreciation, amortization and accretion, net 2,185 2,541 Gain on sale of real estate held for sale 250 363 Gain on sale of premises and equipment 10 - Net increase in interest receivable & other assets (3,808) (1,068) Net (increase) decrease in deferred loan fees (690) 85 Net increase in accrued interest payable & other liabilities 1,880 92 -------- -------- Net cash provided by operating activities 5,251 6,390 INVESTING ACTIVITIES: Investment security purchases (47,591) (40,745) Proceeds from maturities of investment securities 26,160 25,381 Proceeds from sales of AFS investment securities 21,351 26,219 Net (increase) decrease in time deposits in other financial (6,601) 99 institutions Proceeds from sales of commercial and real estate loans 939 6,410 Net increase in loans (55,396) (50,088) Purchases of premises and equipment (873) (1,912) Proceeds from sales of real estate held for sale 250 478 -------- -------- Net cash used by investing activities (61,761) (34,158) FINANCING ACTIVITIES: Net increase in demand, NOW and savings deposits 2,225 36,271 Net increase in certificates of deposit 26,065 21,209 Net increase (decrease) in other borrowings 19,864 (672) Purchase of treasury stock (1,768) - Fractional shares purchased - (6) Exercise of stock options 121 105 -------- -------- Net cash provided by financing activities 46,507 56,907 Net (decrease) increase in cash and cash equivalents (10,003) 29,139 Cash and cash equivalents at beginning of period 44,896 23,435 -------- -------- Cash and cash equivalents at end of period $ 34,893 $ 52,574 -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Investment securities net unrealized losses; net of tax (2,143) (427) Interest paid 9,559 10,127 Income tax payments 1,511 200 Transfer of securities from available for sale to held to maturity 4,327 9,636 Loans transferred to other real estate owned - 478
See accompanying notes 6 Capital Corp of the West Notes to Consolidated Financial Statements September 30, 1999 and December 31, 1998 (Unaudited) GENERAL - COMPANY Capital Corp of the West (the "Company" or "Capital Corp") is a bank holding company incorporated under the laws of the State of California on April 26, 1995. On November 1, 1995, the Company became registered as a bank holding company, and is a holder of all of the capital stock of County Bank (the "Bank") and all of the capital stock of Town and Country Finance and Thrift (the "Thrift"). During 1998, the Company formed Capital West Group, a new subsidiary that engages in the financial institution advisory business, but is currently inactive. The Company's primary asset is the Bank and the Bank is the Company's primary source of income. The Company's securities consist of 20,000,000 shares of Common Stock, no par value, and 10,000,000 shares of Authorized Preferred Stock. As of September 30, 1999 there were 4,483,483 common shares outstanding, held of record by approximately 2,300 shareholders. There were no preferred shares outstanding at September 30, 1999. The Bank has two wholly owned subsidiaries, Merced Area Investment & Development, Inc. ("MAID") and County Asset Advisors ("CAA"). CAA is currently inactive. All references herein to the "Company" include the Bank, the Bank's subsidiaries, Capital West Group and the Thrift, unless context otherwise requires. GENERAL - BANK The Bank was organized and commenced operations, in 1977, as County Bank of Merced, a California state banking corporation. In November 1992, the Bank changed its legal name to County Bank. The Bank's securities consist of one class of Common Stock, no par value and are wholly owned by the Company. The Bank's deposits are insured under the Federal Deposit Insurance Act by the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits stated therein. It is not a member of the Federal Reserve System. GENERAL - THRIFT The Company acquired the Thrift on September 28, 1996 for a combination of cash and stock with an aggregate value of approximately $5.8 million. The Thrift is an industrial loan company with four offices. It specializes in direct loans to the public and the purchase of financing contracts. It was originally incorporated in 1957. Its deposits (technically known as investment certificates or certificates of deposit rather than deposits) are insured by the FDIC up to applicable limits. During the second quarter of 1999, the Company applied with federal and state regulatory agencies for permission to merge the Thrift into the Bank. Pending regulatory approval, this merger should take place in the fourth quarter of 1999. INDUSTRY AND MARKET AREA The Bank engages in general commercial banking business primarily in Merced, Tuolumne, Mariposa, Madera and Stanislaus counties. The bank has thirteen branch offices: two in Merced with one branch centrally located in Merced and the other in downtown Merced which also serves as the Bank's administrative office building, offices in Atwater, Turlock, Hilmar, Sonora, Los Banos, Mariposa, Livingston, Dos Palos, Madera and two offices in Modesto. The Thrift engages in the general consumer lending business primarily in Stanislaus, Fresno, and Tulare counties from its main office in Turlock, and branch offices located Modesto, Visalia, and Fresno. 7 OTHER FINANCIAL NOTES All adjustments which in the opinion of Management are necessary for a fair presentation of the Company's financial position at September 30, 1999 and December 31, 1998 and the results of operations for the three and nine month periods ended September 30, 1999 and 1998, and the statements of cash flows for the nine months ended September 30, 1999 and 1998 have been included. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The interim results for the three and nine months ended September 30, 1999 and 1998 are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and the notes included in the Company's Annual Report for the year ended December 31, 1999. Per share information is based on the weighted average number of shares of common stock outstanding during each three and nine month period presented after giving retroactive effect for the 5% stock dividend declared for shareholders of record May 7, 1998, payable September 1, 1998. Basic earnings per share (EPS) is computed by dividing net income available to shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to shareholders by the weighted average number of common shares outstanding during the period plus potential common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The following table provides a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation of the three and nine month periods ending September 30, 1999 and 1998:
For The Three Months For The Nine Months Ended September 30, Ended September 30, 1999 1998 1999 1998 ------ ------ ------ ------ (In thousands, except per share data) Basic EPS computation: Net income $1,296 $ 994 $3,652 $2,687 ------ ------ ------ ------ Average common shares outstanding 4,550 4,603 4,585 4,601 ------ ------ ------ ------ Basic EPS $ 0.28 $ 0.22 $0.80 $ 0.58 ------ ------ ------ ------ ------ ------ ------ ------ Diluted EPS computation: Net income $1,296 $ 994 $3,652 $2,687 ------ ------ ------ ------ Average common shares outstanding 4,550 4,603 4,585 4,601 Stock options 140 155 140 155 ------ ------ ------ ------ 4,690 4,758 4,725 4,756 ------ ------ ------ ------ ------ ------ ------ ------ Diluted EPS $ 0.28 $ 0.21 $ 0.77 $ 0.56 ------ ------ ------ ------ ------ ------ ------ ------
8 In June 1998, the Financial Accounting Standards Board 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 variable 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. SFAS No. 133 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 - an amendment of FASB Statement No. 133, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Initial application of this 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 this statement. SFAS 133 should not be applied retroactively to financial statements of prior periods. The Company does not expect that the adoption of SFAS 133 will have a material impact on its financial condition. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS. THESE FACTORS INCLUDE GENERAL RISKS INHERENT TO COMMERCIAL LENDING; RISKS RELATED TO ASSET QUALITY; RISKS RELATED TO THE COMPANY'S DEPENDENCE ON KEY PERSONNEL AND ITS ABILITY TO MANAGE EXISTING AND FUTURE GROWTH; RISKS RELATED TO COMPETITION; RISKS POSED BY PRESENT AND FUTURE GOVERNMENT REGULATION AND LEGISLATION; AND RISKS RESULTING FROM FEDERAL MONETARY POLICY. The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and its subsidiaries' financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Consolidated Financial Statement of the Company and the Notes thereto. RESULTS OF OPERATIONS OVERVIEW. For the three and nine months ended September 30, 1999 the Company reported record net income of $1,296,000 and $3,652,000 which compares to $994,000 and $2,687,000 for the three and nine months ending September 30, 1999. These amounts represent increases of 30.4% and 35.9%, respectively. Basic and diluted earnings per share were $0.28 for the three months ended September 30, 1999, compared with $0.22 and $0.21 for the same period in 1998. Basic and diluted earnings per share were $0.80 and $0.77 for the nine months ended September 30, 1999, compared with $0.58 and $0.56 for the same period in 1998. The annualized return on average assets was .99% and .85% for the three months ended September 30, 1999 and 1998, respectively. The Company's annualized return on average equity was 11.92% and 9.27% for the three months ended September 30, 1999 and 1998, respectively. The following tables provides a summary of the major categories of income and expense for the third quarter of 1999 compared with the third quarter of 1998 and for the first nine months of 1999 compared with the first nine months of 1998.
Three Months Ended September 30, Percentage Change 1999 1998 Increase (Decrease) (In thousands, except earnings per share) Interest income $10,106 $9,021 12.0% Interest expense 3,558 3,448 3.2 Net interest income 6,548 5,573 17.5 Provision for loan losses 672 700 (4.0) Net interest income after provision for loan losses 5,876 4,873 20.6 Other income 1,207 1,220 (0.1) Other expenses 5,295 4,851 9.2 Income before income taxes 1,788 1,242 44.0 Income taxes 492 248 98.4 Net income 1,296 994 30.4 Diluted earnings per common share 0.28 0.21 33.3
10
Nine Months Ended September 30, Percentage Change 1999 1998 Increase (Decrease) (In thousands, except earnings per share) Interest income $28,487 $25,475 11.8% Interest expense 10,032 10,137 (1.0) Net interest income 18,455 15,338 20.3 Provision for loan losses 1,772 1,690 4.9 Net interest income after provision for loan losses 16,683 13,648 22.2 Other income 3,810 3,667 3.9 Other expenses 15,238 13,552 12.4 Income before income taxes 5,255 3,763 39.6 Income taxes 1,603 1,076 49.0 Net income 3,652 2,687 35.9 Diluted earnings per common share 0.77 0.56 37.5
NET INTEREST INCOME. The Company's primary source of income is net interest income and is determined by the difference between interest income and fees derived from earnings assets and interest paid on interest bearing liabilities. Net interest income for the three and nine months ended September 30, 1999 totaled $6,548,000 and $18,455,000 and represented an increase of $975,000 and $3,117,000 or 17.5% and 20.3% when compared to the $5,573,000 and $15,338,000 achieved during the three and nine months ended September 30, 1998. Total interest and fees on earning assets were $10,106,000 and $28,487,000 for the three and nine months ended September 30, 1999, an increase of $1,085,000 and $3,012,000 or 12.0% and 11.8% from the $9,021,000 and $25,475,000 for the same periods in 1998. The level of interest income is affected by changes in volume of and rates earned on interest-earning assets. Interest-earning assets consist primarily of loans, investment securities and federal funds sold. The increase in the volume of interest income for the three months ended September 30, 1999 was primarily the result of an increase in the volume of interest-earning assets. Average interest-earning assets for the three and nine months ended September 30, 1999 were $467,085,000 and $450,140,000 compared with $414,457,000 and $392,812,000 for the three and nine months ended September 30, 1998, an increase of $52,628,000 and $57,328,000 or 12.7% and 14.6%. Interest expense is a function of the volume of and the rates paid on interest-bearing liabilities. Interest-bearing liabilities consist primarily of certain deposits and borrowed funds. Total interest expense was $3,558,000 and $10,032,000 for the three and nine months ended September 30, 1999, compared with $3,448,000 and $10,137,000 for the three and nine months ended September 30, 1998, an increase (decrease) of $110,000 and (105,000) or 3.2% and (1.0)%. During 1999, there was a decrease in deposit interest rates and an increase in volume of interest-bearing liabilities. Average interest-bearing liabilities were $398,308,000 and $383,805,000 for the three and nine months ended September 30, 1999 compared with $354,752,000 and $339,532,000 for the same three and nine months in 1998, an increase of $43,556,000 and $44,273,000 or 12.3% and 13%. Average interest rates paid on interest-bearing liabilities were 3.57% and 3.49% for the three and nine months ending September 30, 1999 compared with 3.89% and 3.98% for the same three and nine months of 1998, a decrease of 32 and 49 basis points or 8.2% and 12.3%. 11 The increase in interest-earning assets and interest-bearing liabilities is primarily the result of increased market penetration within our target markets. The Company has not opened any new branch locations since the purchase of three branches of Bank of America in December 1997. The Company's net interest margin, the ratio (annualized) of net interest income to average interest-earning assets, was 5.61% and 5.47% for the three and nine months ended September 30, 1999 compared with 5.38% and 5.21% for the same periods in 1998. Net interest margin provides a measurement of the Company's ability to employ funds profitably during the period being measured. The Company's increase in net interest margin was primarily attributable to a moderate change in the mix of interest-earning assets. Loans as a percentage of average interest-earning assets were 68% and 66% for the three and nine months ended September 30, 1999 compared to 62% and 60% for the three and nine months ended September 30, 1998. 12 AVERAGE BALANCES AND RATES EARNED AND PAID. The following table presents condensed average balance sheet information for the Company, together with interest rates earned and paid on the various sources and uses of its funds for each of the three month periods indicated. Nonaccruing loans are included in the calculation of the average balances of loans, but the nonaccrued interest on such loans is excluded. AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS
Three months ended Three months ended September 30, 1999 September 30, 1998 Average Average Balance Interest Yield/rate Balance Interest Yield/rate (In thousands) Assets Federal funds sold $ 2,866 $ 37 5.16% $ 18,712 $ 257 5.49% Time deposits at other financial institutions 3,381 45 5.32 1,242 16 5.15 Taxable investment securities 113,383 1,799 6.35 119,699 1,824 6.10 Nontaxable investment securities (1) 30,070 344 4.58 17,650 216 4.90 Loans, gross (2) 317,385 7,881 9.93 257,154 6,708 10.56 -------- ------- ---- -------- ------ ----- Total interest-earning assets 467,085 10,106 8.65 414,457 9,021 8.71 Allowance for loan losses (6,048) (4,189) Cash and due from banks 22,682 19,943 Premises and equipment, net 13,042 13,533 Interest receivable and other assets 25,145 23,088 -------- -------- Total assets $521,906 $466,832 -------- -------- -------- -------- Liabilities And Shareholders' Equity Negotiable order of withdrawal $ 68,992 $ 117 0.68% $ 58,336 $ 131 0.90% Savings deposits 177,809 1,501 3.38 160,483 1,436 3.60 Time deposits 139,721 1,747 5.00 114,034 1,560 5.47 Other borrowings 11,786 193 6.55 21,899 321 5.86 -------- ------- ---- -------- ------ ----- Total interest-bearing liabilities 398,308 3,558 3.57 354,752 3,448 3.89 Noninterest-bearing deposits 75,964 65,972 Accrued interest, taxes and other liabilities 4,135 3,523 -------- -------- Total liabilities 478,407 424,247 Total shareholders' equity 43,499 42,585 -------- -------- Total liabilities and shareholders' equity $521,906 $466,832 -------- -------- -------- -------- Net interest income and margin (3) $ 6,548 5.61% $5,573 5.38% ------- ---- ------ ----- ------- ---- ------ -----
(1) Interest on nontaxable securities is not computed on a tax-equivalent basis. (2) Nonaccrual loans are included in average balances. Amounts of interest earned includes loan fees of $53,000 and $323,000 for the three months ending September 30, 1999 and 1998 respectively. (3) Net interest margin is computed by dividing net interest income by total average interest-earning assets. 13 The following table presents condensed average balance sheet information for the Company, together with interest rates earned and paid on the various sources and uses of its funds for each of the nine month periods indicated. Nonaccruing loans are included in the calculation of the average balances of loans, but the nonaccrued interest on such loans is excluded.
Nine months ended Nine months ended September 30, 1999 September 30, 1998 Average Average Balance Interest Yield/rate Balance Interest Yield/rate (In thousands) ASSETS Federal funds sold $ 9,503 $ 340 4.77% $ 22,115 $ 907 5.47% Time deposits at other financial institutions 2,095 84 5.35 1,072 50 6.22 Taxable investment securities 112,711 5,130 6.07 121,378 5,547 6.10 Nontaxable investment securities (1) 30,099 1,035 4.58 12,734 483 5.06 Loans, gross (2) 295,732 21,898 9.87 235,513 18,488 10.50 -------- ------- ---- -------- ------ ----- Total interest-earning assets 450,140 28,487 8.44 392,812 25,475 8.65 Allowance for loan losses (5,769) (4,028) Cash and due from banks 21,168 20,155 Premises and equipment, net 13,141 13,356 Interest receivable and other assets 24,285 22,390 -------- -------- Total assets $502,965 $444,685 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Negotiable order of withdrawal $ 67,350 $ 339 0.67% $ 55,721 $ 372 0.89% Savings deposits 175,363 4,285 3.26 153,461 4,316 3.75 Time deposits 133,431 4,985 4.98 108,607 4,472 5.49 Other borrowings 7,661 423 7.36 21,743 977 5.99 -------- ------- ---- -------- ------ ----- Total interest-bearing liabilities 383,805 10,032 3.49 339,532 10,137 3.98 Noninterest-bearing deposits 71,717 60,420 Accrued interest, taxes and other liabilities 3,899 2,921 -------- -------- Total liabilities 459,421 402,873 Total shareholders' equity 43,544 41,812 -------- -------- Total liabilities and shareholders' equity $502,965 $444,685 -------- -------- -------- -------- Net interest income and margin (3) $18,455 5.47% $15,338 5.21% ------- ---- ------ ----- ------- ---- ------ -----
(1) Interest on nontaxable securities is not computed on a tax-equivalent basis. (2) Nonaccrual loans are included in average balances. Amounts of interest earned includes loan fees of $329,000 and $971,000 for September 30, 1999 and 1998 respectively. (3) Net interest margin is computed by dividing net interest income by total average interest-earning assets. NET INTEREST INCOME CHANGES DUE TO VOLUME RATE. The following table sets forth, for the periods indicated, a summary of the changes in average asset and liability balances and interest earned and interest paid resulting from changes in average asset and liability balances (volume) and changes in average interest rates and the total net change in interest income and expenses. The changes in interest due to both rate and volume have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each. 14 Net Interest Income Variance Analysis:
Nine Months Ended September 30, 1999 compared to September 30, 1998 Volume Rate Total ------ ------- ------ (In thousands) (Decrease) increase in interest income: Federal funds sold $ (463) $ (104) $ (567) Time deposits at other financial institutions 42 (8) 34 Taxable investment securities (393) (24) (417) Tax-exempt investment securities 570 (18) 552 Loans 4,507 (1,097) 3,410 ------ ------- ------ Total 4,263 (1,251) 3,012 ------ ------- ------ ------ ------- ------ Increase (decrease) interest expense: Interest bearing demand 69 (102) (33) Savings deposits 574 (605) (31) Time deposits 955 (442) 513 Other borrowings (740) 186 (554) ------ ------- ------ Total 858 (963) (105) ------ ------- ------ Increase in net interest income $3,405 $ (288) $3,117 ------ ------- ------ ------ ------- ------
PROVISION FOR LOAN LOSSES. The provision for loan losses for the three and nine months ended September 30, 1999 was $672,000 and $1,772,000 which compares with $700,000 and $1,690,000 for the three and nine months ended September 30, 1998. See "Allowance for Loan Losses" contained herein. As of September 30, 1999 the allowance for loan losses was $6,016,000 or 1.86% of total loans. At September 30, 1999, nonperforming assets totaled $3,713,000 or 0.68% of total assets, nonperforming loans totaled $3,321,000 or 1.03% of total loans and the allowance for loan losses totaled 181% of nonperforming loans. No assurance can be given that nonperforming loans will not increase or that the allowance for loan losses will be adequate to cover losses inherent in the loan portfolio. OTHER INCOME. Total other income for the three and nine months ended September 30, 1999 was $1,207,000 and $3,810,000 which compares with $1,220,000 and $3,667,000 for the same periods in 1998. Service charges on deposit accounts increased by $112,000 or 15.2% to $846,000 for the three months ended September 30, 1999 compared with $734,000 for the same period in 1998. Income from the sale of real estate held for sale or development decreased by $56,000 over 1998 levels, as there were no real estate sales during the third quarter of 1999. Other income, which includes commissions earned on the retail sale of securities and annuities, decreased by $69,000 or 16% for the three month period ended September 30, 1999 to $361,000 which compares to the $430,000 recorded in the same period in 1998. The $250,000 gain on sale of real estate recorded during the first nine months of 1999 resulted from the sale of a property during the first quarter of 1999 that was previously written off. OTHER EXPENSE. Noninterest expenses for the three and nine months ended September 30, 1999 were $5,295,000 and $15,238,000 which compares with $4,851,000 and $13,552,000 for the three and nine months ended September 30, 1998. The primary components of noninterest expenses were salaries and employee benefits, furniture and equipment expenses, occupancy expenses, professional fees, and other operating expenses. For the three and nine months ended September 30, 1999, salaries and related benefits increased by $490,000 and $1,234,000 over the same period in 1998 to $2,545,000 and $7,163,000. Equipment expenses decreased by $42,000 and $78,000 during the three and nine months ended September 30, 1999 to $539,000 and $1,547,000. When comparing the results of the three months ending September 30, 1999 15 to three months ending September 30, 1998, premises and occupancy expenses increased $88,000 or 27%, professional fees decreased by $153,000 or 40%, marketing expenses increased by $15,000, goodwill and intangible amortization expense increased by $3,000, supplies expense decreased by $17,000, and other expenses increased by $60,000. The salary expense increases were primarily the result of increased staffing levels and normal salary progression. The decrease in professional fees was the result of a decrease in the use of management consultants. Expenses for branch purchases incurred in 1998 were the result of trailing expenses related to the acquisition of three branches purchased from Bank of America in December, 1997. PROVISION FOR INCOME TAXES. The Company recorded an increase of $244,000 and $527,000 in the income tax provision to $492,000 and $1,603,000 for the three and nine months ended September 30,1999 compared to the $248,000 and $1,076,000 recorded for the same periods in 1998. For the three and nine months ended September 30, 1999, the Company experienced an effective tax rate of 28% and 31% compared to 20% and 29% recorded for the same periods in 1998. The increase in income taxes during the third quarter of 1999 is primarily related to an overall increase in pretax earnings. The increase in effective tax rates between 1999 and 1998 is primarily related to an increase in taxable earnings. The Company's tax rate was positively affected by investments in housing tax credit limited partnerships during 1998 and 1999. These partnership investments allow the Company to utilize federal and state housing credits obtained from investments in low-income affordable housing projects. The Company had investments in these partnerships of $5,800,000 as of September 30, 1999 and $4,238,000 as of September 30, 1998, resulting in estimated tax credits of $105,000 and $330,000 for the three and nine months ending September 30, 1999 compared with $79,000 and $227,000 for the same periods in 1998. INTEREST RATE RISK Managing interest rate risk is an integral part of managing a banking institution's primary source of income, net interest income. The Company manages the balance between rate-sensitive assets and rate-sensitive liabilities being repriced in any given period with the objective of stabilizing net interest income during periods of fluctuating interest rates. The Company considers its rate-sensitive assets to be those which either contain a provision to adjust the interest rate periodically or mature within one year. These assets include certain loans, investment securities and federal funds sold. Rate-sensitive liabilities are those which allow for periodic interest rate changes within one year and include maturing time certificates, certain savings deposits and interest-bearing demand deposits. The difference between the aggregate amount of assets and liabilities that reprice at various time frames in called the "gap." Generally, if repricing assets exceed repricing liabilities in a time period the Company would be considered to be asset-sensitive. If repricing liabilities exceed repricing assets in a time period, the Company would be considered to be liability-sensitive. Generally, the Company seeks to maintain a balanced position whereby there is no significant asset or liability sensitivity within a one-year period to ensure net interest margin stability in times of volatile interest rates. This is accomplished through maintaining a significant level of loans, investment securities and deposits available for repricing within one year. 16 The following tables set forth the interest rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities as of September 30, 1999, using the interest rate sensitivity gap ratio. For purposes of the following table, an asset or liability is considered rate-sensitive within a specified period when it can be repriced or matures within its contractual terms.
AT SEPTEMBER 30, 1999 AFTER 3 AFTER 1 BUT YEAR BUT WITHIN WITHIN WITHIN AFTER NONINTEREST- 3 MONTHS 12 MONTHS 5 YEARS 5 YEARS BEARING TOTAL --------- --------- -------- -------- -------- -------- (IN THOUSANDS) ASSETS Time deposits at other banks $ 7,201 $ - $ - $ - $ - $ 7,201 Federal funds sold 2,300 - - - - 2,300 Investment securities 6,161 7,235 39,640 94,155 3,760 150,951 Loans 140,591 38,191 97,480 47,104 - 323,366 --------- --------- -------- -------- -------- -------- Total earning assets 156,253 45,426 137,120 141,259 3,760 483,818 Noninterest-earning assets and allowances for loan losses - - - - 65,497 65,497 --------- --------- -------- -------- -------- -------- Total assets $ 156,253 $ 45,426 $137,120 $141,259 $ 69,257 $549,315 LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits $ - $ - $ - $ - $ 78,315 $ 78,315 Savings, money market and NOW deposits 241,507 - - - - 241,507 Time deposits 49,253 78,027 25,398 - - 152,678 Other interest-bearing liabilities 14,500 12,600 - 3,230 - 30,330 Other liabilities and shareholders' equity - - - - 46,485 46,485 --------- --------- -------- -------- -------- -------- Total liabilities and shareholders' equity $ 305,260 $ 90,627 $ 25,398 $ 3,230 $124,800 $549,315 --------- --------- -------- -------- -------- -------- --------- --------- -------- -------- -------- -------- Incremental gap (149,007) (45,201) 111,722 138,029 (55,543) Cumulative gap $(149,007) $(194,208) $(82,486) $ 55,543 $ - Cumulative gap as a % of earning assets (30.80)% (40.14)% (17.12)% 11.48%
The Company was liability-sensitive with a negative cumulative one-year gap of $194,208,000 or (40.14)% of interest-earning assets at September 30, 1999. In general, based upon the Company's mix of deposits, loans and investments, increases in interest rates would be expected to result in a decrease in the Company's net interest margin. The interest rate gaps reported in the tables arise when assets are funded with liabilities having different repricing intervals. Since these gaps are actively managed and change daily as adjustments are made in interest rate views and market outlook, positions at the end of any period may not be reflective of the Company's interest rate sensitivity in subsequent periods. Active management dictates that longer-term economic views are balanced against prospects for short-term interest rate changes in all repricing intervals. For purposes of the analysis above, repricing of fixed-rate instruments is based upon the contractual maturity of the applicable instruments. Actual payment patterns may differ from contractual payment patterns. The change in net interest income may not always follow the general expectations of an asset-sensitive or liability-sensitive balance sheet during periods of changing interest rates, because interest rates earned or paid may change by differing increments and at different time intervals for each 17 type of interest-sensitive asset and liability. As a result of these factors, at any given time, the Company may be more sensitive or less sensitive to changes in interest rates than indicated in the above tables. Greater liability sensitivity would have a more adverse effect on net interest margin if market interest rates were to increase, and a more favorable effect if rates were to decrease. As an additional measure of interest rate sensitivity, the Company now monitors through a detailed model its expected change in net interest income. This model's estimate of interest rate sensitivity takes into account the differing time intervals and differing rate change increments of each type of interest-sensitive asset and liability. It then measures the projected impact of changes in market interest rates on the Company's net interest income. Based upon the September 30, 1999 mix of interest-sensitive assets and liabilities, given an immediate and sustained increase in the market interest rates of 2%, this model estimates the Company's cumulative change in net interest income over the next year would decrease by approximately $783,000 or 3% of net interest income. No assurance can be given that the actual net interest income would not decrease substantially if market interest rates increased by more than 2%. FINANCIAL CONDITION Total assets at September 30, 1999 were $549,315,000, an increase of $49,456,000 or 10% compared with total assets of $499,859,000 at December 31, 1998. Net loans were $317,350,000 at September 30, 1999, an increase of $53,192,000 or 20% compared with net loans of $264,158,000 at December 31, 1998. Deposits were $472,500,000 at September 30, 1999, an increase of $28,290,000 or 6% compared with deposits of $444,210,000 at December 31, 1998. Brokered deposits totaled $6,538,000 and $0 as of September 30, 1999 and December 31, 1998. The increase in total assets of the Company from December 31, 1998 to September 30, 1999 was primarily the result of increased retail deposit gathering efforts and the introduction of a brokered certificate of deposit program. During the third quarter of 1999, maturities that occurred within the investment portfolio and new deposit monies received were primarily used to fund loan growth. Short term borrowings were used to purchase investment securities and fund loan growth. All short term borrowings were secured by a portion of the Company's investment portfolio. Total shareholders' equity was $42,666,000 at September 30, 1999, a decrease of $138,000 or .3% from $42,804,000 at December 31, 1998. The decline in shareholders' equity between September 30, 1998 and September 30, 1999 was primarily the result of an increased loss in other comprehensive income. INVESTMENT PORTFOLIO. The following table sets forth the carrying amount (fair value) of available for sale investment securities as of September 30, 1999 and December 31, 1998.
SEPTEMBER 30 DECEMBER 31 ------------------------------------- 1999 1998 (In thousands) AVAILABLE FOR SALE SECURITIES: U.S Treasury and U.S. Government agencies $ 17,033 $ 12,711 State and political subdivisions 23,998 30,192 Mortgage-backed securities 45,602 56,048 Collateralized mortgage obligations 20,523 29,264 Corporate debt securities 9,706 9,878 Other securities 3,760 3,264 -------- -------- Carrying amount and fair value $120,622 $141,357 -------- -------- -------- --------
18 The following table sets forth the carrying amount (amortized cost) and fair value of held to maturity securities at September 30, 1999 and December 31, 1998.
SEPTEMBER 30 DECEMBER 31 1999 1998 (In thousands) HELD TO MATURITY SECURITIES: U.S. Treasury and U.S. Government agency $ 1,009 $ 2,024 State and political subdivision 4,392 - Mortgage-backed securities 24,928 11,486 ------- ------- Carrying amount (amortized cost) $30,329 $13,510 ------- ------- ------- ------- Fair value $29,740 $13,584 ------- ------- ------- -------
As of September 30, 1999, the amortized cost of held to maturity securities was $30,329,000, an increase of $16,819,000 or 124% over the $13,510,000 held as of December 31, 1998. Approximately $4,327,000 of this increase is the result of a transfer of state and political subdivision securities from the available for sale portfolio to the held to maturity portfolio that took place in the first quarter of 1999. The remainder of the increase is derived primarily from the purchase of mortgage-backed securities. The following table sets forth the maturities of the Company's investment securities at September 30, 1999 and the weighted average yields of such securities based on cost and the scheduled maturity of each security. Maturities of mortgage-backed securities are stipulated in their respective contracts. However, actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. Yields on municipal securities have not been calculated on a tax-equivalent basis.
AT SEPTEMBER 30, 1999 ----------------------------------------------------------------------------------- WITHIN ONE YEAR ONE TO 5 YEARS FIVE TO TEN YEAS OVER TEN YEARS TOTAL AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT (In thousands) Available for Sale Securities Treasury and U.S. Government agency $ - -% $12,610 6.05% $ - -% $ 4,423 6.42% $ 17,033 State and political 251 5.00 519 7.78 2,540 4.31 20,688 4.43 23,998 Mortgage-backed securities - - 1,162 6.24 526 7.00 43,914 6.34 45,602 Collateralized mortgage obligations - - - - - - 20,523 6.39 20,523 Corporate debt securities - - 4,150 6.31 - - 5,556 6.51 9,706 Equity Securities - - - - - - 3,760 - 3,760 ----------------------------------------------------------------------------------- Carrying amount and fair value 251 5.00 18,441 6.17 3,066 4.77 98,864 5.72 120,622 ----------------------------------------------------------------------------------- Held to maturity securities: Treasury and U.S. Government agency - - - - 1,009 5.79 - - 1,009 State and political - - - - - - 4,392 5.14 4,392 Mortgage-backed securities - - - - - - 24,928 7.07 24,928 ----------------------------------------------------------------------------------- Carrying amount (amortized cost) - - - - 1,009 5.79 29,320 6.78 30,329 ----------------------------------------------------------------------------------- Total securities $251 5.00% $18,441 6.17% $4,075 5.02% $128,184 5.96% $150,951 ----------------------------------------------------------------------------------- -----------------------------------------------------------------------------------
In the preceding table, mortgage-backed securities and collateralized mortgage obligations are shown repricing at the time of maturity rather than in accordance with their principal amortization schedules. The Company does not own securities of a single issuer whose aggregate book value is in excess of 10% of its total equity. 19 LOAN PORTFOLIO. The following table shows the composition of the Company's loan portfolio at the dates indicated.
At September 30, 1999 At December 31, 1998 ----------------------------------------------------- Percent Percent Dollar Amount of Loans Dollar Amount of Loans ------------- -------- ------------- -------- (In thousands) Loan Categories: Commercial $ 50,795 16% $ 37,609 14% Agricultural 55,218 17 49,636 18 Real estate construction 14,847 5 13,840 5 Real estate mortgage 118,070 36 96,957 36 Consumer 84,436 26 70,891 27 -------- --- -------- --- Total 323,366 100% 268,933 100% -------- --- -------- --- --- --- Less allowance for loan losses (6,016) (4,775) -------- -------- Net loans $317,350 $264,158 -------- -------- -------- --------
The following table shows the maturity distribution of the portfolio of commercial, agricultural, real estate construction, real estate mortgage, and consumer loans at September 30, 1999:
AT SEPTEMBER 30, 1999 AFTER 1 BUT WITHIN 1 YEAR WITHIN 5 YEARS AFTER 5 YEARS TOTAL ------------------------------------------------------------ (IN THOUSANDS) Commercial and agricultural Loans with floating interest rates $ 55,923 $ 23,060 $ 4,077 $ 83,060 Loans with fixed interest rates 10,127 11,449 1,377 22,953 -------- -------- ------- -------- Subtotal 66,050 34,509 5,454 106,013 Real estate construction Loans with floating interest rates 4,496 1,033 4,429 9,958 Loans with fixed interest rates 3,395 1,331 163 4,889 -------- -------- ------- -------- Subtotal 7,891 2,364 4,592 14,847 Real estate mortgage Loans with floating interest rates 9,856 46,168 34,124 90,148 Loans with fixed interest rates 2,901 25,021 - 27,922 -------- -------- ------- -------- Subtotal 12,757 71,189 34,124 118,070 Consumer 39,299 42,203 2,934 84,436 -------- -------- ------- -------- Total $125,997 $150,265 $47,104 $323,366 -------- -------- ------- -------- -------- -------- ------- --------
20 The following table shows the maturity distribution of the portfolio of commercial, agricultural, real estate construction, real estate mortgage, and consumer loans at December 31, 1998:
AT DECEMBER 31, 1998 AFTER 1 BUT WITHIN 1 YEAR WITHIN 5 YEARS AFTER 5 YEARS TOTAL (IN THOUSANDS) Commercial and agricultural Loans with floating interest rates $ 49,843 $ 18,195 $ 3,818 $ 71,856 Loans with fixed interest rates 7,405 6,993 991 15,389 -------- -------- ------- -------- Subtotal 57,248 25,188 4,809 87,245 Real estate construction Loans with floating interest rates 5,974 1,454 1,963 9,391 Loans with fixed interest rates 2,590 1,618 241 4,449 -------- -------- ------- -------- Subtotal 8,564 3,072 2,204 13,840 Real estate mortgage Loans with floating interest rates 9,006 50,770 24,041 83,817 Loans with fixed interest rates 51 13,089 - 13,140 -------- -------- ------- -------- Subtotal 9,057 63,859 24,041 96,957 Consumer 40,570 29,054 1,267 70,891 -------- -------- ------- -------- Total $115,439 $121,173 $32,321 $268,933 -------- -------- ------- -------- -------- -------- ------- --------
OFF-BALANCE SHEET COMMITMENTS. The following table shows the distribution of the Company's undisbursed loan commitments at the dates indicated.
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------- ------- (IN THOUSANDS) Letters of credit $ 2,225 $ 2,694 Commitments to extend credit 88,738 76,984 ------- ------- Total $90,963 $79,678 ------- ------- ------- -------
OTHER INTEREST-EARNING ASSETS. The following table relates to other interest-earning assets not disclosed previously for the dates indicated. This item consists of a salary continuation plan for the Company's executive management and deferred retirement benefits for participating board members. The plan is informally linked with universal life insurance policies for the salary continuation plan. Income from these policies is reflected in noninterest income.
AT SEPTEMBER 30, AT DECEMBER 31, 1999 1998 ------ ------ (IN THOUSANDS) Cash surrender value of life insurance $5,235 $4,019 ------ ------ ------ ------
21 NONPERFORMING ASSETS. Nonperforming assets include nonaccrual loans, loans 90 days or more past due, restructured loans and other real estate owned. Nonperforming loans are those which the borrower fails to perform in accordance with the original terms of the obligation and include loans on nonaccrual status, loans past due 90 days or more and still accruing and restructured loans. The Company generally places loans on nonaccrual status and accrued but unpaid interest is reversed against the current year's income when interest or principal payments become 90 days or more past due unless the outstanding principal and interest is adequately secured and, in the opinion of management, is deemed in the process of collection. Interest income on nonaccrual loans is recorded on a cash basis. Payments may be treated as interest income or return of principal depending upon management's opinion of the ultimate risk of loss on the individual loan. Cash payments are treated as interest income where management believes the remaining principal balance is fully collectible. Additional loans not 90 days past due may also be placed on nonaccrual status if management reasonably believes the borrower will not be able to comply with the contractual loan repayment terms and collection of principal or interest is in question. A "restructured loan" is a loan on which interest accrues at a below market rate or upon which certain principal has been forgiven so as to aid the borrower in the final repayment of the loan, with any interest previously accrued, but not yet collected, being reversed against current income. Interest is reported on a cash basis until the borrower's ability to service the restructured loan in accordance with its terms is established. The Company had no restructured loans as of the dates indicated in the table below. The following table summarizes nonperforming assets of the Company at September 30, 1999 and December 31, 1998:
SEPTEMBER 30, DECEMBER 31, 1999 1998 (IN THOUSANDS) Nonaccrual loans $3,275 $1,032 Accruing loans past due 90 days or more 46 413 ------ ------ Total nonperforming loans $3,321 1,445 Other real estate owned 60 60 Repossessed automobiles 332 132 ------ ------ Total nonperforming assets $3,713 $1,637 ------ ------ ------ ------ Nonperforming assets: To total loans 1.15% .61% To total assets .68% .33%
Contractual interest income due on loans on nonaccrual status that would have been recognized if the loans had been current in accordance with their original terms was approximately $432,000 and $244,000, as of September 30, 1999 and December 31, 1998. At September 30, 1999, nonperforming assets represented .68% of total assets, an increase of .35% of total assets compared to the .33% at December 31, 1998. Nonperforming loans represented 1.03% of total loans at September 30, 1999, an increase of .42% of total loans compared to the .61% at December 31, 1998. Nonperforming loans that were secured by first deeds of trust on real property were $790,774 at September 30, 1999 and $623,000 at December 31, 1998. Other forms of collateral such as inventory and equipment secured the remaining nonperforming loans as of each date. No assurance can be given that the collateral securing nonperforming loans will be sufficient to prevent losses on such loans. 22 The increase in nonperforming loans and nonperforming assets as of September 30, 1999 compared with their levels as of December 31, 1998, was due primarily to an increase in delinquent consumer and agricultural loans coupled with an increase in delinquent loans guaranteed by the Small Business Administration. At September 30, 1999, the Company had $60,000 in one property acquired through foreclosure. The property is carried at the lower of its estimated market value, as evidenced by an independent appraisal, or the recorded investment in the related loan, less estimated selling expenses. At foreclosure, if the fair value of the real estate is less than the Company's recorded investment in the related loan, a charge is made to the allowance for loan losses. The Company does not expect to sell this property during 1999. No assurance can be given that the Company will sell such property during 1999 or at any time or the amount for which such property might be sold. During the first quarter of 1999, one foreclosure property that had previously been written-off was sold for $250,000 resulting in a gain on sale equal to the net sales proceeds. In addition to property acquired through foreclosure, the Company has investments in residential real estate lots in various stages of development in Merced County through MAID. MAID held one property for sale or development at September 30, 1999. This investment was completely written off in 1995, although County Bank still retains title to this property. During the first nine months of 1999, no lots were sold. Management defines impaired loans, regardless of past due status on loans, as those on which principal and interest are not expected to be collected under the original contractual loan repayment terms. An impaired loan is charged off at the time management believes the collection process has been exhausted. At September 30, 1999 and December 31, 1998, impaired loans were measured based on the present value of future cash flows discounted at the loan's effective rate, the loan's observable market price or the fair value of collateral if the loan is collateral-dependent. Impaired loans at September 30, 1999 were 3,274,000 (all of which were also nonaccrual loans), on account of which the Company had made provisions to the allowance for loan losses of $490,000. Except for loans that are disclosed above, there were no assets as of September 30, 1999, where known information about possible credit problems of the borrower causes management to have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may become nonperforming assets. Given the magnitude of the Company's loan portfolio, however, it is always possible that current credit problems may exist that may not have been discovered by management. 23 ALLOWANCE FOR LOAN LOSSES The following table summarizes the loan loss experience of the Company for the nine months ended September 30, 1999 and 1998, and the year ended December 31, 1998:
SEPTEMBER 30, DECEMBER 31, 1999 1998 1998 -------- -------- -------- (IN THOUSANDS) ALLOWANCE FOR LOAN LOSSES: Balance at beginning of period $ 4,775 $ 3,833 $ 3,833 Provision for loan losses 1,772 1,690 3,903 Charge-offs: Commercial and agricultural 518 667 2,539 Real estate construction - - 4 Real estate mortgage - 4 - Consumer 849 727 983 -------- -------- -------- Total charge-offs 1,367 1,398 3,526 -------- -------- -------- Recoveries Commercial and agricultural 576 135 Real estate - mortgage - 119 100 Consumer 260 301 330 -------- -------- -------- Total recoveries 836 420 565 -------- -------- -------- Net charge-offs 531 978 2,961 -------- -------- -------- Balance at end of period $ 6,016 $ 4,545 $ 4,775 -------- -------- -------- -------- -------- -------- Loans outstanding at period-end $323,366 $260,114 $268,933 Average loans outstanding $295,732 $235,513 $242,989 Net charge-offs to average loans .18% .42% 1.22% Allowance for loan losses To total loans 1.86% 1.75% 1.78% To nonperforming assets 162.02% 219.46% 291.69%
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 economic considerations. In determining the adequacy of the allowance for loan losses, management takes into consideration growth trends in the portfolio, examination of financial institution supervisory authorities, prior loan loss experience for the Company, concentrations of credit risk, delinquency trends, general economic conditions, the interest rate environment and internal and external credit reviews. In addition, the risks management considers vary depending on the nature of the loan. The normal risks considered by management with respect to agricultural loans include the fluctuating value of the collateral, changes in weather conditions and the availability of adequate water resources in the Company's local market area. The normal risks considered by management with respect to real estate construction loans include fluctuation in real estate values, the demand for improved commercial and industrial properties and housing, the availability of permanent financing in the Company's market area and borrowers' ability to obtain permanent financing. The normal risks considered by management with respect to real estate mortgage loans include fluctuations in the value of real estate. Additionally, the Company relies on data obtained through independent appraisals for significant properties to determine loss exposure on nonperforming loans. The balance in the allowance is affected by the amounts provided from operations, amounts charged off and recoveries of loans previously charged off. The Company recorded provisions for loan 24 losses in the three months ended September 30, 1999 of $672,000 compared with $700,000 in the same period of 1998. The decrease in loan loss provisions in the third quarter of 1999 compared to 1998 was primarily due to a reduction in the level of charge-offs experienced in 1999. The Company's charge-offs, net of recoveries, were $545,000 for the three months ended September 30, 1999 compared with $401,000 for the same three months in 1998. The increase in net charge-off for the third quarter of 1999 was primarily due to increased charge-offs experienced within the consumer loan portfolio. These increased charge-offs are attributable to loan growth in this segment of the portfolio. As of September 30, 1999, the allowance for loan losses was $6,016,000 or 1.86% of total loans outstanding, compared with $4,775,000 or 1.78% of total loans outstanding as of December 31, 1998. During 1999, the allowance for loan loss has increased $1,241,000 or 26% compared to December 31, 1998 levels. From 1992 to 1996, loan losses were relatively low and stable. In 1997, the Company experienced loan problems and made provisions at levels not previously experienced. As a result, the Company concluded that its historical method of determining the appropriate levels for its allowance and provisions for loan losses should be revised. The Company therefore adopted a new methodology of determining the appropriate level of its allowance for loan losses. This method applies relevant risk factors to the entire loan portfolio, including nonperforming loans. The methodology is based, in part, on the Company's loan grading and classification system. The Company grades its loans through internal reviews and periodically subjects loans to external reviews which then are assessed by the Company's audit committee. Credit reviews are performed on a monthly basis and the quality grading process occurs on a quarterly basis. Risk factors applied to the performing loan portfolio are based on the Company's past loss history considering the current portfolio's characteristics, current economic conditions and other relevant factors. General reserves are applied to various categories of loans at percentages ranging up to 1.8% based on the Company's assessment of credit risks for cash category. Risk factors are applied to the carrying value of each classified loan: (i) loans internally graded "Watch" or Special Mention" carry a risk factor from 1.0% to 2.0%; (ii) "Substandard" loans carry a risk factor from 15% to 40% depending on collateral securing the loan, if any; (iii) "Doubtful" loans carry a 50% risk factor; and (iv) "Loss" loans are charged off 100%. In addition a portion of the allowance is specially allocated to identified problem credits. The analysis also includes reference to factors such as the delinquency status of the loan portfolio, inherent risk by type of loans, industry statistical data, recommendations made by the Company's regulatory authorities and outside loan reviewers, and current economic environment. Important components of the overall credit rating process are the asset quality rating process and the internal loan review process. The allowance is based on estimates and ultimate future losses may vary from current estimates. It is always possible that future economic or other factors may adversely affect the Company's borrowers, and thereby cause loan losses to exceed the current allowance. In addition, there can be no assurance that future economic or other factors will not adversely affect the Company's borrowers, or that the Company's asset quality may not deteriorate through rapid growth, failure to enforce underwriting standards, failure to maintain appropriate underwriting standards, failure to maintain an adequate number of qualified loan personnel, failure to identify and monitor potential problem loans or for other reasons, and thereby cause loan losses to exceed the current allowance. 25 The following table summarizes the allocation for loan losses expressed as a dollar amount and a percentage of applicable loan categories at the dates indicated:
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ AMOUNT OF AMOUNT OF ALLOCATION ALLOCATION AS A % OF AS A % OF AMOUNT LOANS IN CATEGORY AMOUNT LOANS IN CATEGORY (IN THOUSANDS) Commercial and agricultural $2,603 2.46% $2,618 3.10% Real estate-construction 383 2.58 376 2.72 Real estate-mortgage 1,754 1.50 1,260 1.30 Consumer 1,276 1.51 521 0.73 ------ ------ Total $6,016 1.86% $4,775 1.78% ------ ------ ------ ------
The allocation of the allowance to loan categories is an estimate by management of the relative risk characteristics of loans in those categories. No assurance can be given that losses in one or more loan categories will not exceed the portion of the allowance allocated to that category or even exceed the entire allowance. EXTERNAL FACTORS AFFECTING ASSET QUALITY. As a result of the Company's loan portfolio mix, the future quality of its assets could be affected by adverse economic trends in its region or in the agricultural community. These trends are beyond the control of the Company. California is an earthquake-prone region. Accordingly, a major earthquake could result in material loss to the Company. At times the Company's service area has experienced other natural disasters such as floods and droughts. The Company's properties and substantially all of the real and personal property securing loans in the Company's portfolio are located in California. The Company faces the risk that many of its borrowers face, uninsured property damage, interruption of their businesses or loss of their jobs from earthquakes, floods or droughts. As a result these borrowers may be unable to repay their loans in accordance with their terms and the collateral for such loans may decline significantly in value. The Company's service area is a largely agricultural region and therefore is highly dependent on a reliable supply of water for irrigation purposes. The area obtains nearly all of its water from the run-off of melting snow in the mountains of the Sierra Nevada to the east. Although such sources have usually been available in the past, water supply can be adversely affected by light snowfall over one or more winters or by any diversion of water from its present natural courses. Any such event could impair the ability of many of the Company's borrowers to meet their obligations to the Company. Parts of California experienced significant floods in early 1998. The Company has completed an analysis of its collateral as a result of these floods. The Company is not aware of any material adverse effects to the collateral position of the Company as a result of these events. No assurance can be given that future flooding will not have an adverse impact on the Company and its borrowers and depositors. During the second quarter of 1998, an additional $200,000 was added to the loan loss reserve for possible losses to agricultural loans due to adverse weather conditions. Since its inception, approximately $125,000 has been charged-off against this reserve. 26 LIQUIDITY. In order to maintain adequate liquidity, the Company must have sufficient resources available at all times to meet its cash flow requirements. The need for liquidity in a banking institution arises principally to provide for deposit withdrawals, the credit needs of its customers and to take advantage of investment opportunities as they arises. The Company may achieve desired liquidity from both assets and liabilities. The Company's primary source of liquidity on a stand alone basis is dividends from the Bank and Thrift. Such dividends are subject to regulatory restrictions. The Company considers cash and deposits held in other banks, federal funds sold, other short term investments, maturing loans and investments, payments of principal and interest on loans and investments and potential loan sales as sources of 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 liability liquidity. The Company reviews its liquidity position on a regular basis based upon its current position and expected trends of loans and deposits. These assets include cash and deposits in other banks, available-for-sale securities and federal funds sold. The Company's liquid assets totaled $162,716,000 and $186,853,000 on September 30, 1999 and December 31, 1998, respectively, and constituted 30% and 37%, respectively, of total assets on those dates. Liquidity is also affected by the collateral requirements of its public deposits and certain borrowings. Total pledged securities were $75,414,000 at September 30, 1999 compared with $46,023,000 at December 31, 1998. Although the Company's primary sources of liquidity include liquid assets and a stable deposit base, the Company maintains lines of credit with the Federal Reserve Bank of San Francisco, Federal Home Loan Bank of San Francisco and Pacific Coast Bankers' Bank aggregating $58,518,000 of which $27,100,000 was outstanding as of September 30, 1999 and $7,203,000 was outstanding as of December 31, 1998. Funds obtained from increased outstanding short term borrowings during the third quarter of 1999 were primarily used to fund growth in loans and investments. Management believes that the Company maintains adequate amounts of liquid assets to meet its liquidity needs. The Company's liquidity might be insufficient if deposit withdrawals were to exceed anticipated levels. Deposit withdrawals can increase if a company experiences financial difficulties or receives adverse publicity for other reasons, or if its pricing, products or services are not competitive with those offered by other institutions. CAPITAL RESOURCES. On May 23, 1999 the Company's Board of Directors authorized management repurchase up to 200,000 shares or $2,300,000 of the Company's common stock. The Company intends to repurchase shares from time to time in open market transactions. As of September 30, 1999, 137,510 shares had been repurchased for a total cost of $1,768,000. Management's authorization to repurchase Company common stock will continue until withdrawn by the Board of Directors. The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a material adverse effect on the Company's financial statements. Management believes, as of September 30, 1999, that the Company, the Bank and the Thrift met all capital requirements to which they are subject. The Company's leverage capital ratio at September 30, 1999 was 7.65% as compared with 7.58% as of December 31, 1998. The Company's total risk based capital ratio at September 30, 1999 was 10.95% as compared to 11.94 as of December 31, 1998. 27 The Company's and Bank's actual capital amounts and ratios met all regulatory requirements as of September 30, 1999 and were summarized as follows:
To Be Well Capitalized Under Prompt For Capital Corrective (In thousands) Actual Adequacy Purposes Action Provisions: --------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio --------------------------------------------------------------------- Consolidated As of September 30, 1999 Total capital (to risk weighted assets) $44,616 10.95% $32,587 8.0% $40,734 10.0% Tier 1 capital (to risk weighted assets) 39,513 9.70 16,294 4.0 24,441 6.0 Leverage ratio* 39,513 7.65 20,666 4.0 25,832 5.0 The Bank As of September 30, 1999 Total capital (to risk weighted assets) $37,004 10.68% $27,713 8.0% $34,641 10.0% Tier 1 capital (to risk weighted assets) 32,659 9.43 13,856 4.0 20,784 6.0 Leverage ratio * 32,659 7.10 18,396 4.0 22,995 5.0
* The leverage ratio consists of Tier 1 capital divided by quarterly average assets. The minimum leverage ratio is 3 percent for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality and in general, are considered top-rated banks. The Company has no formal dividend policy, and dividends are issued solely at the discretion of the Company's Board of Directors, subject to compliance with regulatory requirements. In order to pay any cash dividends, the Company must receive payments of dividends or management fees from the Bank or the Thrift. There are certain regulatory limitations on the payment of cash dividends by banks and thrift and loan companies. DEPOSITS. Deposits are the Company's primary source of funds. At September 30, 1999, the Company had a deposit mix of 37% in savings deposits, 32% in time deposits, 14% in interest-bearing checking accounts and 17% in noninterest-bearing demand accounts. Noninterest-bearing demand deposits enhance the Company's net interest income by lowering its costs of funds. The Company obtains deposits primarily from the communities it serves. No material portion of its deposits has been obtained from or is dependent on any one person or industry. The Company's business is not seasonal in nature. The Company accepts deposits in excess of $100,000 from customers. These deposits are priced to remain competitive. At September 30, 1999, the Company had brokered deposits of $6,538,000. Maturities of time certificate of deposits of $100,000 or more outstanding at September 30, 1999 and December 31, 1998 are summarized as follows:
SEPTEMBER 30, 1999 DECEMBER 31, 1998 ------------------ ----------------- ( IN THOUSANDS) Three months or less $24,005 $17,137 Over three to six months 12,317 10,028 Over six to twelve months 9,344 8,205 Over twelve months 8,811 7,232 ------- ------- Total $54,477 $42,602 ------- ------- ------- -------
28 BORROWED FUNDS At September 30, 1999 and December 31, 1998, the Company's borrowed funds consisted of the following:
SEPTEMBER 30 DECEMBER 31 1999 1998 ------- ------- (IN THOUSANDS) Federal funds purchased, dated September 30, 1999; Fixed rate of 5.20%; payable on October 1, 1999 $14,500 $ - Securities sold under agreements to repurchase; dated December 25, 1998; fixed rate of 5.69%; payable on January 25, 1999 - 2,100 FHLB loan, dated September 17, 1999; variable rate of 5.28%; rate reprices monthly based on the 1 month LIBOR; payable on June 19, 2000 2,600 5,000 FHLB loan, dated August 19,1999; fixed rate of 5.75% Payable on February 15, 2000 5,000 103 FHLB loan, dated September 20,1999; fixed rate of 5.75% Payable on March 20, 2000 5,000 - Long-term note from unaffiliated bank dated December 22, 1997; fixed rate of 7.08%; principal and interest Payable monthly at $25,047; payments calculated as Fully amortizing over 25 years with a 10 year call 3,230 3,263 ------- ------- Total $30,330 $10,466 ------- ------- ------- -------
The increase in the borrowings was primarily due to an increase in federal funds purchased and additional short term borrowings from the Federal Home Loan Bank. 29 RETURN ON EQUITY AND ASSETS
Three months ended Nine months ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Annualized return on average assets 0.99% 0.85% 0.97 0.79% Annualized return on average equity 11.92% 9.34% 11.18 8.31% Average equity to average assets 8.33% 9.12% 8.66 9.60%
IMPACT OF INFLATION The primary impact of inflation on the Company is its effect on interest rates. The Company's primary source of income is net interest income which is affected by changes in interest rates. The Company attempts to limit inflation's impact on its net interest margin through management of rate sensitive assets and liabilities and the analysis of interest rate sensitivity. The effect of inflation on premises and equipment, as well as on interest expenses, has not been significant for the periods covered in this report. REAL ESTATE DEVELOPMENT ACTIVITIES California law allows state-chartered banks to engage in real estate development activities. The Bank established MAID in 1987 pursuant to this authorization. After changes in federal law effectively required that these activities be divested as prudently as possible but in any event before 1997, MAID reduced its activities and embarked on a plan to liquidate its real estate holdings. In 1995, the uncertainty about the effect of the investment in MAID on the results of future operations caused management to write off its remaining investment of $2,881,000 in real property development. At September 30, 1999, MAID held one real estate project including improved and unimproved land in various stages of development. MAID continues to develop this project, and any amounts realized upon sale or other disposition of this asset above its current carrying value of zero will result in noninterest income at the time of such sale or disposition. During the first nine months of 1999, no lots were sold. Although the Company expects that the sale or disposition of its remaining project will result in some positive contribution to noninterest income at some time in the future, no assurance can be given as to whether or when such sale or disposition will be completed or that the amount, if any, that the Company will ultimately realize on such asset or whether such amount will exceed the future expenses required to hold and complete development of the project. The amounts, if any, realized on future disposition of this property will depend on conditions in the local real estate market and the demand, if any, for new development. The Company's regulatory deadline for completing its divestiture of this asset is December 31, 2000. YEAR 2000 General The Company is aware of the issues associated with the programming code in existing computer systems as the millennium (Year 2000) approaches. The "Year 2000" problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. 30 The impact of Year 2000 issues on the Company will depend not only on corrective actions that the Company takes, but also on the way in which Year 2000 issues are addressed by governmental agencies, businesses and other third parties that provide services or data to, or receive services or data from, the Company, or whose financial condition or operational capability is important to the Company. State of Readiness The Company has a Year 2000 (Y2K) compliance plan that has been approved by the board of directors. The board of directors is updated monthly on the progress of the plan. The Company is utilizing both internal and external resources to identify, correct, or reprogram its systems to make them Year 2000 compliant. The Bank's core banking system, Jack Henry Associates Inc. Silverlake, issued a new software release in August 1999 that is Year 2000 compliant. In addition to a review and testing of the Jack Henry Associates Inc. Silverlake product, Capital Corp of the West's Year 2000 Y2K plan also addresses internal systems, customer systems, and vendor systems, including its non-information technology systems, which might be effected by the century date change. The Company is on schedule to meet all internal deadlines set in the plan. The Company is in the process of ensuring these additional concerns are addressed within the Y2K plan. The Company's Y2K plan takes a systematic approach to identifying and resolving the hardware and software problems inherent with this date change. The Company's Y2K plan is broken into six phases. The awareness phase is ongoing throughout the project. This started with an internal training program to raise the awareness of employees to the Y2K problems and the steps being taken by the Company to resolve these. These training efforts are now being expanded to include customers and the general community through community meetings with civic organizations, and Chambers of Commerce. The inventory phase, which is completed, included such actions as creating a master inventory of all systems within the Company which might be affected by Y2K. The evaluation phase, completed as well, consisted of rating each inventoried system's importance to the day-to-day operation of the Company. The most important systems were rated as "mission critical." The renovation phase is also 100% completed, During this phase, the vendors for each software and hardware system have been contacted and either (a) notified the Company that their product is Y2K compliant, (b) notified the Company as to when a Y2K compliant product will be available or, (c) notified the Company that their product is not Y2K compliant and they have no intention of making it so. The fifth phase is the testing phase, which is also 100% complete. This is by far the costliest and most time consuming part of the project. Each mission critical system was tested for Y2K compliance. This included the Company's core application software and its data communications systems. Additionally, the Company tested many of its other systems which had been deemed non-mission critical. Implementation is the last phase and involves putting the new Y2K compliant software into production. This phase is 80% complete. The Company continues to have ongoing communication with significant customers and vendors to determine the extent and provide risk mitigation strategies for those risks created by third parties' failure to remediate their own Year 2000 issues. However, it is not possible, at present, to determine the financial effect if significant customer and vendor remediation efforts are not resolved in a timely manner. Costs The estimated cost to the Company of the Y2K project is projected to be approximately $400,000. Hard costs consist of 30% of this amount, while the remainder is made up of soft costs such as meeting time. No major projects have been delayed or canceled due to these Y2K costs. During the first 31 nine months of 1999, the Company has incurred approximately $135,000 in Y2K plan expenses. Total cumulative costs of the Y2K project total approximately $360,000 as of September 30, 1999. Risks Failure to address all Y2K issues could result in substantial interruptions to the Company's normal business activities. These interruptions could in turn affect the organization's financial condition as well as the business activities of its customers. Through the efforts involved in its Year 2000 project, no major interruptions are expected. However, due to the uncertainty involved in the Year 2000 problem, all of the effects of the century date change to the organization cannot be absolutely determined. Although at this time it is not possible to determine the extent of the adverse financial effects with any specificity, the Company is preparing contingency plans if disruptions occur. Given the Y2K project progress to date and with successful implementation of the remaining phases of the project, management believes that the Company is well positioned to significantly reduce potential negative effects that may exist. Contingency Plan A contingency plan has been developed in order to structure a methodology that would allow the Company to continue operations in the event the Company, or its key suppliers, customers, or third party service providers will not be year 2000 compliant, and such noncompliance is expected to have a material adverse impact on the Company's operations. CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company is including the following cautionary statement to take advantage of the "safe harbor" provisions of the PRIVATE SECRITIES LITIGATION REFORM ACT OF 1995 for a forward-looking statement made by, or on behalf of, the Company. The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or behalf of, the Company. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result, or be achieved or accomplished. Taking into account the foregoing, the following are identified as important risk factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company: The ability to meet financial and human resources requirements, including the funding of the Company's capital program from operations, is subject to changes in the deposit base, which the Company has only limited control and the effect of domestic legislation of federal, state and municipal governments that have jurisdiction in regard to taxes, the environment and human resources. 32 The dates on which the Company believes the Year 200 project will be completed and implemented are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain financial resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of the Year 2000 Project. Specific factors that might cause differences between the estimates and actual results include, but are not limited to, the availability and cost of personnel trained in these areas, the ability to locate and correct all relevant computer code, timely responses to and corrections by third-parties and suppliers, the ability to implement interfaces between the new systems and the systems not being replaced, and similar uncertainties. Due to the uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-parties and the interconnection of global businesses, the Company cannot ensure its ability to timely and cost-effectively resolve problems associated with the Year 2000 issue that may affect its operations and business, or expose it to third-party liability. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the Company is exposed to market risk which includes both price and liquidity risk. Price risk is created from fluctuations in interest rates and the mismatch in repricing characteristics of assets, liabilities, and off balance sheet instruments at a specified point in time. Mismatches in interest rate repricing among assets and liabilities arise primarily through the interaction of the various types of loans versus the types of deposits that are maintained as well as from management's discretionary investment and funds gathering activities. Liquidity risk arises from the possibility that the Company may not be able to satisfy current and future financial commitments or that the Company may not be able to liquidate financial instruments at market prices. Risk management policies and procedures have been established and are utilized to manage the Company's exposure to market risk. On September 30, 1999, the interest rate position of the Company was relatively neutral as the impact of a gradual parallel 100 basis-point rise or fall in interest rates over the next 12 months was estimated to be approximately 1-2% of net interest income when compared to stable rates. See "BUSINESS - Selected Statistical Information - Interest Rate Sensitivity" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk Management." PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is a party to routine litigation in the ordinary course of its business. In the opinion of Management, pending and threatened litigation is not likely to have a material adverse effect on the financial condition or results of operations of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None 33 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. None ITEM 5. OTHER INFORMATION. In the opinion of management, there is no additional information relating to these periods being reported which warrants inclusion in the report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a.) Exhibits.
Exhibits Description of Exhibits - -------- ----------------------- 3.1 Articles of Incorporation, incorporated by reference from (filed as * Exhibit 3.1 of the Company's June 30, 1996 Form 10Q filed with the SEC on or about November 14, 1996). 3.2 Bylaws (filed as Exhibit 3.2 of the Company's June 30, 1996 form 10Q * filed with the SEC on or about November 14, 1996). 10 Employment agreement between Thomas T. Hawker and Capital Corp. * (Filed as Exhibit 10 of the Company's 1996 form 10K filed with the SEC on or about June 30, 1997). 10.1 Administrative Construction Agreement (filed as Exhibit 10.4 of the * Company's 1995 Form 10K filed with the SEC on or about June 30, 1996). 10.2 Stock Option Plan (filed as Exhibit 10.6 of the Company's 1995 * Form 10K filed with the SEC on or about June 30, 1996). 10.3 401 (k) Plan (filed as Exhibit 10.7 of the Company's 1995 10K filed * with the SEC on or about June 30, 1996). 10.4 Employee Stock Ownership Plan (filed as Exhibit 10.8 of the * Company's 1995 form 10K filed with the SEC on or about June 30, 1996). 10.5 Purchase Agreement for three branches from Bank of America is * incorporated herein by reference from Note 1 of the Company's Consolidated Financial Statements. 27 Financial Data Schedule
(b.) Reports on Form 8-K None * Denotes documents which have been incorporated by reference. 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPITAL CORP OF THE WEST (Registrant) By /s/ Thomas T. Hawker ---------------------------------- Thomas T. Hawker President and Chief Executive Officer By /s/ R. Dale Mckinney ---------------------------------- R. Dale McKinney Chief Financial Officer 35 EX-27 2 EXHIBIT 27
9 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 32,593 7,201 2,300 0 120,622 30,329 29,740 323,366 (6,016) 549,315 472,500 27,100 3,819 3,230 0 0 35,495 7,171 42,666 21,898 6,165 424 28,487 9,609 10,032 18,455 1,772 0 15,238 5,255 3,652 0 0 3,652 0.80 0.77 5.47 3,275 46 0 0 4,775 1,367 836 6,016 6,016 0 0
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