EXH 13
Capital Corp of the West
Selected Financial Data
- ---------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands) 1999 1998 1997 (1) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Summary income data:
Interest income $ 39,361 $ 34,614 $ 25,912 $ 19,351 $ 15,873
Interest expense 14,040 13,634 10,190 6,865 5,717
Net interest income 25,321 20,980 15,722 12,486 10,156
Provision for loan losses 2,659 3,903 5,825 1,513 228
Noninterest income (loss) 5,089 4,838 3,852 2,935 (1,224)
Noninterest expense 20,538 18,244 13,372 10,736 8,146
Provision (benefit) for income taxes 2,104 930 (26) 1,163 223
Net income $ 5,109 $ 2,741 $ 403 $ 2,009 $ 335
Share Data:
Average common shares outstanding 4,562 4,602 3,467 2,485 2,207
Basic earnings per share $ 1.12 $ 0.60 $ 0.12 $ 0.81 $ 0.15
Diluted earnings per share 1.09 0.58 0.11 0.77 0.15
Cash dividends per share - - - 0.03 -
Book value per share 9.71 9.29 8.74 7.66 6.80
Tangible book value per share $ 8.59 $ 8.02 $ 7.30 $ 6.78 $ 6.80
Balance Sheet Data:
Total assets $ 563,550 $ 499,859 $ 421,394 $ 265,989 $ 209,033
Total securities 147,368 154,867 148,032 43,378 45,302
Total loans 331,268 268,933 217,977 183,247 133,734
Total deposits 494,901 444,210 356,395 283,345 192,601
Stockholders' equity $ 43,677 $ 42,804 $ 40,248 $ 20,974 $ 15,093
Operating Ratios:
Return on average equity 11.86 % 6.48 % 1.46 % 10.24 % 2.30 %
Return on average assets .99 .60 .13 .88 .18
Net interest margin 5.51 5.17 5.64 6.12 6.09
Credit Quality Ratios:
Nonperforming loans to total loans (2) .60 % .54 % 1.26 % 3.71 % 3.04 %
Allowance for loan losses to total loans 1.97 1.78 1.76 1.52 1.27
Allowance for loan losses to nonperforming loans 328.83 310.87 139.79 50.14 35.07
Capital Ratios:
Risk-based tier 1 capital 9.99 % 10.69 % 11.60 % 9.04 % 9.22 %
Total risk-based capital 11.24 11.94 12.78 10.20 10.27
Leverage ratio 7.50 7.58 8.58 7.37 7.43
(1) Reflects the acquisition of three branches from Bank of America in December,
1997.
(2) Nonperforming loans consist of loans on nonaccrual, loans past due 90 days
or more and restructured loans.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to Capital Corp of
the West (the "Company"). The following discussion should be read in conjunction
with the consolidated financial statements of the Company and the Notes thereto.
The consolidated financial statements of the Company include its subsidiaries,
County Bank (the "Bank") and Capital West Group ("CWG"). It also includes the
Bank's subsidiary, Merced Area Investment Development, Inc. ("MAID").
In addition to historical information, this discussion and analysis
includes certain forward-looking statements that are subject to risks and
uncertainties and include information about possible or assumed future results
of operations. Many possible events or factors could affect the future financial
results and performance of the Company. This could cause results or performance
to differ materially from those expressed in our forward-looking statements.
Words such as "expects", "anticipates", "believes", "estimates", variations of
such words and other similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in, or implied by, such
forward-looking statements.
Readers of the Company's Form 10-K should not rely solely on forward
looking statements and should consider all uncertainties and risks discussed
throughout this report. These statements are representative only on the date
hereof, and the Company undertakes no obligation to update any forward-looking
statements made. Some possible events or factors that could occur that may cause
differences from expected results include the following: the Company's loan
growth is dependent on economic conditions, as well as various discretionary
factors, such as decisions to sell, or purchase certain loans or loan
portfolios; participations of loans and the management of borrower, industry,
product and geographic concentrations and the mix of the loan portfolio. The
rate of charge-offs and provision expense can be affected by local, regional and
international economic and market conditions, concentrations of borrowers,
industries, products and geographical conditions, the mix of the loan portfolio
and management's judgements regarding the collectibility of loans. Liquidity
requirements may change as a result of fluctuations in assets and liabilities
and off-balance sheet exposures, which will impact the capital and debt
financing needs of the Company and the mix of funding sources. Decisions to
purchase, hold, or sell securities are also dependent on liquidity requirements
and market volatility, as well as on and off-balance sheet positions. Factors
that may impact interest rate risk include local, regional and international
economic conditions, levels, mix, maturities, yields or rates of assets and
liabilities and the wholesale and retail funding sources of the Company. Factors
that may cause actual noninterest expense to differ from estimates include the
ability of third parties with whom the Company has business relationships to
fully accommodate uncertainties related to the Company's efforts to prepare its
technology systems and non-information technology systems for the Year 2000, as
well as uncertainties relating to the ability of third parties with whom the
Company has business relationships to address the Year 2000 issue in an adequate
manner.
The Company is also exposed to the potential of losses arising from adverse
changes in market rates and prices which can adversely impact the value of
financial products, including securities, loans, and deposits. In addition, the
banking industry in general is subject to various monetary and fiscal policies
and regulations, which include those determined by the Federal Reserve Board,
the Federal Deposit Insurance Corporation and state regulators, whose policies
and regulations could affect the Company's results.
Other factors that may cause actual results to differ from the
forward-looking statements include the following: competition with other local
and regional banks, savings and loan associations, credit unions and other
nonbank financial institutions, such as investment banking firms, investment
advisory firms, brokerage firms, mutual funds and insurance companies, as well
as other entities which offer financial services; interest rate, market and
monetary fluctuations; inflation; market volatility; general economic
conditions; introduction and acceptance of new banking-related products,
services and enhancements; fee pricing strategies, mergers and acquisitions and
their integration into the Company and management's ability to manage these and
other risks.
28
Overview
During 1999, earnings increased $2,368,000 or 86% to $5,109,000 which
compares favorably to the $2,741,000 and $403,000 achieved in 1998 and 1997.
Basic earnings per share were $1.12 in 1999 compared to $.60 and $.12 in 1998
and 1997. The Company's return on average total assets was .99% in 1999 as
compared with .60% and .13% in 1998 and 1997. The earnings improvement in 1999
was the result of strong growth in interest-earning assets, improvements in
noninterest income and a lower provision for loan losses as compared to the
prior two years. In 1998 and 1997 the provision for loan losses was increased
due to the higher level of charge-off activity in these years. Additionally,
during 1998 there was a charge-off of a single commercial relationship totaling
$1,325,000. Increased charge-offs in 1997 were primarily attributable to the
charge-off of one commercial real estate loan within the Bank's loan portfolio,
which had previously been considered a nonperforming asset. The charge-off
related to this loan totaled $3,458,000.
The Company achieved strong growth in 1999, reaching total assets at
December 31, 1999 of $563,550,000, up $63,691,000 or 12.74% from $499,859,000 at
December 31, 1998. Net loans grew to $324,726,000 at December 31, 1999, a 22.93%
increase from the $264,158,000 outstanding at December 31, 1998. Deposits grew
to $494,901,000, an increase of $50,691,000 or 11.41% over the $444,210,000
outstanding as of December 31, 1998. Total equity capital grew to $43,677,000,
an increase of 2.03% over year end 1998 and the Company continues to be well
capitalized by regulatory definitions.
Results of Operations
Capital Corp of the West's earnings were a record $5,109,000 during 1999,
driven primarily by an increase in net interest income. Net interest income
increased by $4,341,000, or 20.69%, to $25,321,000 during 1999 as compared to
$20,980,000 in 1998. The increase in earnings in 1999 as compared to 1998 is
primarily due to an increase in the size of the Bank's loan portfolio and a
reduced amount of provision for loan losses. The improvement in earnings during
1998 compared to 1997 was achieved as a result of growth in interest-earning
assets, improvements in noninterest income and a reduced amount of provision for
loan losses.
The Company's primary source of revenue is net interest income, which is
the difference between interest income and fees derived from earning assets and
interest paid on liabilities obtained to fund those assets. Total interest and
fee income on earning assets increased from $34,614,000 in 1998 to $39,361,000,
a $4,747,000 or 13.71% increase in 1999. During 1998, there was an increase of
$8,702,000 or 34% to $34,614,000 compared to $25,912,000 in 1997. The level of
interest income is affected by changes in the volume and the rates earned on
interest-earning assets. Interest-earning assets consist primarily of loans,
investment securities and federal funds sold. Average interest-earning assets in
1999 were $459,753,000 as compared with $405,546,000 in 1998, an increase of
$54,207,000 or 13.37%.
Interest expense is a function of the volume and rates paid for
interest-bearing liabilities. Interest-bearing liabilities consist primarily of
certain deposits and borrowed funds. Total average interest bearing liabilities
in 1999 were $394,704,000 as compared with $347,975,000 in 1998, an increase of
$46,729,000 or 13.43%. Total interest expense increased $406,000 or 2.99% to
$14,040,000 in 1999 as compared to $13,634,000 and $10,190,000 for 1998 and
1997.
The Company's net interest margin, the ratio of net interest income to
average interest-earning assets for 1999 was 5.51%. This is an increase of 34
basis points compared to the 1998 margin of 5.17%. The increased net interest
margin during 1999 was primarily the result of growth obtained within the loan
portfolio. The net interest margin decline of 47 basis points during 1998 from
the 5.64% achieved in 1997 was primarily due to a change in the asset mix
compared with the previous year. In 1999, loans comprised 68% of
interest-earning assets as compared with 60% and 71% in 1998 and 1997.
Securities comprised 30% of interest-earning in 1999 compared with 34% in 1998.
The Company's net interest income is affected by changes in the amount and
mix of interest-earning assets and interest-bearing liabilities. It is also
affected by changes in yields earned on interest-earning assets and rates paid
on interest-bearing deposits and other borrowed funds. The changes due to both
rate and volume have been allocated to rate and volume in proportion to the
relationship of the absolute dollar amount of the change in each. The effects of
tax-equivalent yields have not been considered because they are not considered
significant.
The increase in total interest income of $4,747,000 in 1999 is comprised of
a $5,632,000 volume increase primarily attributable to an increase in average
interest-earning assets of $54,207,000 or 13.37% between 1999 and 1998 that is
offset by an $885,000 rate decrease during this same period. The increase in
29
total interest expense of $406,000 in 1999 related to a $46,729,000 or 13.43%
increase in average interest-bearing liabilities between 1999 and 1998 offset by
a $1,065,000 rate decrease during this same period.
The increase in total interest income of $8,702,000 in 1998 is comprised of
a $9,376,000 volume increase associated with the $126,298,000 increase in
average interest-earning assets between 1997 and 1998, and a $674,000 rate
decrease. The increase in total interest expense of $3,444,000 in 1998 related
to a $101,925,000 or 41.42% increase in average interest-bearing liabilities
between 1997 and 1998 offset by a $579,000 rate decrease.
Provision for Loan Losses
The Company maintains an allowance for loan losses at a level considered by
management to be adequate to cover the inherent risks of loss associated with
its loan portfolio under prevailing and anticipated economic conditions. The
provision for loan losses is charged against income and increases the allowance
for loan losses. The provision for loan losses for the year ended December 31,
1999 was $2,659,000 compared to $3,903,000 in 1998 and $5,825,000 in 1997. The
decreased level of provision for loan losses in 1999 was primarily the result of
a reduced level of net charge-offs experienced during the year. The level of the
provision for loan losses in 1998 is partially attributable to replenishing the
allowance for loan losses following the charge-off of one commercial loan
relationship totaling $1,325,000. The increase in 1997 is due primarily to
coverage of the charge-off of one real estate loan totaling $3,458,000 that was
determined to be uncollectible in 1997. The methodology used to determine the
level of provision for loan losses that is needed each year includes an analysis
of relevant risk factors within the entire loan portfolio, including
nonperforming loans. The methodology is based, in part, on management's use of a
loan grading and classification system. The Bank's management grades its loans
through internal reviews and periodically subjects loans to external reviews.
These external reviews are presented to and assessed by the Bank's audit
committee. Credit reviews are performed monthly and the quality grading process
occurs on a quarterly basis. The level of provision for loan losses in 1999,
1998, and 1997 also supports the general loan growth of the Company, as gross
loans increased 23% in 1999, and 24% in 1998.
Other Income
The following table summarizes other income for the years ended December 31,
(Dollars in thousands) 1999 1998 1997
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Other Income:
Deposit service charges $ 3,254 $ 2,807 $ 1,709
Income from real estate held for sale or development 260 540 879
Loan service fees 167 172 195
Gain on sale of loans 48 173 153
Retail investment commissions 139 156 218
Earnings on director and officer life insurance 288 201 181
Other 933 789 517
-------- --------- --------
Total other income $ 5,089 $ 4,838 $ 3,852
======== ========= ========
Total noninterest income increased by $251,000 or 5% to $5,089,000 in 1999,
compared to $4,838,000 and $3,852,000 in 1998 and 1997. Deposit service charges
increased by $447,000 or 16% during 1999. The 1999 increase in deposit service
charges was primarily the result of an increase in demand deposit and NOW
account balances. The increase in 1998 was in large part attributable to the
purchase of the three branches of Bank of America and to the Bank's overall
deposit growth. Other income increased by $144,000 or 18% to $933,000 in 1999,
compared to $789,000 and $517,000 in 1998 and 1997. The 1999 increase is due
primarily to an increase in ancillary product income.
The Company has an investment in residential real estate in Merced County
through its wholly owned subsidiary, MAID, which is now inactive. This
investment was completely written-off in 1995. As of December 31, 1999, the Bank
owned one parcel of land. When this property is sold, any income that may be
generated will be recognized as other income.
30
Other Expense
Total noninterest expense increased $2,294,000 or 13% to $20,538,000 in
1999 as compared with an increase of $4,872,000 or 36% to $18,244,000 in 1998.
Noninterest expense totaled $13,372,000 in 1997.
Salaries and related benefits increased by $1,741,000 or 22% to $9,699,000
in 1999, compared with an increase of $1,825,000 or 30% to $7,958,000 in 1998.
The salary increases were primarily due to an increase in full-time equivalent
employees as well as normal merit increases and related benefit expenses. The
increase in full time equivalent employees in 1998 was due primarily to the
purchase of three branches of Bank of America and a corresponding increase in
the number of support personnel. Premises and occupancy expenses increased
$254,000 or 19% to $1,579,000 in 1999 compared with an increase of $90,000 or 7%
to $1,325,000 in 1998. The increase in 1999 was caused primarily by increased
spending on branch facility upgrades.
Equipment expenses decreased $11,000, or .05% to $2,144,000 in 1999
compared with an increase of $709,000 or 49.03% in 1998. The decrease during
1999 was the result of a slowdown in spending on technology during the year. The
1998 increase was primarily due to upgraded computer technology, additional
branches and branch relocation expenses and new technology expenditures required
to build the infrastructure necessary to provide check imaging to the Bank's
deposit customers.
The Company's professional fees include legal, consulting, audit and
accounting fees. These expenses decreased by $143,000 or 12% to $1,060,000 in
1999 as compared with an increase of $651,000 or 118% to $1,203,000 in 1998. The
increase in 1998 is attributable, in part, to the outsourcing of internal
audits, increased legal fees due to regulatory matters, consultants used to
update the Bank's sales incentive program and expenditures relating to earnings
enhancement programs and regulatory matters. The decrease in 1999 was due to a
decreased use of outside professionals.
Supplies decreased by $58,000 or 10% to $551,000 in 1999 as compared with
an increase of $71,000 or 13% to $609,000 in 1998. The decrease in 1999 were due
to cost savings programs initiated during 1999. The increases in 1998 were
primarily related to new branch openings.
Marketing expenses increased by $52,000 or 8% to $708,000 in 1999 as
compared with increases of $66,000 or 11% in 1998. Marketing expenses have
continued to increase over the past several years as the Company actively
promoted various deposit and loan products to assist with the general growth of
the Company.
Other increases relate primarily to overall growth of the Company. In 1999,
approximately $300,000 of other expense relates to Y2K expenses. In 1998 and
1997, other expenses totaling $179,000 and $275,000 were related to costs
associated with the Bank of America branch purchases.
Provision for Income Taxes
The Company's provision for income taxes was $2,104,000 in 1999 compared to
a $930,000 income tax provision in 1998, and a tax benefit of $26,000 in 1997.
The effective income tax rates (computed as income taxes as a percentage of
income before income taxes) were 29%, 25% and (7%) for 1999, 1998 and 1997. In
part, the effective tax rate of the Company was reduced in 1999 and 1998 due to
the tax credits earned from the investment of low-income housing partnerships
that qualify for housing tax credits. Total housing tax credits for 1999, 1998
and 1997 were approximately $450,000, $426,000 and $71,000. In addition, during
1999, 1998 and 1997, the Company realized tax benefits of $ 413,000, 239,000 and
$86,000 from nontaxable interest income received from bank qualified municipal
securities.
Financial Condition
Total assets increased 13% to $563,550,000 at December 31, 1999, compared
to $499,859,000 at December 31, 1998. Net loans grew to $324,726,000 at year end
1999, a 23% increase compared to growth of $50,014,000 or 23% in 1998. Deposits
grew by $50,691,000 or 11% in 1999 as compared to an increase of $87,815,000 or
25% in 1998.
31
Securities
The following table sets forth the carrying amount (fair value) of available for
sale securities at December 31,
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------
U.S. Treasury & U.S. Government agencies $ 16,756 $ 12,711 $ 1,824
State and political subdivisions 23,371 30,192 9,640
Mortgage-backed securities 43,723 56,048 68,808
Collateralized mortgage obligations 20,341 29,264 51,874
Other securities 13,623 13,142 3,111
-------- --------- ---------
Carrying amount and fair value $117,814 $ 141,357 $ 135,257
======== ========= =========
The following table sets forth the carrying amount (amortized cost) and fair
value of held to maturity securities at December 31,
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------
U.S. Treasury and U.S. Government agencies $ 1,001 $ 2,024 $ 9,442
State and political subdivisions 4,159 - -
Mortgage-backed securities 23,515 11,486 3,333
------- ------- -------
Carrying amount (amortized cost) $29,554 $13,510 $12,775
======= ======= =======
Fair value $28,675 $ 13,584 $12,780
======= ======== =======
Available for sale securities decreased $23,543,000 or 17% at December 31,
1999 over the same year-end in 1998. This decrease was primarily the result of
an increased level of cash holdings at December 31, 1999. The Company owns a
large amount of mortgage-backed securities which generally have stated
maturities in excess of 10 years but are subject to substantial prepayments
which effectively accelerate actual maturities. At December 1999 the Company did
not hold any structured notes. See Note 1 and 3 to the Company's Consolidated
Financial Statements for further information concerning the securities
portfolio. Available for sale securities increased $6,100,000 or 5% during 1998.
Loans
Total loans increased 23% to $331,268,000 at December 31, 1999, compared to
$268,933,000 at December 31, 1998. The increase in loan volumes in 1999, 1998
were due to the Company's strategic efforts to increase loan production coupled
with the business development efforts by the Company's loan officers.
The Company concentrates its lending activities in five principal areas:
commercial, agricultural, real estate construction, real estate mortgage, and
consumer loans. Interest rates charged for loans made by the Company vary with
the degree of risk, the size and term of the loan, and borrowers' depository
relationships with the Company and prevailing market rates.
As a result of the Company's loan portfolio mix, the future quality of
these assets could be affected by adverse trends in its region or in the broader
community. These trends are beyond the control of the Company.
Credit Risk Management and Asset Quality
The Company closely monitors the markets in which it conducts its lending
operations and adjusts its strategy to control exposure to loans with higher
credit risk. Asset reviews are performed using grading standards and criteria
similar to those employed by bank regulatory agencies. Assets receiving lesser
grades become "classified assets" which includes all nonperforming assets and
potential problem loans, and receive an elevated level of attention to improve
the likelihood of collection. The policy of the Company is to review each loan
in the portfolio to identify problem credits. There are three classifications
for problem loans: "substandard," "doubtful" and "loss." Substandard loans have
one or more defined weaknesses and are characterized by the distinct possibility
that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful loans have the weaknesses of substandard loans with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high possibility of loss. A loan classified loss is considered
uncollectible and its continuance as an asset is not warranted. The level of
nonperforming loans and real estate acquired through foreclosure are two
indicators of asset quality. Nonperforming loans are those in which the borrower
fails to perform under the original terms of the obligation and are categorized
as loans past due 90 days or more but still accruing, loans on nonaccrual status
and restructured loans. Loans are generally placed on nonaccrual status and
accrued but unpaid interest is reversed against current year income when
interest or principal payments become 90 days past due unless the outstanding
principal and interest is adequately secured and, in the opinion of management,
are deemed to be in the process of collection. Additionally loans which are not
90 days past due may also be placed on nonaccrual status if management
reasonably believes the borrower will not be able to comply to the contractual
loan repayment terms and the collection of principal or interest is in question.
Management defines impaired loans as those loans, regardless of past due
status, in which principal and interest are not expected to be collected under
the original contractual loan repayment terms. An impaired loan is charged off
at the time management believes the collection of principal and interest process
has been exhausted. At December 31, 1999 and 1998, impaired loans were measured
based upon the present value of future cash flows discounted at the loan's
effective rate, the loan's observable market price, or the fair value of
collateral if the loan is collateral dependent.
The Company had nonperforming loans at December 31, 1999 of $1,990,000 as
compared with $1,577,000 at December 31, 1998. The 1999 totals contain no loans
secured by first deeds of trust on real property as compared with $623,000 in
1998. Impaired loans as of December 31, 1999 were $1,990,000, which had specific
allowances for loan loss of $497,000 as compared with impaired loans of
$1,577,000 as of December 31, 1998, which had specific allowance for loan losses
of $114,000. Other forms of collateral, such as inventory, chattel and
equipment, secure the remaining nonperforming loans as of each date.
A single commercial real estate loan which totaled $3,458,000 was
completely written-off in 1997. As a result of this loan write-off, the
allowance was replenished which resulted in a provision for loan losses in 1997
of $5,825,000.
At December 31, 1999 and 1998 the Bank had $247,000 and $60,000 in real
estate acquired through foreclosure.
Allowance for Loan Losses
In determining the adequacy of the allowance for loan losses, management
takes into consideration the growth trend in the portfolio, examinations by
financial institution supervisory authorities, internal and external credit
reviews, prior loan loss experience of the Company, concentrations of credit
risk, delinquency trends, general economic conditions and the interest rate
environment. The allowance for loan losses is based on estimates and ultimate
future losses may vary from current estimates. It is always possible that future
economic or other factors may adversely affect the Company's borrowers, and
thereby cause loan losses to exceed the current allowance for loan losses.
The balance in the allowance for loan losses is affected by the amounts
provided from operations, amounts charged off and recoveries of loans previously
charged off. The Company had provisions to the allowance in 1999 of $2,659,000
as compared to $3,903,000 and $5,825,000 in 1998 and 1997. See "Results of
Operations - Provision for Loan Losses."
32
The following table summarizes the loan loss experience of the Company for
the years ended December 31,
(Dollars in thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance at beginning of year $ 4,775 $ 3,833 $ 2,792 $ 1,701 $ 1,621
Provision for loan losses 2,659 3,903 5,825 1,513 228
Allowance acquired through merger - - - 148 -
Charge-offs:
Commercial and agricultural 531 2,539 1,121 518 160
Real-estate - construction - - 3,458 - -
Real-estate - mortgage - 4 - - -
Consumer 1,323 983 471 140 63
------- -------- -------- -------- --------
Total charge-offs 1,854 3,526 5,050 658 223
Recoveries:
Commercial and agricultural 715 135 155 27 66
Real-estate - construction - - 1 - -
Real-estate - mortgage - 100 - - -
Consumer 247 330 110 61 9
------- -------- -------- -------- --------
Total recoveries 962 565 266 88 75
------- -------- -------- -------- --------
Net charge-offs 892 2,961 4,784 570 148
------- -------- -------- -------- --------
Balance at end of year $ 6,542 $ 4,775 $ 3,833 $ 2,792 $ 1,701
======== ======== ======== ======== ========
Loan outstanding at year-end $331,268 $268,993 $217,997 $183,247 $133,734
Average loans outstanding $303,463 $242,989 $198,140 $157,098 $120,620
Net charge-offs to average loans 0.29 % 1.22 % 2.41 % 0.36 % 0.12 %
Allowance for loan losses
To total loans 1.97 % 1.78 % 1.76 % 1.52 % 1.27 %
To nonperforming loans 328.74 % 302.79 % 139.79 % 50.14 % 35.07 %
To nonperforming assets 292.45 % 291.69 % 136.80 % 39.69 % 34.74 %
The Company's charge offs, net of recoveries, were $892,000 in 1999 as
compared with $2,961,000 and $4,784,000 in 1998 and 1997. This represents loan
loss experience ratios of .29%, 1.22% and .41% in those respective years stated
as a percentage of average gross loans outstanding for each year. As of December
31, 1999 the allowance for loan losses was $6,542,000 or 1.97% of total loans
outstanding. This compares with an allowance for loan losses of $4,775,000 or
1.78% in 1998 and $3,833,000 or 1.76% in 1997. The increases in net charge offs
in 1997 and 1998 were due to the complete write-off of a single commercial
relationship and the complete write-off of one commercial real estate loan
respectively as previously discussed.
Liquidity
To maintain adequate liquidity requires that sufficient resources be
available at all times to meet cash flow requirements of the Company. The need
for liquidity in a banking institution arises principally to provide for deposit
withdrawals, the credit needs of its customers and to take advantage of
investment opportunities as they arise. A company may achieve desired liquidity
from both assets and liabilities. The Company considers cash and deposits held
in other banks, federal funds sold, other short term investments, maturing loans
and investments, receipts of principal and interest on loans, available for sale
investments and potential loan sales as sources of asset liquidity. Deposit
growth and access to credit lines established with correspondent banks and
market sources of funds are considered by the Company as sources of liquidity.
The Company reviews its liquidity position on a regular basis based upon
its current position and expected trends of loans and deposits. Management
believes that the Company maintains adequate amounts of liquid assets to meet
its liquidity needs. These assets include cash and deposits in other banks,
available for sale securities and federal funds sold. The Company's liquid
assets totaled $168,886,000 and $186,853,000 at December 31, 1999 and 1998 and
are 30% and 37.3% of total assets on those dates. Cash and noninterest-bearing
deposits in other banks increased $15,811,000 or 61% to $41,582,000 in 1999,
compared to $25,771,000 at December 31, 1998. The additional cash position in
1999 was the result of a larger than normal cash inventory maintained in
preparation for any abnormal cash requests by the customers of the Bank due to
potential Y2K problems. Liquidity is also affected by collateral requirements of
its public agency deposits and certain borrowings. Total pledged securities were
$105,008,000 at December 31, 1999 and $46,023,00 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 certain
correspondent banks, the Federal Reserve Bank, and the Federal Home Loan Bank
aggregating $59,392,000 of which $12,600,000 was outstanding as of December 31,
1999. This compares with lines of credit of $16,197,000 of which $5,103,000 was
outstanding as of December 31, 1998.
Market and Interest Rate Risk Management
The Company's success is largely dependent upon its ability to manage
interest rate risk. Interest rate risk can be defined as the exposure of the
Company's net interest income to adverse movements in interest rates. Although
the Company manages other risks, such as credit and liquidity risk in the normal
course of its business, management considers interest rate risk to be its most
significant market risk and could potentially have the largest material effect
on the Company's financial condition and results of operations. Correspondingly,
the overall strategy of the Company is to manage interest rate risk, through
balance sheet structure, to be interest rate neutral. The Company does not
currently engage in trading activities or use derivative instruments to control
interest rate risk. Though such activities may be permitted with the approval of
the Board of Directors, the Company does not intend to engage in such activities
in the immediate future.
The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO), which reports to the Board of
Directors. ALCO establishes policies that monitors and coordinates the Company's
sources, uses and pricing of funds. ALCO is also involved in formulating the
economic projections for the Company's budget and strategic plan. ALCO sets
specific rate sensitivity limits for the Company. ALCO monitors and adjusts the
Company's exposure to changes in interest rates to achieve predetermined risk
targets that it believes are consistent with current and expected market
conditions. Balance sheet management personnel monitor the asset and liability
changes on an ongoing basis and provide report information and recommendations
to the ALCO committee in regards to those changes.
Earnings Sensitivity
The Company's net income is dependent on its net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest- earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net income.
The primary analytical tool used by the Company to gauge interest rate
sensitivity is an analytical model used by many other financial institutions.
Based on the current portfolio mix, this model is used to estimate the effects
of changes in market rates on the Company's net interest income. This model's
estimate of interest rate sensitivity takes into account the differing time
intervals and differing rate change increments of each type of interest
sensitive asset and liquidity. This test measures the impact on net interest
income of change in interest rates in 100 basis point increments over the next
twelve month period.
The estimated impact of immediate changes in interest rates at the
specified levels at December 31, 1999 is presented in the following table:
- -------------------------------------------------------------------------------------------------------------
Percentage
Change in Change in change in
interest rates net interest net interest
(In basis points) income(1) income
- -------------------------------------------------------------------------------------------------------------
+200 $ (738,000) (2.68%)
-200 $ 374,000 1.36%
- -------------------------------------------------------------------------------------------------------------
(1) The amount in this column represents the change in net interest income for
12 months in a stable interest rate environment versus the net interest income
in the various rate scenarios.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the
33
Company's asset-liability structure to obtain the maximum yield-cost spread
on that structure. The Company relies primarily on its asset-liability
structure to control interest rate risk.
Based upon the December 31, 1999 mix of interest sensitive assets and
liabilities, given sustained increase in the federal funds rate of 2%, this
model estimates the Company's cumulative net interest income over the next year
would decrease by $738,000. This compares with a cumulative one year expected
decrease in net interest income of $388,000 as of December 31, 1998. As this
measure of interest rate risk indicates, the Company is not subject to
significant risk of change in its net interest margin as a result of changes in
interest rates.
Capital Resources
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate mandatory and possibly additional discretionary
actions by the regulators that, if undertaken, could have a material effect on
the Company's financial statements. Management believes, as of December 31,
1999, that the Company and the Bank meet all capital requirements to which they
are subject. The Company's leverage capital ratio at December 31, 1999 was 7.50%
as compared with 7.58% as of December 31, 1998. The Company's risk-based capital
ratio at December 31, 1999 was 11.24% as compared to 11.94% as of December 31,
1998.
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet the Company's
future needs. All ratios are in excess of the regulatory definitions of "well
capitalized". Management believes that, under the current regulations, the
Company will continue to meet its minimum capital requirements in the
foreseeable future.
The Company has no formal dividend policy, and dividends are issued solely
at the discretion of the Company's Board of Directors, subject to compliance
with regulatory requirements. In order to pay any cash dividend, the Company
must receive payments of dividends or management fees from the Bank. There are
certain regulatory limitations on the payment of cash dividends by banks.
Notwithstanding regulatory restrictions, in order for the Bank to maintain a 10%
risk weighted capital ratio, the Bank has the ability to pay cash dividends at
December 31, 1999 of $2,958,000.
Impact of Inflation
The primary impact of inflation on the Company is its effect on interest
rates. The Company's primary source of income is net interest income which is
affected by changes in interest rates. The Company attempts to limit inflation's
impact on its net interest margin through management of rate-sensitive assets
and liabilities and the analysis of interest rate sensitivity. The effect of
inflation on premises and equipment, as well as noninterest expenses, has not
been significant for the periods covered in this report.
34
Market for Company's Common Stock and Related Stock Matters
The Company's stock is included for quotation on the NASDAQ National Market
System with a stock quotation symbol of CCOW.
The following table indicates the range of high and low sales prices for
the period shown, based upon information provided by the NASDAQ National Market
System.
- -------------------------------------------------------------------------
1999 High Low
- -------------------------------------------------------------------------
4th quarter $12.00 $ 8.50
3rd quarter 13.88 12.00
2nd quarter 14.09 9.75
1st quarter $10.75 $ 8.50
1998 High Low
- -------------------------------------------------------------------------
4th quarter $12.00 $9.38
3rd quarter 13.37 9.81
2nd quarter 15.35 12.75
1st quarter $14.28 $11.67
- -------------------------------------------------------------------------
Generally, the Company has retained earnings to support the growth of the
Company and has not paid regular cash dividends. In 1998 the Company paid a 5%
stock dividend for shareholders of record as of May 7, 1998.
Year 2000
The Company has not experienced any technology problems through January 25,
2000 related to the Year 2000 (Y2K) date change. The company successfully tested
their systems for Y2K compliance, and all Y2K compliance programs were reviewed
by the Company's primary regulators.
Although at this time it is not possible to fully determine the extent of
potentially adverse financial effects with any specificity, the Company has
prepared contingency plans if disruptions occur. The contingency plans allow the
Company to continue operations in the event the Company, or its key suppliers,
customers, or third party service providers experience serious problems related
to year 2000 problems. The plans include, but are not limited to, generating
paper reports, using paper receipts, paper forms, and other required documents
in order to be able to operate manually, without any computer access, if
necessary.
Prospective Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which amends the disclosure
requirements of Statement No. 52, FOREIGN CURRENCY TRANSLATIONS and Statement
No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. SFAS 133
supersedes Statements No.80 ACCOUNTING FOR FUTURE CONTRACTS, No. 105 DISCLOSURE
OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK and No. 119, DISCLOSURE
ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other assets
or liabilities on the balance sheet and measurement of those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment (a fair value
hedge) or (b) a hedge of the exposure to variable cash flows of a forecasted
transaction (a cash flow hedge).
In June 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF SFAS NO.
133. SFAS No. 137 defers the effective date of SFAS No. 133 from all fiscal
quarters of fiscal years beginning after June 15, 1999 to all fiscal quarters of
fiscal years beginning after June 15, 2000.
Independent Auditors' Report
35
To the Board of Directors and Shareholders of Capital Corp of the West:
We have audited the accompanying consolidated balance sheets of Capital
Corp of the West and subsidiaries (the Company) as of December 31, 1999 and 1998
and the related consolidated statements of income and comprehensive income, cash
flows, and shareholders' equity for each of the years in the three year period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Capital Corp
of the West and subsidiaries as of December 31, 1999 and 1998 and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
- -------------------------------------
Sacramento, California
January 25, 2000
36
Capital Corp of the West
Consolidated Balance Sheets
As of December 31,
---------------------------
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------
ASSETS
Cash and noninterest-bearing deposits in other
banks $ 41,582 $ 25,771
Federal funds sold 8,640 19,125
Time deposits at other financial institutions 850 600
Investment securities available for sale, at fair value 117,814 141,357
Investment securities held to maturity, at cost 29,554 13,510
Loans, net 324,726 264,158
Interest receivable 3,436 3,272
Premises and equipment, net 13,163 13,319
Goodwill and other intangible assets 5,069 5,865
Other assets 18,716 12,882
--------- ---------
Total assets $ 563,550 $ 499,859
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 87,564 $ 80,290
Negotiable orders of withdrawal 72,788 71,526
Savings 164,158 165,781
Time, under $100,000 101,395 84,011
Time, $100,000 and over 68,996 42,602
--------- ---------
Total deposits 494,901 444,210
Borrowed funds 20,814 10,466
Accrued interest, taxes and other liabilities 4,158 2,379
--------- ---------
Total liabilities 519,873 457,055
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 10,000,000 shares authorized;
none outstanding
Common stock, no par value; 20,000,000 shares authorized;
4,496,201 and 4,607,102 issued and outstanding 35,593 37,142
Retained earnings 10,743 5,634
Accumulated other comprehensive (loss) income (2,659) 28
--------- ---------
Total shareholders' equity 43,677 42,804
--------- ---------
Total liabilities and shareholders' equity $ 563,550 $ 499,859
========= =========
See accompanying notes to consolidated financial statements
37
Capital Corp of the West
Consolidated Statements of Income and Comprehensive Income
Years Ended December 31,
-----------------------------------------
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 30,255 $ 25,159 $ 20,646
Interest on deposits with other financial
institutions 156 57 53
Interest on investment securities held to
maturity:
Taxable 1,116 1,257 828
Non-taxable 190 - -
Interest on investment securities available for
sale:
Taxable 6,013 6,091 3,810
Non-taxable 1,188 797 231
Interest on federal funds sold 443 1,253 344
------- ------- -------
Total interest income 39,361 34,614 25,912
INTEREST EXPENSE:
Deposits
Negotiable orders of withdrawal 458 503 345
Savings 5,752 5,696 4,770
Time, under $100,000 4,504 4,418 3,174
Time, $100,000 and over 2,570 1,725 809
------- ------- -------
Total interest on deposits 13,284 12,342 9,098
Other borrowings 756 1,292 1,092
------- ------- -------
Total interest expense 14,040 13,634 10,190
Net interest income 25,321 20,980 15,722
Provision for loan losses 2,659 3,903 5,825
------- ------- -------
Net interest income after provision for loan
losses 22,662 17,077 9,897
OTHER INCOME:
Service charges on deposit accounts 3,254 2,807 1,709
Income from sale of real estate 260 540 879
Other 1,575 1,491 1,264
------- ------- -------
Total other income 5,089 4,838 3,852
OTHER EXPENSES:
Salaries and related benefits 9,699 7,958 6,133
Premises and occupancy 1,579 1,325 1,235
Equipment 2,144 2,155 1,446
Professional fees 1,060 1,203 552
Supplies 551 609 538
Marketing 708 656 590
Goodwill and intangible amortization 792 778 111
Other 4,005 3,560 2,767
------- ------- -------
Total other expenses 20,538 18,244 13,372
Income before provision (benefit) for income
taxes 7,213 3,671 377
Provision (benefit) for income taxes 2,104 930 (26)
------- ------- -------
Net income $ 5,109 $ 2,741 $ 403
- ----------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
Unrealized (loss) gain on securities arising
during the period (2,615) (112) 246
Less: reclassification adjustment for (gains)
losses included in net income (72) (55) 18
------- ------- -------
Comprehensive income $ 2,422 $ 2,574 $ 667
======== ======== =======
- ----------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.12 0.60 $ 0.12
Diluted earnings per share $ 1.09 $ 0.58 $ 0.11
See accompanying notes to consolidated financial statements
38
Capital Corp of the West
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31,
--------------------------------------
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 5,109 $ 2,741 $ 403
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 2,659 3,903 5,825
Depreciation, amortization and accretion, net 2,763 3,374 1,661
(Benefit) provision for deferred income taxes (1,090) 310 499
Gain on sale of real estate 260 540 879
Net increase in interest receivable & other assets (3,340) (872) (5,770)
Net decrease in mortgage loans held for sale - - 880
Net (decrease) increase in deferred loan fees (699) (1,085) 167
Net increase (decrease) in accrued interest payable & other
liabilities 1,727 (763) 703
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,389 8,148 5,247
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Investment security purchases - available for sale securities (20,272) (46,213) (23,360)
Investment security purchases - mortgage-backed securities and
collateralized mortgage obligations (27,522) (27,863) (119,734)
Proceeds from maturities of available for sale investment
securities 1,719 3,127 7,433
Proceeds from maturities of held to maturity investment securities 1,000 - 2,013
Proceeds from maturities of mortgage-backed securities and
collateralized mortgage obligations 26,279 35,752 13,861
Proceeds from sales of available for sale investment securities 13,777 9,088 12,833
Proceeds from sales of mortgage-backed securities and
collateralized mortgage obligations 7,574 18,131 2,410
Net (increase) decrease in time deposits in other financial
institutions (250) (1) 2,502
Proceeds from sales of commercial and real estate loans 1,023 6,826 5,972
Origination of loans (227,590) (179,866) (117,726)
Proceeds from repayment of loans 163,982 119,730 72,009
Purchases of premises and equipment (1,585) (2,090) (7,904)
Proceeds from sales of real estate held for sale or development 260 478 1,470
Purchase of intangible assets - - (4,343)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (61,605) (62,901) (152,564)
- -----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in demand, NOW and savings deposits 6,966 60,997 71,856
Net increase in certificates of deposit 43,777 26,818 46,194
Net increase (decrease) in other borrowings 10,348 (11,583) 17,378
Issuance of common stock - - 17,951
Issued shares for benefit plan purchases - - 217
Stock repurchases (1,768) - -
Fractional shares purchased - (6) -
Exercise of stock options, net 219 (12) 439
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 59,542 76,214 154,035
- -----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 5,326 21,461 6,718
Cash and cash equivalents at beginning of year 44,896 23,435 16,717
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 50,222 $ 44,896 $ 23,435
- -----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash investing and financing activities:
Investment securities unrealized (losses) gains, net of taxes $ (2,687) $ (167) $ 264
Interest paid 13,788 13,524 10,073
Income tax payments 2,827 1,564 1,185
Transfer of securities from available for sale to held to maturity 4,499 9,636 11,455
Loans transferred to other real estate owned 187 478 64
- -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
39
Capital Corp of the West
Consolidated Statements of Shareholders' Equity
ACCUMULATED
COMMON STOCK OTHER
NUMBER RETAINED COMPREHENSIVE
(Dollars in thousands) OF SHARES AMOUNTS EARNINGS INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 2,591 $ 15,321 $ 5,722 $ (69) $ 20,974
- --------------------------------------------------------------------------------------------------------------------
Exercise of stock options 47 439 - - 439
Issuance of shares pursuant to
401K & ESOP plans 14 217 - - 217
Issuance of shares pursuant to
stock offering 1,725 17,951 - - 17,951
Change in fair value of
investment securities, net of
tax effect of $172 - - - 264 264
Net income - - 403 - 403
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 4,377 $ 33,928 $ 6,125 $ 195 $ 40,248
- --------------------------------------------------------------------------------------------------------------------
5% stock dividend, including
payment for fractional shares 219 3,226 (3,232) - (6)
Exercise of stock options 11 109 - - 109
Net change in fair market value of
investment securities, net of
tax
effect of ($106) - - - (167) (167)
Adjustment - stock option plan - (121) - - (121)
Net income - - 2,741 - 2,741
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 4,607 $ 37,142 $ 5,634 $ 28 $ 42,804
- --------------------------------------------------------------------------------------------------------------------
Exercise of stock options 26 219 - - 219
Stock repurchases (137) (1,768) - - (1,768)
Net change in fair market value of
investment securities net of
tax
effect of ($1,824) - - - (2,687) (2,687)
Net income - - 5,109 - 5,109
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 4,496 $ 35,593 $ 10,743 $ (2,659) $ 43,677
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
40
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Capital Corp of the West (the "Company") is a registered bank holding company,
which provides a full range of banking services to individual and business
customers primarily in the Central San Joaquin Valley, through its subsidiaries.
The following is a description of the more significant policies.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements of Capital
Corp of the West includes its subsidiaries: County Bank (the "Bank") and Capital
West Group ("CWG"). Town and Country Finance and Thrift was acquired in June
1996 and merged into County Bank on November 23, 1999. CWG, a subsidiary formed
in 1996, became inactive in 1997. The Bank also has one active subsidiary,
Merced Area Investment and Development, Inc. ("MAID"). All significant
intercompany balances and transactions are eliminated.
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles and prevailing practices in the financial
services industry. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reported period. Actual results could
differ from those estimates applied in the preparation of the consolidated
financial statements. A material estimate that is particularly susceptible to
possible change in the near term relates to the determination of the allowance
for loan losses. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1999 presentation.
CASH AND CASH EQUIVALENTS: The Company maintains deposit balances with various
banks which are necessary for check collection and account activity charges.
Cash in excess of immediate requirements is invested in federal funds sold or
other short term investments. Generally, federal funds are sold for periods from
one to thirty days. Cash, noninterest bearing deposits in other banks and
federal funds sold are considered to be cash and cash equivalents for the
purposes of the consolidated statements of cash flows. Banks are required to
maintain minimum average reserve balances with the Federal Reserve Bank. The
amount of those reserve balances was approximately $22,000 at December 31, 1999.
INVESTMENT SECURITIES: Investment securities consist of U.S. treasury, federal
agencies, state and county municipal securities, corporate bonds,
mortgage-backed securities, collateralized mortgage obligations and equity
securities. Investment securities are classified into one of three categories.
These categories include trading, available for sale, and held to maturity. The
category of each security is determined based on the Company's investment
objectives, operational needs and intent. The Company has not purchased
securities with the intent of actively trading them.
Securities available for sale may be sold prior to maturity and are available
for future liquidity requirements. These securities are carried at fair value.
Unrealized gains and losses on securities available for sale are excluded from
earnings and reported net of tax as a separate component of shareholders' equity
until realized.
Securities held to maturity are classified as such where the Company has the
ability and positive intent to hold them to maturity. These securities are
carried at cost, adjusted for amortization of premiums and accretion of
discounts. Unrealized losses due to fluctuations in fair value of securities
held to maturity or available for sale, are recognized through earnings when it
is determined that a permanent decline in value has occurred.
Premiums and discounts are amortized or accreted over the life of the related
investment security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned. Realized gains
and losses for securities classified as available for sale or held to maturity,
are included in earnings and are derived using the specific identification
method for determining the cost of securities sold.
41
LOANS: Loans are carried at the principal amount outstanding, net of unearned
income, including deferred loan origination fees and costs. Nonrefundable loan
origination and commitment fees and the direct costs associated with originating
or acquiring the loans are deferred and amortized as an adjustment to interest
income over the life of the related loan using a method that approximates the
level yield method. Deferred loan origination costs totaled $1,878,000 and
$1,058,000 at December 31, 1999 and 1998. Deferred loan origination fees totaled
$1,026,000 and $905,000 at December 31, 1999 and 1998.
Interest income on loans is accrued based on contract interest rates and
principal amounts outstanding. Loans which are more than 90 days delinquent,
with respect to interest or principal, are placed on nonaccrual status, unless
the outstanding principal and interest is adequately secured and, in the opinion
of management, remains collectable. Uncollected accrued interest is reversed
against interest income, and interest is subsequently recognized only as
received until the loan is returned to accrual status. Interest accruals are
resumed when such loans are brought fully current with respect to interest and
principal and when, in the judgment of management, the loans are estimated to be
fully collectable as to both principal and interest.
A loan is considered impaired, if it is probable that the Company will be unable
to collect the scheduled payments of principal and interest when due according
to the contractual terms of the loan agreement. Any allowance for loan losses on
impaired loans is measured based upon the present value of future cash flows
discounted at the loan's effective rate, the loan's observable market price, or
the fair value of collateral if the loan is collateral dependent. Interest on
impaired loans is recognized on a cash basis. In general, these statements are
not applicable to large groups of small balance homogenous loans that are
collectively evaluated for impairment, such as residential mortgage and consumer
installment loans. Income recognition on impaired loans conforms to the method
the Company uses for income recognition on nonaccrual loans. Interest income on
nonaccrual loans is recorded on a cash basis. Payments may be treated as
interest income or return of principal depending upon management's opinion of
the ultimate risk of loss on the individual loan. Cash payments are treated as
interest income when management believes the remaining principal balance is
fully collectable.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at the
level considered to be adequate for potential loan losses based on management's
assessment of various factors affecting the loan portfolio, which include:
growth trends in the portfolio, historical experience, concentrations of credit
risk, delinquency trends, general economic conditions, and internal and external
credit reviews. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance for loan losses based on their judgment of information available to
them at the time of their examination. Additions to the allowance for loan
losses, in the form of provision for loan losses, are reflected in current
operating results, while charge-offs to the allowance for loan losses are made
when a loss is determined to have occurred. Management uses the best information
available on which to base estimates, however, ultimate losses may vary from
current estimates.
GAIN OR LOSS ON SALE OF LOANS AND SERVICING RIGHTS: The Company services both
sold and retained portions of United States Small Business Administration (SBA)
loans and a portfolio of mortgage loans. The Company applies the provisions of
Statement of Financial Accounting Standards (SFAS) No. 125, ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES.
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. In addition, it requires that servicing
assets and other retained interests in transferred assets be measured by
allocating the previous carrying amount of the transferred assets between the
assets sold, if any, and the retained interests, if any, based on their relative
fair values at the date of transfer. Liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets are to be
initially measured at fair value. Servicing assets and liabilities, which are
carried at the lower of cost or market, are to be subsequently amortized in
proportion to and over the period of, estimated net servicing income or loss and
assessed for asset impairment or increased obligation based on fair value.
42
The Bank recognizes a gain and a related asset for the fair value of the rights
to service loans for others when loans are sold. In accordance with SFAS No.
125, the fair value of the servicing assets are estimated based upon the present
value of the estimated expected future cash flows. The cash flows are calculated
using a discount rate commensurate with the risk involved and include estimates
of future revenues and expenses, including assumptions about defaults and
prepayments. The Company measures the impairment of the servicing asset based on
the difference between the carrying amount of the servicing asset and its
current fair value. As of December 31, 1999 and 1998, there was no impairment in
mortgage servicing assets.
When servicing rights are sold, a gain or loss is recognized at the closing date
to the extent that the sale proceeds, less costs to complete the sale, exceed or
are less than the carrying value of the servicing rights held.
Real estate mortgage loans held for sale are carried at the lower of cost or
market at the balance sheet date. There were no loans held for sale as of
December 31, 1999 and 1998. Gains or losses are recognized at the time of sale
and are calculated based on the amounts received and the book value of the loans
sold.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
computed on the straight line basis over the estimated useful life of each type
of asset. Estimated useful lives range up to 35 years for buildings, up to the
lease term for leasehold improvements, and 3 to 15 years for furniture and
equipment.
REAL ESTATE HELD FOR SALE OR DEVELOPMENT: Real estate held for sale or
development is recorded at the lower of cost or net realizable value. Revenue
recognition on the disposition of real estate is dependent upon the transaction
meeting certain criteria relating to the nature of the property sold and the
terms of the sale. Under certain circumstances, revenue recognition may be
deferred until these criteria are met.
OTHER REAL ESTATE: Other real estate is comprised of property acquired through
foreclosure proceedings or acceptance of deeds-in-lieu of foreclosure. Losses
recognized at the time of acquiring property in full or partial satisfaction of
debt are charged against the allowance for loan losses. Other real estate is
recorded at the lower of the related loan balance or fair value, less estimated
disposition costs. Fair value of other real estate is generally based on an
independent appraisal of the property. Any subsequent costs or losses are
recognized as noninterest expense when incurred.
INTANGIBLE ASSETS: Goodwill, representing the excess of purchase price paid over
the fair value of net assets acquired in an acquisition, was generated with the
purchase of the Thrift in June 1996. The Thrift's assets, including intangible
assets, were subsequently merged into County Bank in November, 1999, and the
Thrift's charter was eliminated. Goodwill associated with the purchase of the
Thrift is being amortized over 18 years. Core deposit intangibles, representing
the excess of purchase price paid over the fair value of net savings deposits
acquired, were generated by the purchase of the Thrift in June 1996 and the
purchase of three branches from the Bank of America in December, 1997 (as
discussed in Note 2). Core deposit intangibles are being amortized over 10 and 7
years, respectively. Intangible assets are reviewed on a periodic basis for
impairment. If such impairment is indicated, recoverability of the asset is
assessed based upon expected undiscounted net cash flows.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF:
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
DEFERRED COMPENSATION: The Company has purchased single premium universal life
insurance policies in conjunction with implementation of salary continuation
plans for certain members of management and a deferred compensation plan for
certain members of the Board of Directors. The Company is the owner and
43
beneficiary of these plans. The cash surrender value of the insurance policies
is recorded in other assets and these values totaled $6,292,000 and $4,111,000
as of December 31, 1999 and 1998. Income from these policies is recorded in
other income and the load, mortality and surrender charges have been recorded in
other expenses. An accrued liability is recorded to reflect the present value of
the expected retirement benefits for the salary continuation plans and the
deferred compensation benefits.
INCOME TAXES: The Company files a consolidated federal income tax return and a
combined state franchise tax return. The provision for income taxes includes
federal income and state franchise taxes. Income tax expense is allocated to
each entity of the Company based upon the analysis of the tax consequences of
each company on a stand alone basis.
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
INCOME TAX CREDITS: The Company has investments in limited partnerships which
own low income affordable housing projects that generate tax benefits in the
form of federal and state housing tax credits. As an investor in these
partnerships, the Company receives tax benefits in the form of tax deductions
from partnership operating losses and income tax credits. These income tax
credits are earned over a 10 year period as a result of the investment meeting
certain criteria and are subject to recapture over a 15 year period. The
expected benefit resulting from the affordable housing income tax credits is
recognized in the period in which the tax benefit is recognized in the Company's
consolidated tax returns. These investments are accounted for using the cost
method and are evaluated at each reporting period for impairment. The Bank had
investments in these partnerships of $5,800,000 and $4,300,000 as of December
31, 1999 and 1998.
STOCK OPTION PLAN: The Company accounts for its stock option plan in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
EARNINGS PER SHARE: Basic earnings per share (EPS) includes no dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in the earnings
of an entity. The number of shares outstanding have been adjusted to reflect the
5% dividend declared in 1998 and the 3 for 2 stock split that occurred in 1997.
COMPREHENSIVE INCOME: On January 1, 1998, the Company adopted SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and unrealized
gains (losses) on securities and is presented in the consolidated statements of
income and comprehensive income. The statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
SEGMENT REPORTING: On January 1, 1998, the Company adopted SFAS No. 131,
FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. SFAS No. 131 requires
corporations to disclose certain financial information by "industry segment" as
defined by the statement. As of December 31, 1999 the Company does not have
separate reportable segments.
44
NOTE 2. ACQUISITIONS
On December 11, 1997 the Company acquired, for $5,310,000, deposits and
buildings of three former branches of Bank of America. These branches were
merged into the Bank, and added $60,849,000 in deposits and $967,000 in
buildings and equipment. The transaction was accounted for under the purchase
method of accounting. In connection with the transaction, the Bank recorded a
core deposit intangible of $4,343,000, which is being amortized using the
straight line method over 7 years.
In conjunction with the purchase of the branches, the Company completed a
capital offering which increased common stock shares outstanding by 1,725,000
shares and increased shareholders' equity by $17,951,000. This capital was used
to support the purchase of the branches and for general Company growth.
NOTE 3. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities at
December 31, are summarized below:
- -------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
(Dollars in thousands) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
1999
- -------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury and U.S. Government agencies $ 17,113 $ - $ 357 $ 16,756
State & political subdivisions 25,421 15 2,065 23,371
Mortgage-backed securities 45,253 42 1,572 43,723
Collateralized mortgage obligations 20,847 - 506 20,341
Corporate debt securities 9,681 67 88 9,660
-------- ------ ------ --------
Total debt securities 118,315 124 4,588 113,851
Equity securities 3,963 - - 3,963
-------- ------ ------ --------
Total available for sale securities 122,278 124 4,588 117,814
-------- ------ ------ --------
HELD TO MATURITY SECURITIES:
U.S. Treasury & U.S. government agencies 1,004 - 3 1,001
State and political subdivisions 4,389 - 230 4,159
Mortgage-backed securities 24,161 - 646 23,515
-------- ------ ------ --------
Total held to maturity securities 29,554 - 879 28,675
-------- ------ ------ --------
Total investment securities $ 151,832 $ 124 $ 5,467 $ 146,489
========= ======= ======== =========
- -------------------------------------------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury & U.S. Government agencies $ 12,631 $ 101 $ 21 $ 12,711
State & political subdivisions 30,177 393 378 30,192
Mortgage-backed securities 56,214 189 355 56,048
Collateralized mortgage obligations 29,305 128 169 29,264
Corporate debt securities 9,718 210 50 9,878
-------- ------ ------ --------
Total debt securities 138,045 1,021 973 138,093
Equity securities 3,264 - - 3,264
-------- ------ ------ --------
Total available for sale securities 141,309 1,021 973 141,357
-------- ------ ------ --------
HELD TO MATURITY SECURITIES:
U.S. Treasury & U.S. government agencies 2,024 12 - 2,036
Mortgage-backed securities 11,486 66 4 11,548
-------- ------ ------ --------
Total held to maturity securities 13,510 78 4 13,584
-------- ------ ------ --------
Total investment securities $ 154,819 $ 1,099 $ 977 $ 154,941
========= ========= ======== =========
45
At December 31, 1999 and 1998, investment securities with carrying values of
approximately $105,008,000 and $46,023,000, respectively, were pledged as
collateral for deposits of public funds, government deposits, the Bank's use of
the Federal Reserve Bank's discount window and Federal Home Loan Bank line of
credit. The Bank is a member of the Federal Reserve Bank and the Federal Home
Loan Bank. The Bank carried balances, stated at cost, of $2,378,000 and
$3,109,000 of Federal Home Loan Bank stock and $1,229,000 and $0 of Federal
Reserve Bank stock as of December 31, 1999 and 1998. The Company recognized
gross gains on the sale of securities of $0, $13,000 and $17,000, in 1999, 1998,
and 1997. Gross losses of $118,000, $16,000 and $46,000 were recognized in 1999,
1998, and 1997.
In August 1998, mortgage-backed securities with a market value of $9,636,000
were transferred from the available for sale portfolio to the held to maturity
portfolio at market value. In February 1999, state and political subdivision
securities with a market value of $4,499,000 were transferred from the available
for sale portfolio to the held to maturity portfolio at market value. The
unrealized holding gain at the date of transfer is reported as a separate
component of shareholders' equity, and is amortized over the remaining life of
the securities as an adjustment of yield in a manner consistent with the
amortization of a premium or discount.
The carrying and estimated fair values of debt securities at December 31, 1999
by contractual maturity, are shown on the following table. Actual maturities may
differ from contractual maturities because issuers generally have the right to
call or prepay obligations with or without call or prepayment penalties.
- -------------------------------------------------------------------------------------------------------
AMORTIZED ESTIMATED
(Dollars in thousands) COST FAIR VALUE
- -------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE DEBT SECURITIES:
One year or less $ 500 $ 515
One to five years 16,713 16,397
Five to ten years 8,034 7,713
Over ten years 26,968 25,162
Mortgage-backed securities and CMOs 66,100 64,064
---------- -----------
Total available for sale debt securities $ 118,315 $ 113,851
========== ===========
HELD TO MATURITY DEBT SECURITIES:
One year or less $ - $ -
One to five years - -
Five to ten years 1,004 1,001
Over ten years 4,389 4,159
Mortgage-backed securities and CMOs 24,161 23,515
---------- -----------
Total held to maturity debt securities $ 29,554 $ 28,675
========== ==========
NOTE 4. LOANS
Loans at December 31 consisted of the following:
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------
Commercial $ 53,932 $ 37,609
Agricultural 58,247 49,636
Real estate - mortgage 120,978 96,957
Real estate - construction 11,926 13,840
Consumer 86,185 70,891
---------- ----------
Gross loans 331,268 268,933
Less allowance for loan losses 6,542 4,775
---------- ----------
Net loans $ 324,726 $ 264,158
=========== ==========
46
Nonaccrual loans totaled $1,984,000 and $1,164,000 at December 31, 1999 and
1998. Foregone interest on nonaccrual loans was approximately $143,000, $91,000
and $189,000 for the years ending December 31, 1999, 1998 and 1997.
Impaired loans are loans for which it is probable that the Company will not be
able to collect all amounts due. At December 31, 1999 and 1998, the recorded
investment in loans for which impairment was recognized totaled $1,990,000 and
$1,577,000 which had a related allowance for loan losses of $497,000 and
$114,000 in 1999 and 1998. The average outstanding balance of impaired loans for
the years ended December 31, 1999, 1998 and 1997 was $2,215,000, $1,876,000, and
$4,715,000, on which $126,000, $134,000 and $471,000, was recognized as interest
income.
At December 31, 1999 and 1998, the collateral value method was used to measure
impairment for all loans classified as impaired. The following table shows the
recorded investment in impaired loans by loan category at December 31:
- -----------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------
Commercial $ 635 $ 106
Agricultural 921 668
Consumer and other 428 258
------- -------
$ 1,984 $ 1,032
======= =======
The following is a summary of changes in the allowance for loan losses during
the years ended December 31:
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Balance at beginning of year $ 4,775 $ 3,833 $ 2,792
Loans charged-off (1,854) (3,526) (5,050)
Recoveries of loans previously charged-off 962 565 266
Provision for loan losses 2,659 3,903 5,825
-------- -------- --------
Balance at end of year $ 6,542 $ 4,775 $ 3,833
======== ======== ========
In the ordinary course of business, the Company, through its subsidiaries, has
made loans to certain directors and officers and their related businesses. In
management's opinion, these loans are granted on substantially the same terms,
including interest rates and collateral, as those prevailing on comparable
transactions with unrelated parties, and do not involve more than the normal
risk of collectibility.
Activity in loans to, or guaranteed by, directors and executive offices and
their related businesses at December 31, are summarized as follows:
- ------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- ------------------------------------------------------------------------
Balance at beginning of year $ 280 $ 415
Loan advances and renewals 328 532
Loans matured or collected (8) (623)
Other changes (38) (44)
------ ------
Balance at end of year $ 562 $ 280
====== ======
Other changes in 1999 and 1998 represent loans to former directors and executive
officers of the Company who are no longer related parties
47
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31:
- --------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------
Land $ 1,349 $ 1,349
Buildings 8,339 8,214
Leasehold improvements 1,176 894
Furniture and equipment 10,693 9,534
-------- -------
Subtotal 21,557 19,991
Less accumulated depreciation and amortization 8,394 6,672
-------- -------
Premises and equipment, net $ 13,163 $13,319
======== =======
Included in the totals above is construction in progress of $154,000 and
$308,000 at December 31, 1999 and 1998 respectively. Depreciation expense
totaled $1,741,000, $1,716,000 and $1,222,000 in 1999, 1998 and 1997.
NOTE 6. BORROWED FUNDS
At December 31, 1999 and 1998 the Company's borrowed funds consisted of the
following:
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
Treasury tax loan, dated December 31, 1999; variable rate of 5%; rate reprices
monthly based on the federal funds rate; payable on January 3, 2000 $ 5,000 -
FHLB loan, dated January 16, 1997; variable rate of 5.75%; rate reprices
monthly based on the 1 month LIBOR; paid in full on January 15, 1999 - $ 5,000
FHLB loan, dated July 15, 1999; fixed rate of 5.75%; payable on
February 15, 2000 5,000 103
FHLB loan, dated September 20, 1999; fixed rate of 5.75%; payable on
March 20, 2000 5,000 -
Securities sold under agreements to repurchase; dated March 25, 1998;
fixed rate of 5.74%; paid in full on March 25, 1999 - 2,100
FHLB loan, dated June 17, 1999; variable rate of 6.36%; rate reprices
monthly
based on the 1 month LIBOR; payable on June 19, 2000 2,600 -
Long-term mortgage note from unaffiliated bank dated December 11, 1997;
fixed rate of 7.80%; principal and interest payable monthly at $15,017;
payments calculated as fully amortizing over 15 years with a 10 year call 3,214 3,263
------- -------
Total borrowed funds $20,814 $10,466
======= =======
The $2,100,000 repurchase agreement outstanding at December 31, 1998 matured on
March 25, 1999. No new repurchase agreements were entered into during 1999.
Interest expense recorded in 1999, 1998 and 1997 for securities sold under
agreements to repurchase was $28,000, $126,000 and $706,000. Securities pledged
under repurchase agreements are held in the custody of independent securities
brokers.
The Company maintains a secured line of credit with the Federal Home Loan Bank
of San Francisco (FHLB). Based on the FHLB stock requirements at December 31,
1999, this line provided for maximum borrowings of $52,392,000 of which
$12,600,000 was outstanding, leaving $39,792,000 available. At December 31, 1999
this borrowing line is collateralized by securities with a market value of
$55,149,000. At December 31, 1998, the line of credit collateralized by
securities totaled $14,197,000 of which
48
$5,103,000 was outstanding. Interest expense related to FHLB borrowings
totaled $375,000, $906,000, and $308,000 in 1999, 1998, and 1997. The Company
had additional unused, lines of credit secured my mortgage notes of
$7,000,000 and $2,000,000 at December 31, 1999 and 1998.
The Company incurred interest expense of $273,000, $260,000, and $78,000 in
1999, 1998, and 1997, related to the notes with unaffiliated banks. The
long-term note dated December 11, 1997 is secured by Company land and buildings.
Interest expense related to federal funds purchased was $80,000, $2,000, and $0
in 1999, 1998 and 1997. Compensating balance arrangements are not significant to
the operations of the Company.
Principal payments required to service the Company's borrowings during the next
five years are:
- ------------------------------------------
(Dollars in thousands)
- ------------------------------------------
2000 $ 17,653
2001 56
2002 61
2003 65
2004 71
Thereafter 2,908
--------
Total borrowed funds $ 20,814
========
NOTE 7. REAL ESTATE OPERATIONS
As of December 31, 1999, MAID held one real estate project composed of
unimproved land. The Bank has reduced the carrying value of its remaining
project to zero.
Summarized below is condensed financial information of MAID:
CONDENSED BALANCE SHEETS December 31,
- -------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------
ASSETS:
Cash on deposit with County Bank $ 114 $ 88
Notes receivable and other assets 28 156
-- ---
Total assets $ 142 $ 244
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY:
Accounts payable and other $ 27 $ 244
Shareholder's equity 115 -
------ ------
Total liabilities and shareholder's
equity $ 142 $ 244
====== ======
CONDENSED STATEMENT OF OPERATIONS Years ended December 31,
- ---------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Revenues $ 10 $ 354 $ 876
Expenses 66 22 66
------- ------ -----
Income before income taxes $ (56) $ 332 $ 810
====== ====== =====
49
NOTE 8. INCOME TAXES
The provision for income taxes for the years ended December 31 is comprised of
the following:
- -----------------------------------------------------------------------------
(Dollars in thousands) FEDERAL STATE TOTAL
- -----------------------------------------------------------------------------
1999
Current $ 2,248 $ 946 $ 3,194
Deferred (772) (318) (1,090)
------- ------ -------
$ 1,476 $ 628 $ 2,104
======= ====== =======
- -----------------------------------------------------------------------------
1998
Current $ 567 $ 53 $ 620
Deferred 223 87 310
------ ------ ------
$ 790 $ 140 $ 930
====== ====== ======
- -----------------------------------------------------------------------------
1997
Current $ (484) $ (41) $ (525)
Deferred 456 43 499
------ ----- -------
$ (28) $ 2 $ (26)
====== ===== =======
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999 and
1998 consists of the following:
- -----------------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998
- -----------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Real estate subsidiary $ 939 $ 947
Allowance for loan losses 1,788 940
Nonaccrual interest 125 80
Tax Credits 253 329
Investment securities unrealized loss 1,739 -
Other 792 300
------ ------
Total gross deferred tax assets 5,636 2,596
Less valuation allowance (20) (20)
------ ------
Deferred tax assets $ 5,616 $ 2,576
------- -------
DEFERRED TAX LIABILITIES:
Fixed assets $ 358 $ 169
State franchise taxes 286 178
Investment in partnerships 26 64
Investment securities unrealized gain - 19
Other 106 154
------ ------
Total gross deferred tax liabilities 776 584
------ ------
Net deferred tax assets $ 4,840 $ 1,992
====== =======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31, 1999 and
1998.
50
A reconciliation of the provision for income taxes to the statutory federal
income tax rate follows:
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Statutory (34%) federal income tax rate due $ 2,452 $ 1,248 $ 128
State franchise tax, net of federal income tax benefit 516 263 14
Tax exempt interest income, net (413) (239) (60)
Housing tax credits (375) (426) (71)
Intangible amortization 43 33 36
Cash surrender value Life Insurance (98) (69) -
State tax benefit lost due to net operating loss
limitations - - 20
Decrease in valuation allowance for deferred tax
assets - - (150)
Other (21) 120 57
------- ------ ------
Provision (benefit) for income taxes $ 2,104 $ 930 $ (26)
======= ====== ======
NOTE 9. REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
initiate mandatory and possibly, additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weighting and other factors.
First, a bank must meet a minimum Tier I (as defined in the regulations) capital
ratio ranging from 3% to 5% based upon the bank's CAMEL ("capital adequacy,
asset quality, management, earnings and liquidity") rating.
Second, a bank must meet minimum total risk based capital to risk weighted
assets ratio of 8%. Risk based capital and asset guidelines vary from Tier I
capital guidelines by redefining the components of capital, categorizing assets
into different risk classes, and including certain off-balance sheet items in
the calculation of the capital ratio. The effect of the risk based capital
guidelines is that banks with high exposure will be required to raise additional
capital while institutions with low risk exposure could, with the concurrence of
regulatory authorities, be permitted to operate with lower capital ratios. In
addition, a bank must meet minimum Tier I capital to average assets ratio of 4%.
Management believes, as of December 31, 1999, that the Company and the Bank meet
all capital adequacy requirements to which they are subject, including the ratio
test for a well capitalized bank under the regulatory framework for prompt
corrective action. The most recent notification from the FRB categorized the
Company and the Bank as well capitalized under the FDICIA regulatory framework
for prompt corrective action. Subsequent to this notification, there are no
conditions or events that management believes have changed the risk based
capital category of the Company and the Bank. To be categorized as well
capitalized, the Bank must meet minimum ratios.
The Company has no formal dividend policy, and dividends are issued solely at
the discretion of the Company's Board of Directors subject to compliance with
regulatory requirements. In order to pay any cash dividends, the Company must
receive payments of dividends from the Bank. There are certain regulatory
limitations on the payment of cash dividends by banks.
51
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
following table).
The Company's and Bank's actual capital amounts and ratios as of December 31,
1999 are as follows:
- ------------------------------------------------------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
(Dollars in thousands) ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- ------------------------------------------------------------------------------------------------------------------
THE COMPANY: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------------
Total capital (to risk weighted
assets) $46,448 11.24 % $33,058 8.0 % $41,322 10.0 %
Tier I capital (to risk weighted
assets) 41,266 9.99 16,529 4.0 24,793 6.0
Leverage ratio(1) 41,266 7.50 21,999 4.0 27,498 5.0
- ------------------------------------------------------------------------------------------------------------------
THE BANK:
- ------------------------------------------------------------------------------------------------------------------
Total capital (to risk weighted
assets) 43,714 10.73 32,605 8.0 40,756 10.0
Tier I capital (to risk weighted
assets) 38,602 9.47 16,302 4.0 24,453 6.0
Leverage ratio(1) $38,602 7.09 % $21,785 4.0 % $27,231 5.0 %
(1) The leverage ratio consists of Tier 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's and Bank's actual capital amounts and ratios as of December 31,
1998 are as follows:
- ------------------------------------------------------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
(Dollars in thousands) ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- ------------------------------------------------------------------------------------------------------------------
THE COMPANY: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------------
Total capital (to risk weighted
assets) $41,235 11.94 % $27,635 8.0 % $34,544 10.0 %
Tier I capital (to risk weighted
assets) 36,911 10.69 13,818 4.0 20,726 6.0
Leverage ratio(1) 36,911 7.58 19,450 4.0 27,312 5.0
- ------------------------------------------------------------------------------------------------------------------
THE BANK:
- ------------------------------------------------------------------------------------------------------------------
Total capital (to risk weighted
assets) 33,511 11.11 24,129 8.0 30,162 10.0
Tier I capital (to risk weighted
assets) 29,732 9.86 12,065 4.0 18,097 6.0
Leverage ratio(1) $29,732 6.73 % $19,472 4.0 % $24,340 5.0 %
(1) 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.
52
NOTE 10. COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT
RISK At December 31, 1999, the Company has operating lease rental commitments
for remaining terms of one to ten years. The Company has options to renew one
of its leases for a period of 15 years. The minimum future commitments under
noncancelable lease agreements having terms in excess of one year at December
31, 1999 are as follows:
-------------------------------------------------
(Dollars in thousands)
-------------------------------------------------
2000 $ 483
2001 489
2002 490
2003 461
2004 388
Thereafter 1,342
-------
Total minimum lease payments $ 3,653
=======
Rent expense was approximately $477,000, $619,000, and $513,000 for the years
ended December 31, 1999, 1998 and 1997.
In the ordinary course of business, the Company enters into various types of
transactions which involve financial instruments with off-balance sheet risk.
These instruments include commitments to extend credit and standby letters of
credit and are not reflected in the accompanying balance sheet. These
transactions may involve, to varying degrees, credit and interest risk in excess
of the amount, if any, recognized in the balance sheet.
The Company's off-balance sheet credit risk exposure is the contractual amount
of commitments to extend credit and standby letters of credit. The Company
applies the same credit standards to these contracts as it uses in its lending
process. Additionally, commitments to extend credit and standby letters of
credit bear similar credit risk characteristics as outstanding loans.
Financial instruments whose contractual amount represents risk: AS OF DECEMBER 31
- --------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------
Commitments to extend credit $101,847 $ 76,984
Standby letters of credit 2,674 2,694
Commitments to extend credit are agreements to lend to customers. These
commitments have specified interest rates and generally have fixed expiration
dates, but may be terminated by the Company if certain conditions of the
contract are violated. Although currently subject to drawdown, many of these
commitments are expected to expire or terminate without funding. Therefore, the
total commitment amounts do not necessarily represent future cash requirements.
Collateral held relating to these commitments varies, but may include
securities, equipment, inventory and real estate.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of the customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Collateral held for standby letters
of credit is based on an individual evaluation of each customer's credit
worthiness, but may include cash, equipment, inventory and securities.
The Company because of the nature of its business, is subject to various
threatened or filed legal cases. The Company, based on the advice of legal
counsel, does not expect such cases will have a material, adverse effect on its
financial position or results of operations.
53
NOTE 11. TIME DEPOSITS
At December 31, 1999 the aggregate maturities for time deposits are as follows:
---------------------------------------
(Dollars in thousands)
---------------------------------------
2000 $ 142,012
2001 26,596
2002 1,296
2003 259
2004 17
Thereafter 211
NOTE 12. Concentrations of Credit Risk
The Bank's business activity is with customers located primarily in the counties
of Fresno, Madera, Mariposa, Merced, Stanislaus, Tulare and Tuolumne. The Bank
is diversified into retail and wholesale lending. Retail lending represents
approximately 30% of the total loan portfolio and consists of consumer lending,
loans to small businesses, credit cards and the purchase of financing contracts
principally from automobile dealers. Individual loans and lines are made in a
variety of ways. In many cases collateral such as real estate, automobiles and
equipment are used to support the extension of credit. Repayment, however, is
largely dependent upon the borrower's personal cash flow.
Loans to businesses and agricultural communities make up nearly 70% of the
Bank's loan portfolio. Wholesale activities are spread across a wide spectrum
including commercial loans to businesses, construction and permanent real estate
financing, short and long term agricultural loans for production and real estate
purposes and SBA financing. Where appropriate, collateral is taken to secure and
reduce the Bank's credit risk. Each loan is submitted to an individual risk
grading process but the borrowers' ability to repay is dependent, in part, upon
factors affecting the local and national economies.
NOTE 13. EMPLOYEE AND DIRECTOR BENEFIT PLANS
The Company has a noncontributory employee stock ownership plan ("ESOP") and an
employee savings plan covering substantially all employees. During 1999, 1998,
and 1997, the Company contributed approximately $217,000, $193,000, and
$119,000, to the ESOP and $70,000, $70,000, and $71,000, to the employee savings
plan.
Under provisions of the ESOP, the Company can make discretionary contributions
to be allocated based on eligible individual annual compensation, as approved by
the Board of Directors. Contributions to the ESOP are recognized as compensation
expense. For the years December 31, 1999, 1998, and 1997, the ESOP owned
154,305, 130,441, and 158,363 shares of the Company's stock. ESOP shares are
included in the weighted average number of shares outstanding for earnings per
share computations.
The employee savings plan allowed participating employees to contribute up to
$10,000 in 1999. The Company matched 25% of the employees elective contribution,
as defined, not to exceed 10% of eligible annual compensation.
The Company maintains a non-qualified salary continuation plan for certain
senior executive officers of the Company and the Bank. Under the plan, the
Company has agreed to pay these executives retirement benefits for a ten to
fifteen year period after their retirement so long as they meet certain length
of service vesting requirements. The plan is informally linked to several single
premium universal life insurance policies that provide life insurance on certain
senior executive officers with the Company named as the owner and beneficiary of
these policies. Salary continuation expense totaled $340,938, $244,482 and
$221,187 in 1999, 1998 and 1997.
The Company also maintains a non-qualified deferred compensation plan for
members of the board of directors of the Company and the Bank. Under the
deferred compensation plan, members of the board of directors have the ability
to defer compensation they receive as directors until they reach retirement age,
so
54
long as they meet certain length of service vesting requirements. Upon
reaching retirement age, the Company has agreed to pay these directors
retirement benefits over a ten year period. The plan is informally linked to
several single premium universal life insurance policies that provide life
insurance on certain directors with the Company named as the owner and
beneficiary of these policies. Deferred compensation expense totaled $58,000,
$60,000 and $54,000 in 1999, 1998 and 1997
NOTE 14. STOCK OPTION PLAN
In 1992, shareholders approved the adoption of an incentive stock option plan
for bank management and a nonstatutory stock option plan for directors. The
maximum number of shares issuable under the plans was 126,000. Options are
available for grant under the plans at prices that approximate fair market value
at the date of grant. Options granted under both plans become exercisable 25% at
the time of grant and 25% each year thereafter and expire 10 years from the date
of grant. In 1995, shareholders approved an amendment to the stock option plans
increasing the number of authorized but unissued shares available for future
grant of the Company's common stock to 450,000.
A summary of the status of the Company's stock options as of December 31, 1999,
1998, and 1997, and changes during the years ended on those dates, follows:
- ----------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Weighted Weighted
average Weighted average
Number of exercise Number of average Number of exercise
shares price shares exercise price shares price
- ----------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 325,806 $ 7.25 297,370 $ 6.65 289,745 $ 5.84
Granted 68,000 10.45 39,000 13.56 62,000 12.86
Exercised (26,609) 8.09 (11,402) 7.51 (49,257) 7.19
Forfeited (15,624) 12.09 (14,620) 10.96 (5,118) 8.89
Stock dividend declared - 15,458 6.65 - -
------- ------ ------- ------ ------- ------
Outstanding at end of year 351,573 $ 7.59 325,806 $ 7.25 297,370 $ 6.65
======= ======= =======
Options exercisable at end of year 276,170 $ 6.58 267,395 $ 6.16 237,933 $ 5.79
The following table summarizes information about options outstanding at December
31, 1999:
- --------------------------------------------------------------------------------------------------------
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
- --------------------------------------------------------------------------------------------------------
NUMBER WEIGHTED WEIGHTED WEIGHTED
RANGE OF EXERCISE OF SHARES REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------
$ 3 - 6 185,988 2.53 Years $ 4.54 185,988 $ 4.54
6 - 9 33,374 6.33 7.68 27,749 7.46
9 - 16 132,211 8.44 11.88 62,433 12.23
-------- --------
$ 3 - 16 351,573 5.11 Years $ 7.59 276,170 $ 6.58
======== ========
The number of shares and exercise price per share has been adjusted for stock
dividends and stock splits during the period.
The per share weighted average fair value of stock options granted during 1999,
1998 and 1997 was $4.01, $5.20, and $4.76 on the date of grant using the Black
Scholes option pricing model with the following weighted average assumptions:
1999-1997 expected dividend yield 0%; 1999-1997 expected volatility of 30
percent, risk free interest rate of 6.41%, 4.64%, and 5.71%; and, an expected
life of 7 years.
55
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock options in
the accompanying consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company's net income would have been reduced to the proforma amounts indicated
as follows:
- -----------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
NET INCOME
As reported $ 5,109 $ 2,741 $ 403
Proforma 5,018 2,504 241
BASIC EARNINGS PER SHARE
As reported 1.12 0.60 0.12
Proforma 1.10 0.54 0.07
DILUTED EARNINGS PER SHARE
As reported 1.09 0.58 0.11
Proforma 1.07 0.52 0.06
Proforma net income reflects only options granted in 1997 through 1999.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the proforma net income amounts presented
above because compensation cost is reflected over the options' vesting period of
three years and compensation cost for options granted prior to January 1, 1997
is not considered.
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company in estimating its fair value disclosures for financial instruments
used the following methods and assumptions:
FINANCIAL ASSETS:
CASH AND CASH EQUIVALENTS: For these assets, the carrying amount is a reasonable
estimate for fair value.
INVESTMENTS: Fair values for available for sale and held to maturity investment
securities are based on quoted market prices where available. If quoted market
prices were not available, fair values were based upon quoted market prices of
comparable instruments.
NET LOANS: The fair value of loans is estimated by utilizing discounted future
cash flow calculations using the interest rates currently being offered for
similar loans to borrowers with similar credit risks and for the remaining or
estimated maturities considering prepayments. The carrying value of loans is net
of the allowance for loan losses and unearned loan fees.
FINANCIAL LIABILITIES:
DEPOSITS: The fair values disclosed for deposits generally paid upon demand
(i.e. noninterest bearing and interest-bearing demand) savings and money market
accounts are considered equal to their respective carrying amounts as reported
on the consolidated balance sheets. The fair value of fixed rate certificates of
deposit is estimated using the rates currently offered for deposits of similar
remaining maturities.
BORROWINGS: For these instruments, the fair value is estimated using rates
currently available for similar loans with similar credit risk and for the
remaining maturities.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: The Company has not
estimated the fair value of commitments to extend credit and standby letters of
credit. Because of the uncertainty in attempting to assess the likelihood and
timing of a commitment being drawn upon, coupled with the lack of an established
market for these financial instruments, the Company does not believe it is
meaningful or practicable to provide an estimate of fair value.
56
(Dollars in thousands)
- ------------------------------------------------------------------------------
1999 CARRYING AMOUNT FAIR VALUE
- ------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 50,222 $ 50,222
Time deposits at other
Financial institutions 850 850
INVESTMENT SECURITIES:
Available for sale 117,814 117,814
Held to maturity 29,554 28,675
Net loans 324,726 323,851
FINANCIAL LIABILITIES
DEPOSITS:
Noninterest bearing demand 87,564 87,564
Interest bearing demand 72,788 72,788
Savings and money market 164,158 164,158
Time deposits 170,391 170,680
Borrowings $ 20,814 $ 20,704
- ------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------
1998 CARRYING AMOUNT FAIR VALUE
- ------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 44,896 $ 44,896
Time deposits at other
financial institutions 600 600
INVESTMENT SECURITIES:
Available for sale 141,357 141,357
Held to maturity 13,510 13,584
Net loans 264,158 263,551
FINANCIAL LIABILITIES
DEPOSITS:
Noninterest bearing demand 80,290 80,290
Interest bearing demand 71,526 71,526
Savings and money market 165,781 165,781
Time deposits 126,613 126,823
Borrowings $ 10,466 $ 10,470
NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS
As of December 31, 1999 and 1998 the Company had no derivative financial
instruments.
57
NOTE 17. RECONCILIATION OF BASIC AND DILUTED NET EARNINGS PER SHARE.
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------------------
INCOME SHARES PER-SHARE
(Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------------------
Basic EPS $ 5,109 4,562 1.12
Income available to common shareholders ====
Effect of dilutive securities:
Stock options - 128
-------- -----
Diluted EPS
Income available to common shareholders plus
Assumed conversions $ 5,109 4,690 1.09
======== ===== ====
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands except per share amounts) INCOME SHARES PER-SHARE
- -----------------------------------------------------------------------------------------------------------
(Numerator) (Denominator) Amount
-------------- ---------------- -------------
Basic EPS $ 2,741 4,602 0.60
Income available to common shareholders ====
Effect of dilutive securities:
Stock options - 123
------- -------
Diluted EPS
Income available to common shareholders plus
assumed conversions $ 2,741 4,725 0.58
======= ===== ====
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------
INCOME SHARES PER-SHARE
(Numerator) (Denominator) Amount
-------------- ---------------- -------------
Basic EPS $ 403 3,467 $ 0.12
=======
Income available to common shareholders
Effect of dilutive securities:
Stock options - 136
-------- ---------
Diluted EPS
Income available to common shareholders plus $ 403 3,467 $ 0.11
assumed conversions 403 3,603 0.11
======== ===== =======
58
NOTE 18. PARENT COMPANY ONLY FINANCIAL INFORMATION
This information should be read in conjunction with the other notes to the
consolidated financial statements. The following are the condensed balance
sheets of the Company as of December 31, 1999 and 1998 and the condensed
statements of income and cash flows for the years ended December 31, 1999, 1998
and 1997:
CONDENSED BALANCE SHEETS DECEMBER 31,
- ---------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------------------
ASSETS
Cash and short-term investments $ 654 $ 1,370
Investment in County Bank 40,960 33,479
Investment in Town and Country - 5,882
Net premises and equipment 6,101 6,301
Other assets 345 246
-------- ---------
Total assets $ 48,060 $ 47,278
======== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Borrowed funds $ 3,214 $ 3,262
Capitalized lease 800 1,014
Other liabilities 369 198
-------- ---------
Total liabilities 4,383 4,474
SHAREHOLDERS' EQUITY
Common stock 35,593 37,142
Accumulated other comprehensive (loss)
income (2,659) 28
Retained earnings 10,743 5,634
-------- ---------
Total shareholders' equity 43,677 42,804
-------- ---------
Total liabilities and shareholders' equity $ 48,060 $ 47,278
======== =========
59
- --------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries $ 1,243 $ - $ 90
Interest 19 102 52
Lease income 502 503 -
Management fees from subsidiaries 2,101 2,299 1,949
-------- -------- -------
Total income 3,865 2,904 2,091
EXPENSES
Interest on borrowings 273 274 71
Capitalized lease interest 71 42 -
Salaries and related benefits 2,340 1,299 827
Other noninterest expense 1,820 1,469 828
-------- -------- -------
Total other expenses 4,504 3,084 1,726
(Loss) income before taxes and equity in
undistributed earnings (639) (180) 365
Income tax benefit (expense) 219 72 (109)
Equity in undistributed income of subsidiaries 5,529 2,849 147
-------- -------- -------
Net income $ 5,109 $ 2,741 $ 403
======== ========= =======
- -------------------------------------------------------------------------------------------------------------
DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 5,109 $ 2,741 $ 403
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Equity in undistributed earnings of subsidiaries (5,529) (2,849) (147)
Decrease (increase) in other assets 379 446 (305)
Increase (decrease) in other liabilities 171 (312) 281
-------- ------- -------
Net cash provided by operating activities 130 26 232
INVESTING ACTIVITIES:
Capital contribution to subsidiary bank - (600) (14,000)
Purchase of premises and equipment (278) (1,366) (5,245)
Dividends from subsidiaries 1,243 - 90
-------- ------- -------
Net cash provided by (used in) investing
activities 965 (1,966) (19,155)
FINANCING ACTIVITIES:
Proceeds from stock offering - - 17,951
Net (decrease) increase in other borrowings (262) 690 2,795
Issuance of common stock related to exercise of
stock options and employee benefit plans 219 (12) 656
Repurchase of common stock (1,768) - -
Cash dividends and fractional shares - (6) -
-------- ------- -------
Net cash (used in) provided by financing activities (1,811) 672 21,402
(Decrease) increase in cash and cash equivalents (716) (1,268) 2,479
Cash and cash equivalents at beginning of year 1,370 2,638 159
-------- ------- -------
Cash and cash equivalents at end of year $ 654 $ 1,370 $ 2,638
======= ======= ========
60
NOTE 19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
1999 QUARTER ENDED
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands) Dec 31 Sept 30 June 30 Mar 31
- -----------------------------------------------------------------------------------------------------------
Interest income $ 10,874 $ 10,106 $ 9,438 $ 8,943
Interest expense 4,008 3,558 3,268 3,206
Net interest income 6,866 6,548 6,170 5,737
Provision for loan losses 887 672 593 507
Other income 1,162 1,207 1,224 1,379
Other expenses 5,183 5,295 5,147 4,796
Income before income taxes 1,958 1,788 1,654 1,813
Income taxes 501 492 449 662
Net income $ 1,457 $ 1,296 $ 1,205 $ 1,151
- -----------------------------------------------------------------------------------------------------------
Basic earnings per share (1) $ .32 $ .28 $ .26 $ .25
- -----------------------------------------------------------------------------------------------------------
Diluted earnings per share (1) $ .32 $ .28 $ .25 $ .24
- -----------------------------------------------------------------------------------------------------------
1998 QUARTER ENDED
- -----------------------------------------------------------------------------------------------------------
Dec 31 Sept 30 June 30 Mar 31
- -----------------------------------------------------------------------------------------------------------
Interest income $ 9,139 $ 9,021 $ 8,362 $ 8,092
Interest expense 3,497 3,448 3,386 3,303
Net interest income 5,642 5,573 4,976 4,789
Provision for loan losses 2,213 700 738 252
Other income 1,171 1,220 1,389 1,058
Other expenses 4,692 4,851 4,378 4,323
(Loss) income before income taxes (92) 1,242 1,249 1,272
Income taxes (benefit) (146) 248 393 435
Net income $ 54 $ 994 $ 856 $ 837
- -----------------------------------------------------------------------------------------------------------
Basic earnings per share (1) $ .01 $ .22 $ .19 $ .18
- -----------------------------------------------------------------------------------------------------------
Diluted earnings per share (1) $ .01 $ .21 $ .18 $ .18
(1) BASIC AND DILUTED EARNINGS PER SHARE CALCULATIONS ARE BASED UPON THE
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING EACH PERIOD. FULL YEAR
WEIGHTED AVERAGE SHARES DIFFER FROM QUARTERLY WEIGHTED AVERAGE SHARES AND,
THEREFORE, ANNUAL EARNINGS PER SHARE MAY NOT EQUAL THE SUM OF THE QUARTERS.