-----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, II6hzJympkPZe4s+L6yw3A5qmbKkr7rPrRhtpn6OPEuF2uh1cmR8GZ2gmfKdZFza O6NMr06tkpCXuxwORb3S+w== 0001047469-99-020599.txt : 19990517 0001047469-99-020599.hdr.sgml : 19990517 ACCESSION NUMBER: 0001047469-99-020599 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99623536 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 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended MARCH 31, 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 March 31, 1999 was 4,607,102. No shares of preferred stock, no par value, were outstanding at March 31, 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 Statement of Changes in Stockholders Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 30 PART II. -- OTHER INFORMATION Item 1. Legal Proceedings 31 Item 2. Changes in Securities 31 Item 3. Defaults Upon Senior Securities 31 Item 4. Submission of matters to a vote of Security Holders 31 Item 5. Other Information 31 Item 6. Exhibits and Reports on Form 8-K 31 SIGNATURES 33 2 Capital Corp of the West Consolidated Balance Sheets (Unaudited)
03/31/99 12/31/98 -------- -------- (In thousands) ASSETS Cash and noninterest-bearing deposits in other banks $ 23,833 $ 25,771 Federal funds sold 11,400 19,125 Time deposits at other financial institutions 1,850 600 Investment securities available for sale, at fair value 126,289 141,357 Investment securities held to maturity at cost, fair value of $16,140,000, and $13,584,000 at March 31, 1999 and December 31, 1998, respectively 15,935 13,510 Loans, net of allowance for loan losses of $5,383,000, and $4,775,000 at March 31, 1999 and December 31, 1998, respectively 276,439 264,158 Interest receivable 3,069 3,272 Premises and equipment, net 13,199 13,319 Intangible assets 5,664 5,865 Other assets 15,857 12,882 ----------- ---------- Total assets $ 493,535 $ 499,859 ----------- ---------- ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing demand $ 68,972 $ 80,290 Negotiable orders of withdrawal 64,099 71,526 Savings 181,338 165,781 Time, under $100,000 85,506 84,011 Time, $100,000 and over 42,813 42,602 ----------- ---------- Total deposits 442,728 444,210 Short term borrowings 503 7,203 Long term borrowings 3,251 3,263 Accrued interest, taxes and other liabilities 3,257 2,379 ----------- ---------- Total liabilities 449,739 457,055 Preferred Stock, no par value; 10,000,000 shares authorized; None outstanding Common stock, no par value; 20,000,000 shares authorized; 4,607,102 issued & outstanding at March 31, 1999, and December 31, 1998 37,142 37,142 Retained earnings 6,785 5,634 Accumulated other comprehensive (loss) income (131) 28 ----------- ---------- Total shareholders' equity 43,796 42,804 ----------- ---------- Total liabilities and shareholders' equity $ 493,535 $ 499,859 ----------- ---------- ----------- ----------
See accompanying notes 3 Capital Corp of the West Consolidated Statements of Income and Comprehensive Income (Unaudited)
For the three months ended March 31, 1999 1998 ---- ---- (In thousands) INTEREST INCOME: Interest and fees on loans $ 6,712 $ 5,687 Interest on deposits with other financial institutions 10 12 Interest on investments held to maturity: Taxable 184 205 Non-taxable 22 - Interest on investments available for sale: Taxable 1,533 1,794 Non-taxable 324 121 Interest on federal funds sold 158 273 ----------- ----------- Total interest income 8,943 8,092 INTEREST EXPENSE: Interest on negotiable orders of withdrawal 110 118 Interest on savings deposits 1,358 1,434 Interest on time deposits, under $100,000 1,064 1,050 Interest on time deposits, $100,000 and over 537 365 Interest on other borrowings 137 336 ----------- ----------- Total interest expense 3,206 3,303 Net interest income 5,737 4,789 Provision for loan losses 507 252 ----------- ----------- Net interest income after provision for loan losses 5,230 4,537 NONINTEREST INCOME: Service charges on deposit accounts 733 648 Income from real estate held for sale or development 250 22 Other 396 388 ----------- ----------- Total noninterest income 1,379 1,058 NONINTEREST EXPENSES: Salaries and related benefits 2,214 1,963 Premises and occupancy 330 325 Equipment 491 502 Professional fees 331 154 Marketing 166 102 Goodwill and intangible amortization 198 198 Branch purchase - 101 Supplies 140 151 Other 926 827 ----------- ----------- Total noninterest expenses 4,796 4,323 Income before income taxes 1,813 1,272 Provision for income taxes 662 435 ----------- ----------- Net income $ 1,151 $ 837 - ------------------------------------------------------------------------------------------------------------------ Comprehensive Income: Unrealized (loss) gain on securities arising during the period (167) (31) Less: reclassification adjustment for (gains) losses included in net income - 46 ----------- ----------- Comprehensive Income $ 984 $ 852 ----------- ----------- ----------- ----------- - ------------------------------------------------------------------------------------------------------------------ Basic earnings per share $ 0.25 $ .18 Diluted earnings per share $ 0.24 $ .18
See accompanying notes 4 Capital Corp of the West Consolidated Statement of Changes in Shareholders' Equity (Unaudited) (Amounts in thousands except number of shares)
Common Stock Accumulated ------------------------- Other Number of Retained Comprehensive shares Amounts earnings Income Total --------- ---------- --------- -------------- ---------- Balance, December 31, 1998 4,607,102 $ 37,142 $ 5,634 $ 28 $ 42,804 Net Change in fair market value of investment securities, net of tax effect of $(102) - - - (159) (159) Net income - - 1,151 - 1,151 --------- ---------- --------- -------- ---------- Balance, March 31, 1999 4,607,102 $ 37,142 $ 6,785 $ (131) $ 43,796 --------- ---------- --------- -------- ---------- --------- ---------- --------- -------- ----------
See accompanying notes 5 Capital Corp of the West Consolidated Statements of Cash Flows (Unaudited)
3 months ended 3 months ended 03/31/99 03/31/98 (In thousands) OPERATING ACTIVITIES: Net income $ 1,151 $ 837 Adjustments to reconcile net income to net cash (used) provided by operating activities: Provision for loan losses 507 252 Depreciation, amortization and accretion, net 803 752 Gain on sale of real estate held for sale 250 22 Net increase in interest receivable & other assets (3,951) (367) Net decrease in deferred loan fees (313) (23) Net decrease (increase) in accrued interest payable & other liabilities 1,318) (540) ---------------- -------------- Net cash (used) provided by operating activities (235) 933 INVESTING ACTIVITIES: Investment security purchases (243) (21) Proceeds from maturities of investment securities 13,030 15,219 Proceeds from sales of AFS investment securities - 15,615 Net increase in time deposits in other financial institutions (1,250) (401) Proceeds from sales of commercial and real estate loans 304 814 Net increase in loans (13,044) (4,208) Purchases of premises and equipment (281) (637) Net increase in real estate held for sale - (478) Proceeds from sales of real estate held for sale 250 - ---------------- -------------- Net cash (used) provided by investing activities (1,234) 25,903 FINANCING ACTIVITIES: Net (decrease) increase in demand, NOW and deposits (3,188) 11,161 Net increase in certificates of deposit 1,706 5,664 Net decrease in other borrowings (6,712) (620) Exercise of stock options - 50 ---------------- -------------- Net cash (used) provided by financing activities (8,194) 16,255 Net (decrease) increase in cash and cash equivalents (9,663) 43,091 Cash and cash equivalents at beginning of period 44,896 23,435 ---------------- -------------- Cash and cash equivalents at end of period $ 35,233 $ 66,526 ---------------- -------------- ---------------- -------------- SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Investment securities net unrealized (losses) gains; net of tax $ (159) $ 15 Interest paid 3,195 3,281 Transfer of securities from available for sale to held to maturity 4,327 - Loans transferred to other real estate owned - 478
See accompanying notes 6 Capital Corp of the West Notes to Consolidated Financial Statements March 31, 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 March 31, 1999 there were 4,607,102 common shares outstanding, held of record by approximately 2,200 shareholders. There were no preferred shares outstanding at March 31, 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, and the Bank's subsidiaries, Capital West Group and the Thrift, unless context otherwise requires. GENERAL - BANK The Bank was organized on August 1, 1977, as County Bank of Merced, a California state banking corporation. The Bank commenced operations on December 22, 1977. In November 1992, the Bank changed its legal name to County Bank. The Bank's securities consist of one class of Common Stock, no par value and is wholly owned by the Company. The Bank's deposits are insured under the Federal Deposit Insurance Act, by the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits stated therein. Like most state-chartered banks of its size in California, it is not a member of the Federal Reserve System. 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. 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 and the other in downtown Merced located within 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 Bank relocated its existing administrative office and existing branch in downtown Merced to a new facility constructed in 1997. 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 in 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 March 31, 1999 and December 31, 1998 and the results of operations for the three month period ended March 31, 1999 and 1998, and the statements of cash flows for the three months ended March 31, 1999 and 1998 have been included. The interim results for the three months ended March 31, 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, 1998. The accompanying unaudited financial statements have been prepared on a basis consistent with the generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Per share information is based on the weighted average number of shares of common stock outstanding during each three-month period 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 March 31, 1999 and 1998:
For The Three Months Ended March 31, ------------------------------- (In thousands, except per share data) 1999 1998 -------------- ------------ Basic EPS computation: Net income $ 1,151 $ 837 ------------ ------------ ------------ ------------ Average common shares outstanding 4,607 4,599 ------------ ------------ ------------ ------------ Basic EPS $ 0.25 $ .18 ------------ ------------ ------------ ------------ Diluted EPS Computations: Net income $ 1,151 $ 837 ------------ ------------ ------------ ------------ Average common shares Outstanding 4,607 4,599 Stock options 135 145 ------------ ------------ 4,742 4,744 ------------ ------------ ------------ ------------ Diluted EPS $ 0.24 $ 0.18 ------------ ------------ ------------ ------------
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 133 is effective for all fiscal quarters of fiscal years beginning September 15, 1999, with early application encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after the issuance of the 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 Statements of the Company and the Notes thereto. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1998 OVERVIEW. For the three months ended March 31, 1999 the Company reported record net income of $1,151,000. This compares to $837,000 for the same period in 1998 and represents an increase of $314,000 or 38%. Basic and fully diluted earnings per share were $.25 and $.24 for the three months ending March 31, 1999. This compares to basic and fully diluted earnings per share of $.18 for the three months ending March 31, 1998 and represents an increase of $0.07 and $0.06 per share, respectively. The annualized return on average assets was .94% and .78% for the first three months of 1999 and 1998. The Company's annualized return on average equity was 10.56% and 8.01% for the three months ended March 31, 1999 and 1998. NET INTEREST INCOME. The Company's primary source of income is net interest income and is determined by the difference between interest income and fees derived from earning assets and interest paid on interest bearing liabilities. Net interest income for the three months ended March 31, 1999 totaled $5,737,000 and represented an increase of $948,000 or 20% when compared to the $4,789,000 achieved during the three months ended March 31, 1998. Total interest and fees on earning assets were $8,943,000 for the three months ended March 31, 1999, an increase of $851,000 or 11% from the $8,092,000 for the same period 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 interest income for the three months ended March 31, 1999 was primarily the result of an increase in the volume of interest-earning assets. Average interest-earning assets for the three months ended March 31, 1999 were $434,811,000 compared with $375,683,000 for the three months ended March 31, 1998, an increase of $59,128,000 or 16%. Interest expense is a function of the volume of and the rates paid on interest-bearing liabilities. Interest-bearing liabilities consist primarily of certain deposits and borrowed funds. Total interest expense was $3,206,000 for the three months ended March 31, 1999, compared with $3,303,000 for the three months ended March 31, 1998, a decrease of $97,000 or 3%. This decrease was primarily the result of a decrease in the rates of interest-bearing liabilities. Average interest-bearing liabilities were $373,814,000 for the three months ended March 31, 1999 compared with $326,930,000 for the same three months in 1998, an increase of $46,884,000 or 14%. Average interest rates paid on interest-bearing liabilities were 3.43% for the three months ending March 31, 1999 compared with 4.10% for the same three months of 1998, a decrease in interest rates paid of 0.67% or 16%. 10 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 of net interest income to average interest-earning assets, was 5.28% for the three months ended March 31, 1999 compared with 5.17% for the same period 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 63% for the three months ended March 31, 1999 compared to 58% for the three months ended March 31, 1998. 11 AVERAGE BALANCES AND RATES EARNED AND PAID. The following table presents condensed average balance sheet information for the Company, together with interest rates earned and paid on the various sources and uses of its funds for each of the periods indicated. Nonaccruing loans are included in the calculation of the average balances of loans, but the nonaccrued interest on such loans is excluded. AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS
Three months ended Three months ended March 31, 1999 March 31, 1998 Average Average Balance Interest Yield/rate Balance Interest Yield/rate (DOLLARS IN THOUSANDS) ASSETS Federal funds sold $ 12,917 $ 158 4.89% $ 20,041 $ 273 5.52% Time deposits at other financial institutions 706 10 5.40% 820 12 5.93 Taxable investment securities: 115,332 1,717 5.95% 128,008 1,999 6.33 Nontaxable investment securities (1) 30,147 346 4.59 9,215 121 5.33 Loans, gross: (2) 275,709 6,712 9.74 217,599 5,687 10.60 --------- -------- ------ -------- -------- ------- Total interest-earning assets: 434,811 8,943 8.23% 375,683 8,092 8.74 Allowance for loan losses (4,852) (4,073) Cash and due from banks 20,789 20,606 Premises and equipment, net 13,212 13,153 Interest receivable and other assets 26,395 22,094 --------- -------- Total assets $ 490,355 $427,463 --------- -------- --------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Negotiable order of withdrawal $ 66,033 $ 110 0.67 $ 53,560 $ 118 0.89 Savings deposits 172,237 1,358 3.15 148,507 1,434 3.92 Time deposits 127,679 1,601 5.02 102,965 1,415 5.57 Other borrowings 7,865 137 6.97 21,898 336 6.22 --------- -------- ------ -------- -------- ------- Total interest-bearing liabilities 373,814 3,206 3.43 326,930 3,303 4.10 Noninterest-bearing deposits 69,818 56,419 Accrued interest, taxes and other liabilities 3,107 2,342 --------- -------- Total liabilities 446,739 385,691 Total shareholders' equity 43,616 41,772 --------- -------- Total liabilities and shareholders' equity $ 490,355 $427,463 --------- -------- --------- -------- Net interest income and margin (3) $ 5,737 5.28% $ 4,789 5.17% -------- ------ -------- ------- -------- ------ -------- -------
(1) Interest on nontaxable securities is not computed on a tax-equivalent basis. (2) Amounts of interest earned includes loan fees of $193,000 and $343,000 for March 31, 1999 and 1998 respectively. (3) Net interest margin is computed by dividing net interest income by total average interest-earning assets. 12 NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE. The following table sets forth, for the periods indicated, a summary of the changes in average asset and liability balances and interest earned and interest paid resulting from changes in average asset and liability balances (volume) and changes in average interest rates and the total net change in interest income and expenses. The changes in interest due to both rate and volume have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each. Net Interest Income Variance Analysis:
March 31, 1999 compared to March 31, 1998 Volume Rate Total -------- -------- -------- (Dollars in thousands) Increase (decrease) in interest income: Federal funds sold $ (85) $ (37) $ (122) Time deposits at other financial institutions (1) (2) (3) Taxable investment securities (176) (98) (274) Tax-exempt investment securities 242 (17) 225 Loans 1,504 (479) 1,025 ------- -------- ------- Total 1,484 (633) 851 ------- -------- ------- ------- -------- ------- Increase (decrease) interest expense: Interest bearing demand 25 (33) (8) Savings deposits 221 (297) (76) Time deposits 334 (148) 186 Other borrowings (236) 37 (199) ------- -------- ------- Total 344 (441) 97 ------- -------- ------- ------- -------- ------- Increase in net interest income $ 1,140 $ (192) $ 948 ------- -------- ------- ------- -------- -------
PROVISION FOR LOAN LOSSES. The provision for loan losses for the three months ended March 31, 1999 was $507,000 compared with $252,000 for the three months ended March 31, 1998, an increase of $195,000 or 77%. See "Allowance for Loan Losses" contained herein. As of March 31, 1999 the allowance for loan losses was $5,383,000 or 1.91% of total loans. At March 31, 1999, nonperforming assets totaled $2,456,000 or .45% of total assets, nonperforming loans totaled $2,209,000 or .78% of total loans and the allowance for loan losses totaled 244% 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. Also see "Memorandum of Understanding" contained herein. NONINTEREST INCOME. Noninterest income increased by $321,000 or 30% to $1,379,000 for the three months ended March 31, 1999 compared with $1,058,000 in the same period in 1998. Service charges on deposit accounts increased by $85,000 or 13% to $733,000 for the three months ended March 31, 1999 compared with $648,000 for the same period in 1998. Income from the sale of real estate held for sale or development increased by $228,000 over 1998 levels, and other income increased by $8,000 or 2% for the three month period ended March 31, 1999 when compared to the same period in 1998. The increase in income from the sale of real estate during the first quarter of 1999 resulted from the sale of a property that was previously written off. NONINTEREST EXPENSE. Noninterest expenses increased by $473,000 or 11% to $4,796,000 for the three months ended March 31, 1999 compared with $4,323,000 for the same period in 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 months ended March 31, 1999, salaries and related benefits increased by $251,000 or 13% to $2,214,000 from the $1,963,000 recorded for the same period in 1998. Equipment expenses decreased by $11,000 or 2% to $491,000 during the three months ended March 31, 1999 from the $502,000 experienced during the same period in 1998. When comparing the results of the three months 13 ending March 31, 1999 to three months ending March 31, 1998, premises and occupancy expenses increased $5,000 or 2%, professional fees increased by $177,000 or 115%, marketing expenses increased by $64,000 or 63%, goodwill and intangible amortization expense did not change from 1998 levels, supplies expense decreased by $11,000 or 7%, and other expenses increased by $99,000 or 12%. The salary expense increases were primarily the result of increased staffing levels and normal salary progression. Increased professional fees were the result of increased use of consultants to identify and develop profitability enhancement strategies, and increased marketing expenditures designed to provide greater market penetration within our existing markets. 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 $227,000 or 52% in the income tax provision to $662,000 for the three months ended March 31, 1999 compared to the $435,000 recorded for the same period in 1998. During the first quarter of 1999, the Company experienced an effective tax rate of 37% compared to 34% recorded for the same period in 1998. The increase in income taxes during the first quarter of 1999 is primarily related to a reduction in the overall size of the California Enterprise Zone tax credit that was recorded. This credit is the result of certifying eligible employees that work within the Merced-Atwater Enterprise Zone and may fluctuate over time. Overall income tax expense was reduced in both 1999 and 1998 by utilizing federal low income housing credits that were obtained from investments in limited partnerships in low-income affordable housing projects. The Company had investments in these partnerships of $5,736,000 as of March 31, 1999 and $4,300,000 as of March 31, 1998, resulting in tax credits of $80,000 and 79,000 respectively. INTEREST RATE RISK Interest rate risk is an integral part of managing a banking institution's primary source of income, net interest income. The Company manages the balance between rate-sensitive assets and rate-sensitive liabilities being repriced in any given period with the objective of stabilizing net interest income during periods of fluctuating interest rates. The Company considers its rate-sensitive assets to be those which either contain a provision to adjust the interest rate periodically or mature within one year. These assets include certain loans and investment securities and federal funds sold. Rate-sensitive liabilities are those which allow for periodic interest rate changes within one year and include maturing time certificates, certain savings deposits and interest-bearing demand deposits. The difference between the aggregate amount of assets and liabilities that reprice at various time frames is called the "gap." Generally, if repricing assets exceed repricing liabilities in a time period the Company would be deemed to be asset-sensitive. If repricing liabilities exceed repricing assets in a time period the Company would be deemed to be liability-sensitive. Generally, the Company seeks to maintain a balanced position whereby there is no significant asset or liability sensitivity within a one-year period to ensure net interest margin stability in times of volatile interest rates. This is accomplished through maintaining a significant level of loans, investment securities and deposits available for repricing within one year. 14 The following tables set forth the interest rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities as of March 31, 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 MARCH 31, 1999 --------------------------------------------------------------------------------------- AFTER 3 AFTER 1 BUT YEAR BUT WITHIN WITHIN WITHIN AFTER NONINTEREST- 3 MONTHS 12 MONTHS 5 YEARS 5 YEARS BEARING TOTAL --------- --------- --------- --------- ------------ ---------- (DOLLARS IN THOUSANDS) ASSETS Time deposits at other banks $ 1,850 $ - $ - $ - $ - $ 1,850 Federal funds sold 11,400 - - - - 11,400 Investment securities 8,941 18,812 34,584 76,380 3,507 142,224 Loans 135,148 39,075 73,041 34,508 - 281,822 --------- --------- --------- --------- ------------ ---------- Total earning assets 157,339 57,937 107,625 110,888 $ 3,507 437,296 Noninterest-earning assets and allowances for loan losses - - - - 56,239 56,239 --------- --------- --------- --------- ------------ ---------- Total assets $ 157,339 $ 57,937 $ 107,625 $ 110,888 $ 59,746 $ 493,535 LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits $ - $ - $ - $ - $ 68,972 $ 68,972 Savings, money market and NOW deposits 245,437 - - - - 245,437 Time deposits 38,562 75,014 14,743 - - 128,319 Other interest-bearing liabilities 400 103 - 3,251 - 3,754 Other liabilities and shareholders' equity - - - - 46,255 47,053 --------- --------- --------- --------- ------------ ---------- Total liabilities and shareholders' equity 284,399 75,117 14,743 3,251 116,025 $ 493,535 Incremental gap (127,060) (17,180) 92,882 107,736 (56,279) Cumulative gap $(127,060) $(144,240) $ (51,358) $ 56,279 $ - Cumulative gap as a % of earning assets (29.06)% (32.98)% (11.74)% 12.87%
The Company was liability-sensitive with a negative cumulative one-year gap of $144,240,000 or (32.98)% of interest-earning assets at March 31, 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 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 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. 15 An additional measure of interest rate sensitivity that the Company monitors through a detailed model is its expected change in net interest income. This model's estimate of interest rate sensitivity takes into account the differing time intervals and differing rate change increments of each type of interest-sensitive asset and liability. It then measures the projected impact of changes in market interest rates on the Company's net interest income. Based upon the March 31, 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 $585,000 or 2% of net interest income. No assurance can be given that the actual net interest income would not decrease by more than $585,000 or 2% in response to a 2% increase in market interest rates or that actual net interest income would not decrease substantially if market interest rates increased by more than 2%. Also see "Memorandum of Understanding" contained herein. At the Bank's most recent examination, the regulators felt that the then current model that was used by the Bank was not adequate for a bank of its current size and complexity. During the second quarter of 1998, the Company contracted with interest rate sensitivity consultants to provide additional expertise in the interest rate sensitivity modeling process and has updated the model it uses for interest rate risk analysis. The estimates stated above were derived from this updated model. FINANCIAL CONDITION Total assets at March 31, 1999 were $493,535,000, a decrease of $6,324,000 or 1% compared with total assets of $499,859,000 at December 31, 1998. Net loans were $276,439,000 at March 31, 1999, an increase of $12,281,000 or 5% compared with net loans of $264,158,000 on December 31, 1998. Deposits were $442,728,000 at March 31, 1999, a decrease of $1,482,000 or less than 1% compared with deposits of $444,210,000 at December 31, 1998. The reduction in total assets of the Company from December 31, 1998 to March 31, 1999 was primarily the result of a reduction in leverage that was maintained in the Company's investment portfolio. During the first quarter of 1999, maturities that occurred within the investment portfolio were used, in part, to repay short term borrowings that were secured by a portion of the Company's investment portfolio Total shareholders' equity was $43,796,000 at March 31, 1999, an increase of $992,000 or 2% from $42,804,000 at December 31, 1998. The growth in shareholders' equity from December 31, 1998 to March 31, 1999 was primarily achieved through the retention of accumulated earnings. INVESTMENT PORTFOLIO. The following table sets forth the carrying amount (fair value) of available for sale investment securities as of March 31, 1999 and December 31, 1998.
MARCH 31 DECEMBER 31 ---------------------------------- 1999 1998 (In thousands) Available for sale securities: ----------------------------------- U.S. Treasury and U.S. Government agencies $ 12,058 $ 12,711 State and political subdivisions 25,481 30,192 Mortgage-backed securities 50,797 56,048 Collateralized mortgage obligations 24,509 29,264 Corporate debt securities 9,937 9,878 Other securities 3,507 3,264 ------------- ------------ Carrying amount and fair value $ 126,289 $ 141,357 ------------- ------------ ------------- ------------
16 The following table sets forth the carrying amount (amortized cost) and fair value of held to maturity securities at March 31, 1999 and December 31, 1998.
MARCH 31 DECEMBER 31 ---------- ------------ (Dollars in thousands) 1999 1998 Held To Maturity Securities: - ----------------------------- U.S. Treasury and U.S. Government agency $ 1,019 $ 2,024 State and political subdivisions 4,400 - Mortgage-backed securities 10,516 11,486 ---------- ----------- Carrying amount (amortized cost) $ 15,935 $ 13,510 ---------- ----------- ---------- ----------- Fair value $ 16,140 $ 13,584 ---------- ----------- ---------- -----------
The following table sets forth the maturities of the Company's investment securities at March 31, 1999 and the weighted average yields of such securities calculated on the basis of the cost and effective yields based on 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 call or prepay obligations with or without call prepayment penalties. Yields on municipal securities have not been calculated on a tax-equivalent basis.
AT MARCH 31, 1999 ----------------------------------------------------------------------------------------- WITHIN ONE YEAR ONE TO 5 YEARS FIVE TO TEN YEARS OVER TEN YEARS TOTAL AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT (Dollars in thousands) Available for Sale Securities: Treasury and U.S. Government agency $ 501 6.02% $ 6,049 5.76% $ - -% $ 5,508 6.45% $ 12,058 State and political 253 4.99 532 7.80 1,662 4.08 23,034 4.49 25,481 Mortgage-backed securities 18 7.67 1,483 5.59 572 6.89 48,724 5.90 50,797 Collateralized mortgage obligations - - - - 714 4.60 23,795 6.05 24,509 Corporate debt securities - - 4,258 6.07 - - 5,679 6.28 9,937 ----------------------------------------------------------------------------------------- Carrying amount and fair value 772 5.72 12,322 5.70 2,948 4.75 106,740 5.68 122,782 ----------------------------------------------------------------------------------------- Held to maturity securities: Treasury and U.S. Government agency - - - - 1,019 5.79 - - 1,019 State and political 4,400 5.14 4,400 Mortgage-backed securities - - - - - - 10,516 6.58 10,516 ----------------------------------------------------------------------------------------- Carrying amount (amortized cost) - - - - 1,019 5.79 14,916 6.16 15,935 ----------------------------------------------------------------------------------------- Total securities $ 772 5.72% $12,322 5.70% $3,967 5.02% $ 121,656 5.74% $138,717 -------- ---- ------- ---- ------ ---- --------- ----- -------- -------- ---- ------- ---- ------ ---- --------- ----- --------
In the above table, mortgage-backed securities and collateralized mortgage obligations are shown repricing at the time of maturity rather than in accordance with their principal amortization schedules. The Company does not own securities of a single issuer whose aggregate book value is in excess of 10% of its total equity. Also see "Memorandum of Understanding" contained herein. 17 LOAN PORTFOLIO. The following table shows the composition of the Company's loan portfolio at the dates indicated.
AT MARCH 31, AT DECEMBER 31, -------------------------------- ---------------------------------- (Dollars in thousands) 1999 1998 ---- ---- Percent Percent Loan Categories: Dollar Amount of loans Dollar Amount of loans ---------------- -------- -------------- -------- Commercial $ 43,221 15% $ 37,609 14% Agricultural 46,733 16 49,636 18 Real estate construction 16,098 6 13,840 5 Real estate mortgage 98,095 35 96,957 36 Consumer 77,675 28 70,891 27 ---------------- ------ -------------- -------- Total 281,822 100% 268,933 100% ---------------- ------ -------------- -------- ------ -------- Less allowance for loan losses (5,383) (4,775) ---------------- -------------- Net loans $ 276,439 $ 264,158 ---------------- -------------- ---------------- --------------
The table that follows shows the maturity distribution of the portfolio of commercial, agricultural, real estate construction, real estate mortgage, and consumer loans at March 31, 1999:
AT MARCH 31, 1999 ------------------------------------------------------------------------- AFTER 1 BUT WITHIN 1 YEAR WITHIN 5 YEARS AFTER 5 YEARS TOTAL ------------------------------------------------------------------------- (IN THOUSANDS) Commercial and agricultural Loans with floating interest rates $ 51,255 $ 18,795 $ 4,037 $ 74,087 Loans with fixed interest rates 7,635 7,210 1,022 15,867 ------------------ ---------------- --------------- -------------- Subtotal 58,890 26,005 5,059 89,954 Real estate construction Loans with floating interest rates 9,485 1,929 853 12,267 Loans with fixed interest rates 2,652 1,053 126 3,831 ------------------ ---------------- --------------- -------------- Subtotal 12,137 2,982 979 16,098 Real estate mortgage Loans with floating interest rates 9,055 50,737 24,085 83,877 Loans with fixed interest rates 71 14,147 - 14,218 ------------------ ---------------- --------------- -------------- Subtotal 9,126 64,884 24,085 98,095 Consumer 37,834 38,476 1,365 77,675 ------------------ ---------------- --------------- -------------- Total $ 117,987 $ 132,347 $ 31,488 $ 281,822 ------------------ ---------------- --------------- -------------- ------------------ ---------------- --------------- --------------
18 The table that follows shows the maturity distribution of the portfolio of commercial, agricultural, real estate construction, real estate mortgage, and consumer loans at December 31, 1998:
AT DECEMBER 31, 1998 ------------------------------------------------------------------------ AFTER 1 BUT WITHIN 1 YEAR WITHIN 5 YEARS AFTER 5 YEARS TOTAL ------------------------------------------------------------------------ (DOLLARS 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.
MARCH 31, DECEMBER 31, ----------- ------------- 1999 1998 ----- ----- (DOLLARS IN THOUSANDS) Letters of credit $ 2,554 $ 2,694 Commitments to extend credit 81,935 76,984 ----------- --------- Total $ 84,489 $ 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 MARCH 31, AT DECEMBER 31, ----------- ---------------- 1999 1998 ---- ---- (DOLLARS IN THOUSANDS) Cash surrender value of life insurance $5,151 $4,104 ----- ----- ----- -----
19 NONPERFORMING ASSETS. Nonperforming assets include nonaccrual loans, loans 90 days or more past due, restructured loans and other real estate owned. Nonperforming loans are those which the borrower fails to perform in accordance with the original terms of the obligation and include loans on nonaccrual status, loans past due 90 days or more and restructured loans. The Company generally places loans on nonaccrual status and accrued but unpaid interest is reversed against the current year's income when interest or principal payments become 90 days or more past due unless the outstanding principal and interest is adequately secured and, in the opinion of management, is deemed in the process of collection. Interest income on nonaccrual loans is recorded on a cash basis. Payments may be treated as interest income or return of principal depending upon management's opinion of the ultimate risk of loss on the individual loan. Cash payments are treated as interest income where management believes the remaining principal balance is fully collectible. Additional loans not 90 days past due may also be placed on nonaccrual status if management reasonably believes the borrower will not be able to comply with the contractual loan repayment terms and collection of principal or interest is in question. A "restructured loan" is a loan on which interest accrues at a below market rate or upon which certain principal has been forgiven so as to aid the borrower in the final repayment of the loan, with any interest previously accrued, but not yet collected, being reversed against current income. Interest is reported on a cash basis until the borrower's ability to service the restructured loan in accordance with its terms is established. The Company had no restructured loans as of the dates indicated in the above table. The following table summarizes nonperforming assets of the Company at March 31, 1999 and December 31, for the years indicated:
March 31, December 31, 1999 1998 ---- ---- (Dollars in thousands) Nonaccrual loans $ 1,967 $ 1,032 Accruing loans past due 90 days or more 242 413 -------------- -------------- Total nonperforming loans 2,209 1,445 Other real estate owned 60 60 Repossessed automobiles 187 132 -------------- -------------- Total nonperforming assets $ 2,456 $ 1,637 -------------- -------------- -------------- -------------- Nonperforming assets: To total loans .78% .61% To total assets .45% .33%
Interest income on loans on nonaccrual status during the three months ended March 31, 1999, and the nine months ended March 31, 1998, that would have been recognized if the loans had been current in accordance with their original terms was approximately $235,000 and $142,000, respectively. At March 31, 1999, nonperforming assets represented .45% of total assets, an increase of .12% of total assets compared to the .33% at December 31, 1998. Nonperforming loans represented .78% of total loans at March 31, 1999, an increase of .17% 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 $863,000 at March 31, 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. The increase in nonperforming loans and nonperforming assets as of March 31, 1999 compared with their levels as of December 31, 1998, was due primarily to an increase in delinquent agricultural loans coupled with an increase in repossessed automobiles. 20 At March 31, 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 March 31, 1999. This investment was completely written off in 1995, although County Bank still retains title to this property. During the first three 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 March 31, 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 March 31, 1999 were 2,209,000 (all of which were also nonaccrual loans), on account of which the Company had made provisions to the allowance for loan losses of $553,000. Except for loans that are disclosed above, there were no assets as of March 31, 1999, where known information about possible credit problems of borrower causes management to have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may become nonperforming assets. Given the magnitude of the Company's loan portfolio, however, it is always possible that current credit problems may exist that may not have been discovered by management. 21 ALLOWANCE FOR LOAN LOSSES The following table summarizes the loan loss experience of the Company for the three months ended March 31, 1999 and 1998, and for the year ended December 31, 1998.
MARCH 31 DECEMBER 31 ------------------------------ ----------- 1999 1998 1998 ---- ---- ---- (Dollars in thousands) ALLOWANCE FOR LOAN LOSSES: Balance at beginning of period $ 4,775 $ 3,833 $ 2,792 --------- --------- ---------- Provision for loan losses 507 252 3,903 Charge-offs: Commercial and agricultural 123 121 2,539 Real estate construction - - 4 Consumer 297 223 983 --------- --------- ---------- Total charge-offs 420 344 3,526 --------- --------- ---------- Recoveries Commercial and agricultural 430 20 135 Real estate-mortgage - - 100 Consumer 91 37 330 --------- --------- ---------- Total recoveries 521 57 565 Net (recoveries) charge-offs (101) 287 2,961 --------- --------- ---------- Balance at end of period $ 5,383 $ 3,799 $ 4,775 --------- --------- ---------- --------- --------- ---------- Loans outstanding at period-end $ 260,114 $ 221,108 $ 268,933 --------- --------- ---------- --------- --------- ---------- Average loans outstanding $ 275,709 $ 217,599 $ 242,989 --------- --------- ---------- --------- --------- ---------- Net (recoveries) charge-offs to average loans (0.04%) .13% 1.22% Allowance for loan losses To total loans 1.91% 1.72% 1.78% To nonperforming assets 219.22% 297.02% 301.07%
The Company maintains an allowance for loan losses at a level considered by management to be adequate to cover the inherent risks of loss associated with its loan portfolio under prevailing and anticipated economic conditions. In determining the adequacy of the allowance for loan losses, management takes into consideration growth trends in the portfolio, examination of financial institution supervisory authorities, prior loan loss experience for the Company, concentrations of credit risk, delinquency trends, general economic conditions, the interest rate environment and internal and external credit reviews. In addition, the risks management considers vary depending on the nature of the loan. The normal risks considered by management with respect to agricultural loans include the fluctuating value of the collateral, changes in weather conditions and the availability of adequate water resources in the Company's local market area. The normal risks considered by management with respect to real estate construction loans include fluctuation in real estate values, the demand for improved commercial and industrial properties and housing, the availability of permanent financing in the Company's market area and borrowers' ability to obtain permanent financing. The normal risks considered by management with respect to real estate mortgage loans include fluctuations in the value of real estate. Additionally, the Company relies on data obtained through independent appraisals for significant properties to determine loss exposure on nonperforming loans. The balance in the allowance is affected by the amounts provided from operations, amounts charged off and recoveries of loans previously charged off. The Company recorded provisions for loan losses in the first three months of 1999 of $507,000 compared with $252,000 in the same period of 1998. The increase in loan loss provisions in 1998 was primarily due to increased reserves established for the commercial real estate development loan that was charged off in 1997 and, to a lesser extent, reserves to support the general loan growth of the Company. 22 The Company's charge-offs, net of recoveries, were $(101,000) for the three months ended March 31, 1999 compared with $287,000 for the same three months in 1998. The decrease in net charge-offs for the first quarter of 1999 was primarily due to a single recovery in excess of $400,000 on a loan that was written-off in the fourth quarter of 1998. As of March 31, 1999, the allowance for loan losses was $5,383,000 or 1.91% of total loans outstanding, compared with $4,775,000 or 1.78% of total loans outstanding as of December 31, 1998 and $3,799,000 or 1.72% of total loans outstanding as of March 31, 1998. During the first quarter of 1999, the allowance for loan loss increased $608,000 or 13% compared to December 31, 1998 levels. From 1992 to 1996, loan losses were relatively low and stable. In 1998, 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 each category. Risk factors are applied to the carrying value of each classified loan: (i) loans internally graded "Watch" or "Special Mention" carry a risk factor from 1.0% to 2.0%; (ii) "Substandard" loans carry a risk factor from 15% to 40% depending on collateral securing the loan, if any; (iii) "Doubtful" loans carry a 50% risk factor; and (iv) "Loss" loans are charged off 100%. In addition, a portion of the allowance is specially allocated to identified problem credits. The analysis also includes reference to factors such as the delinquency status of the loan portfolio, inherent risk by type of loans, industry statistical data, recommendations made by the Company's regulatory authorities and outside loan reviewers, and current economic environment. Important components of the overall credit rating process are the asset quality rating process and the internal loan review process. The allowance is based on estimates and ultimate future losses may vary from current estimates. It is always possible that future economic or other factors may adversely affect the Company's borrowers, and thereby cause loan losses to exceed the current allowance. In addition, there can be no assurance that future economic or other factors will not adversely affect the Company's borrowers, or that the Company's asset quality may not deteriorate through rapid growth, failure to enforce underwriting standards, failure to maintain appropriate underwriting standards, failure to maintain an adequate number of qualified loan personnel, failure to identify and monitor potential problem loans or for other reasons, and thereby cause loan losses to exceed the current allowance. The following table summarizes a breakdown of the allowance for loan losses by loan category and the allocation in each category as a percentage of total loan allowance at the dates indicated:
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ AMOUNT AMOUNT TO TOTAL TO TOTAL LOAN LOSS LOAN LOSS AMOUNT ALLOWANCE AMOUNT ALLOWANCE ------ --------- ------ --------- (DOLLARS IN THOUSANDS) Commercial and agricultural $ 2,736 51% $ 2,618 55% Real estate- construction 402 7 376 8 Real estate- mortgage 1,600 30 1,260 26 Consumer 645 12 521 11 --------- --- --------- --- Total $ 5,383 100% $ 4,775 100% --------- --- --------- --- --------- --- --------- ---
23 The allocation of the allowance to loan categories is an estimate by management of the relative risk characteristics of loans in those categories. No assurance can be given that losses in one or more loan categories will not exceed the portion of the allowance allocated to that category or even exceed the entire allowance. EXTERNAL FACTORS AFFECTING ASSET QUALITY. As a result of the Company's loan portfolio mix, the future quality of its assets could be affected by adverse economic trends in its region or in the agricultural community. These trends are beyond the control of the Company. California is an earthquake-prone region. Accordingly, a major earthquake could result in material loss to the Company. At times the Company's service area has experienced other natural disasters such as floods and droughts. The Company's properties and substantially all of the real and personal property securing loans in the Company's portfolio are located in California. The Company faces the risk that many of its borrowers face uninsured property damage, interruption of their businesses or loss of their jobs from earthquakes, floods or droughts. As a result these borrowers may be unable to repay their loans in accordance with their terms and the collateral for such loans may decline significantly in value. The Company's service area is a largely agricultural region and therefore is highly dependent on a reliable supply of water for irrigation purposes. The area obtains nearly all of its water from the run-off of melting snow in the mountains of the Sierra Nevada to the east. Although such sources have usually been available in the past, water supply can be adversely affected by light snowfall over one or more winters or by any diversion of water from its present natural courses. Any such natural disaster could impair the ability of many of the Company's borrowers to meet their obligations to the Company. Parts of California experienced significant floods in early 1998. The Company has completed an analysis of its collateral as a result of these floods. Current estimates indicate that there were no 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. LIQUIDITY. In order to maintain adequate liquidity, the Company must have sufficient resources available at all times to meet its cash flow requirements. The need for liquidity in a banking institution arises principally to provide for deposit withdrawals, the credit needs of its customers and to take advantage of investment opportunities as they arise. A company may achieve desired liquidity from both assets and liabilities. The Company considers cash and deposits held in other banks, federal funds sold, other short term investments, maturing loans and investments, payments of principal and interest on loans and investments and potential loan sales as sources of asset liquidity. Deposit growth and access to credit lines established with correspondent banks and market sources of funds are considered by the Company as sources of 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 $163,372,000 and $186,853,000 on March 31, 1999 and December 31, 1998, respectively, and constituted 33%, 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 $48,838,000 at March 31, 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 $27,379,000, of which $503,000 was outstanding as of March 31, 1999 and $7,203,000 was outstanding as of December 31, 1998. Funds used to reduce outstanding short term borrowings during the first quarter of 1999 were obtained from maturities and curtailments that occurred within the investment portfolio. Management believes that the Company maintains adequate amounts of liquid assets to meet its liquidity needs. The Company's liquidity might be insufficient if deposit withdrawals were to exceed anticipated levels. Deposit withdrawals can increase if a company experiences financial difficulties or 24 receives adverse publicity for other reasons, or if its pricing, products or services are not competitive with those offered by other institutions. CAPITAL RESOURCES. Capital serves as a source of funds and helps protect depositors against potential losses. The primary source of capital for the Company has been internally generated capital through retained earnings. In 1997, the Company completed a common stock offering which netted the Company approximately $17,951,000 to add to its capital resources. This addition to capital was necessary to maintain favorable capital ratios through the Company's purchase of the three branches from Bank of America and to support internal growth on the Company's balance sheet. The Company's shareholders' equity increased by $992,000 or 2% from December 31, 1998 to March 31, 1999. The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a material adverse effect on the Company's financial statements. Management believes, as of March 31, 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 March 31, 1999 was 8.15% as compared with 8.58% as of December 31, 1998. The Company's total risk based capital ratio at March 31, 1999 was 12.37% as compared to 12.78% as of December 31,1998. The Company's and Bank's actual capital amounts and ratios met all regulatory requirements as of March 31, 1999 are summarized as follows:
To Be Well Capitalized For Capital Under Prompt Corrective Dollars in thousands Actual Adequacy Purposes Action Provisions: - ---------------------------------------------------------------------------------------------------------------------------------- Consolidated Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------------------------------- As of March 31, 1999 Total capital (to risk weighted assets) $ 42,756 11.93% $ 28,682 8.0% $ 35,853 10.0% Tier 1 capital (to risk weighted assets) 38,263 10.67 14,341 4.0 21,512 6.0 Leverage ratio* 38,263 7.89 19,388 4.0 24,235 5.0 The Bank: --------------------------------------------------------------------------------------------------------------------------------- As of March 31, 1999 Total capital (to risk weighted assets) $ 34,956 11.34% $ 24,661 8.0% $ 30,826 10.0% Tier 1 capital (to risk weighted assets) 31,088 10.08 12,330 4.0 18,496 6.0 Leverage ratio* 31,088 7.13 17,447 4.0 21,809 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. On May 23, 1999 the Company's board of directors authorized management to repurchase up to 200,000 shares or $2,300,000 of the Company's common stock. The Company intends to repurchase shares from time to time in open market transactions. Management's authorization to repurchase Company common stock will continue until withdrawn by the Board of Directors. DEPOSITS. Deposits are the Company's primary source of funds. At March 31, 1999, the Company had a deposit mix of 41% in savings deposits, 29% in time deposits, 16% in interest-bearing checking accounts and 16% in noninterest-bearing demand accounts. Noninterest-bearing demand deposits enhance the Company's net interest income by lowering its costs of funds. 25 The Company obtains deposits primarily from the communities it serves. No material portion of its deposits has been obtained from or is dependent on any one person or industry. The Company's business is not seasonal in nature. The Company accepts deposits in excess of $100,000 from customers. These deposits are priced to remain competitive. At March 31, 1999, the Company had no brokered deposits. Maturities of time certificates of deposits of $100,000 or more outstanding at March 31, 1999 and December 31, 1998 are summarized as follows:
MARCH 31, 1999 DECEMBER 31, 1998 ------------------ -------------------- (DOLLARS IN THOUSANDS) Three months or less $ 14,851 $ 17,136 Over three to six months 11,624 10,028 Over six to twelve months 8,355 8,205 Over twelve months 7,983 7,233 ---------------- ----------------- Total $ 42,813 $ 42,602 ---------------- ----------------- ---------------- -----------------
BORROWED FUNDS At March 31 1999 and December 31, 1998, the Company's borrowed funds consisted of the following:
MARCH 31 DECEMBER 31 --------- ----------- (Dollars in thousands) 1999 1998 (DOLLARS IN THOUSANDS) Securities sold under agreements to repurchase; dated March 25, 1999; fixed rate of 5.69%; payable on April 25, 1999 $ 400 $ 2,100 FHLB loan, dated January 16, 1997; variable rate of 5.68%; rate reprices monthly based on the 1 month LIBOR; payable on January 25, 1999 - 5,000 FHLB loan, dated July 15, 1994; fixed rate of 7.58% payable on July 15, 1999 103 103 Long-term note from unaffiliated bank dated December 22, 1997; fixed rate of 7.80%; principal and interest payable monthly at $25,047; payments calculated as fully amortizing over 25 years with a 10 year call 3,251 3,263 ---------- ----------- Total $ 3,754 $ 10,466 ---------- ----------- ---------- -----------
The decrease in the borrowings was primarily due to amortized principal payments and maturities on available lines of credit with the Federal Home Loan Bank. RETURN ON EQUITY AND ASSETS
Three months Three months ended ended Year ended March 31 March 31 December 31 1999 1998 1998 ---- ---- ---- Annualized return on average assets .94% .78% .60% Annualized return on average equity 10.56% 8.12% 6.48% Average equity to average assets 8.89% 9.77% 9.26%
26 IMPACT OF INFLATION The primary impact of inflation on the Company is its effect on interest rates. The Company's primary source of income is net interest income which is affected by changes in interest rates. The Company attempts to limit inflation's impact on its net interest margin through management of rate sensitive assets and liabilities and the analysis of interest rate sensitivity. The effect of inflation on premises and equipment, as well as on interest expenses, has not been significant for the periods covered in this report. REAL ESTATE DEVELOPMENT ACTIVITIES California law allows state-chartered banks to engage in real estate development activities. The Bank established MAID in 1987 pursuant to this authorization. After changes in federal law effectively required that these activities be divested as prudently as possible but in any event before 1997, MAID reduced its activities and embarked on a plan to liquidate its real estate holdings. In 1995, the uncertainty about the effect of the investment in MAID on the results of future operations caused management to write off its remaining investment of $2,881,000 in real property development. At March 31, 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 three months of 1999, no lots were sold. Although the Company expects that the sale or disposition of its remaining project will result in some positive contribution to noninterest income at some time in the future, no assurance can be given as to whether or when such sale or disposition will be completed or that the amount, if any, that the Company will ultimately realize on such asset or whether such amount will exceed the future expenses required to hold and complete development of the project. The 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. 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 27 they be 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 regulatory agencies have identified several areas within the Y2K plan that need additional review. These areas include, but are not limited to, improvement in Y2K communication between subsidiaries, increased focus on core and mission critical systems, and the need to establish firm test dates for the most important "mission critical" systems. The Company is in the process of insuring 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 costs and the Y2K costs are not expected to have any effect on the Company's continuing status as a technological leader among community financial organizations. During the first three months of 1999, the Company has incurred approximately $10,000 in Y2K plan expenses. 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 28 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 is in the process of being 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. Also see "Memorandum of Understanding" contained herein. 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 SECURITIES LITIGATION REFORM ACT OF 1995 for any 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 on 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 almost always vary from actual results, and the differences between 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. The dates on which the Company believes the Year 2000 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 general 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 29 resolve problems associated with the Year 2000 issue that may affect its operations and business, or expose it to third-party liability. MEMORANDUM OF UNDERSTANDING As a result of a joint examination of the Bank conducted as of January 12, 1998 by FDIC and the Department of Financial Institutions (the "DFI"), the FDIC and the DFI have required the Bank to enter into a Memorandum of Understanding requiring the Bank to do the following: 1) Conduct a comprehensive management review of the Bank's executive management to maintain a management structure suitable to its needs in light of its recent rapid growth. 2) Have and retain qualified management with qualifications and experience commensurate with their duties and responsibilities at the Bank. 3) Develop a plan to reduce the Bank's economic value of equity exposure to loss from interest rate changes to acceptable levels. 4) Formulate, adopt and implement a comprehensive risk management process that will strengthen management expertise and improve securities portfolio management and management information and measurement systems. 5) Establish and maintain an adequate reserve for loan losses and develop and revise, adopt and implement a comprehensive policy to ensure the adequacy of the allowance. 6) Develop, adopt and implement a plan to control overhead and restore the Bank's profitability. 7) Correct deficiencies relating to the Year 2000 project. 8) Furnish written progress reports. As of the date of this report, the Company believes it is in substantial compliance with all the terms of the agreement. A Memorandum of Understanding is an enforceable agreement. Failure to comply with its terms can lead to further enforcement action by bank regulators, including cease-and-desist orders, imposition of a receiver or conservator, termination of deposit insurance, imposition of civil money penalties and removal and prohibition orders against institution-affiliated parties. On May 12, 1999, the DFI contacted the Company with notification that the Memorandum of Understanding was being removed. The FDIC and the DFI agreed that the Bank was in compliance with the terms and conditions of the Memorandum of Understanding and that management had made the changes necessary to allow its removal. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the Company is exposed to market risk which includes both price and liquidity risk. Price risk is created from fluctuations in interest rates and the mismatch in repricing characteristics of assets, liabilities, and off balance sheet instruments at a specified point in time. Mismatches in interest rate repricing among assets and liabilities arise primarily through the interaction of the various types of loans versus the types of deposits that are maintained as well as from management's discretionary investment and funds gathering activities. Liquidity risk arises from the possibility that the Company may not be able to satisfy current and future financial commitments or that the Company may not be able to liquidate financial instruments at market prices. Risk management policies and procedures have been established and are utilized to manage the Company's exposure to market risk. On March 31, 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." 30 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to routine litigation in the ordinary course of its business. In the opinion of management, pending and threatened litigation is not likely to have a material adverse effect on the financial condition or results of operations of the Company. Also see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Memorandum of Understanding." contained herein. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. None. ITEM 5. OTHER INFORMATION. In the opinion of management, there is no additional information relating to these periods being reported which warrants inclusion in the report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibits Description of Exhibits -------- ----------------------- 3.1 Articles of Incorporation, incorporated by reference * from (filed as Exhibit 3.1 of the Company's March 31, 1996 Form 10Q filed with the SEC on or about November 14, 1996). 3.2 Bylaws (filed as Exhibit 3.2 of the Company's March * 31, 1996 Form 10Q filed with the SEC on or about November 14, 1996.) 10 Employment agreement between Thomas T. Hawker and * Capital Corp. (filed as Exhibit 10 of the Company's 1996 Form 10K filed with the SEC on or about March 31, 1997) 10.1 Administration Construction Agreement (filed as * Exhibit 10.4 of the Company's 1995 Form 10K filed with the SEC on or about March 31, 1996). 10.2 Stock Option Plan (filed as Exhibit 10.6 of the * Company's 1995 Form 10K filed with the SEC on or about March 31, 1996). 10.3 401 (k) Plan (filed as Exhibit 10.7 of the Company's * 1995 Form 10K filed with the SEC on or about March 31, 1996 31 10.4 Employee Stock Ownership Plan (filed as Exhibit 10.8 * of the Company's 1995 Form 10K filed with the SEC on or about March 31, 1996). 10.5 Purchase Agreement for three branches from Bank of * America is incorporated herein by reference from Note 1 of the Company's Consolidated Financial Statements b) REPORTS ON FORM 8-K None * DENOTES DOCUMENTS WHICH HAVE BEEN INCORPORATED BY REFERENCE. 32 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 33 EX-27 2 EXHIBIT 27
9 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 23,833 1,850 11,400 0 126,289 15,935 16,140 281,822 5,383 493,535 442,728 503 3,257 3,251 0 0 37,142 6,654 493,535 6,712 2,063 168 8,943 3,069 3,206 5,737 507 0 4,796 1,813 1,151 0 0 1,151 0.25 0.24 8.23 1,967 242 0 0 4,775 420 521 5,383 5,383 0 0
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