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 June 30, 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 (I.R.S. Employer
incorporation or organization) 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 June 30, 1996 was approximately 1,730,072. No shares of
preferred stock, no par value, were outstanding at June 30, 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 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
1
Capital Corp of the West
Consolidated Balance Sheets
(Unaudited)
6/30/96 12/31/95
-------- --------
(In thousands)
ASSETS
Cash & noninterest-bearing deposits in other banks $ 17,451 $ 18,967
Federal funds sold 575 --
Investment securities available for sale at market 41,211 45,302
Mortgage loans held for sale 865 501
Loans, net of allowance for loan losses of $2,064,000
at June 30, 1996 and $1,701,000 at December 31, 1995 161,988 132,035
Interest receivable 1,799 1,860
Bank premises and equipment, net 4,827 4,138
Real estate held for sale or development -- --
Other assets 11,092 6,230
-------- --------
Total Assets $239,808 $209,033
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 35,082 $ 39,726
Negotiable orders of withdrawal 26,920 29,019
Savings 106,063 95,537
Time, under $100,000 39,548 21,917
Time, $100,000 and over 8,004 6,402
-------- --------
Total Deposits 215,617 192,601
Accrued interest, taxes and other liabilities 4,864 1,339
-------- --------
Total Liabilities 220,481 193,940
Common stock, no par value
20,000,000 shares authorized;
1,730,033 issued & outstanding at June 30, 1996 and
1,400,128 issued & outstanding at December 31, 1995 15,298 9,870
Investment securities unrealized (losses) gains, net (485) 312
Retained earnings 4,514 4,911
-------- --------
Total Shareholders' Equity 19,327 15,093
-------- --------
Total Liabilities and Shareholders' Equity $239,808 $209,033
-------- --------
-------- --------
See accompanying notes.
2
Capital Corp of the West
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
6/30/96 6/30/95 6/30/96 6/30/95
------- ------- ------- -------
(In Thousands Except (In Thousands Except
For Per Share Data) For Per Share Data)
Interest Income
Interest and fees on loans $3,647 $3,232 $7,067 $6,220
Interest on investment
securities
Taxable 589 502 1,304 967
Non-taxable 62 98 121 195
Interest on federal funds
sold 15 61 71 148
------- ------- ------- -------
Total Interest Income 4,313 3,893 8,563 7,530
Interest Expense
Deposits
Negotiable orders of
withdrawal 64 57 127 117
Savings 1,025 1,068 2,061 2,117
Time, under $100,000 315 218 622 417
Time, $100,000 and over 91 65 185 114
Other 35 5 47 7
------- ------- ------- -------
Total Interest Expense 1,530 1,413 3,042 2,772
Net Interest Income 2,783 2,480 5,521 4,758
Provision for loan losses 150 39 310 78
------- ------- ------- -------
Net interest income after
provision for loan losses 2,633 2,441 5,211 4,680
Other Income
Service charges on deposit
accounts 320 218 601 432
Income from real estate
held for sale 68 10 76 10
Provision for loss on real
estate held for sale 0 (50) 0 (100)
Other 296 110 578 299
------- ------- ------- -------
Total Other Income 684 288 1,255 641
Other Expenses
Salaries and related
benefits 1,454 1,046 2,640 2,018
Bank premises and occupancy 184 152 341 289
Equipment 251 197 484 363
Bank assessments 11 90 21 186
Professional fees 190 89 332 171
Marketing 106 41 196 112
Other 657 449 1,192 820
------- ------- ------- -------
Total Other Expenses 2,853 2,064 5,206 3,959
Income before income taxes 464 665 1,260 1,362
Provision for income taxes 168 259 463 536
------- ------- ------- -------
Net Income 296 406 797 826
------- ------- ------- -------
------- ------- ------- -------
Net Income Per Share $0.21 $0.29 $0.55 $0.59
------- ------- ------- -------
------- ------- ------- -------
See accompanying notes
3
Capital Corp of The West
Statement of Consolidated Cash Flows
(Unaudited)
6 months ended 6 months ended
6/30/96 6/30/95
-------------- --------------
(In thousands)
Operating activities
Net income $ 797 $ 826
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Provision for loan losses 310 78
Depreciation, amortization and accretion, net 609 366
Provision for deferred income taxes (59) 370
Net (increase) decrease in accrued interest
receivable & other assets (3,854) 525
Net (increase) decrease in mortgage loans
held for sale (364) 1,071
Net increase in deferred loan fees 3 12
Net increase (decrease) in accrued interest
payable & other liabilities 3,443 (122)
Provision for loss on real estate held for
sale or development - 100
Net (gains) loss on sale of assets 121 (65)
-------- --------
Net cash provided by operating activities 1,006 3,161
Investing activities
Purchases of investment securities (7,699) (7,862)
Proceeds from maturities of investment securities 1,757 4,087
Proceeds from sales of investment securities 8,472 -
Proceeds from sales of commercial and
real estate loans 1,941 1,145
Net (increase) in loans (32,327) (5,574)
Purchases of bank premises and equipment (1,054) (1,115)
Proceeds from sale of equipment - -
Purchases of real estate held for
sale or development (504) (267)
Proceeds from sale of real estate held for
sale or development 135 244
-------- --------
Net cash (used) by investing activities (29,279) (9,342)
Financing activities
Net increase in demand, now and savings deposits 3,783 2,518
Net increase in certificates of deposit 19,233 2,571
Issuance of common stock for acquisition 3,969 -
Cash dividends and fractional shares - (6)
Exercise of stock options & purchase of shares 347 -
-------- --------
Net cash provided by financing activities 27,332 5,089
Net (decrease) in cash and cash equivalents (941) (1,092)
Cash and cash equivalents at beginning of year 18,967 16,490
-------- --------
Cash and cash equivalents at end of quarter $ 18,026 $ 15,398
-------- ---------
-------- ---------
Supplemental Disclosure of noncash investing
and financing activities:
Investment securities unrealized losses (1,306) 198
See accompanying notes.
4
PART 1--FINANCIAL INFORMATION (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
June 30, 1996, December 31, 1995 and June 30, 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 bank holding company
and the holder of all of the capital stock of County Bank (the "Bank"). The
Company's primary asset is County Bank and County 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 June 28,
1996 there were approximately 1,730,072 common shares outstanding, held of
record by approximately 1,265 shareholders. This estimate includes
approximately 281,676 shares of common stock that will be issued to
approximately 68 shareholders of Town and Country Finance & Thrift Company
(The "Thrift") as a result of the acquisition of the Thrift on June 28, 1996.
There were no preferred shares outstanding at June 30, 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, the Thrift and the Bank's subsidiary, unless the context otherwise
requires.
ACQUISITION
In March 1996, the Company entered into an agreement for the acquisition of
the Thrift. On June 28, 1996, the Company received regulatory and shareholder
approval to consummate the purchase of the Thrift. The transaction will
result in approximately 281,676 shares of stock being issued and $1,800,000
being disbursed to the 83 shareholders of Town & Country. The total purchase
price was $33.05 per share, or $5,558,000 which represents approximately 158%
of Town & Country equity capital as of June 28, 1996. The Thrift was
incorporated in 1957. It is licensed by the California Department of
Corporations as an industrial loan company, also known as a thrift and loan
company. It conducts a general consumer lending and deposit-taking business
from its four offices serving Turlock, Modesto, Visalia and Fresno,
California. It specializes in direct loans to the public and the purchase of
financing contracts, principally from automobile dealerships and furniture
stores. Town & Country's deposits (technically known as investment
certificate or certificates of deposit rather than deposits) are insured by
the FDIC up to applicable limits. The purchase is being accounted for under
the purchase method of accounting. The balance sheet of the Company as of
June 28, 1996 includes the Thrift. The income statement for the periods
ending June 30, 1996 does not include the Thrift.
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.
BANK'S INDUSTRY & MARKET AREA
The Bank engages in general commercial banking business primarily in Merced,
Stanislaus and Tuolumne Counties from its main office, in Merced; and
full-service branch offices located in Atwater; downtown Merced, Los Banos;
Hilmar, Turlock; and Sonora, California. The Bank has a loan production
office in Modesto, California. The Bank's administrative headquarters and its
real estate department are located in Merced, California. 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 MAID. Although approved to be a full service branch banking
office, the administrative headquarters facility is presently used solely as
the Company's corporate headquarters.
5
OTHER FINANCIAL NOTES
All adjustments, in the opinion of Management, which are necessary for a fair
presentation of the Company's financial position at June 30, 1996, and at
December 31, 1995 and the results of operations and statements of cash flows
for the six month periods ended June 30, 1996 and 1995 and the three month
periods ended June 30, 1996 and 1995 have been included. These interim
statements are not necessarily indicative of the results for a full year.
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 presented period after giving retroactive
effect for the 5% stock dividend for shareholders of record on August 16,
1996 and an estimated 281,676 shares to be issued as a result of the
acquisition of the Thrift. The weighted average number of shares outstanding
were 1,446,199 for the six month period ended June 30, 1996 and 1,437,203 for
the three month period ended June 30, 1996. This compares with weighted
average number of shares for the three and six month period ended June 30,
1995 of 1,400,128. On June 20, 1996, the Company declared a $.05 per share
cash dividend and a 5% stock dividend for shareholders of record August 16,
1996 payable on September 16, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW--For the six months ended June 30, 1996, consolidated net income was
$797,000 compared to $826,000 for the six month period ended June 30, 1995, a
$29,000 (3.5%) decrease. Earnings per share were $.55 and $.59, respectively.
The annualized return on average assets was .78% for the first six months of
1996 as compared with .93% for the same six month period in 1995. The
Company's annualized return on beginning equity was 10.6% and 11.8%,
respectively.
Total assets at June 30, 1996 were $239,808,000, an increase of $30,775,000
or 14.7% compared to December 31, 1995. Net loans were $161,988,000 at June
30, 1996, an increase of $29,953,000 or 22.7% and deposits were $215,617,000,
an increase of $23,016,000 or 11.9%. Total shareholders' equity grew to
$19,327,000, a 28.1% increase from December 31, 1995. A primary contributor to
the growth of the Company was the acquisition of Town & Country as of June
28, 1996. As of that date, Town & Country had total assets of $28.0 million,
total loans of $18.0 million and $22.3 million in total deposits.
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 financial institutions arises principally to provide
for deposit withdrawals, the credit needs of its customers and to take
advantage of investment opportunities as they arise. A financial institution
may achieve desired liquidity from both assets and liabilities. The Company
considers cash and deposits held in other banks, federal funds sold, other
short term investments, maturing loans and investments, payments of principal
and interest on loans and investments and potential loan sales as sources of
asset liquidity. Deposit growth, access to credit lines established with
correspondent banks and market sources of funds are considered by the Company
as sources of liability liquidity.
The Company reviews its liquidity position on a regular basis based upon its
current position and expected trends of loans and deposits. 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,
certain investment securities and federal funds sold. The Bank's liquid
assets totalled $59,237,000 and $64,269,000 on June 30, 1996 and December 31,
1995, respectively, and constituted 24.7% and 30.7%, respectively, of total
assets on those dates. In analyzing liquidity for the Company, consideration
is also taken for the market value and pledging requirements of the Company's
investment securities. As of June 30, 1996 and December 31, 1995, the
Company's investment portfolio had unrealized security losses of $485,000 and
unrealized securities gains of $312,000, respectively. Total pledged
securities as of June 30, 1996 totalled $17,493,000 as compared to
$18,157,000 at December 31, 1995. The decline in liquidity is primarily a
result of an increase in loans since December 31, 1995 of $29,953,000 with a
corresponding increase in deposits of $23,016,000. Total investment
securities decreased by $4,091,000 since December 31, 1995.
6
Although the Company's primary sources of liquidity include liquid assets and
a stable deposit bank, the Company maintains lines of credit with certain
correspondent banks and Federal Reserve Bank aggregating $10,072,000 of which
$1,606,000 was outstanding as of June 30, 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 $4,234,000 (28.0%) since
December 31, 1995. This increase was the result of net income of $797,000 for
the six month period ended June 30, 1996 and $4,234,000 as a result of the
issuance of stock for the purchase of Town & Country, $347,000 as a result of
exercised stock options and stock issuance related to the Company's benefit
plans, offset in part by $82,000 set aside for the payment of the 5 cents per
share cash dividend to be paid in September 1996, a decrease of $797,000 in
investment securities unrealized gains, net of taxes. The Company had
unrealized losses, net of taxes, in its securities classified as
available-for-sale of $485,000 as of June 30, 1996, compared to unrealized
gains of $312,000 as of December 31, 1995.
Capital levels for the Company continue to remain above established
regulatory capital requirements. The Company is subject to FRB guidelines
governing capital adequacy. Federal regulations 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. Banks are required to maintain a risk-based
capital ratio of 8.0% (with Tier One capital constituting at least 50% of
total qualifying capital). As of June 30, 1996 and December 31, 1995 the
Company had risk-based capital ratios of 11.1% and 10.3% respectively (Tier
One capital ratios equaled 10.8% and 9.2%, respectively).
Additionally, a minimum leverage capital ratio standard exists which is
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 FRB has stated that most banks should maintain
ratios at least 1 to 2 percentage points above the 3% minimum. As of June 30,
1996 and December 31, 1995, the Company's leverage capital ratio equaled 9.4%
for June 10, 1996 and 7.4% as of December 31, 1995. The acquisition of the
Thrift occurred on June 28, 1996. The leverage ratio, restated as if the
Company owned the Thrift for an entire quarter, would be 8.3% as of June 30,
1996.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 -- Net income
for the six month period ended June 30, 1996 totaled $797,000, a decrease of
$29,000 (3.5%) over the same six month period in 1995. Included in the 1996
results are the final results of a one-time expense as a result of an
implementation plan announced by the Bank to streamline operations and
improve customer service. The implementation plan included a voluntary
separation package offered to all Bank employees based upon their years of
service. As of June 28, 1996, the last day upon which such offer could be
accepted, 23 employees accepted the package resulting in a one-time expense
of $286,000 before taxes or $183,000 after taxes. Without this expense,
earnings for the six months ended June 30, 1996 would have been $980,000. The
increase in earnings in 1996 before this one-time expense resulted primarily
from strong asset growth and an improvement in the Bank's net interest income
of $763,000 (16.0%), and improvements in fee income of $614,000 (95.8%)
offset by increased loan loss provisions of $232,000 (297.4%) and an increase
in noninterest expenses of $1,247,000 (31.5%). The increase in other income
is primarily the result of increased fees generated from service charges of
$169,000, no further provision for loss on the Bank's real estate subsidiary
which was completely written off last year and other income increases of
$279,000. The increase in noninterest expense is primarily the result of the
$286,000 one time expense for the severance package previously discussed and
increases in salary and benefit costs, additional premises, occupancy and
marketing costs. Many of the expense increases are the result of the addition
of a Loan Production Office (LPO) and two full service branch offices in the
Bank in late 1995 and early 1996 and the formation of Capital West Group, a
new subsidiary of the holding company.
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 company's ability to
profitably employ its resources. Annualized return on average assets for the
six month period ended June 30, 1996 was .78%. This compares with .93% for
the same six month period in 1995. Return on beginning equity is a measure of
a company's ability to generate income on the capital invested in the company
by its shareholders. Annualized return on beginning equity was 10.6% for the
six month period ended June 30, 1996 compared with 11.8% for the same six
month period in 1995.
7
NET INTEREST INCOME -- The Company'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 six months ended June 30, 1996 totaled $5,521,000 compared to
$4,758,000 for the same period in 1995, a $763,000 (16.2%) increase.
Total interest and fees on earning assets increased to $8,563,000 for the
first half of 1996, an increase of $1,033,000 (13.7%) over the same six 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 $1,033,000 increase in interest income, $1,150,000 was the
result of increases in volume of interest-earning assets which is partially
offset by $117,000 as the result of decreased yields on those assets. Average
interest-earning assets for the first six months of 1996 were $185,694,000 as
compared with $160,704,000 for the first six months of 1995, a $24,990,000
(15.6%) 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
$3,042,000 in 1996 or an increase of $270,000 (9.7%) over the same six month
period in 1995. Of the $270,000 increase, $399,000 was the result of
increases in the volume of liabilities which was partially offset by $129,000
as a result of lower rates paid on those liabilities. Average
interest-bearing liabilities were $160,500,000 for the first six months of
1996 as compared with $138,885,000 for the same six month period in 1995, a
$21,615,000 (15.6%) increase.
The Company's net interest margin, the ratio of net interest income expressed
as a percent of average interest-earning assets was 5.95% for the six month
period ended June 30, 1996 compared with 5.92% 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 loans as a percentage
of interest earning assets, partially offset by an increase in nonperforming
loans in 1996.
ASSET AND LIABILITY MANAGEMENT -- Asset and liability management is an
integral part of managing a financial institution's primary source of income,
net interest income. The Company manages the balance between rate-sensitive
assets and rate-sensitive liabilities being repriced in any given period with
the objective of stabilizing net interest income during periods of
fluctuating rates. The Company 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 Company
would be "asset-sensitive" and if repricing liabilities exceed repricing
assets in a time period the Company 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 Company was moderately "liability-sensitive" with a negative cumulative
one year gap of $35,649,000 or 14.9% of total assets as of June 30, 1996.
This compares with the Company 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 increase in the liability sensitive
nature of the Company is due to the acquisition of the Thrift.
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 Company 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
8
market interest rates on the Company's return on equity. Based upon the June
30, 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
Company'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
Company appears not to be subject to significant risk of change in its net
interest margin as a result of this level of change in interest rates.
ALLOWANCE AND PROVISION FOR LOAN LOSSES--The Company 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 Company'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 Company recorded loss provisions in the first six month period of
1996 of $232,000 as compared to $78,000 in the same period in 1995. The
Company's charge offs, net of recoveries, were $107,000 for the six month
period ended June 30, 1996 as compared with $46,000 for the same six month
period in 1995. As of June 30, 1996 the allowance for loan losses was
$2,064,000 or 1.3% of total gross loans outstanding for the Company. This
compares with an allowance for loan losses of $1,701,000 or 1.3% of total
loans outstanding as of December 31, 1995.
ASSET QUALITY--Management recognizes the importance of asset quality as a key
ingredient to the successful financial performance of a financial
institution. 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. 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 and interest is in question.
Management defines impaired loans as those loans, regardless of past due
status, in which principal and interest is 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 June 30, 1996 impaired loans were measured
during the underlying value of collateral measurement method.
The Company had nonperforming loans at June 30, 1996 of $6,112,000 as
compared with $4,673,000 at December 31, 1995. Included in the June 30, 1996
and December 31, 1995 totals respectively, $5,426,000 and $4,626,000 were
loans on nonaccrual status and $661,000 and $224,000 were loans 90 day past
due that were not on nonaccrual status. Of the total nonperforming loans as
of June 30, 1996, $3,295,000 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 nonperforming loans is a $3.3 million real estate loan that has been
restructured but is still shown as a non-performing loan. The loan is
expected to remain on a nonaccrual status until substantial performance on
the loan occurs. The restructured loan matures in 1998. Specific reserves
have been established for this loan in the amount of $545,000. Nonperforming
loans also include a $.6 million 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 by the end of the year. Specific reserves
established for this loan are $150,000.
In addition, the Bank has purchased a portfolio of lease receivables in 1994
that as of June 30, 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 than 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,
9
if any, the Bank may incur. The bankruptcy court has released certain of its
leases of which the Bank held approximately $500,000 from the effect of the
bankruptcy proceeding which is now current and performing. Because the
bankruptcy proceedings are likely to delay the regular payments under the
leases, the Bank has $1,281,000 of these receivables on non-accrual status
since May 3, 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 the 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.
Currently reserves of $128,000 have been established for this portfolio.
These items are considered isolated incidences and are not indicative of a
continuing trend at this time.
Additionally as of June 30, 1996 and December 31, 1995, the Company 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 28.6% of the allowance for loan losses
and total equity capital as of June 30, 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 Company's loan portfolio (including the loans for the newly acquired
Thrift) 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 June 30, 1996 was
as follows: commercial loans (21.2%), agriculture loans (25.8%), real estate
construction loans (7.7%), real estate mortgage loans (31.9%) and consumer
loans comprised 13.4% of the portfolio. The largest segment within the
agriculture portfolio is the Bank's dairy loans. Dairy loans comprised 14.8%
of the loan portfolio as June 30, 1996. The above referenced loan portfolio
mix has not materially changed from the end of the prior year, however, there
is an increase in consumer loans this quarter due to the purchase of the
Thrift.
In accordance with SFAS #114 "Accounting for Impaired Loans" management
defines homogeneous loans as loans less than $200,000 that consist primarily
of single family residences, home equity lines and consumer type loans. The
major risk classifications used for the application of SFAS #114 are defined
primarily by Real Estate Construction and Development and Agriculture loans.
All loans are concentrated in the Company's service areas. Historically, the
Company has evaluated the carrying amount of loans based upon the underlying
value of collateral. Accordingly, it is management's opinion that applying the
provisions of SFAS #114 does not materially impact the credit risk data
required by the Securities and Exchange Commission regulations.
MERCED AREA INVESTMENT DEVELOPMENT, INC. "MAID"
In late 1995, the Company wrote down the Bank's 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 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
state's economic condition. The Bank has also noted that other financial
institutions in its area have 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 June 30, 1996, 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 of
disposition. One project consists of 11 remaining improved lots and 117
additional unimproved lots. MAID does not intend to develop the subsequent
three phases (117 lots) of this property. Another project is comprised of 183
remaining unimproved lots. A
10
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.
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 $614,000 (95.8%)
for the six month period ended June 30, 1996 as compared with the same period
in 1995. Service charges on deposit accounts increased by $169,000 (39.1%),
income from the sale of loans and real estate held for sale or development
increased by $66,000 (660%) and other income increased by $279,000 (93.3%).
This increase is primarily due to increased fees earned on the servicing of
loans, increased fees earned on the commission investment products, increased
gains on the sale of SBA loans and gains on the sale of securities. In
addition, the Company did not provide provisions for the possible loss on the
sale of real estate held for sale or development in 1996 as compared with
$100,000 in provisions in the same six month period in 1995.
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 $100,000
for future possible losses on the sale of certain real estate projects in the
first half of 1995. There are no write downs in the same six month period
of 1996 due to the complete write down of all MAID properties at the end of
1995.
NONINTEREST EXPENSES--Noninterest expenses increased by $1,247,000 (31.5%)
for the six month period ended June 30, 1996 as compared with the same period
in 1995. Salaries and related benefits increased $622,000 (30.8%), occupancy
expenses increased by $52,000 (18.0%), equipment expenses increased $121,000
(33.3%), marketing expenses increased by $84,000 or (75.0%), professional
fees increased by $161,000 (94.2%) and other expenses increased by $372,000
(45.4%). This is in part offset by a reduction in Bank assessments of
$165,000 (88.7%).
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. Increases are also due to the one-time expense related to the
severance package of $286,000 previously discussed and the consulting
charges related to that project. On average, full time equivalent employees
increased by 6 (5%) for the six months ended June 30, 1996 as compared with
the same six month period in 1995.
PROVISION FOR INCOME TAXES--The Bank's provision for income taxes was $463,000
for the six month period ended June 30, 1996 as compared with $536,000 for
the same six month period in 1995. Effective tax rates were 39% and 37%
respectively. The lower effective tax rate in 1996 is a result of the
purchase of $1.7 million in low income housing tax credits in late 1995.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996--Net income
for the three month period ended June 30, 1996 totaled $296,000, a decrease
of $110,000 (27.1%) over the same three month period in 1995. This results
in earnings per share of $.21 and $.29 respectively. Included in the 1996
results are the final results of a one-time expense of $286,000 before
taxes as a result of an implementation plan announced by the Bank to
streamline operations and improve customer service. Without this expense,
earnings for the three months ended June 30, 1996 would have been $469,000.
The increase in earnings in 1996 before this expense of $63,000 (15.5%)
resulted primarily from strong asset growth and an improvement in the
Company's net interest income of $303,000 (12.2%) and improvements in fee
income of $396,000 (137.5%) offset by increased loan loss provisions of
$111,000 (284.6%) and an increase in noninterest expenses of $789,000 (38.2%.
The increase in other income is primarily the result of an increase in fees
generated from service charges of $102,000, no further provision for loss on
the Bank's real estate subsidiary which
11
was completely written off last year and other income increases of $186,000.
The increase in noninterest expense is primarily from the $286,000 one-time
expense for the severance package previously discussed and the related
consulting fees paid related to this project and increases in salary and
benefit costs, additional premises, occupancy and marketing costs. 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,
and the formation of Capital West Group, a newly formed subsidiary of the
holding company.
Annualized return on average assets for the three month period ended June 30,
1996 was .57%. This compares with .93% for the same three month period in
1995.
NET INTEREST INCOME--Net interest income for the three months ended June 30,
1996 totaled $2,783,000 compared to $2,480,000 for the same period in 1995, a
$303,000 (12.2%) increase.
Total interest and fees on earning assets increased to $4,313,000 for the
first half of 1996, an increase of $420,000 (10.8%) over the same three month
period of 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 $420,000 increase in interest income,
$552,000 was the result of increases in volume of interest-earning assets
which is partially offset by $132,000 as the result of decreased yields on
those assets. Average interest-earning assets for the three months ended
June 30, 1996 were $185,694,000 as compared with $161,640,000 for the same
three months of 1995, a $24,054,000 (14.9%) increase.
Total interest expense increased to $1,530,000 in 1996 or an increase of
$117,000 (8.3%) over the same three month period in 1995. Of the $117,000
increase, $200,000 was the result of increases in the volume of liabilities
which was partially offset by $83,000 as a result of lower rates paid on
those liabilities. Average interest-bearing liabilities were $162,237,000
for the three months ended June 30, 1996 as compared with $139,941,000 for
the same period in 1995, a $22,296,000 (15.9%) increase.
The Company's net interest margin, the ratio of net income expressed as a
percent of average interest-earning assets was 5.99% for the three month
period ended June 30, 1996 compared with 6.14% for the same period in 1995.
The decrease in net interest margin is primarily attributable to an increase
in nonperforming loans, partially offset by the growth in loans as a
percentage of interest earning assets.
The Company recorded loss provisions in the three month period ended June 30,
1996 of $150,000 as compared to $39,000 in the same period in 1995. The
Company's charge offs, net of recoveries, were $106,000 for the three month
period ended June 30, 1996 as compared with $36,000 for the same period in
1995.
NONINTEREST INCOME--Total noninterest income increased by $396,000 (137.5%)
for the three month period ended June 30, 1996 as compared with the same
period in 1995. Service charges on deposit accounts increased by $102,000
(46.8%), income from the sale of loans and real estate held for sale or
development increased by $58,000 (580.0%) and other income increased by
$186,000 (169.1%). 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.
NONINTEREST EXPENSE--Noninterest expenses increased by $789,000 (38.2%) for
the three month period ended June 30, 1996 as compared with the same period
in 1995. Salaries and related benefits increased by $408,000 (39.0%) of
which $286,000 is the one-time severance expense previously discussed,
occupancy expenses increased $32,000 (21.0%), equipment expenses increased
$54,000 (27.4%), marketing expenses increased by $65,000 or (158.5%),
professional fees increased by $101,000 (113.5%) and other expenses incurred
by $208,000 (46.3%). This is in part offset by a reduction in Bank
assessments of $79,000 (87.8%).
Many of the expense increases are the result of the addition of a Loan
Production Officer (LPO) and two full service branch offices in late 1995 and
early 1996 and the addition of Capital West Group, a newly formed subsidiary
of the holding company. On average, full time equivalent employees increased
by 2 (1.7%) for the three months ended June
12
30, 1996 as compared with the same three month period in 1995.
PROVISION FOR INCOME TAXES--The Bank's provision for income taxes was
$168,000 for the three month period ended June 30, 1996 as compared with
$259,000 for the same three month period in 1995. Effective tax rates were
40% and 36% respectively. The lower effective tax rate in 1996 is a result of
the purchase of $1.7 million in low income housing tax credits in late 1995.
OTHER FINANCIAL INFORMATION--Effective July 15, 1995, the Company 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, data processing and certain loan departments
will be relocated to this site as well. Construction is expected to commence
August 6, 1996 with completion of the facility by summer 1997. Anticipated
costs of this project are currently estimated at $4,800,000. In conjunction
with the construction of this facility, the Merced Redevelopment Agency has
provided the Bank with an interest-free loan in the amount of $3,000,000. It
is anticipated that upon completion of construction of the facility, a
permanent mortgage loan will be sought from an unaffiliated lender. The
facility is planned to be a three story building of approximately 29,000
square feet.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date of this report, neither the Company nor is any of their
property the subject of any material pending legal proceedings, nor are any
such proceeding known to the contemplated by government authorities. The
Company is, however, also exposed to certain potential claims encountered in
the normal course of business. In the opinion of Management, the resolution of
these matters will not have a material adverse affect on the Company's
consolidated financial position or results of operations in the foreseeable
future.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following proposals were approved by the Company's shareholders at its
annual meeting held on June 20, 1996:
Proposal 1. The agreement and plan of acquisition dated March 22, 1996 by and
between Capital Corp of the West and Town & Country Finance and
Thrift Company. (811,457 shares voted for; 39,728 voted against)
Proposal 2. The election of eleven individuals to serve as directors of the
Company until the next annual meeting. (853,673 shares voted for)
Proposal 3. An amendment to the Company's bylaws to eliminate cumulative
voting. (760,723 shares voted for; 74,741 voted against)
Proposal 4. An amendment to the Company's bylaws to classify the Board of
Directors and change the authorized range of directors. (809,053
shares voted for; 39,458 voted against)
Proposal 5. The amendment to the Company's Articles of Incorporation to
eliminate action by the shareholders by written consent without
a meeting. (780,114 shares voted for, 59,611 voted against)
The following proposal, which required a two-thirds majority vote, was not
approved by the Company's shareholders at its annual meeting held on June 20,
1996.
Proposal 6. An amendment to the Articles of Incorporation to require a
supermajority vote of the shareholders to approve certain business
combinations. (781,565 shares voted for; 58,862 voted against)
13
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NUMBER DESCRIPTION
-------------- ------------
Form 8-K filed with Securities and Exchange
Commission on July 15, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Capital Corp of the West
/s/ Thomas T. Hawker
----------------------------------
Thomas T. Hawker
President/Chief Executive Officer
/s/ Janey Boyce
----------------------------------
Janey Boyce
Senior Vice President/Chief Financial Officer
Dated: August 8, 1996
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