CAPITAL CORP OF THE WEST
SELECTED FINANCIAL DATA
(Amounts in thousands,
except per share data) 2000 1999 1998 1997(1) 1996
- ---------------------------------------------------------------------------------------------------------
SUMMARY INCOME DATA:
Interest income $ 50,888 $ 39,361 $ 34,614 $ 25,912 $ 19,351
Interest expense 20,768 14,040 13,634 10,190 6,865
Net interest income 30,120 25,321 20,980 15,722 12,486
Provision for loan losses 3,286 2,659 3,903 5,825 1,513
Noninterest income 5,407 5,089 4,838 3,852 2,935
Noninterest expense 22,774 20,538 18,244 13,372 10,736
Income before provision for income taxes 9,467 7,213 3,671 377 3,172
Provision (benefit) for income taxes 2,761 2,104 930 (26) 1,163
Net income $ 6,706 $ 5,109 $ 2,741 $ 403 $ 2,009
SHARE DATA:
Average common shares outstanding 4,529 4,562 4,602 3,467 2,485
Basic earnings per share $ 1.48 $ 1.12 $ 0.60 $ 0.12 $ 0.81
Diluted earnings per share 1.44 1.09 0.58 0.11 0.77
Cash dividends per share - - - - 0.03
Book value per share 11.74 9.71 9.29 8.74 7.66
Tangible book value per share $ 10.80 $ 8.59 $ 8.02 $ 7.30 $ 6.78
BALANCE SHEET DATA:
Total assets $683,021 $563,550 $499,859 $421,394 $265,989
Total securities 191,052 147,368 154,867 148,032 43,378
Total loans 412,664 331,268 268,933 217,977 183,247
Total deposits 601,498 494,901 444,210 356,395 283,345
Stockholders' equity $ 53,451 $ 43,677 $ 42,804 $ 40,248 $ 20,974
OPERATING RATIOS:
Return on average equity 14.33% 11.86% 6.48% 1.46% 10.24%
Return on average assets 1.09 .99 .60 .13 .88
Average equity to average assets ratio 7.64 8.35 9.06 8.76 7.96
Net interest margin 5.42 5.51 5.17 5.64 6.12
CREDIT QUALITY RATIOS:
Nonperforming loans to total loans(2) .57% .60% .54% 1.26% 3.71%
Allowance for loan losses to total loans 1.99 1.97 1.78 1.76 1.52
Allowance for loan losses to nonperforming
loans 350.66 328.83 310.87 139.79 50.14
CAPITAL RATIOS:
Risk-based tier 1 capital 9.66% 9.99% 10.69% 11.60% 9.04%
Total risk-based capital 10.92 11.24 11.94 12.78 10.20
Leverage ratio 7.56 7.50 7.58 8.58 7.37
(1) REFLECTS THE ACQUISITION OF THREE BRANCHES FROM BANK OF AMERICA IN DECEMBER,
1997.
(2) NONPERFORMING LOANS CONSIST OF LOANS ON NONACCRUAL, LOANS PAST DUE 90 DAYS
OR MORE AND RESTRUCTURED LOANS.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to Capital Corp of
the West (the "Company"). The following discussion should be read in conjunction
with the consolidated financial statements of the Company and the notes thereto.
The consolidated financial statements of the Company include its subsidiaries,
County Bank (the "Bank") and Capital West Group ("CWG"). It also includes the
Bank's subsidiaries, Merced Area Investment Development, Inc. ("MAID") and
County Asset Advisor, Inc. ("CAA").
In addition to historical information, this discussion and analysis includes
certain forward-looking statements that are subject to risks and uncertainties
and include information about possible or assumed future results of operations.
Many possible events or factors could affect the future financial results and
performance of the Company. This could cause results or performance to differ
materially from those expressed in our forward-looking statements. Words such as
"expects", "anticipates", "believes", "estimates", variations of such words and
other similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in, or implied by, such forward-looking statements.
Readers of the Company's Form 10-K should not rely solely on forward-looking
statements and should consider all uncertainties and risks discussed throughout
this report. These statements are representative only on the date hereof, and
the Company undertakes no obligation to update any forward-looking statements
made. Some possible events or factors that could occur that may cause
differences from expected results include the following: the Company's loan
growth is dependent on economic conditions, as well as various discretionary
factors, such as decisions to sell, or purchase certain loans or loan
portfolios; participations of loans and the management of borrower, industry,
product and geographic concentrations and the mix of the loan portfolio. The
rate of charge-offs and provision expense can be affected by local, regional and
international economic and market conditions, concentrations of borrowers,
industries, products and geographical conditions, the mix of the loan portfolio
and management's judgements regarding the collectibility of loans. Liquidity
requirements may change as a result of fluctuations in assets and liabilities
and off-balance sheet exposures, which will impact the capital and debt
financing needs of the Company and the mix of funding sources. Decisions to
purchase, hold, or sell securities are also dependent on liquidity requirements
and market volatility, as well as on and off-balance sheet positions. Factors
that may impact interest rate risk include local, regional and international
economic conditions, levels, mix, maturities, yields or rates of assets and
liabilities and the wholesale and retail funding sources of the Company. The
Company is also exposed to the potential of losses arising from adverse changes
in market rates and prices which can adversely impact the value of financial
products, including securities, loans, and deposits. In addition, the banking
industry in general is subject to various monetary and fiscal policies and
regulations, which include those determined by the Federal Reserve Board, the
Federal Deposit Insurance Corporation and state regulators, whose policies and
regulations could affect the Company's results.
Other factors that may cause actual results to differ from the forward-looking
statements include the following: competition with other local and regional
banks, savings and loan associations, credit unions and other nonbank financial
institutions, such as investment banking firms, investment advisory firms,
brokerage firms, mutual funds and insurance companies, as well as other entities
which offer financial services; interest rate, market and monetary fluctuations;
inflation; market volatility; general economic conditions; introduction and
acceptance of new banking-related products, services and enhancements; fee
pricing strategies, mergers and acquisitions and their integration into the
Company and management's ability to manage these and other risks.
OVERVIEW: During 2000, earnings increased $1,597,000 or 31% to $6,706,000 which
compares favorably to the $5,109,000 and $2,741,000 achieved in 1999 and 1998.
Basic earnings per share were $1.48 in 2000 compared to $1.12 and $.60 in 1999
and 1998. Diluted earnings per share were $1.44 in 2000 compared to $1.09 and
$0.58
10
in 1999 and 1998. The Company's return on average total assets was 1.09% in 2000
as compared with 0.99% and 0.60% in 1999 and 1998. The earnings improvement in
2000 was the result of strong growth in interest-earning assets and improvements
in noninterest income when compared to the prior two years. In 2000, the
provision for loan losses increased by $627,000 to $3,286,000 when compared to
the $2,659,000 recorded in 1999. In 1998, the provision for loan losses totaled
$3,903,000. The increase in the provision for loan losses in 2000 compared to
1999 was primarily due to increased charge-offs recorded in 2000 compared to
1999 and increases in the allowance for loan losses necessitated by growth
achieved within the loan portfolio during the year ended December 31, 2000. Loan
charge-off amounts decreased in 1999 when compared to 1998 levels. The size of
the provision in 1998 was due to a high level of charge-off activity that
occurred during that year which was primarily brought about by the charge-off of
a single commercial relationship totaling $1,325,000. The Company achieved
strong asset growth in 2000, reaching total assets at December 31, 2000 of
$683,021,000, up $119,471,000 or 21% from $563,550,000 at December 31, 1999. Net
loans grew to $404,457,000 at December 31, 2000, an increase of $79,731,000 or
25% from the $324,726,000 outstanding at December 31, 1999. Deposits grew to
$601,498,000, an increase of $106,597,000 or 22% over the $494,901,000
outstanding as of December 31, 1999. Total shareholder's equity grew to
$53,451,000, an increase of $9,774,000 or 22% over year end 1999 and the Company
continues to be well capitalized by regulatory definitions.
RESULTS OF OPERATIONS: Capital Corp of the West's earnings were a record
$6,706,000 during 2000, driven primarily by an increase in net interest income.
Net interest income increased by $4,799,000, or 19%, to $30,120,000 during 2000
as compared to $25,321,000 in 1999. The increase in earnings in 2000 as compared
to 1999 is primarily due to an increase in the size of the Bank's loan
portfolio. The improvement in earnings during 1999 compared to 1998 was achieved
as a result of growth in interest-earning assets, improvements in noninterest
income and a reduced amount of provision for loan losses.
The Company's primary source of revenue is net interest income, which is the
difference between interest income and fees derived from earning assets and
interest paid on liabilities obtained to fund those assets. Total interest and
fee income on earning assets increased from $39,361,000 in 1999 to $50,888,000,
a $11,527,000 or 29% increase in 2000. During 1999, there was an increase of
$4,747,000 or 14% to $39,361,000 compared to $34,614,000 in 1998. The level of
interest income is affected by changes in the volume and the rates earned on
interest-earning assets. During 2000, the increase in interest income is due to
both an increase in the volume and rate of earning assets. Interest-earning
assets consist primarily of loans, investment securities and federal funds sold.
Average interest-earning assets in 2000 were $555,428,000 as compared with
$459,753,000 in 1999, an increase of $95,675,000 or 21%. The average rate earned
on interest earning assets was 9.16% in 2000, an increase of 60 basis points
over the 8.56% earned in 1999.
Interest expense is a function of the volume and rates paid for interest-bearing
liabilities. Interest-bearing liabilities consist primarily of certain deposits
and borrowed funds. Average interest bearing liabilities in 2000 were
$473,581,000 as compared with $394,704,000 in 1999, an increase of $78,877,000
or 20%. Total interest expense increased $6,728,000 or 48% to $20,768,000 in
2000 as compared to $14,040,000 for 1999. Total interest expense in 1998 totaled
$13,634,000.
The Company's net interest margin, the ratio of net interest income to average
interest-earning assets for 2000 was 5.42%. This is a decrease of 9 basis points
compared to the 1999 margin of 5.51%. The decrease in net interest margin during
2000 was primarily the result of a larger increase in interest rates paid on
interest bearing liabilities than the increase in interest rates received on
interest earning assets during the year. The net interest margin increase of 34
basis points during 1999 from the 5.17% achieved in 1998 was primarily due to a
change in the asset mix compared with the previous year. In 2000, loans
comprised 67% of average interest-earning assets as compared with 68% and 60% in
1999 and 1998. Securities comprised 30% of average interest-earning in 2000
compared with 32% in 1999.
The Company's net interest income is affected by changes in the amount and mix
of interest-earning assets and interest-bearing liabilities. It is also affected
by changes in yields earned on interest-earning assets and rates paid on
interest-bearing deposits and other borrowed funds. The changes
11
due to both rate and volume have been allocated to rate and volume in proportion
to the relationship of the absolute dollar amount of the change in each. The
effects of tax-equivalent yields have not been considered because they are not
considered significant.
The increase in total interest income of $11,527,000 in 2000 is comprised of a
$8,866,000 volume increase primarily attributable to an increase in average
interest-earning assets of $95,675,000 between 2000 and 1999 coupled with a
$2,661,000 rate increase during this same period. The increase in total interest
expense of $6,728,000 in 2000 related to a $78,877,000 increase in average
interest-bearing liabilities between 2000 and 1999 coupled with a $2,598,000
rate increase during this same period.
The increase in total interest income of $4,747,000 in 1999 is comprised of a
$5,632,000 volume increase associated with the $54,207,000 increase in average
interest-earning assets between 1998 and 1999, and a $1,065,000 rate decrease.
The increase in total interest expense of $406,000 in 1999 related to a
$46,729,000 or 13% increase in average interest-bearing liabilities between 1998
and 1999 offset by a $1,065,000 rate decrease.
PROVISION FOR LOAN LOSSES: The Company maintains an allowance for loan losses at
a level considered by management to be adequate to cover the inherent risks of
loss associated with its loan portfolio under prevailing and anticipated
economic conditions. The provision for loan losses is charged against income and
increases the allowance for loan losses. The provision for loan losses for the
year ended December 31, 2000 was $3,286,000 compared to $2,659,000 in 1999 and
$3,903,000 in 1998. The increased level of provision for loan losses in 2000
when compared to 1999 was primarily the result of an increased level of net
charge-offs experienced during the year coupled with significant growth in the
size of the loan portfolio. The reduced level of the provision for loan losses
in 1999 is attributable to a reduced level of charge-offs experienced during the
year. The level of the provision in 1998 is partly attributable to replenishing
the allowance for loan losses following the charge-off of one commercial loan
relationship totaling $1,325,000. The methodology used to determine the level of
provision for loan losses that is needed each year includes an analysis of
relevant risk factors within the entire loan portfolio, including nonperforming
loans. The methodology is based, in part, on management's use of a loan grading
and classification system. The Bank's management grades its loans through
internal reviews and periodically subjects loans to external reviews. These
external reviews are presented to and assessed by the Bank's audit committee.
Credit reviews are performed quarterly and the quality grading process occurs on
a monthly basis. The level of provision for loan losses in 2000, 1999, and 1998
also supports the general loan growth of the Company, as gross loans increased
25% in 2000, and 23% in 1999.
OTHER INCOME: The following table summarizes other income for the years ended
December 31,
(Dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------
OTHER INCOME:
Deposit service charges $3,527 $3,254 $2,807
Income from real estate held for
sale or development 381 260 540
Earnings on director and officer
life insurance 311 288 201
Loan service fees 116 167 172
Gain on sale of loans 82 48 173
Retail investment commissions 78 139 156
Other 912 933 789
------ ------ ------
Total other income $5,407 $5,089 $4,838
====== ====== ======
Total noninterest income increased by $318,000 or 6% to $5,407,000 in 2000,
compared to $5,089,000 and $4,838,000 in 1999 and 1998. Deposit service charges
increased by $273,000 or 8% during 2000. The 2000 and 1999 increase in deposit
service charges was primarily the result of an increase in demand deposit and
NOW account balances. The increase in 1998 was in large part attributable to the
purchase of the three branches of Bank of America and to the Bank's overall
deposit growth. Other income decreased by $21,000 or 2% to $912,000 in 2000,
compared to $933,000 and $789,000 in 1999 and 1998. The 1999 increase is due
primarily to an increase in ancillary product income.
The Company sold the last remaining real estate parcel that was owned by MAID
during 2000. The carrying balance of land owned by MAID was completely
written-off in 1995.
OTHER EXPENSE: Total noninterest expense increased $2,236,000 or 11% to
$22,774,000 in 2000 as compared with an increase of $2,294,000 or 13% to
$20,538,000 in 1999. Noninterest expense totaled $18,244,000 in 1998.
12
Salaries and related benefits increased by $1,367,000 or 14% to $11,066,000 in
2000, compared with an increase of $1,741,000 or 22% to $9,699,000 in 1999.
Salaries and related benefits totaled $7,958,000 in 1998. The salary increases
were primarily due to an increase in full-time equivalent employees as well as
normal merit increases and related benefit expenses. Premises and occupancy
expenses increased $135,000 or 9% to $1,714,000 in 2000 compared with an
increase of $254,000 or 19% to $1,579,000 in 1999. Premises and occupancy
expense totaled $1,325,000 in 1998. The increases in 2000 and 1999 were caused
primarily by increased spending on branch facility upgrades.
Equipment expenses increased $414,000, or 19% to $2,558,000 in 2000 compared
with a decrease of $11,000 in 1999. Equipment expenses were $2,155,000 in 1998.
The increase in 2000 was primarily due to upgraded computer technology,
additional branches and branch relocation expenses. The decrease during 1999 was
the result of a slowdown in spending on technology during 1999.
The Company's professional fees include legal, consulting, audit and accounting
fees. These expenses increased by $41,000 or 4% to $1,101,000 in 2000 as
compared with a decrease of $143,000 or 12% to $1,060,000 in 1999. Total
professional fees were $1,203,00 in 1998. The increase in 2000 is attributable,
in part, to the continued outsourcing of internal audits, legal fees due to
regulatory matters, consultants used in conjunction with the Bank's strategic
planning process and expenditures relating to earnings enhancement programs. The
decrease in 1999 was due to a decreased use of outside professionals.
Supplies increased by $109,000 or 20% to $660,000 in 2000 as compared with an
decrease of $58,000 or 10% to $551,000 in 1999. Supplies expense totaled
$609,000 in 1998. The increase in 2000 was primarily related to new branch
openings. The decrease in 1999 were due to cost savings programs initiated
during 1999.
Marketing expenses increased by $182,000 or 26% to $890,000 in 2000 as compared
with an increase of $52,000 or 8% to $708,000 in 1999. Marketing expenses
totaled $656,000 in 1998. Marketing expenses have continued to increase over the
past several years as the Company has actively promoted various deposit and loan
products using television, newspaper, and other media sources to assist in
attracting new and retaining existing customers.
Other expenses decreased $12,000 to $3,993,000 in 2000. During 1999, other
expenses increased $445,000 or 13%. The increase during 1999 related primarily
to overall growth of the Company. In 1999, approximately $300,000 of other
expense related to Y2K expenses. In 1998, other expenses totaling $179,000 were
related to costs associated with the purchase of three Bank of America branch
offices.
PROVISION FOR INCOME TAXES: The Company's provision for income taxes was
$2,761,000 in 2000 compared to a provision for income taxes of $2,104,000 and
$930,000 in 1999 and 1998. The effective income tax rates (computed as income
taxes as a percentage of income before income taxes) were 29%, 29%, and 25% for
2000, 1999, and 1998. In part, the effective tax rate was higher in 2000 and
1999 than in 1998 due to the Company experiencing a greater increase in income
than the corresponding increase in tax credits and tax exempt income during
those years. The tax rate during 2000, 1999, and 1998 was lower than the
statutory rate due, in part, to tax credits earned from the investment of
low-income housing partnerships that qualify for housing tax credits. Total
housing tax credits for 2000, 1999 and 1998 were approximately $550,000,
$375,000, and $426,000. In addition, during 2000, 1999 and 1998, the Company
realized tax benefits of $390,000, $413,000, 239,000 from nontaxable interest
income received from bank qualified municipal securities.
FINANCIAL CONDITION: Total assets increased 21% to $683,021,000 at December 31,
2000, compared to $563,550,000 at December 31, 1999. Net loans grew to
$404,457,000 at year end 2000, a 25% increase from the balance of $324,726,000
at December 31, 1999. Deposits grew by $106,597,000 or 22% in 2000 to
$601,498,000 which compares to $494,901,000 at December 31, 1999.
13
SECURITIES: The following table sets forth the carrying amount (fair value) of
available for sale securities at December 31,
(Dollars in thousands) 2000 1999 1998
- ------------------------------------------------------------
U.S. Treasury and U.S.
Government agencies $ 35,939 $ 16,756 $ 12,711
State and political
subdivisions 24,170 23,371 30,192
Mortgage-backed
securities 54,409 43,723 56,048
Collateralized mortgage
obligations 29,015 20,341 29,264
Other securities 12,297 13,623 13,142
-------- -------- --------
Carrying amount and fair
value $155,830 $117,814 $141,357
======== ======== ========
The following table sets forth the carrying amount (amortized cost) and fair
value of held to maturity securities at December 31,
(Dollars in thousands) 2000 1999 1998
- ------------------------------------------------------------
U.S. Treasury and U.S.
Government agencies $ 4,595 $ 1,004 $ 2,024
State and political
subdivisions 4,375 4,389 -
Mortgage-backed
securities 22,736 24,161 11,486
Collateralized mortgage
obligations 3,516 - -
-------- -------- --------
Carrying amount
(amortized cost) $ 35,222 $ 29,554 $ 13,510
======== ======== ========
Fair value $ 35,412 $ 28,675 $ 13,584
======== ======== ========
Available for sale securities increased $38,016,000 or 32% at December 31, 2000
over the comparable year-end in 1999. Held to maturity securities increased
$5,668,000 or 19% to $35,222,000 at December 31, 2000 compared to $29,554,000
outstanding at December 31, 1999. The increases achieved within both segments of
the securities portfolio were made possible by cash flows generated from the
Company's expanding deposit base and the increased use of other borrowings. The
single largest component of the Company's investment portfolio during the last
three years has been mortgage-backed securities. These securities generally have
stated maturities in excess of 10 years and are subject to substantial principal
prepayments which may effectively accelerate actual maturities. At December 31,
2000 and 1999 the Company did not hold any structured notes. See Note 1 and 3 to
the Company's Consolidated Financial Statements for further information
concerning the securities portfolio.
LOANS: Total loans increased 25% to $412,664,000 at December 31, 2000, compared
to $331,268,000 at December 31, 1999. The increase in loan volumes in 2000 were
due to the Company's strategic efforts to increase loan production coupled with
the business development efforts by the Company's loan officers.
The Company concentrates its lending activities in five principal areas:
commercial, agricultural, real estate construction, real estate mortgage, and
consumer loans. Interest rates charged for loans made by the Company vary with
the degree of risk, the size and term of the loan, and borrowers' depository
relationships with the Company and prevailing market rates.
As a result of the Company's loan portfolio mix, the future quality of these
assets could be affected by adverse trends in its region or in the broader
community. These trends are beyond the control of the Company.
CREDIT RISK MANAGEMENT AND ASSET QUALITY: The Company closely monitors the
markets in which it conducts its lending operations and adjusts its strategy to
control exposure to loans with higher credit risk. Asset reviews are performed
using grading standards and criteria similar to those employed by bank
regulatory agencies. Assets receiving lesser grades become "classified assets"
which include all nonperforming assets and potential problem loans and receive
an elevated level of attention to improve the likelihood of collection. The
policy of the Company is to review each loan in the portfolio to identify
problem credits. There are three classifications for problem loans:
"substandard," "doubtful" and "loss." Substandard loans have one or more defined
weaknesses and are characterized by the distinct possibility that the Company
will sustain some loss if the deficiencies are not corrected. Doubtful loans
have the weaknesses of substandard loans with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. A loan classified loss is considered uncollectible and its
continuance as an asset is not warranted. The level of nonperforming loans and
real estate acquired through foreclosure are two indicators of asset quality.
Nonperforming loans are those in which the borrower fails to perform under the
original terms of the obligation and are categorized as loans past due 90 days
or more but still
14
accruing, loans on nonaccrual status and restructured loans. Loans are generally
placed on nonaccrual status and accrued but unpaid interest is reversed against
current year income when interest or principal payments become 90 days past due
unless the outstanding principal and interest is adequately secured and, in the
opinion of management, are deemed to be in the process of collection. Loans that
are not 90 days past due may also be placed on nonaccrual status if management
reasonably believes the borrower will not be able to comply to the contractual
loan repayment terms and the collection of principal or interest is in question.
Management defines impaired loans as those loans, regardless of past due status,
in which principal and interest are not expected to be collected under the
original contractual loan repayment terms. An impaired loan is charged off at
the time management believes the collection of principal and interest process
has been exhausted. At December 31, 2000 and 1999, impaired loans were measured
based upon the present value of future cash flows discounted at the loan's
effective rate, the loan's observable market price, or the fair value of
collateral if the loan is collateral dependent.
The Company had nonperforming loans at December 31, 2000 of $2,340,000 as
compared with $1,990,000 at December 31, 1999. The 2000 and 1999 totals contain
no loans secured by first deeds of trust on real property. Impaired loans as of
December 31, 2000 were $2,340,000, which had specific allowances for loan loss
of $302,000 as compared with impaired loans of $1,990,000 as of December 31,
1999, which had specific allowance for loan losses of $497,000. Other forms of
collateral, such as inventory, chattel and equipment, secure the remaining
nonperforming loans as of each date.
At December 31, 2000 and 1999 the Bank had $247,000 in real estate acquired
through foreclosure. These balances are comprised of one residential and one
commercial property.
ALLOWANCE FOR LOAN LOSSES: In determining the adequacy of the allowance for loan
losses, management takes into consideration the growth trend in the portfolio,
examinations by financial institution supervisory authorities, internal and
external credit reviews, prior loan loss experience of the Company,
concentrations of credit risk, delinquency trends, general economic conditions
and the interest rate environment. The allowance for loan losses is based on
estimates and ultimate future losses may vary from current estimates. It is
always possible that future economic or other factors may adversely affect the
Company's borrowers, and thereby cause loan losses to exceed the current
allowance for loan losses.
The balance in the allowance for loan losses was affected by the amounts
provided from operations, amounts charged-off and recoveries of loans previously
charged off. The Company had provisions to the allowance in 2000 of $3,286,000
as compared to $2,659,000 and $3,903,000 in 1999 and 1998. See "Results of
Operations - Provision for Loan Losses."
15
The following table summarizes the loan loss experience of the Company for the
years ended December 31,
(Dollars in thousands) 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance at beginning of year $ 6,542 $ 4,775 $ 3,833 $ 2,792 $ 1,701
Provision for loan losses 3,286 2,659 3,903 5,825 1,513
Allowance acquired through merger - - - - 148
Charge-offs:
Commercial and agricultural 423 531 2,539 1,121 518
Real-estate - construction - - - 3,458 -
Real-estate - mortgage - - 4 - -
Consumer 1,971 1,323 983 471 140
-------- -------- -------- -------- --------
Total charge-offs 2,394 1,854 3,526 5,050 658
Recoveries:
Commercial and agricultural 410 715 135 155 27
Real-estate - construction - - - 1 -
Real-estate - mortgage - - 100 - -
Consumer 363 247 330 110 61
-------- -------- -------- -------- --------
Total recoveries 773 962 565 266 88
-------- -------- -------- -------- --------
Net charge-offs 1,621 892 2,961 4,784 570
-------- -------- -------- -------- --------
Balance at end of year $ 8,207 $ 6,542 $ 4,775 $ 3,833 $ 2,792
======== ======== ======== ======== ========
Loan outstanding at year-end $412,664 $331,268 $268,993 $217,997 $183,247
Average loans outstanding $369,367 $303,463 $242,989 $198,140 $157,098
Net charge-offs to average loans 0.44% 0.29% 1.22% 2.41% 0.36%
Allowance for loan losses
To total loans 1.99% 1.97% 1.78% 1.76% 1.52%
To nonperforming loans 350.66% 328.74% 302.79% 139.79% 50.14%
To nonperforming assets 317.12% 292.45% 291.69% 136.80% 39.69%
The Company's charge-offs, net of recoveries, were $1,621,000 in 2000 as
compared with $892,000 and $2,961,000 in 1999 and 1998. This represents loan
loss experience ratios of 0.44%, 0.29% and 1.22% in those respective years
stated as a percentage of average loans outstanding for each year. The increase
in charge-offs in 2000 when compared to 1999 is due to increased charge-offs
within the indirect auto loan contract component of the consumer loan portfolio.
As of December 31, 2000 the allowance for loan losses was $8,207,000 or 1.99% of
total loans outstanding. This compares with an allowance for loan losses of
$6,542,000 or 1.97% in 1999 and $4,775,000 or 1.78% in 1998. The decrease in net
charge-offs in 1999 compared to 1998 was due to the complete write-off of a
single commercial relationship and the complete write-off of one large
commercial real estate loan during 1998.
LIQUIDITY: To maintain adequate liquidity requires that sufficient resources be
available at all times to meet cash flow requirements of the Company. The need
for liquidity in a banking institution arises principally to provide for deposit
withdrawals, the credit needs of its customers and to take advantage of
investment opportunities as they arise. A company may achieve desired liquidity
from both assets and liabilities. The Company considers cash and deposits held
in other banks, federal funds sold, other short term investments, maturing loans
and investments, receipts of principal and interest on loans, available for sale
investments and potential loan sales as sources of asset liquidity. Deposit
growth and access to credit lines established with correspondent banks and
market sources of funds are considered by the Company as sources of liquidity.
The Company reviews its liquidity position on a regular basis based upon its
current position and expected trends of loans and deposits. Management believes
that the Company maintains adequate amounts of liquid assets to meet its
liquidity needs. These assets include cash and deposits in other banks,
available for sale securities and federal funds sold. The Company's liquid
assets totaled $203,698,000 and
16
$168,886,000 at December 31, 2000 and 1999 and are 30% of total assets on those
dates. Cash and noninterest-bearing deposits in other banks increased $4,771,000
or 11% to $46,353,000 at December 31, 2000, compared to $41,582,000 at
December 31, 1999. The increase in the 2000 cash position when compared to 1999
was the result of larger volume of clearing deposits created by increased
volumes of check deposits being processed on a daily basis for checking account
customers. Liquidity is also affected by collateral requirements of its public
agency deposits and certain borrowings. Total pledged securities were
$124,396,000 at December 31, 2000 and $105,008,00 at December 31, 1999.
Although the Company's primary sources of liquidity include liquid assets and a
stable deposit base, the Company maintains lines of credit with certain
correspondent banks, the Federal Reserve Bank, and the Federal Home Loan Bank
aggregating $49,608,000 of which $14,600,000 was outstanding as of December 31,
2000. This compares with lines of credit of $52,392,000 of which $12,600,000 was
outstanding as of December 31, 1999.
MARKET AND INTEREST RATE RISK MANAGEMENT: In the normal course of business, the
Company is exposed to market risk which includes both price and liquidity risk.
Price risk is created from fluctuations in interest rates and the mismatch in
repricing characteristics of assets, liabilities, and off balance sheet
instruments at a specified point in time. Mismatches in interest rate repricing
among assets and liabilities arise primarily through the interaction of the
various types of loans versus the types of deposits that are maintained as well
as from management's discretionary investment and funds gathering activities.
Liquidity risk arises from the possibility that the Company may not be able to
satisfy current and future financial commitments or that the Company may not be
able to liquidate financial instruments at market prices. Risk management
policies and procedures have been established and are utilized to manage the
Company's exposure to market risk. Quarterly testing of the Company's assets and
liabilities under both increasing and decreasing interest rate environments are
performed to insure the Company does not assume a magnitude of risk that is
outside approved policy limits.
The Company's success is largely dependent upon its ability to manage interest
rate risk. Interest rate risk can be defined as the exposure of the Company's
net interest income to adverse movements in interest rates. Although the Company
manages other risks, such as credit and liquidity risk in the normal course of
its business, management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on the
Company's financial condition and results of operations. Correspondingly, the
overall strategy of the Company is to manage interest rate risk, through balance
sheet structure, to be interest rate neutral. The Company does not currently
engage in trading activities or use derivative instruments to control interest
rate risk. Though such activities may be permitted with the approval of the
Board of Directors, the Company does not intend to engage in such activities in
the immediate future.
The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO), which reports to the Board of
Directors. ALCO establishes policies that monitors and coordinates the Company's
sources, uses and pricing of funds. ALCO is also involved in formulating the
economic projections for the Company's budget and strategic plan. ALCO sets
specific rate sensitivity limits for the Company. ALCO monitors and adjusts the
Company's exposure to changes in interest rates to achieve predetermined risk
targets that it believes are consistent with current and expected market
conditions. Balance sheet management personnel monitor the asset and liability
changes on an ongoing basis and provide report information and recommendations
to the ALCO committee in regards to those changes.
EARNINGS SENSITIVITY: The Company's net income is dependent on its net interest
income. Net interest income is susceptible to interest rate risk to the degree
that interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net interest income.
The primary analytical tool used by the Company to gauge interest rate
sensitivity is a net interest income simulation model used by many other
17
financial institutions. The model, which is updated quarterly, incorporates all
of the Company's assets and liabilities and off-balance sheet funding
commitments, together with assumptions that reflect the current interest rate
environment. The Company does not utilize off-balance sheet derivative financial
instruments such as interest rate swaps, futures contracts, or other financial
hedging instruments in managing interest rate risk. The model projects changes
in cash flows of the various interest earning assets and interest bearing
liabilities in both rising and falling interest rate environments. Based on the
current portfolio mix, this model is used to estimate the effects of changes in
market rates on the Company's net interest income under interest rate conditions
that simulate an immediate and sustained shift in the yield curve of up and down
2 percent, as well as the effect of immediate and sustained flattening or
steepening of the yield curve. This model's estimate of interest rate
sensitivity takes into account the differing time intervals and differing rate
change increments of each type of interest sensitive asset and liquidity.
The estimated impact of immediate changes in interest rates at the specified
levels at December 31, 2000 is presented in the following table:
Percentage
Change in Change in change in
Interest rates net interest net interest
(In basis points) income(1) income
- ---------------------------------------------------
+200 $ (77,000) (0.24%)
-200 $(374,000) (1.18%)
(1) THE AMOUNT IN THIS COLUMN REPRESENTS THE CHANGE IN NET INTEREST INCOME FOR
12 MONTHS IN A STABLE INTEREST RATE ENVIRONMENT VERSUS THE NET INTEREST
INCOME IN THE VARIOUS RATE SCENARIOS.
The Company's primary objective in managing interest rate risk is to minimize
the adverse impact of changes in interest rates on the Company's net interest
income and capital, while structuring the Company's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Company relies
primarily on its asset-liability structure to control interest rate risk.
Based upon the December 31, 2000 mix of interest sensitive assets and
liabilities, given sustained increase in the federal funds rate of 2%, this
model estimated the Company's cumulative net interest income over the next year
would decrease by $77,000. This compares with a cumulative one year expected
decrease in net interest income of $738,000 as of December 31, 1999. If
prevailing market interest rates sustained a decrease of 2% at December 31,
2000, this model estimated the Company's cumulative one year expected decrease
in net interest income would be $374,000. This compares with an expected
cumulative one year increase in net interest income of $374,000 as of
December 31, 1999. The model shows that at December 31, 2000 if interest rates
increase, the Company has less downside interest rate risk than at December 31,
2000. Conversely, in a falling interest rate environment, at December 31, 2000
the Company has more downside interest rate risk than at December 31, 2000. The
change in interest rate risk profile between 1999 and 2000 is primarily caused
by a substantial increase in loan growth and the increased funding of variable
rate loans that utilize a repricing index tied to prime rate. As the total
measure of interest rate risk indicates, the Company is not subject to
significant risk of change in its net interest margin as a result of changes in
interest rates in the 2% range.
CAPITAL RESOURCES: The Company is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate mandatory and possibly additional
discretionary actions by the regulators that, if undertaken, could have a
material effect on the Company's financial statements. Management believes, as
of December 31, 2000, that the Company and the Bank meet all capital
requirements to which they are subject. The Company's leverage capital ratio at
December 31, 2000 was 7.56% as compared with 7.50% as of December 31, 1999. The
Company's risk-based capital ratio at December 31, 2000 was 10.92% as compared
to 11.24% as of December 31, 1999.
Capital ratios are reviewed on a regular basis to ensure that capital exceeds
the prescribed regulatory minimums and is adequate to meet the Company's future
needs. All ratios are in excess of the regulatory definitions of "well
capitalized." Management believes that, under the current regulations, the
Company will continue to meet its minimum capital requirements in the
foreseeable future.
The Company has no formal dividend policy, and dividends are issued solely at
the discretion of the Company's Board of Directors, subject to compliance with
regulatory requirements. In order
18
to pay any cash dividend, the Company must receive payments of dividends or
management fees from the Bank. There are certain regulatory limitations on the
payment of cash dividends by banks. Notwithstanding regulatory restrictions, in
order for the Bank to maintain a 10% risk weighted capital ratio, the Bank has
the ability to pay cash dividends at December 31, 2000 of $4,662,000.
IMPACT OF INFLATION: The primary impact of inflation on the Company is its
effect on interest rates. The Company's primary source of income is net interest
income which is affected by changes in interest rates. The Company attempts to
limit inflation's impact on its net interest margin through management of
rate-sensitive assets and liabilities and the analysis of interest rate
sensitivity. The effect of inflation on premises and equipment, as well as
noninterest expenses, has not been significant for the periods covered in this
report.
MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCK MATTERS: The Company's stock
is included for quotation on the NASDAQ National Market System with a stock
quotation symbol of CCOW.
The following table indicates the range of high and low sales prices for the
period shown, based upon information provided by the NASDAQ National Market
System.
2000 High Low
- --------------------------------------------------------------
4th quarter $12.00 $10.63
3rd quarter 11.88 10.38
2nd quarter 10.75 8.13
1st quarter $10.75 $ 7.75
1999 High Low
- --------------------------------------------------------------
4th quarter $12.00 $ 8.50
3rd quarter 13.88 12.00
2nd quarter 14.09 9.75
1st quarter $10.75 $ 8.50
Generally, the Company has retained earnings to support the growth of the
Company and has not paid regular cash dividends.
PROSPECTIVE ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), which amends the disclosure requirements of Statement No. 52,
"Foreign Currency Translations" and of Statement No. 107, "Disclosures about
Fair Value of Financial Instruments." SFAS 133 supersedes Statements No. 80
"Accounting for Future Contracts," No. 105 "Disclosure of Information about
Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentrations of Credit Risk" and No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." Under the
provisions of SFAS 133, the Company is required to recognize all derivatives as
either assets or liabilities in the statement of financial condition and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(b) a hedge of the exposure to cash flows of a forecasted transaction, or (c) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and the resulting operation. Certain sections of
SFAS No. 133 were amended in June 2000, when the FASB issued Statement No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of FASB Statement No. 133" (SFAS No. 138). SFAS No. 133, as amended
by SFAS No. 138, also nullifies or modifies the consensuses reached in a number
of issues addressed by the Emerging Issues Task Force. SFAS No. 133, as amended
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" and SFAS No. 138 are
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Initial application of these statement should be as of the beginning of an
entity's fiscal quarter; on that date, hedging relationships must be designated
anew and documented pursuant to the provisions of these statements. Neither SFAS
No. 133 nor SFAS No. 138 should be applied retroactively to financial statements
of prior periods. The Company has a program in place to evaluate its financial
instruments and purchase contracts.
The Company adopted SFAS 133 on January 1, 2001. The adoption of this
pronouncement had no impact on the Company's financial statements.
On March 31, 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain
19
Transactions Involving Stock Compensation - an interpretation of APB Opinion
No. 25" (FIN No. 44). This interpretation provides guidance for issues that have
arisen in applying APB Opinion No. 25, "Accounting for Stock Issued to
Employees." FIN 44 applies prospectively to new awards, exchanges of awards in a
business combination, modifications to outstanding awards, and changes in
grantee status that occur on or after July 1, 2000, except for the provisions
related to repricing and the definition of an employee which apply to awards
issued after December 31, 1998. The provisions related to modifications to fixed
stock option awards are effective for awards modified after January 12, 2000.
Management believes the effects of adopting FIN No. 44 will not have a
significant impact on its results of operations or financial position.
20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Capital Corp of the West:
We have audited the accompanying consolidated balance sheets of Capital Corp
of the West and subsidiaries (the Company) as of December 31, 2000 and 1999 and
the related consolidated statements of income and comprehensive income, cash
flows, and shareholders' equity for each of the years in the three year period
ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Capital Corp
of the West and subsidiaries as of December 31, 2000 and 1999 and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
San Francisco, California
January 26, 2001
21
CAPITAL CORP OF THE WEST
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
---------------------------
(Dollars in thousands) 2000 1999
- -----------------------------------------------------------------------------------------
ASSETS
Cash and noninterest-bearing deposits in other banks $ 46,353 $ 41,582
Federal funds sold 1,415 8,640
Time deposits at other financial institutions 100 850
Investment securities available for sale, at fair value 155,830 117,814
Investment securities held to maturity, at cost 35,222 29,554
Loans, net 404,457 324,726
Interest receivable 5,215 3,436
Premises and equipment, net 13,021 13,163
Goodwill and other intangible assets 4,277 5,069
Other assets 17,131 18,716
--------- ---------
Total assets $ 683,021 $ 563,550
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 107,581 $ 87,564
Negotiable orders of withdrawal 84,521 72,788
Savings 184,073 164,158
Time, under $100,000 131,669 101,395
Time, $100,000 and over 93,654 68,996
--------- ---------
Total deposits 601,498 494,901
Borrowed funds 22,427 20,814
Accrued interest, taxes and other liabilities 5,645 4,158
--------- ---------
Total liabilities 629,570 519,873
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 10,000,000 shares
authorized; none outstanding
Common stock, no par value; 20,000,000 shares
authorized; 4,552,042 and 4,496,201 issued and
outstanding in 2000 and 1999 35,918 35,593
Retained earnings 17,449 10,743
Accumulated other comprehensive income (loss) 84 (2,659)
--------- ---------
Total shareholders' equity 53,451 43,677
--------- ---------
Total liabilities and shareholders' equity $ 683,021 $ 563,550
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22
CAPITAL CORP OF THE WEST
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31,
------------------------------------
(Dollars in thousands, except per share data) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $38,643 $30,255 $25,159
Interest on deposits with other financial institutions 39 156 57
Interest on investment securities held to maturity:
Taxable 2,055 1,116 1,257
Non-taxable 223 190 -
Interest on investment securities available for sale:
Taxable 8,154 6,013 6,091
Non-taxable 1,124 1,188 797
Interest on federal funds sold 650 443 1,253
------- ------- -------
Total interest income 50,888 39,361 34,614
INTEREST EXPENSE:
DEPOSITS:
Negotiable orders of withdrawal 503 458 503
Savings 7,095 5,752 5,696
Time, under $100,000 6,613 4,504 4,418
Time, $100,000 and over 5,029 2,570 1,725
------- ------- -------
Total interest on deposits 19,240 13,284 12,342
Other borrowings 1,528 756 1,292
------- ------- -------
Total interest expense 20,768 14,040 13,634
NET INTEREST INCOME 30,120 25,321 20,980
Provision for loan losses 3,286 2,659 3,903
------- ------- -------
Net interest income after provision for loan losses 26,834 22,662 17,077
OTHER INCOME:
Service charges on deposit accounts 3,527 3,254 2,807
Income from sale of real estate 390 260 540
Other 1,490 1,575 1,491
------- ------- -------
Total other income 5,407 5,089 4,838
OTHER EXPENSES:
Salaries and related benefits 11,066 9,699 7,958
Premises and occupancy 1,714 1,579 1,325
Equipment 2,558 2,144 2,155
Professional fees 1,101 1,060 1,203
Supplies 660 551 609
Marketing 890 708 656
Goodwill and intangible amortization 792 792 778
Other 3,993 4,005 3,560
------- ------- -------
Total other expenses 22,774 20,538 18,244
Income before provision for income taxes 9,467 7,213 3,671
Provision for income taxes 2,761 2,104 930
------- ------- -------
Net income $ 6,706 $ 5,109 $ 2,741
- ------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
Unrealized gain (loss) on securities arising during the
period 2,424 (2,615) (112)
Less: reclassification adjustment for losses (gains)
Included in net income 319 (72) (55)
------- ------- -------
Comprehensive income $ 9,449 $ 2,422 $ 2,574
======= ======= =======
- ------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.48 $ 1.12 $ 0.60
Diluted earnings per share $ 1.44 $ 1.09 $ 0.58
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23
CAPITAL CORP OF THE WEST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK Accumulated
----------------------- Other
Number of Retained Comprehensive
(Dollars in thousands) shares Amounts Earnings Income (Loss) Total
- --------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 4,377 $ 33,928 $ 6,125 $ 195 $ 40,248
- --------------------------------------------------------------------------------------------------------
5% stock dividend, including payment
for fractional shares 219 3,226 (3,232) - (6)
Exercise of stock options 11 109 - - 109
Net change in fair market value of
available for sale investment
securities, net of tax effect of
($106) - - - (167) (167)
Adjustment - stock option plan - (121) - - (121)
Net income - - 2,741 - 2,741
- --------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 4,607 $ 37,142 $ 5,634 $ 28 $ 42,804
- --------------------------------------------------------------------------------------------------------
Exercise of stock options 26 219 - - 219
Stock repurchases (137) (1,768) - - (1,768)
Net change in fair market value of
available for sale investment
securities net of tax effect of
($1,824) - - - (2,687) (2,687)
Net income - - 5,109 - 5,109
- --------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 4,496 $ 35,593 $ 10,743 $ (2,659) $ 43,677
- --------------------------------------------------------------------------------------------------------
Exercise of stock options 50 253 - - 253
Issuance of shares pursuant to 401K
and ESOP plans 6 72 - - 72
Net change in fair market value of
available for sale investment
securities net of tax effect of
($1,768) - - - 2,743 2,743
Net income - - 6,706 - 6,706
- --------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 4,552 $ 35,918 $ 17,449 $ 84 $ 53,451
- --------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24
CAPITAL CORP OF THE WEST
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------
(Dollars in thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 6,706 $ 5,109 $ 2,741
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 3,286 2,659 3,903
Depreciation, amortization and accretion, net 2,291 2,763 3,374
(Benefit) provision for deferred income taxes (405) (1,090) 310
Gain on sale of real estate (390) (260) (540)
Net increase in interest receivable & other assets (1,167) (2,820) 208
Net decrease in deferred loan fees (117) (699) (1,085)
Net increase (decrease) in accrued interest payable &
other liabilities 1,539 1,727 (763)
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,743 7,389 8,148
- -----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Investment security purchases - available for sale
securities (25,062) (20,272) (46,213)
Investment security purchases - held to maturity
securities (4,594) - -
Investment security purchases mortgage-backed securities
and collateralized mortgage obligations (42,301) (27,522) (27,863)
Proceeds from maturities of available for sale
investment securities 869 1,719 3,127
Proceeds from maturities of held to maturity investment
securities 1,017 1,000 -
Proceeds from maturities of mortgage-backed securities
and collateralized mortgage obligations 11,933 26,279 35,752
Proceeds from sales of available for sale investment
securities 8,188 13,777 9,088
Proceeds from sales of mortgage-backed securities and
collateralized mortgage obligations 10,623 7,574 18,131
Net decrease (increase) in time deposits in other
financial institutions 750 (250) (1)
Proceeds from sales of commercial and real estate loans 3,397 1,023 6,826
Origination of loans (224,804) (227,590) (179,866)
Proceeds from repayment of loans 138,718 163,982 119,730
Purchases of premises and equipment (1,804) (1,585) (2,090)
Proceeds from sales of real estate held for sale or
development 390 260 478
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (122,680) (61,605) (62,901)
- -----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in demand, NOW and savings deposits 51,612 6,966 60,997
Net increase in certificates of deposit 54,933 43,777 26,818
Net increase (decrease) in other borrowings 1,613 10,348 (11,583)
Issued shares for benefit plan purchases 72 - -
Stock repurchases - (1,768) -
Fractional shares purchased - - (6)
Exercise of stock options, net 253 219 (12)
- -----------------------------------------------------------------------------------------------
Net cash provided by financing activities 108,483 59,542 76,214
- -----------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (2,454) 5,326 21,461
Cash and cash equivalents at beginning of year 50,222 44,896 23,435
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 47,768 $ 50,222 $ 44,896
- -----------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash investing and financing
activities:
Investment securities unrealized gains (losses), net of
taxes $ 2,743 $ (2,687) $ (167)
Interest paid 20,657 13,788 13,524
Income tax payments 2,880 2,827 1,564
Transfer of securities from available for sale to held
to maturity - 4,499 9,636
Loans transferred to other real estate owned 443 187 478
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Capital Corp of the West (the "Company") is a registered bank holding company,
which provides a full range of banking services to individual and business
customers primarily in the Central San Joaquin Valley, through its subsidiaries.
The following is a description of the more significant policies.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements of Capital
Corp of the West include its subsidiaries: County Bank (the "Bank") and Capital
West Group ("CWG"). Town and Country Finance and Thrift was acquired in June
1996 and merged into County Bank on November 23, 1999. CWG, a subsidiary formed
in 1996, became inactive in 1997. All significant intercompany balances and
transactions are eliminated.
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and prevailing
practices in the financial services industry. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. Actual
results could differ from those estimates applied in the preparation of the
consolidated financial statements. A material estimate that is particularly
susceptible to change in the near term relates to the determination of the
allowance for loan losses.
CASH AND CASH EQUIVALENTS: The Company maintains deposit balances with various
banks which are necessary for check collection and account activity charges.
Cash in excess of immediate requirements is invested in federal funds sold or
other short term investments. Generally, federal funds are sold for periods from
one to thirty days. Cash, noninterest bearing deposits in other banks and
federal funds sold are considered to be cash and cash equivalents for the
purposes of the consolidated statements of cash flows. Banks are required to
maintain minimum average reserve balances with the Federal Reserve Bank. The
amount of those reserve balances was approximately $93,000 at December 31, 2000.
INVESTMENT SECURITIES: Investment securities consist of U.S. treasury, federal
agencies, state and county municipal securities, corporate bonds,
mortgage-backed securities, collateralized mortgage obligations and equity
securities. Investment securities are classified into one of three categories.
These categories include trading, available for sale, and held to maturity. The
category of each security is determined based on the Company's investment
objectives, operational needs and intent. The Company has not purchased
securities with the intent of actively trading them.
Securities available for sale may be sold prior to maturity and are available
for future liquidity requirements. These securities are carried at fair value.
Unrealized gains and losses on securities available for sale are excluded from
earnings and reported net of tax as a separate component of shareholders' equity
until realized.
Securities held to maturity are classified as such where the Company has the
ability and positive intent to hold them to maturity. These securities are
carried at cost, adjusted for amortization of premiums and accretion of
discounts. Unrealized losses due to fluctuations in fair value of securities
held to maturity or available for sale, are recognized through earnings when it
is determined that a permanent decline in value has occurred.
Premiums and discounts are amortized or accreted over the life of the related
investment security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned. Realized gains
and losses for securities classified as available for sale or held to maturity,
are included in earnings and are derived using the specific identification
method for determining the cost of securities sold.
LOANS: Loans are carried at the principal amount outstanding, net of unearned
income, including deferred loan origination fees and costs. Nonrefundable loan
origination and commitment fees and the direct costs associated with originating
or acquiring the loans are deferred and amortized as an adjustment to interest
income over the life of the related loan using a method that approximates the
level yield method. Deferred loan origination costs totaled $1,741,000 and
$1,878,000 at December 31, 2000 and 1999.
26
Deferred loan origination fees totaled $1,006,000 and $1,026,000 at December 31,
2000 and 1999.
Interest income on loans is accrued based on contract interest rates and
principal amounts outstanding. Loans which are more than 90 days delinquent,
with respect to interest or principal, are placed on nonaccrual status, unless
the outstanding principal and interest is adequately secured and, in the opinion
of management, remains collectable. Uncollected accrued interest is reversed
against interest income, and interest is subsequently recognized only as
received until the loan is returned to accrual status. Interest accruals are
resumed when such loans are brought fully current with respect to interest and
principal and when, in the judgment of management, the loans are estimated to be
fully collectable as to both principal and interest.
A loan is considered impaired, if it is probable that the Company will be unable
to collect the scheduled payments of principal and interest when due according
to the contractual terms of the loan agreement. Any allowance for loan losses on
impaired loans is measured based upon the present value of future cash flows
discounted at the loan's effective rate, the loan's observable market price, or
the fair value of collateral if the loan is collateral dependent. Interest on
impaired loans is recognized on a cash basis. In general, these statements are
not applicable to large groups of small balance homogenous loans that are
collectively evaluated for impairment, such as residential mortgage and consumer
installment loans. Income recognition on impaired loans conforms to the method
the Company uses for income recognition on nonaccrual loans. Interest income on
nonaccrual loans is recorded on a cash basis. Payments may be treated as
interest income or return of principal depending upon management's opinion of
the ultimate risk of loss on the individual loan. Cash payments are treated as
interest income when management believes the remaining principal balance is
fully collectable.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at the
level considered to be adequate for potential loan losses based on management's
assessment of various factors affecting the loan portfolio, which include:
growth trends in the portfolio, historical experience, concentrations of credit
risk, delinquency trends, general economic conditions, and internal and external
credit reviews. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance for loan losses based on their judgment of information available to
them at the time of their examination. Additions to the allowance for loan
losses, in the form of provision for loan losses, are reflected in current
operating results, while charge-offs to the allowance for loan losses are made
when a loss is determined to have occurred. Management uses the best information
available on which to base estimates, however, ultimate losses may vary from
current estimates.
GAIN OR LOSS ON SALE OF LOANS AND SERVICING RIGHTS: The Company services both
sold and retained portions of United States Small Business Administration (SBA)
loans and a portfolio of mortgage loans. Accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
are based on consistent application of a financial components approach that
focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Servicing assets and other
retained interests in transferred assets are measured by allocating the previous
carrying amount of the transferred assets between the assets sold, if any, and
the retained interests, if any, based on their relative fair values at the date
of transfer. Liabilities and derivatives incurred or obtained by transferors as
part of a transfer of financial assets are initially measured at fair value.
Servicing assets and liabilities, which are carried at the lower of cost or
market, are subsequently amortized in proportion to and over the period of,
estimated net servicing income or loss and assessed for asset impairment or
increased obligation based on fair value.
The Bank recognizes a gain and a related asset for the fair value of the rights
to service loans for others when loans are sold. The fair value of the servicing
assets are estimated based upon the present value of the estimated expected
future cash flows. The cash flows are calculated using a discount rate
commensurate with the risk involved and include estimates of future revenues and
expenses, including assumptions about defaults and prepayments. The Company
measures the impairment of the servicing asset based on the difference between
the carrying amount of the servicing asset and its current fair value. As of
27
December 31, 2000 and 1999, there was no impairment in mortgage servicing
assets.
Real estate mortgage loans held for sale are carried at the lower of cost or
market at the balance sheet date. There were no loans held for sale as of
December 31, 2000 and 1999. Gains or losses are recognized at the time of sale
and are calculated based on the amounts received and the book value of the loans
sold.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
computed on the straight line basis over the estimated useful life of each type
of asset. Estimated useful lives range up to 35 years for buildings, up to the
lease term for leasehold improvements, and 3 to 15 years for furniture and
equipment.
REAL ESTATE HELD FOR SALE OR DEVELOPMENT: Real estate held for sale or
development is recorded at the lower of cost or net realizable value. Revenue
recognition on the disposition of real estate is dependent upon the transaction
meeting certain criteria relating to the nature of the property sold and the
terms of the sale. Under certain circumstances, revenue recognition may be
deferred until these criteria are met.
OTHER REAL ESTATE: Other real estate is comprised of property acquired through
foreclosure proceedings or acceptance of deeds-in-lieu of foreclosure. Losses
recognized at the time of acquiring property in full or partial satisfaction of
debt are charged against the allowance for loan losses. Other real estate is
recorded at the lower of the related loan balance or fair value, less estimated
disposition costs. Fair value of other real estate is generally based on an
independent appraisal of the property. Any subsequent costs or losses are
recognized as noninterest expense when incurred.
INTANGIBLE ASSETS: Goodwill, representing the excess of purchase price paid over
the fair value of net assets acquired in an acquisition, was generated with the
purchase of the Thrift in June 1996. The Thrift's assets, including intangible
assets, were subsequently merged into County Bank in November, 1999, and the
Thrift's charter was eliminated. Goodwill associated with the purchase of the
Thrift is being amortized over 18 years. Core deposit intangibles, representing
the excess of purchase price paid over the fair value of net savings deposits
acquired, were generated by the purchase of the Thrift in June 1996 and the
purchase of three branches from the Bank of America in December, 1997. Core
deposit intangibles are being amortized over 10 and 7 years, respectively.
Intangible assets are reviewed on a periodic basis for impairment. If such
impairment is indicated, recoverability of the asset is assessed based upon
expected undiscounted net cash flows.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF: Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
DEFERRED COMPENSATION: The Company has purchased single premium universal life
insurance policies in conjunction with implementation of salary continuation
plans for certain members of management and a deferred compensation plan for
certain members of the Board of Directors. The Company is the owner and
beneficiary of these policies. The cash surrender value of the insurance
policies is recorded in other assets and these values totaled $6,075,000 and
$5,792,000 as of December 31, 2000 and 1999. Income from these policies is
recorded in other income and the load, mortality and surrender charges have been
recorded in other expenses. An accrued liability of $1,486,000 and $878,000 as
of December 31, 2000 and 1999 was recorded to reflect the present value of the
expected retirement benefits for the salary continuation plans and the deferred
compensation benefits and was included in other liabilities. Deferred
Compensation expense of $567,000 and $242,000 was recorded for the twelve months
ending December 31, 2000 and 1999.
INCOME TAXES: The Company files a consolidated federal income tax return and a
combined state franchise tax return. The provision for income taxes includes
federal income and state franchise taxes.
28
Income tax expense is allocated to each entity of the Company based upon the
analysis of the tax consequences of each company on a stand alone basis.
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
INCOME TAX CREDITS: The Company has investments in limited partnerships which
own low income affordable housing projects that generate tax benefits in the
form of federal and state housing tax credits. As an investor in these
partnerships, the Company receives tax benefits in the form of tax deductions
from partnership operating losses and income tax credits. These income tax
credits are earned over a 10 year period as a result of the investment meeting
certain criteria and are subject to recapture over a 15 year period. The
expected benefit resulting from the affordable housing income tax credits is
recognized in the period in which the tax benefit is recognized in the Company's
consolidated tax returns. These investments are accounted for using the cost
method and are evaluated at each reporting period for impairment. The Bank had
investments in these partnerships of $6,800,000 and $5,800,000 as of December
31, 2000 and 1999 which were included in other assets.
STOCK OPTION PLAN: The Company accounts for its stock option plan in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price.
EARNINGS PER SHARE: Basic earnings per share (EPS) includes no dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in the earnings
of an entity.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and unrealized
gains (losses) on securities and is presented in the consolidated statements of
income and comprehensive income.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1999 amounts
to conform with the 2000 presentations.
29
NOTE 2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities at
December 31, are summarized below:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
2000
- ---------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury and U.S. Government agencies $ 35,413 $ 564 $ 38 $ 35,939
State & political subdivisions 24,631 74 535 24,170
Mortgage-backed securities 54,364 370 325 54,409
Collateralized mortgage obligations 29,237 102 324 29,015
Corporate debt securities 9,674 186 27 9,833
--------- ------- ------- ---------
Total debt securities 153,319 1,296 1,249 153,366
Equity securities 2,464 - - 2,464
--------- ------- ------- ---------
Total available for sale securities 155,783 1,296 1,249 155,830
--------- ------- ------- ---------
HELD TO MATURITY SECURITIES:
U.S. Treasury & U.S. government agencies 4,595 - - 4,595
State and political subdivisions 4,375 78 -- 4,453
Mortgage-backed securities 22,736 269 201 22,804
Collateralized mortgage obligations 3,516 44 - 3,560
--------- ------- ------- ---------
Total held to maturity securities 35,222 391 201 35,412
--------- ------- ------- ---------
- ---------------------------------------------------------------------------------------------------------------
1999
- ---------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury & U.S. Government agencies $ 17,113 $ - $ 357 $ 16,756
State & political subdivisions 25,421 15 2,065 23,371
Mortgage-backed securities 45,253 42 1,572 43,723
Collateralized mortgage obligations 20,847 - 506 20,341
Corporate debt securities 9,681 67 88 9,660
--------- ------- ------- ---------
Total debt securities 118,315 124 4,588 113,851
Equity securities 3,963 - - 3,963
--------- ------- ------- ---------
Total available for sale securities 122,278 124 4,588 117,814
--------- ------- ------- ---------
HELD TO MATURITY SECURITIES:
U.S. Treasury & U.S. government agencies 1,004 - 3 1,001
State and political subdivisions 4,389 - 230 4,159
Mortgage-backed securities 24,161 - 646 23,515
--------- ------- ------- ---------
Total held to maturity securities 29,554 - 879 28,675
--------- ------- ------- ---------
At December 31, 2000 and 1999, investment securities with carrying values of
approximately $124,396,000 and $105,008,000, respectively, were pledged as
collateral for deposits of public funds, government deposits, the Bank's use of
the Federal Reserve Bank's discount window and Federal Home Loan Bank line of
credit. The Bank is a member of the Federal Reserve Bank and the Federal Home
Loan Bank. The Bank carried balances, stated at cost, of $1,223,000 and
$2,378,000 of Federal Home Loan Bank stock and $886,000 and $1,229,000 of
Federal Reserve Bank stock as of December 31, 2000 and 1999. The Company
recognized gross gains on the sale of securities of $0, $0, and $13,000, in
2000, 1999, and 1998. Gross losses of $235,000, $118,000 and $16,000 were
recognized in 2000, 1999, and 1998.
In February 1999, state and political subdivision securities with a market value
of $4,499,000 were transferred from the available for sale portfolio to the held
to maturity portfolio at market value. The unrealized holding gain at the date
of transfer is reported as a separate component of shareholders' equity, and is
amortized over the remaining life of the securities as an adjustment of yield in
a manner consistent with the amortization of a premium or discount.
30
The carrying and estimated fair values of debt securities at December 31, 2000
by contractual maturity, are shown on the following table. Actual maturities may
differ from contractual maturities because issuers generally have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated
(Dollars in thousands) Cost Fair Value
- -------------------------------------------------------------------------------------
AVAILABLE FOR SALE DEBT SECURITIES:
One year or less $ 1,019 $ 1,008
One to five years 29,281 29,511
Five to ten years 23,201 23,238
Over ten years 16,217 16,185
Mortgage-backed securities and CMOs 83,601 83,424
--------- ---------
Total available for sale debt securities $ 153,319 $ 153,366
========= =========
HELD TO MATURITY DEBT SECURITIES:
One year or less $ - $ -
One to five years - -
Five to ten years 5,937 5,951
Over ten years 3,033 3,097
Mortgage-backed securities and CMOs 26,252 26,364
--------- ---------
Total held to maturity debt securities $ 35,222 $ 35,412
========= =========
NOTE 3. LOANS
Loans at December 31 consisted of the following:
(Dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------------
Commercial $ 71,920 $ 53,932
Agricultural 84,032 58,247
Real estate - mortgage 141,575 120,978
Real estate - construction 30,133 11,926
Consumer 85,004 86,185
--------- ---------
Gross loans 412,664 331,268
Less allowance for loan losses 8,207 6,542
--------- ---------
Net loans $ 404,457 $ 324,726
========= =========
These loans are net of deferred loan costs of $1,006,000 and $1,026,000 and
deferred loan costs of $1,741,000 and $1,878,000 as of December 31, 2000 and
1999.
Nonaccrual loans totaled $2,243,000 and $1,984,000 at December 31, 2000 and
1999. Foregone interest on nonaccrual loans was approximately $224,000, $143,000
and $91,000 for the years ended December 31, 2000, 1999 and 1998.
Impaired loans are loans for which it is probable that the Company will not be
able to collect all amounts due. At December 31, 2000 and 1999, the recorded
investment in impaired loans of $2,340,000 and $1,990,000 which had a related
allowance for loan losses of $302,000 and $497,000 in 2000 and 1999. The average
outstanding balance of impaired loans for the years ended December 31, 2000,
1999 and 1998 was $2,165,000, $2,215,000, and $1,876,000, on which $79,000,
$126,000 and $134,000, was recognized as interest income on a cash basis.
31
At December 31, 2000 and 1999, the collateral value method was used to measure
impairment for all loans classified as impaired. The following table shows the
recorded investment in impaired loans by loan category at December 31:
(Dollars in thousands) 2000 1999
- -------------------------------------------------
Commercial $ 734 $ 635
Agricultural 1,423 921
Consumer and other 183 434
------- -------
$ 2,340 $ 1,990
======= =======
The following is a summary of changes in the allowance for loan losses during
the years ended December 31:
(Dollars in thousands) 2000 1999 1998
- ------------------------------------------------------
Balance at beginning
of year $ 6,542 $ 4,775 $ 3,833
Loans charged-off (2,394) (1,854) (3,526)
Recoveries of loans
previously charged-
off 773 962 565
Provision for loan
losses 3,286 2,659 3,903
-------- -------- --------
Balance at end of year $ 8,207 $ 6,542 $ 4,775
======== ======== ========
In the ordinary course of business, the Company, through its subsidiaries, has
made loans to certain directors and officers and their related businesses. In
management's opinion, these loans are granted on substantially the same terms,
including interest rates and collateral, as those prevailing on comparable
transactions with unrelated parties, and do not involve more than the normal
risk of collectibility.
Activity in loans to, or guaranteed by, directors and executive offices and
their related businesses at December 31, are summarized as follows:
(Dollars in thousands) 2000 1999
- ------------------------------------------------------
Balance at beginning of year $ 562 $ 280
Loan advances and renewals 1,777 328
Loans matured or collected (96) (8)
Other changes (17) (38)
------- -----
Balance at end of year $ 2,226 $ 562
======= =====
Other changes in 2000 and 1999 represent loans to former directors and executive
officers of the Company who are no longer related parties.
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31:
(Dollars in thousands) 2000 1999
- ----------------------------------------------------
Land $ 1,349 $ 1,349
Buildings 8,544 8,339
Leasehold improvements 1,605 1,176
Furniture and equipment 11,863 10,693
-------- --------
Subtotal 23,361 21,557
Less accumulated depreciation
and amortization 10,340 8,394
-------- --------
Premises and equipment,
net $ 13,021 $ 13,163
======== ========
Included in the totals above is construction in progress of $207,000 and
$154,000 at December 31, 2000 and 1999 respectively. Depreciation expense
totaled $1,946,000, $1,741,000 and $1,716,000 in 2000, 1999 and 1998.
NOTE 5. BORROWED FUNDS
At December 31, 2000 and 1999 the Company's borrowed funds consisted of the
following:
(Dollars in thousands) 2000 1999
- -------------------------------------------------
Treasury tax loan, dated
December 31, 2000;
variable rate of 6.25%;
rate reprices monthly
based on the federal
funds rate; payable on
January 5, 2001 $ 4,672 $ 5,000
FHLB loan, dated
February 11, 2000;
variable rate of 6.65%;
rate reprices monthly
based on the 1 month
LIBOR; payable
February 12, 2001 3,000 -
FHLB loan, dated
February 11, 2000; fixed
rate of 6.73%; payable
on February 11, 2005;
fixed rate of 5.75% as
of December 31, 1999 1,000 5,000
32
(Dollars in thousands) 2000 1999
- -------------------------------------------------
FHLB loan, dated
February 11, 2000; fixed
rate of 6.36%; payable
on February 11, 2005;
fixed rate of 5.75% as
of December 31, 1999 1,000 5,000
FHLB loan, dated
February 16, 2000;
variable rate of 6.62%;
rate reprices monthly
based on the 1 month
LIBOR; payable on
February 16, 2001 5,600 2,600
FHLB loan, dated
February 16, 2000; fixed
rate of 6.48%; payable
on February 16, 2005 1,000 -
FHLB loan, dated
February 16, 2000; fixed
rate of 6.83%; payable
on February 16, 2005 1,000 -
FHLB loan, dated
March 20, 2000; fixed
rate of 6.55%; payable
on March 21, 2005 2,000 -
Long-term mortgage note
from unaffiliated bank
dated December 11,
1997; fixed rate of
7.80%; principal and
interest payable monthly
at $15,017; payments
calculated as fully
amortizing over 15 years
with a 10 year call 3,155 3,214
-------- --------
Total borrowed funds $ 22,427 $ 20,814
======== ========
The Company maintains a secured line of credit with the Federal Home Loan Bank
of San Francisco (FHLB). Based on the FHLB stock requirements at December 31,
2000, this line provided for maximum borrowings of $49,608,000 of which
$14,600,000 was outstanding, leaving $35,008,000 available. At December 31, 2000
this borrowing line is collateralized by securities with a market value of
$52,219,000. At December 31, 1999, the line of credit collateralized by
securities totaled $52,392,000 of which $12,600,000 was outstanding. Interest
expense related to FHLB borrowings totaled $951,000, $375,000, and $906,000 in
2000, 1999, and 1998. The Company had additional unused, lines of credit secured
my mortgage notes of $7,000,000 at December 31, 2000 and 1999. In addition, the
Company had an unused, unsecured line of credit of $2,000,000 as of
December 31, 2000.
The Company incurred interest expense of $249,000, $273,000, and $260,000 in
2000, 1999, and 1998, related to the notes with unaffiliated banks. The
long-term note dated December 11, 1997 is secured by Company land and buildings.
Interest expense related to federal funds purchased was $16,000, $80,000, and
$2,000 in 2000, 1999 and 1998. Compensating balance arrangements are not
significant to the operations of the Company.
Principal payments required to service the Company's borrowings during the next
five years are:
(Dollars in thousands)
- ------------------------------------------------
2001 $ 13,327
2002 61
2003 66
2004 71
2005 6,077
Thereafter 2,825
--------
Total borrowed funds $ 22,427
========
NOTE 6. REAL ESTATE OPERATIONS
As of December 31, 2000, MAID had no real estate holdings. During 2000, the last
remaining real estate parcel held by MAID was sold.
33
Summarized below is condensed financial information of MAID:
CONDENSED BALANCE SHEETS DECEMBER 31,
(Dollars in thousands) 2000 1999
- ---------------------------------------------------
ASSETS:
Cash on deposit with County
Bank $ 51 $ 114
Notes receivable and other
assets - 28
---- -----
Total assets $ 51 $ 142
==== =====
LIABILITIES AND SHAREHOLDER'S
EQUITY:
Accounts payable and other $ 50 $ 27
Shareholder's equity 1 115
---- -----
Total liabilities and
shareholder's equity $ 51 $ 142
==== =====
CONDENSED STATEMENT OF YEARS ENDED
OPERATIONS DECEMBER 31,
(Dollars in thousands) 2000 1999 1998
- --------------------------------------------------------
Revenues $ 381 $ 10 $ 354
Expenses 15 66 22
----- ----- -----
Income before income
taxes $ 366 $ (56) $ 332
===== ===== =====
NOTE 7. INCOME TAXES
The provision for income taxes for the years ended December 31 is comprised of
the following:
(Dollars in thousands) Federal State Total
- -------------------------------------
2000
Current $ 2,612 $ 554 $ 3,166
Deferred (597) 192 (405)
------- ----- --------
$ 2,015 $ 746 $ 2,761
======= ===== ========
- --------------------------------------------------------
1999
Current $ 2,248 $ 946 $ 3,194
Deferred (772) (318) (1,090)
------- ----- --------
$ 1,476 $ 628 $ 2,104
======= ===== ========
- --------------------------------------------------------
1998
Current $ 567 $ 53 $ 620
Deferred 223 87 310
------- ----- --------
$ 790 $ 140 $ 930
======= ===== ========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2000 and
1999 consists of the following:
(Dollars in Thousands) 2000 1999
- -------------------------------------------------
DEFERRED TAX ASSETS:
Real estate subsidiary $ - $ 939
Allowance for loan
losses 2,675 1,788
Deferred compensation 612 362
Intangible amortization 301 -
Nonaccrual interest 92 125
State franchise taxes 99 -
Tax Credits - 253
Investment securities
unrealized loss - 1,739
Other 70 430
------- -------
Total gross deferred
tax assets 3,849 5,636
Less valuation allowance (20) (20)
------- -------
Deferred tax assets $ 3,829 $ 5,616
======= =======
DEFERRED TAX LIABILITIES:
Fixed assets $ 125 $ 358
State franchise taxes - 286
Investment securities
unrealized gain 55 -
Investment in
partnerships 116 26
Other 82 106
------- -------
Total gross deferred
tax liabilities 378 776
------- -------
Net deferred tax
assets $ 3,451 $ 4,840
======= =======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31, 2000 and
1999.
34
A reconciliation of the provision for income taxes to the statutory federal
income tax rate follows:
(Dollars in thousands) 2000 1999 1998
- -------------------------------------------------------
Statutory (34%) federal
income tax rate due $ 3,218 $ 2,452 $ 1,248
State franchise tax,
net of federal income
tax benefit 504 516 263
Tax exempt interest
income, net (390) (413) (239)
Housing tax credits (550) (375) (426)
Intangible amortization 43 43 33
Cash surrender value
life insurance (106) (98) (69)
Other 42 (21) 120
------- ------- -------
Provision for income
taxes $ 2,761 $ 2,104 $ 930
======= ======= =======
NOTE 8. REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
initiate mandatory and possibly, additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weighting and other factors.
First, a bank must meet a minimum Tier I (as defined in the regulations) capital
ratio ranging from 3% to 5% based upon the bank's CAMEL ("capital adequacy,
asset quality, management, earnings and liquidity") rating.
Second, a bank must meet minimum total risk based capital to risk weighted
assets ratio of 8%. Risk based capital and asset guidelines vary from Tier I
capital guidelines by redefining the components of capital, categorizing assets
into different risk classes, and including certain off-balance sheet items in
the calculation of the capital ratio. The effect of the risk based capital
guidelines is that banks with high exposure will be required to raise additional
capital while institutions with low risk exposure could, with the concurrence of
regulatory authorities, be permitted to operate with lower capital ratios. In
addition, a bank must meet minimum Tier I capital to average assets ratio of 4%.
Management believes, as of December 31, 2000 that the Company and the Bank meet
all capital adequacy requirements to which they are subject, including the ratio
test for a well capitalized bank under the regulatory framework for prompt
corrective action. The most recent notification from the FRB categorized the
Company and the Bank as well capitalized under the FDICIA regulatory framework
for prompt corrective action. Subsequent to this notification, there are no
conditions or events that management believes have changed the risk based
capital category of the Company and the Bank. To be categorized as well
capitalized, the Bank must meet minimum ratios.
The Company has no formal dividend policy, and dividends are issued solely at
the discretion of the Company's Board of Directors subject to compliance with
regulatory requirements. In order to pay any cash dividends, the Company must
receive payments of dividends from the Bank. There are certain regulatory
limitations on the payment of cash dividends by banks.
35
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
following table).
The Company's and Bank's actual capital amounts and ratios as of December 31,
2000 are as follows:
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
(DOLLARS IN THOUSANDS) ACTUAL PURPOSES PROVISIONS
- -----------------------------------------------------------------------------------------------------------------
THE COMPANY: Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------
Total capital (to risk weighted assets) $ 55,462 10.92% $ 40,640 8.0% $ 50,800 10.0%
Tier I capital (to risk weighted assets) 49,089 9.66 20,320 4.0 30,480 6.0
Leverage ratio(1) 49,089 7.56 25,973 4.0 32,467 5.0
- -----------------------------------------------------------------------------------------------------------------
THE BANK:
- -----------------------------------------------------------------------------------------------------------------
Total capital (to risk weighted assets) 52,701 10.57 39,902 8.0 49,878 10.0
Tier I capital (to risk weighted assets) 46,442 9.31 19,951 4.0 29,927 6.0
Leverage ratio(1) $ 46,442 7.21% $ 25,759 4.0% $ 32,192 5.0%
(1) THE LEVERAGE RATIO CONSISTS OF TIER I CAPITAL DIVIDED BY QUARTERLY AVERAGE
ASSETS. THE MINIMUM LEVERAGE RATIO IS 3 PERCENT FOR BANKING ORGANIZATIONS
THAT DO NOT ANTICIPATE SIGNIFICANT GROWTH AND THAT HAVE WELL-DIVERSIFIED
RISK, EXCELLENT ASSET QUALITY AND IN GENERAL, ARE CONSIDERED TOP-RATED
BANKS.
The Company's and Bank's actual capital amounts and ratios as of December 31,
1999 are as follows:
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective
(Dollars in thousands) Actual Purposes Action Provisions
- -----------------------------------------------------------------------------------------------------------------
THE COMPANY: Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------
Total capital (to risk weighted assets) $ 46,448 11.24% $ 33,058 8.0% $ 41,322 10.0%
Tier I capital (to risk weighted assets) 41,266 9.99 16,529 4.0 24,793 6.0
Leverage ratio(1) 41,266 7.50 21,999 4.0 27,498 5.0
- -----------------------------------------------------------------------------------------------------------------
THE BANK:
- -----------------------------------------------------------------------------------------------------------------
Total capital (to risk weighted assets) 43,714 10.73 32,605 8.0 40,756 10.0
Tier I capital (to risk weighted assets) 38,602 9.47 16,302 4.0 24,453 6.0
Leverage ratio(1) $ 38,602 7.09% $ 21,785 4.0% $ 27,231 5.0%
(1) THE LEVERAGE RATIO CONSISTS OF TIER I CAPITAL DIVIDED BY QUARTERLY AVERAGE
ASSETS. THE MINIMUM LEVERAGE RATIO IS 3 PERCENT FOR BANKING ORGANIZATIONS
THAT DO NOT ANTICIPATE SIGNIFICANT GROWTH AND THAT HAVE WELL-DIVERSIFIED
RISK, EXCELLENT ASSET QUALITY AND IN GENERAL, ARE CONSIDERED TOP-RATED
BANKS.
36
NOTE 9. COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK
At December 31, 2000, the Company has operating lease rental commitments for
remaining terms of one to ten years. The Company has options to renew one of its
leases for a period of 15 years. The minimum future commitments under
noncancelable lease agreements having terms in excess of one year at December
31, 2000 are as follows:
(Dollars in thousands)
- ------------------------------------------------
2001 $ 610
2002 609
2003 581
2004 507
2005 464
Thereafter 1,499
-------
Total minimum lease payments $ 4,270
=======
Rent expense was approximately $598,000, $477,000, and $619,000 for the years
ended December 31, 2000, 1999 and 1998.
In the ordinary course of business, the Company enters into various types of
transactions which involve financial instruments with off-balance sheet risk.
These instruments include commitments to extend credit and standby letters of
credit and are not reflected in the accompanying balance sheet. These
transactions may involve, to varying degrees, credit and interest risk in excess
of the amount, if any, recognized in the balance sheet.
The Company's off-balance sheet credit risk exposure is the contractual amount
of commitments to extend credit and standby letters of credit. The Company
applies the same credit standards to these contracts as it uses in its lending
process. Additionally, commitments to extend credit and standby letters of
credit bear similar credit risk characteristics as outstanding loans.
Financial instruments whose contractual amount represents risk:
AS OF DECEMBER 31
---------------------
(Dollars in thousands) 2000 1999
- -------------------------------------------------
Commitments to extend
credit $ 144,480 $ 101,847
Standby letters of
credit 1,320 2,674
Commitments to extend credit are agreements to lend to customers. These
commitments have specified interest rates and generally have fixed expiration
dates, but may be terminated by the Company if certain conditions of the
contract are violated. Although currently subject to drawdown, many of these
commitments are expected to expire or terminate without funding. Therefore, the
total commitment amounts do not necessarily represent future cash requirements.
Collateral held relating to these commitments varies, but may include
securities, equipment, inventory and real estate.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of the customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Collateral held for standby letters
of credit is based on an individual evaluation of each customer's credit
worthiness, but may include cash, equipment, inventory and securities.
The Company because of the nature of its business, is subject to various
threatened or filed legal cases. The Company, based on the advice of legal
counsel, does not expect such cases will have a material, adverse effect on its
financial position or results of operations.
NOTE 10. TIME DEPOSITS
At December 31, 2000 the aggregate maturities for time deposits are as follows:
(Dollars in thousands)
- ------------------------------------------------
2001 $195,110
2002 25,358
2003 3,802
2004 30
2005 775
Thereafter 248
NOTE 11. CONCENTRATIONS OF CREDIT RISK
The Bank's business activity is with customers located primarily in the counties
of Fresno, Madera, Mariposa, Merced, Stanislaus, Tulare and Tuolumne. The Bank
is diversified into retail and wholesale lending. Retail lending represents
approximately 30% of the total loan portfolio and consists of consumer lending,
loans to small
37
businesses, credit cards and the purchase of financing contracts principally
from automobile dealers. Individual loans and lines are made in a variety of
ways. In many cases collateral such as real estate, automobiles and equipment
are used to support the extension of credit. Repayment, however, is largely
dependent upon the borrower's personal cash flow.
Loans to businesses and agricultural communities make up nearly 80% of the
Bank's loan portfolio. Wholesale activities are spread across a wide spectrum
including commercial loans to businesses, construction and permanent real estate
financing, short and long term agricultural loans for production and real estate
purposes and SBA financing. Where appropriate, collateral is taken to secure and
reduce the Bank's credit risk. Each loan is submitted to an individual risk
grading process but the borrowers' ability to repay is dependent, in part, upon
factors affecting the local and national economies.
NOTE 12. EMPLOYEE AND DIRECTOR BENEFIT PLANS
The Company has a noncontributory employee stock ownership plan ("ESOP") and an
employee savings plan covering substantially all employees. During 2000, 1999,
and 1998, the Company contributed approximately $288,000, $217,000, and
$193,000, to the ESOP and $95,000, $70,000, and $70,000, to the employee savings
plan.
Under provisions of the ESOP, the Company can make discretionary contributions
to be allocated based on eligible individual annual compensation, as approved by
the Board of Directors. Contributions to the ESOP are recognized as compensation
expense. For the years December 31, 2000, 1999, and 1998, the ESOP owned
164,800, 154,305, and 130,441 shares of the Company's stock. ESOP shares are
included in the weighted average number of shares outstanding for earnings per
share computations.
The employee savings plan allowed participating employees to contribute up to
$10,500 each in 2000. The Company matched 25% of the employees' elective
contribution, as defined, not to exceed 10% of eligible annual compensation.
The Company maintains a non-qualified salary continuation plan for certain
senior executive officers of the Company and the Bank. Under the plan, the
Company has agreed to pay these executives retirement benefits for a ten to
fifteen year period after their retirement so long as they meet certain length
of service vesting requirements. The plan is informally linked to several single
premium universal life insurance policies that provide life insurance on certain
senior executive officers with the Company named as the owner and beneficiary of
these policies. Salary continuation expense totaled $595,000, $341,000 and
$244,000 in 2000, 1999 and 1998.
The Company also maintains a non-qualified deferred compensation plan for
members of the board of directors of the Company and the Bank. Under the
deferred compensation plan, members of the board of directors have the ability
to defer compensation they receive as directors until they reach retirement age,
so long as they meet certain length of service vesting requirements. Upon
reaching retirement age, the Company has agreed to pay these directors
retirement benefits over a ten year period. The plan is informally linked to
several single premium universal life insurance policies that provide life
insurance on certain directors with the Company named as the owner and
beneficiary of these policies. Deferred compensation expense totaled $63,000,
$58,000 and $60,000 in 2000, 1999 and 1998.
NOTE 13. STOCK OPTION PLAN
In 1992, shareholders approved the adoption of an incentive stock option plan
for bank management and a nonstatutory stock option plan for directors. The
maximum number of shares issuable under the plans was 126,000. Options are
available for grant under the plans at prices that approximate fair market value
at the date of grant. Options granted under both plans become exercisable 25% at
the time of grant and 25% each year thereafter and expire 10 years from the date
of grant. In 1995, shareholders approved an amendment to the stock option plans
increasing the number of authorized but unissued shares available for future
grant of the Company's common stock to 450,000.
38
A summary of the status of the Company's stock options as of and for the years
ended December 31, 2000, 1999, and 1998, and changes during the years ended on
those dates, follows:
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 351,573 $ 7.59 325,806 $ 7.25 297,370 $ 6.65
Granted 64,500 10.43 68,000 10.45 39,000 13.56
Exercised (49,068) 9.82 (26,609) 8.09 (11,402) 7.51
Forfeited (3,407) 11.84 (15,624) 12.09 (14,620) 10.96
Stock dividend
declared - - 15,458 6.65
------- ------- -------
Outstanding at end of
year 363,598 $ 8.40 351,573 $ 7.59 325,806 $ 7.25
======= ======= =======
Options exercisable
at end of year 274,717 $ 7.67 276,170 $ 6.58 267,395 $ 6.16
The following table summarizes information about options outstanding at December
31, 2000:
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
- --------------------------------------------------------------------------------------------------------
Range of Number Weighted Weighted Weighted
Exercise Of Shares Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------------
$ 3 - 6 141,053 1.40 Years $ 4.46 141,053 $ 4.46
6 - 9 35,741 6.07 7.88 27,116 7.60
9 - 16 186,804 8.08 11.49 106,298 11.94
------- -------
$ 3 - 16 363,598 5.46 Years $ 8.40 274,467 $ 7.67
======= =======
39
The number of shares and exercise price per share has been adjusted for stock
dividends and stock splits during the period.
The per share weighted average fair value of stock options granted during 2000,
1999 and 1998 was $3.45, $4.01, and $5.20 on the date of grant using the Black
Scholes option pricing model with the following weighted average assumptions:
2000-1998 expected dividend yield 0%; 2000-1998 expected volatility of 26
percent, risk free interest rate of 5.05%, 6.41%, and 4.64%; and, an expected
life of 7 years.
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock options in
the accompanying consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company's net income would have been reduced to the proforma amounts indicated
as follows:
(Dollars in
thousands) 2000 1999 1998
- -----------------------------------------------------
Net income
As reported...... $ 6,706 $ 5,109 $ 2,741
Proforma......... 6,592 5,018 2,504
BASIC EARNINGS PER
SHARE
As reported...... 1.48 1.12 0.60
Proforma......... 1.45 1.10 0.54
DILUTED EARNINGS PER
SHARE
As reported...... 1.44 1.09 0.58
Proforma......... 1.41 1.07 0.52
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company in estimating its fair value disclosures for financial
instruments used the following methods and assumptions:
FINANCIAL ASSETS:
CASH AND CASH EQUIVALENTS: For these assets, the carrying amount is a
reasonable estimate for fair value.
INVESTMENTS: Fair values for available for sale and held to maturity investment
securities are based on quoted market prices where available. If quoted market
prices were not available, fair values were based upon quoted market prices of
comparable instruments.
NET LOANS: The fair value of loans is estimated by utilizing discounted future
cash flow calculations using the interest rates currently being offered for
similar loans to borrowers with similar credit risks and for the remaining or
estimated maturities considering prepayments. The carrying value of loans is net
of the allowance for loan losses and unearned loan fees.
FINANCIAL LIABILITIES:
DEPOSITS: The fair values disclosed for deposits generally paid upon demand
(i.e. noninterest bearing and interest-bearing demand) savings and money market
accounts are considered equal to their respective carrying amounts as reported
on the consolidated balance sheets. The fair value of fixed rate certificates of
deposit is estimated using the rates currently offered for deposits of similar
remaining maturities.
BORROWINGS: For these instruments, the fair value is estimated using rates
currently available for similar loans with similar credit risk and for the
remaining maturities.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: The Company has not
estimated the fair value of commitments to extend credit and standby letters of
credit. Because of the uncertainty in attempting to assess the likelihood and
timing of a commitment being drawn upon, coupled with the lack of an established
market for these financial instruments, the Company does not believe it is
meaningful or practicable to provide an estimate of fair value.
(Dollars in thousands)
Carrying
2000 Amount Fair Value
- -------------------------------------------------
FINANCIAL ASSETS:
Cash and cash
equivalents.......... $ 47,768 $ 47,768
Time deposits at other
Financial
institutions... 100 100
Available for sale
investment
securities........... 155,830 155,830
40
(Dollars in thousands)
Carrying
2000 Amount Fair Value
- -------------------------------------------------
Held to maturity
investment
securities........... 35,222 35,412
Net loans.............. 404,457 398,059
FINANCIAL LIABILITIES
Noninterest bearing
demand............... 107,581 107,581
Interest bearing
demand............... 84,521 84,521
Savings and money
market............... 184,073 184,073
Time deposits.......... 225,323 225,838
Borrowings............. $ 22,427 $ 22,888
(Dollars in thousands)
Carrying
1999 Amount Fair Value
- -------------------------------------------------
FINANCIAL ASSETS:
Cash and cash
equivalents.......... $ 50,222 $ 50,222
Time deposits at other
financial
institutions......... 850 850
Available for sale
investment
securities........... 117,814 117,814
Held to maturity
investment
securities........... 29,554 28,675
Net loans.............. 324,726 323,851
FINANCIAL LIABILITIES
Noninterest bearing
demand............... 87,564 87,564
Interest bearing
demand............... 72,788 72,788
Savings and money
market............... 164,158 164,158
Time deposits.......... 170,391 170,680
Borrowings............. $ 20,814 $ 20,704
NOTE 15. RECONCILIATION OF BASIC AND DILUTED NET EARNINGS PER SHARE
(Dollars in YEAR ENDED DECEMBER 31,
thousands 2000
except per share -------------------------------
amounts) Income Shares Per-Share
- ------------------------------------------------------
Basic EPS
Income available to
common
shareholders....... $ 6,706 4,529 $ 1.48
======
Effect of dilutive
securities:
Stock options........ - 131
------- ------
(Dollars in YEAR ENDED DECEMBER 31,
thousands 2000
except per share -------------------------------
amounts) Income Shares Per-Share
- ------------------------------------------------------
Diluted EPS
Income available to
common shareholders
plus assumed
conversions........ $ 6,706 4,660 $ 1.44
======= ====== ======
(Dollars in YEAR ENDED DECEMBER 31,
thousands except 1999
per share -------------------------------
amounts) Income Shares Per-Share
- ------------------------------------------------------
Basic EPS
Income available to
common
shareholders....... $ 5,109 4,562 $ 1.12
======
Effect of dilutive
securities:
Stock options........ - 128
------- ------
Diluted EPS
Income available to
common shareholders
plus assumed
conversions........ $ 5,109 4,690 $ 1.09
======= ====== ======
(Dollars in YEAR ENDED DECEMBER 31,
thousands except 1998
per share -------------------------------
amounts) Income Shares Per-Share
- ------------------------------------------------------
Basic EPS
Income available to
common
shareholders....... $ 2,741 4,602 $ 0.60
======
Effect of dilutive
securities:
Stock options........ - 123
------- ------
Diluted EPS
Income available to
common shareholders
plus assumed
conversions........ $ 2,741 4,725 $ 0.58
======= ====== ======
41
NOTE 16. PARENT COMPANY ONLY FINANCIAL INFORMATION
This information should be read in conjunction with the other notes to the
consolidated financial statements. The following are the condensed balance
sheets of the Company as of December 31, 2000 and 1999 and the condensed
statements of income and cash flows for the years ended December 31, 2000, 1999
and 1998:
CONDENSED BALANCE SHEETS
DECEMBER 31,
---------------------
(Dollars in thousands) 2000 1999
- -------------------------------------------------
ASSETS
Cash and short-term
investments............. $ 960 $ 654
Investment in County
Bank.................... 50,765 40,960
Net premises and
equipment............... 5,931 6,101
Other assets.............. 918 345
-------- --------
Total assets.......... $ 58,574 $ 48,060
======== ========
LIABILITIES AND
SHAREHOLDER'S EQUITY
LIABILITIES
Borrowed funds............ $ 3,155 $ 3,214
Capitalized lease......... 931 800
Other liabilities......... 1,037 369
-------- --------
Total liabilities..... 5,123 4,383
SHAREHOLDERS' EQUITY
Common stock.......... 35,918 35,593
Accumulated other
comprehensive (loss)
income.............. 84 (2,659
Retained earnings..... 17,449 10,743
-------- --------
Total
shareholders'
equity.......... 53,451 43,677
-------- --------
Total liabilities and
shareholders' equity.... $ 58,574 $ 48,060
======== ========
42
Condensed statements of income Year Ended December 31,
- --------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries $ - $ 1,243 $ -
Interest 1 19 102
Lease income 502 502 503
Management fees from subsidiaries 4,918 2,101 2,299
------- ------- -------
Total income 5,421 3,865 2,904
EXPENSES
Interest on borrowings 282 273 274
Capitalized lease interest 80 71 42
Salaries and related benefits 2,975 2,340 1,299
Other noninterest expense 2,650 1,820 1,469
------- ------- -------
Total other expenses 5,987 4,504 3,084
Loss before taxes and equity in undistributed earnings (566) (639) (180)
Income tax benefit 211 219 72
Equity in undistributed income of subsidiaries 7,061 5,529 2,849
------- ------- -------
Net income $ 6,706 $ 5,109 $ 2,741
======= ======= =======
December 31,
- --------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 6,706 $ 5,109 $ 2,741
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries (7,061) (5,529) (2,849)
Decrease in other assets 56 379 446
Increase (decrease) in other liabilities 668 171 (312)
Net cash provided by operating activities 369 130 26
INVESTING ACTIVITIES:
Capital contribution to subsidiary bank - - (600)
Purchase of premises and equipment (459) (278) (1,366)
Dividends from subsidiaries - 1,243 -
-------- ------- --------
Net cash (used in) provided by investing activities (459) 965 (1,966)
FINANCING ACTIVITIES:
Net increase (decrease) in other borrowings 71 (262) 690
Issuance of common stock related to exercise of stock
options and employee benefit plans 325 219 (12)
Repurchase of common stock - (1,768) -
Cash dividends and fractional shares - - (6)
-------- ------- --------
Net cash provided by (used in) financing activities 396 (1,811) 672
Increase (decrease) in cash and cash equivalents 306 (716) (1,268)
Cash and cash equivalents at beginning of year 654 1,370 2,638
-------- ------- --------
Cash and cash equivalents at end of year $ 960 $ 654 $ 1,370
======== ======= ========
43
NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
2000 Quarter Ended
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands) Dec 31 Sept 30 June 30 Mar 31
- -------------------------------------------------------------------------------------------------------
Interest income $ 13,995 $ 13,299 $ 12,361 $ 11,233
Interest expense 5,831 5,592 5,041 4,304
Net interest income 8,164 7,707 7,320 6,929
Provision for loan losses 963 792 768 763
Other income 1,276 1,340 1,644 1,147
Other expenses 6,088 5,888 5,655 5,143
Income before income taxes 2,389 2,367 2,541 2,170
Income taxes 643 721 741 656
Net income $ 1,746 $ 1,646 $ 1,800 $ 1,514
- -------------------------------------------------------------------------------------------------------
Basic earnings per share (1) $ .38 $ .36 $ .40 $ .34
- -------------------------------------------------------------------------------------------------------
Diluted earnings per share (1) $ .37 $ .35 $ .39 $ .33
- -------------------------------------------------------------------------------------------------------
1999 Quarter Ended
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands) Dec 31 Sept 30 Mar 31 June 30
- -------------------------------------------------------------------------------------------------------
Interest income $ 10,874 $ 10,106 $ 9,438 $ 8,943
Interest expense 4,008 3,558 3,268 3,206
Net interest income 6,866 6,548 6,170 5,737
Provision for loan losses 887 672 593 507
Other income 1,162 1,207 1,224 1,379
Other expenses 5,183 5,295 5,147 4,796
Income before income taxes 1,958 1,788 1,654 1,813
Income taxes 501 492 449 662
Net income $ 1,457 $ 1,296 $ 1,205 $ 1,151
- -------------------------------------------------------------------------------------------------------
Basic earnings per share (1) $ .32 $ .28 $ .26 $ .25
- -------------------------------------------------------------------------------------------------------
Diluted earnings per share (1) $ .32 $ .28 $ .25 $ .24
(1) BASIC AND DILUTED EARNINGS PER SHARE CALCULATIONS ARE BASED UPON THE
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING DURING EACH PERIOD. FULL YEAR
WEIGHTED AVERAGE SHARES DIFFER FROM QUARTERLY WEIGHTED AVERAGE SHARES AND,
THEREFORE, ANNUAL EARNINGS PER SHARE MAY NOT EQUAL THE SUM OF THE QUARTERS.
44