U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Period Ended March 31, 1996
Commission File Number: 0-27384
________________________________________________________________________________
CAPITAL CORP OF THE WEST
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0405791
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1160 WEST OLIVE AVENUE, SUITE A MERCED, CALIFORNIA 95348-1952
(Address of principal executive offices) (Zip Code)
(209) 725-2200
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
The Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Bank was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
X Yes ___ No
The number of shares outstanding of the Registrant's common stock, no par value,
as of March 31, 1996 was 1,335,831. No shares of preferred stock, no par
value, were outstanding at March 31, 1996.
CAPITAL CORP OF THE WEST
Table of Contents
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II--OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
Exhibit 2.1 13
Exhibit 2.2 15
CAPITAL CORP OF THE WEST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
3/31/96 12/31/95
---------- ----------
(IN THOUSANDS)
ASSETS
Cash & noninterest-bearing deposits in other banks $18,784 $18,967
Federal funds sold - -
Investment securities available for sale at market 44,199 45,302
Mortgage loans held for sale 2,315 501
Loans, net of allowance for
loan losses of $1,860,000
at March 31, 1996 136,483 132,035
and $1,701,000 at December 31, 1995
Interest receivable 1,830 1,860
Bank premises and equipment, net 4,333 4,138
Other assets 6,568 6,230
---------- ----------
Total Assets $214,512 $209,033
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $34,979 $39,726
Negotiable orders of withdrawal 27,388 29,019
Savings 101,220 95,537
Time, under $100,000 23,969 21,917
Time, $100,000 and over 6,943 6,402
---------- ----------
Total Deposits 194,499 192,601
Accrued interest, taxes and other liabilities 4,770 1,339
---------- ----------
Total Liabilities 199,269 193,940
Common stock, no par value
2,500,000 shares authorized;
1,335,831 issued & outstanding at March 31, 1996 9,880 9,870
and 1,334,956 issued & outstanding at December
31, 1995
Investment securities unrealized gains/(losses), net (50) 312
Retained earnings 5,413 4,911
---------- ----------
Total Shareholders' Equity 15,243 15,093
---------- ----------
Total Liabilities and Shareholders' Equity $214,512 $209,033
---------- ----------
---------- ----------
See accompanying notes.
2
CAPITAL CORP OF THE WEST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
3/31/96 3/31/95
---------- ----------
(In Thousands Except For Per Share Data)
INTEREST INCOME
Interest and fees on loans $3,419 $2,988
Interest on investment securities
Taxable 716 465
Non-taxable 59 97
Interest on federal funds sold 56 86
---------- ----------
Total Interest Income 4,250 3,636
Interest Expense
Deposits
Negotiable orders of withdrawal 64 60
Savings 1,036 1,049
Time, under $100,000 306 202
Time, $100,000 and over 94 48
Other 12 1
---------- ----------
Total Interest Expense 1,512 1,360
Net Interest Income 2,738 2,276
Provision for loan losses 160 39
---------- ----------
Net interest income after provision for loan losses 2,578 2,237
Other Income
Service charges on deposit accounts 474 215
Income from real estate held for sale or development 85 10
Other 12 130
---------- ----------
Total Other Income 571 355
Other Expenses
Salaries and related benefits 1,186 972
Bank premises and occupancy 157 136
Equipment 232 166
Bank assessments 10 95
Professional fees 178 71
Marketing 90 71
Other 500 383
---------- ----------
Total Other Expenses 2,353 1,894
Income before income taxes 796 698
Provision for income taxes 295 277
---------- ----------
Net Income 501 421
---------- ----------
---------- ----------
Net Income Per Share $0.38 $0.32
---------- ----------
---------- ----------
See accompanying notes
3
CAPITAL CORP OF THE WEST
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
3 MONTHS ENDED 3 MONTHS ENDED
3/31/95 3/31/95
-------------- --------------
(IN THOUSANDS)
Operating activities
Net income $ 501 $ 421
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses 160 39
Depreciation, amortization and accretion, net 368 112
Provision for deferred income taxes - 317
Net decrease in accrued interest receivable & other assets 71 234
Net (increase) in mortgage loans held for sale (1,814) (1,874)
Net increase in deferred loan fees 61 21
Net increase (decrease) in accrued interest pay. & other liab. 3,431 (92)
Provision for loss on real estate held for sale or development - 50
Net (gains) on sale of assets (80) (65)
-------------- --------------
Net cash provided/(used) by operating activities 2,698 (837)
Investing activities
Investment security purchases (7,699) (4,847)
Proceeds from maturities of investment securities 2,000 2,571
Proceeds from sales of investment securities 6,242 -
Proceeds from sales of commercial and real estate loans 591 1,145
Net (increase) in loans (5,185) (1,303)
Purchases of bank premises and equipment (369) (406)
Purchases from sale of real estate held for sale or development (369) (62)
Proceeds from sale of real estate held for sale or development - 196
--------------- --------------
Net cash (used) by investing activities (4,789) (2,706)
Financing activities
Net increase (decrease) in demand, now and savings deposits (695) 8,419
Net increase (decrease) in certificates of deposit 2,593 (1,333)
Exercise of stock options 11 -
-------------- --------------
Net cash provided by financing activities 1,909 7,086
Net (decrease) increase in cash and cash equivalents (183) 3,543
Cash and cash equivalents at beginning of year 18,967 16,490
-------------- --------------
Cash and cash equivalents at end of quarter $ 18,784 $ 20,033
-------------- --------------
-------------- --------------
Supplemental Disclosure of noncash investing
and financing activities:
Investment securities unrealized losses 362 266
See accompanying notes
4
PART 1--FINANCIAL INFORMATION (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
March 31, 1996, December 31, 1995 AND March 31, 1995
(UNAUDITED)
GENERAL-COMPANY
Capital Corp of the West (the "Company") is a bank holding company which was
organized as a corporation under the laws of the State of California on April
26, 1995. On November 1, 1995 the Company became a federally chartered bank
holding company and the holder of all of the capital stock of County Bank (the
"Bank"). The Company's primary asset is the Bank and the Bank is the Company's
primary source of income. The Company's securities consist of one class of
Common Stock, no par value and one class of Preferred Stock. As of February
29, 1996 there were 1,335,831 common shares outstanding, held of record by
approximately 1,200 shareholders. There were no preferred shares outstanding
at March 31, 1996. In April 1996 the Company formed Capital West Group, a new
subsidiary that intends to engage in the financial institutions advisory
business, subject to Regulatory approval. The Bank has one wholly owned
subsidiary, Merced Area Investment & Development, Inc. ("MAID"). All
references herein to the "Company" include the Bank and the Bank's
subsidiary, unless the context otherwise requires.
ACQUISITION
In March 1996, the Company entered into an agreement for the acquisition of
Town & Country Finance and Thrift Company (the "Thrift"). As of the date of
this report, no assurances can be given that the Company will receive the
required regulatory and shareholder approvals for the acquisition.
GENERAL-BANK
The Bank was organized on August 1, 1977, as County Bank of Merced, a California
state banking corporation. The Bank commenced operations on December 22, 1977.
In November 1992, the Bank changed its legal name to County Bank. The Bank's
securities consist of one class of Common Stock, no par value and is wholly
owned by the Company. The Bank's deposits are insured under the Federal
Deposit Insurance Act, up to applicable limits stated therein. Like most state-
chartered banks of its size in California, it is not a member of the Federal
Reserve System.
BANK'S INDUSTRY & MARKET AREA
The Bank engages in general commercial banking business primarily in Merced,
Stanislaus and Tuolumne Counties from its main office, located at 490 West
Olive Avenue, Merced, California 95341; and full-service branch offices located
at 735 Bellevue Road, Atwater, California 95301; 606 West 19th Street, Merced,
California 95340; 953 West Pacheco Boulevard, Los Banos, California 93635; 8019
N. Lander Avenue, Hilmar, California 95365;2001 Geer Road, Turlock, California
95382; and the Crossroads Shopping Center, Sonora, California. The Bank has a
loan production office at 909 14th Street in Modesto, California. The Bank's
administrative headquarters are located at 1160 West Olive, Suite A, Merced,
California 95348, and its real estate department is located at 1170 West Olive,
Suite I, Merced, California 95348. The latter has also been approved to be a
full service branch banking office, although at present it is only being used
to serve real estate loan customers with construction financing and permanent
home mortgages. It also provides accommodations for the activities of Merced
Area Investment and Development ("MAID"), the Bank's wholly owned real estate
development subsidiary. Although approved to be a full service branch banking
office, the administrative headquarters facility is presently used solely as
the Company's corporate headquarters.
OTHER FINANCIAL NOTES
All adjustments, in the opinion of Management, which are necessary for a fair
presentation of the Company's financial position at March 31, 1996, and at
December 31, 1995 and the results of operations and statements of cash flows for
the three month periods ended March 31, 1996 and 1995, have been included.
These interim statements are not necessarily indicative of the results for a
full year.
5
The accompanying unaudited financial statements have been prepared on a basis
consistent with the generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X.
Per share information is based on weighted average number of shares of common
stock outstanding during each three month period after giving retroactive
effect for the 15% stock dividend in June, 1995. The weighted average number
of shares outstanding were 1,335,177 for the three month period ended March 31,
1996 and 1,333,869 for March 31, 1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW--For the three months ended March 31, 1996, consolidated net income
was $501,000 compared to $421,000 for the three month period ended March 31,
1995, a $80,000 (19%) increase. Earnings per share were $.38 and $.32,
respectively. The annualized return on average assets was .99% for the first
three months of 1996 as compared with .96% for the same three month period in
1995. The Company's annualized return on beginning equity was 13.3% and 12.1%,
respectively.
Total assets at March 31, 1996 were $214,512,000, an increase of $5,479,000 or
2.6% compared to December 31, 1995. Net loans were $138,798,000 at March 31,
1996, an increase of $6,763,000 or 5.1% and deposits were $194,499,000, an
increase of $1,898,000 or 1%. Total shareholders' equity grew to $15,243,000, a
1% increase from December 31, 1995.
LIQUIDITY--To maintain adequate liquidity requires that sufficient resources be
available at all times to meet cash flow requirements of the Bank. 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 bank may achieve desired liquidity
from both assets and liabilities. The Bank considers cash and deposits held in
other banks, federal funds sold, other short term investments, maturing loans
and investments, payments of principal and interest on loans and investments and
potential loan sales as sources of asset liquidity. Deposit growth, access to
credit lines established with correspondent banks and market sources of funds
are considered by the Bank as sources of liability liquidity.
The Bank reviews its liquidity position on a regular basis based upon its
current position and expected trends of loans and deposits. Management believes
that the Bank maintains adequate amounts of liquid assets to meet its liquidity
needs. These assets include cash and deposits in other banks, certain
investment securities and federal funds sold. The Bank's liquid assets totalled
$62,983,000 and $64,269,000 on March 31, 1996 and December 31, 1995,
respectively, and constituted 29.4% and 30.7%, respectively, of total assets on
those dates. In analyzing liquidity for the Bank, consideration is also taken
for the market value and pledging requirements of the Bank's investment
securities. As of March 31, 1996 and December 31, 1995, the Bank's investment
portfolio had market values of approximately $44,199,000 and $45,302,000,
respectively. Total pledged securities as of March 31, 1996 totalled
$19,328,000 as compared to $18,157,000 at December 31, 1995.
Although the Bank's primary sources of liquidity include liquid assets and a
stable deposit base, the Bank maintains lines of credit with certain
correspondent banks and Federal Reserve Bank aggregating $5,648,000 of which
$3,506,000 was outstanding as of March 31, 1996 and $107,000 was outstanding as
of December 31, 1995.
CAPITAL RESOURCES--Capital serves as a source of funds and helps protect
depositors against potential losses. The primary source of capital for the
Company has been internally generated capital through retained earnings. The
Company's shareholders' equity increased by $150,000 (1%) since December 31,
1995. This increase was the result of net income of $501,000 for the three
month period ended March 31, 1996 offset by a decrease of $362,000 in investment
securities unrealized gains, net of taxes. The Bank had unrealized losses, net
of taxes, in its securities classified as available-for-sale of $50,000 as of
March 31, 1996, compared to unrealized gains of $312,000 as of December 31,
1995.
Capital levels for the Bank continue to remain above established regulatory
capital requirements. The Bank is subject to FDIC guidelines governing capital
adequacy. Federal regulations
6
establish guidelines for calculating "risk-adjusted" capital ratios. These
guidelines establish a systematic approach of assigning risk weights to bank
assets and commitments making capital requirements more sensitive to
differences in risk profiles among banking organizations. Under these new
regulations, banks are required to maintain a risk-based capital ratio of 8.0%
by December 31, 1992 (with Tier One capital constituting at least 50% of total
qualifying capital). As of March 31, 1996 and December 31, 1995 the Bank had
risk-based capital ratios of 10.2% and 10.3% respectively (Tier One capital
ratios equaled 9.1% and 9.2%, respectively).
Additionally, in 1991 the Comptroller of the Currency, the Federal Reserve Board
and the FDIC adopted a new minimum leverage capital ratio standard which
replaced the existing primary capital standards. These requirements are
designed to ensure that all banks, irrespective of their risk profile, maintain
minimum levels of core capital which by definition excludes the allowance for
loan losses. These minimum standards for top rated banks may be as low as 3%,
however, the FDIC has stated that most banks should maintain ratios at least 1
to 2 percentage points above the 3% minimum. As of March 31, 1996 and December
31, 1995, the Bank's leverage capital ratio equalled 7.4% for both periods.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996--Net income for
the three month period ended March 31, 1996 totaled $501,000, a increase of
$80,000 (19%) over the same three month period in 1995. The increase in
earnings in 1996 resulted primarily from strong asset growth, an improvement in
the Bank's net interest income of $461,000 (20.2%) and improvements in fee
income of $167,000 (41.3%) offset by increased loan loss provisions of $121,000
and an increase in noninterest expenses of $439,000 (23.2%). The increase in
noninterest income is primarily the result of an increase in fees generated
from asset management of $43,000, and service charges of $67,000. The increase
in noninterest expense is primarily from a $214,000 increase in salary and
benefit costs and additional premises, occupancy and marketing costs of
$106,000. Many of the expense increases are the result of the addition of a
Loan Production Office (LPO) and two full service branch offices in late 1995
and early 1996. On average, full time equivalent employees increased by 12
(11%) for the three months ended March 31, 1996 as compared with the same three
month period in 1995.
When evaluating the performance of banking organizations, two measures of
profitability commonly used are return on average assets and return on beginning
equity. Return on average assets measures a bank's ability to profitably employ
its resources. Annualized return on average assets for the three month period
ended March 31, 1996 was .99%. This compares with .96% for the same three month
period in 1995. Return on beginning equity is a measure of a bank's ability to
generate income on the capital invested in the company by its shareholders.
Annualized return on beginning equity was 13.3% for the three month period ended
March 31, 1996 compared with 12.1% for the same three month period in 1995.
NET INTEREST INCOME--The Bank's primary source of income is the difference
between interest income and fees derived from earning assets and interest paid
on liabilities obtained to fund those assets. The difference between the two is
referred to as net interest income. Net interest income for the three months
ended March 31, 1996 totalled $2,738,000 compared to $2,277,000 for the same
period in 1995, a $461,000 (20.2%) increase.
Total interest and fees on earning assets increased to $4,250,000 for the first
quarter of 1996, an increase of $615,000 (16.9%) over the same three month
period in 1995. The level of interest income is affected by changes in volume
(growth) and the rates earned on interest-earning assets. Interest-earning
assets consists primarily of loans, investment securities and federal funds
sold. Of the $615,000 increase in interest income, $558,000 was the result of
increases in volume of interest-earning assets and $57,000 as the result of
increased yields on those assets. Average interest-earning assets for the first
three months of 1996 were $183,943,000 as compared with $159,756,000 for the
first three months of 1995, a $21,083,000 (12.9%) increase.
Interest expense is a function of the volume of and the rates paid for
interest- bearing liabilities. Interest-bearing liabilities consist primarily
of certain deposits and borrowed funds. Total interest expense increased to
$1,512,000 in 1996 or an increase of $154,000 (11.3%) over the same period in
1995. Of the $154,000 increase, $177,000 was the result of increases in the
volume of liabilities which was partially offset by $23,000 as a result of
lower rates paid on those liabilities. Average interest-bearing liabilities
were $186,349,000 for the first three months of 1996 as compared with
$164,521,000 for the same three month period in 1995, a $21,828,000 (13.3%)
increase.
7
The Bank's net interest margin, the ratio of net interest income expressed as a
percent of average interest-earning assets was 5.95% for the three month period
ended March 31, 1996 compared with 5.70% for the same period in 1995. This
provides a measurement of the Bank's ability to purchase and employ funds
profitably during the period being measured. The increase in net interest
margin is primarily attributable to growth of interest bearing assets.
ASSET AND LIABILITY MANAGEMENT--Asset and liability management is an integral
part of managing a bank's primary source of income, net interest income. The
Bank manages the balance between rate-sensitive assets and rate-sensitive
liabilities being repriced in any given period with the objective of stabilizing
net interest income during periods of fluctuating rates. The Bank considers its
rate-sensitive assets to be those which contain a provision to adjust the
interest rate periodically or mature within one year. These assets include
certain loans, investment securities and federal funds sold. Rate-sensitive
liabilities are those which allow for periodic interest rate changes and include
maturing time certificates of deposits and certain savings and interest-bearing
transaction account deposits. The difference between the amount of assets and
liabilities that are repricing in various time frames is called the "gap".
Generally, if repricing assets exceed repricing liabilities in a time period the
Bank would be "asset-sensitive" and if repricing liabilities exceed repricing
assets in a time period the Bank would be "liability-sensitive". The Bank
generally seeks to maintain a balanced position whereby there is no significant
"asset or liability sensitivity" to ensure net interest margin stability in
times of volatile interest rates. This is accomplished through maintaining a
significant level of loans, investment securities and deposits available for
repricing within one year.
The Bank was moderately "liability-sensitive" with a negative cumulative one
year gap of $26,871,000 or 12.5% of total assets as of March 31, 1996. This
compares with the Bank being moderately "liability-sensitive" with a negative
cumulative one year gap of $14,718,000 or 7% of total assets as of December 31,
1995. In general, based upon the Bank's mix of deposits, loans and investments,
declines in interest rates would be expected to moderately increase the Bank's
net interest margin. Increases in interest rates would be expected to have the
opposite effect.
The change in net interest income may not, however, always follow the general
expectations of an "asset-sensitive" or "liability-sensitive" balance sheet
during periods of changing interest rates. This results from interest rates
paid changing by differing increments and at different time intervals for each
type of rate-sensitive asset and liability.
An additional measure of interest rate sensitivity that the Bank monitors is its
expected change in earnings. This model's estimate of interest rate sensitivity
takes into account an estimate of the differing time intervals and interest rate
change increments for each type of rate-sensitive asset and liability. It then
measures the projected impact of changes in market interest rates on the Bank's
return on equity. Based upon the March 31, 1996 mix of rate-sensitive assets
and liabilities, given an immediate and sustained increase in the federal funds
rate of 1%, this model estimates the Bank's cumulative return on equity over the
next year would decrease by less than 1%. This compares with a cumulative one
year expected decrease in return on equity of less than 1% as of December 31,
1995. While no assurance can be made, both of these measures of interest rate
risk indicate that the Bank appears not to be subject to significant risk of
change in its net interest margin as a result of changes in interest rates.
ALLOWANCE AND PROVISION FOR LOAN LOSSES--The Bank maintains an allowance for
possible loan losses at a level considered by Management to be adequate to cover
the inherent risks of loss associated with its loan portfolio under prevailing
and anticipated economic conditions. In determining the adequacy of the
allowance for possible loan losses, Management takes into consideration the
overall growth trend in the portfolio, examinations of bank supervisory
authorities, internal and external credit reviews, prior loan loss experience
for the Bank, concentrations of credit risk, delinquency trends, general
economic conditions and the interest rate environment. The allowance is based
on estimates and ultimate future losses may vary from current estimates. It is
always possible that future economic or other factors may adversely affect the
Bank's borrowers, and thereby cause loan losses to exceed the current allowance.
The balance in the allowance is affected by the amounts provided from
operations, amounts charged off and recoveries of loans previously charged off.
The Bank recorded loss provisions in the first three month period of 1996 of
$160,000 as compared to $39,000 in the same period in 1995. The Bank's charge
offs, net of recoveries, were $1,000 for the three month period ended March 31,
1996 as compared with $10,000 for the same three month period in 1995. As of
March 31, 1996 the allowance for loan losses was $1,860,000 or 1.3% of total
gross loans outstanding. This compares with an allowance for loan losses of
$1,701,000 or 1.3% of total loans outstanding as of December 31, 1995.
8
ASSET QUALITY--Management recognizes the importance of asset quality as a key
ingredient to the successful financial performance of a bank. 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, 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, is in process
of collection. Additional loans which are not 90 days past due may also be
placed on nonaccrual status if Management believes the borrower will not be able
to comply with the contractual loan repayment terms and the collection of
principal interest is in question.
The Bank had nonperforming loans at March 31, 1996 of $5,540,000 as compared
with $4,673,000 at December 31, 1995. Included in the March 31, 1996 totals,
$4,511,000 were loans on nonaccrual status and $635,000 were loans 90 day past
due that were not on nonaccrual status. Of the total nonperforming loans as of
that date, $3,292,000 were loans that are secured by first deeds of trust on
real property. Other forms of collateral such as inventory and equipment secure
the remaining nonperforming loans as of that date. Included in the non-
performing loans is a large real estate loan that has recently been restructured
but is still shown as a non-performing loan and a large agriculture loan that is
in the process of liquidation. It is anticipated that a majority of the
liquidation of the agriculture loan will be completed without material loss by
June 30, 1996.
In addition, the Bank has purchased a portfolio of lease receivables in 1994
that as of March 31, 1996 totaled $1,793,000. The company which packages and
sells these leases to financial institutions filed a Chapter 11 reorganization
in April 1996 and its chief financial officer has been charged by the Securities
and Exchange Commission with participating in securities fraud. More that 360
banks nationwide have acquired similar lease receivable contracts. The Bank has
retained counsel jointly with other California banks and is currently analyzing
its position to ascertain the extent of loss, if any, the Bank may incur. The
bankruptcy court has released approximately $500,000 in lease receivables from
the effect of the bankruptcy proceeding. Because the bankruptcy proceedings are
likely to delay the regular payments under the leases, the Bank placed
$1,200,000 of these receivables on non-accrual status on May 3, 1996. This
amount is not included in non-performing assets as of March 31, 1996. The Bank
has no information that would lead it to conclude that the leases are not
genuine. The Bank is in possession of what appear to be originals of the leases
and filed the necessary documentation to perfect its interest in those leases.
The bankruptcy trustee has advised the bankruptcy court that he will make an
early investigation of the general position of the creditor banks, including
County Bank, and will take appropriate action upon making his determination. As
further information becomes available, the bank will re-evaluate its position
and, if necessary, make appropriate provisions if any loss is expected in
connection with the leases.
Additionally as of March 31, 1996 and December 31, 1995, the Bank had $416,000
and $47,000 in real estate acquired through foreclosure, respectively. Such
properties are carried at the lower of their estimated market value, as
evidenced by independent appraisals, or the recorded investment in the related
loan. At foreclosure, if the fair value of the real estate is less than the
Bank's recorded investment in the related loan, a charge is made to the
allowance for possible loan losses.
Total nonperforming loans represented 30.4% of the allowance for loan losses
and total equity capital as of March 31, 1996. This compares with nonperforming
loans of 27.7% of the allowance for loan losses and total equity capital as of
December 31, 1995.
The Bank's loan portfolio consists primarily of commercial loans, agriculture
loans, real estate mortgage loans, real estate construction loans and consumer
installment loans. The composition of the portfolio as of March 31, 1996 was as
follows: commercial loans (13.4%), agriculture loans (30.6%), real estate
construction loans (8%), real estate mortgage loans (34.5%) and consumer loans
comprised 13.5% of the portfolio. The largest segment within the agriculture
portfolio is the Bank's dairy loans. Dairy loans comprised 25.9% of the loan
portfolio as March 31, 1995. The above referenced loan portfolio mix has not
materially changed from the end of the prior year.
MERCED AREA INVESTMENT DEVELOPMENT, INC. "MAID."--
In late 1995, the Company and Bank wrote down the entire remaining investment in
MAID in the amount of $2,881,000. The uncertainty about the effect of the
investment in MAID on the results of future operations caused
9
management to recognize the complete write-down in 1995. Furthermore, the
general local real estate market has experienced declines in value over the last
several years, especially in real estate values associated with the type of
development in which MAID is involved. The decline in the general real estate
market in the Merced area is in part attributable to the closure of a large
military facility and is exaggerated by the general extended downturn in the
states economic condition. The Bank has also noted that other financial
institutions in its area has taken a similar course of action in the
write-down of similar properties.
Although the FRB did not require that the bank write-off MAID, the FRB does not
consider real estate development to be an activity closely related to banking
and the Bank had previously committed itself to divesting its real estate
development assets by the end of 1996, as required by FDICIA regulations
discussed above. At December 31, 1995, MAID held two real estate projects
including improved and unimproved land in various stages of development. MAID
continues to market these projects, and any amounts realized upon sale or other
disposition of these assets above their current carrying value of zero will
result in non-interest income at the time of such sale or disposition.
As mentioned above the bank still retains title to two properties. The
following is a general discussion of these properties:
(1) This project consists of 13 remaining improved lots and 117 additional
unimproved lots. In 1995, MAID sold 6 homes. For the aforementioned reasons,
provisions for the write-off of this property of $1,255,000 were recorded in
1995. MAID does not intend to develop the subsequent three phases (117 lots) of
this property.
(2) This project is comprised of 230 unimproved lots of which 183 are
remaining. A bulk sale of 47 lots occurred in 1995 in which an agreement was
made with the purchaser of the lots for an option to acquire additional 47 lots
over the next eighteen months. For the aforementioned reasons, provisions for
the write-off of this property of $1,626,000 were recorded in 1995.
Beginning in December, 1992, FDICIA required that state banks and their
subsidiaries could not engage, as principal, in activities not permissible to
national banks and their subsidiaries, unless the FDIC determines the activity
poses no significant risk to the BIF and the state bank is and continues to be
adequately capitalized. Generally, national banks may not engage in real estate
development or investment.
In December 1995 the Bank was granted regulatory approval to extend its plan for
divestiture of its existing real estate development activities for an additional
five years from December 19, 1996 or until the end of the year 2001.
NONINTEREST INCOME--Total noninterest income increased by $167,000 (41.3%) for
the three month period ended March 31, 1996 as compared with the same period in
1995. Service charges on deposit accounts increased by $66,000 (30.7%), income
from the sale of loans and real estate held for sale or development decreased by
$32,000 (49%) and other income increased by $118,000 (157%). In addition the
Bank did not provide provisions for the possible loss on the sale of real estate
held for sale or development in 1996 as compared with $50,000 in provisions in
the same three month period in 1995.
The Bank recognized $97,000 in gains on the sale of loans and real estate held
for sale or development for the three months ended March 31, 1996. This amount
consists primarily of the sale of SBA loans. This compares with gains of
$65,000 for that same three month period in 1995 which primarily consisted of
SBA loans and the sale of 2 MAID residential properties.
The Bank records its investment in real estate held for sale or development at
the lower cost or net realizable value, as evidenced by independent appraisals.
As a result of Management's evaluation of current and potential future market
conditions in the local market area, the Bank provided $50,000 for future
possible losses on the sale of certain real estate projects in the first quarter
of 1995. There are no write downs in the same quarter for 1996 due to the
complete write down of all MAID properties at the end of 1995.
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NONINTEREST EXPENSE--Noninterest expenses increased by $439,000 (23.2%) for the
three month period ended March 31, 1996 as compared with the same period in
1995. Salaries and related benefits increased by $214,000 (22%), occupancy
expenses increased $21,000 (15.4%), equipment expenses increased $66,000
(39.8%), marketing expenses increased by $19,000 or (26.8%) and other expenses
increased by $139,000 (25.3%).
Many of the expense increases are the result of the addition of a Loan
Production Office (LPO) and two full service branch offices in late 1995 and
early 1996. On average, full time equivalent employees increased by 12 (11%)
for the three months ended March 31, 1996 as compared with the same three month
period in 1995.
PROVISION FOR INCOME TAXES--The Bank's provision for income taxes was $295,000
for the three month period ended March 31, 1996 as compared with $277,000 for
the same three month period in 1995. Effective tax rates were 39% for both
years.
OTHER FINANCIAL INFORMATION--The Company has entered into an agreement to
relocate its administrative office and its Downtown Branch to the corner of M &
Main Street in downtown Merced, California. Central administrative support and
certain loan departments will be relocated to this site as well. Construction
is expected to commence Summer 1996 with completion of the facility by Spring
1997. Anticipated costs of this project are currently estimated at $4,800,000.
The facility is a three story building of approximately 29,000 square feet.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the opinion of management, there is no additional information relating to
these periods being reported which warrants inclusion in the report.
ITEM 2. CHANGES IN SECURITIES
In the opinion of management, there is no additional information relating to
these periods being reported which warrants inclusion in the report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In the opinion of management, there is no additional information relating to
these periods being reported which warrants inclusion in the report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In the opinion of management, there is no additional information relating to
these periods being reported which warrants inclusion in the report.
ITEM 5. OTHER INFORMATION
In the opinion of management, there is no additional information relating to
these periods being reported which warrants inclusion in the report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NUMBER DESCRIPTION
2.1 Form 8-K filed with Securities and Exchange Commission on January 30, 1996
2.2 Form 8-K filed with Securities and Exchange Commission
on April 19, 1996
27 Financial Data Schedules
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be
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signed on its behalf by the undersigned thereunto duly authorized.
Capital Corp of the West
/s/ Thomas T. Hawker
-------------------------------------------
Thomas T. Hawker
President & Chief Executive Officer
/s/ Janey Boyce
-------------------------------------------
Janey Boyce
Vice President & Chief Financial Officer
Dated: May 12, 1996
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