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 September 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 Identification No.)
incorporation or organization)
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 November 4, 1996 was approximately 1,732,974. No shares of preferred
stock, no par value, were outstanding at November 4, 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 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
1
Capital Corp of the West
Consolidated Balance Sheets
(Unaudited)
9/30/96 12/31/95
------- --------
ASSETS (In thousands)
Cash & noninterest-bearing deposits in other banks $ 16,669 $ 18,967
Federal funds sold 4,395 --
Investment securities available for sale at market 40,846 45,302
Mortgage loans held for sale -- 501
Loans, net of allowance for
loan losses of $2,148,000 at September 30, 1996
and $1,701,000 at December 31, 1995 173,641 132,035
Interest receivable 1,867 1,860
Bank premises and equipment, net 4,840 4,138
Real estate held for sale or development 416 --
Other assets 11,217 6,230
-------- --------
Total Assets $253,891 $209,033
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 38,094 $ 39,726
Negotiable orders of withdrawal 29,734 29,019
Savings 110,263 95,537
Time 50,648 28,319
-------- --------
Total Deposits 228,739 192,601
Accrued interest, taxes and other liabilities 5,127 1,339
-------- --------
Total Liabilities 233,866 193,940
Common stock, no par value
20,000,000 shares authorized;
1,732,974 issued & outstanding at September 30, 1996 and 15,298 9,870
1,400,128 issued & outstanding at December 31, 1995
Investment securities unrealized (losses) gains, net (400) 312
Retained earnings 5,127 4,911
-------- --------
Total Shareholders' Equity 20,025 15,093
-------- --------
Total Liabilities and Shareholders' Equity $253,891 $209,033
-------- --------
-------- --------
See accompanying notes.
2
Capital Corp of the West
Consolidated Statements of Income
(Unaudited)
Three Months Nine Months Ended
Ended
9/30/96 9/30/95 9/30/96 9/30/95
------- ------- ------- -------
Interest Income (In Thousands Except For (In Thousands Except For
Per Share Data) Per Share Data)
Interest and fees on loans $4,449 $3,309 $11,515 $ 9,527
Interest on investment securities
Taxable 644 598 1,949 1,566
Non-taxable 63 69 184 264
Interest on federal funds sold 70 101 141 248
------ ------ ------- -------
Total Interest Income 5,226 4,077 13,789 11,605
Interest Expense
Deposits
Negotiable orders of withdrawal 68 59 195 177
Savings 1,132 1,045 3,193 3,162
Time 667 343 1,473 874
Other 2 2 49 9
------ ------ ------- -------
Total Interest Expense 1,869 1,449 4,910 4,222
Net Interest Income 3,357 2,628 8,879 7,383
Provision for loan losses 96 0 406 78
------ ------ ------- -------
Net interest income after provision for loan losses 3,261 2,628 8,473 7,305
Other Income
Service charges on deposit accounts 343 229 944 661
Income from real estate held for sale or development 67 0 143 0
Provision for loss on real estate held for sale or development 0 (177) 0 (277)
Other 284 173 862 485
------ ------ ------- -------
Total Other Income 694 225 1,949 869
Other Expenses
Salaries and related benefits 1,419 1,134 4,059 3,152
Bank premises and occupancy 240 161 581 450
Equipment 265 207 749 571
Bank assessments 12 (25) 33 161
Professional fees 272 93 604 265
Marketing 93 72 289 184
Other 685 470 1,877 1,288
------ ------ ------- -------
Total Other Expenses 2,986 2,112 8,192 6,071
Income before income taxes 969 741 2,230 2,103
Provision for income taxes 356 289 820 825
------ ------ ------- -------
Net Income 613 452 1,410 1,278
------ ------ ------- -------
------ ------ ------- -------
Net Income Per Share $0.35 $0.32 $0.98 $0.91
------ ------ ------- -------
------ ------ ------- -------
See accompanying notes
3
Capital Corp of The West
Statement of Consolidated Cash Flows
(Unaudited)
9 months ended 9 months ended
9/30/96 9/30/95
-------------- --------------
(In thousands)
Operating activities
Net income $ 1,410 $ 1,278
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses 406 78
Depreciation, amortization and accretion, net 879 616
Provision (benefit) for deferred income taxes (301) 47
Net (increase) in accrued interest receivable & other assets (4,155) (826)
Net decrease in mortgage loans held for sale 501 1,445
Net increase in deferred loan fees 66 43
Net increase in accrued interest payable & other liabilities 3,019 91
Provision for loss on real estate held for sale or development -- 277
Net (gains) on sale of assets (609) (65)
-------- -------
Net cash provided by operating activities 1,216 2,984
Investing activities
Purchases of investment securities (11,308) (15,340)
Proceeds from maturities of investment securities 3,836 7,887
Proceeds from sales of investment securities 10,493 -
Proceeds from sales of commercial and real estate loans 3,158 1,246
Net (increase) in loans (44,801) (9,085)
Purchases of bank premises and equipment (1,279) (1,376)
Proceeds from sale of equipment -- --
Purchases of real estate held for sale or development (795) (631)
Proceeds from sale of real estate held for sale or development 436 751
-------- -------
Net cash (used) by investing activities (40,260) (16,548)
Financing activities
Net increase in demand, now and savings deposits 13,809 8,228
Net increase in certificates of deposit 22,329 2,540
Issuance of common stock for acquisition 3,969 --
Cash dividends and fractional shares (82) (6)
Change in borrowed funds 769 (1)
Exercise of stock options & purchase of shares 347 14
-------- -------
Net cash provided by financing activities 41,141 10,775
Net (decrease) in cash and cash equivalents 2,097 (2,789)
Cash and cash equivalents at beginning of period 18,967 16,490
-------- -------
Cash and cash equivalents at end of period $ 21,064 $13,701
-------- -------
-------- -------
Supplemental Cash Flow Information
Investment securities unrealized (losses)/gains (712) 30
See accompanying notes.
4
PART 1--FINANCIAL INFORMATION (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 1996, December 31, 1995 and September 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. As of September 30, 1996 there were approximately
1,732,974 common shares outstanding, held of record by approximately 1,265
shareholders. There were no preferred shares outstanding at September 30,
1996. In April 1996, the Company formed Capital West Group, a new subsidiary
that engages in the financial institutions advisory business. The Company
has a wholly owned industrial loan company, Town + Country Finance + Thrift
(the "Thrift"). The Bank has one wholly owned subsidiary, Merced Area
Investment & Development, Inc. ("MAID"). All references herein to the
"Company" include Capital West Group, 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 resulted in
approximately 284,578 shares of stock being issued and $1,600,000 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 acquisition resulted in
$2,298,000 in goodwill, deposit, and loan intangibles. The goodwill and
intangibles will be amortized over 3 to 18 years. 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 was accounted for under the purchase method
of accounting.
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 September 30, 1996, and at
December 31, 1995 and the results of operations and statements of cash flows for
the nine month periods ended September 30, 1996 and 1995 and the three month
periods ended September 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. The
weighted average number of shares outstanding were 1,436,445 for the nine month
period ended September 30, 1996 and 1,732,974 for the three month period ended
September 30, 1996. This compares with weighted average number of shares for
the three and nine month period ended September 30, 1995 of 1,417,340. 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 paid on or about September
16, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW--For the nine months ended September 30, 1996, consolidated net income
was $1,410,000 compared to $1,278,000 for the nine month period ended September
30, 1995, a $132,000 (10.3%) increase. Earnings per share were $.98 and $.91,
respectively. The annualized return on average assets was .86% for the first
nine months of 1996 as compared with .94% for the same nine month period in
1995. The Company's annualized return on beginning equity was 12.47% and
12.13%, respectively.
Total assets at September 30, 1996 were $253,891,000, an increase of $44,858,000
or 21.5% compared to December 31, 1995. Net loans were $173,641,000 at
September 30, 1996, an increase of $41,606,000 or 31.5% and deposits were
$228,739,000, an increase of $36,138,000 or 18.8%. Total shareholders' equity
was $20,025,000, an increase of $4,932,000 or 28.1% 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 $61,910,000 and $64,269,000 on September 30, 1996 and December 31,
1995, respectively, and constituted 24.7% and 30.7%, respectively, of total
assets on those dates. The decline in liquidity is primarily a result of an
increase in loans since December 31, 1995 of $41,606,000 with a corresponding
increase in deposits of $36,138,000. Total investment securities decreased by
$4,456,000 since December 31, 1995. 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 Septemeber 30, 1996 and December 31,
1995, the Company's investment portfolio had unrealized security losses of
$656,000 and unrealized securities gains of $512,000, respectively. Total
pledged securities as of September 30, 1996 totalled $16,135,000 as compared to
$18,157,000 at December 31, 1995.
6
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 and the Federal Reserve Bank aggregating $10,050,000 of
which $106,000 was outstanding as of September 30, 1996 and $107,000 was
outstanding as of December 31, 1995.
In addition, in conjunction with the purchase of Town & Country the Company
incurred debt to assist in the cash portion of the purchase. Total debt
outstanding as of September 30, 1996 was $769,000.
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 $4,932,000 (32.7%) since December
31, 1995. This increase is the result of net income of $1,410,000 for the nine
month period ended September 30, 1996 and $3,969,000 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 for the payment of a 5 cents per share cash dividend paid
September 1996, a decrease of $712,000 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 $400,000 as of September 30,
1996, compared to unrealized gains, net of taxes, 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 September 30, 1996 and December 31, 1995 the Company had risk-
based capital ratios of 10.5% and 10.3% respectively (Tier One capital ratios
equaled 9.4% 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. The Company's leverage capital ratio
equaled 8.2% for September 30, 1996 and 7.4% as of December 31, 1995.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996--Net income
for the nine month period ended September 30, 1996 totaled $1,410,000, a
increase of $132,000 (10.3%) over the same nine 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. The increase in earnings in 1996
before the one-time charge mentioned above resulted primarily from strong asset
growth and an improvement in the Bank's net interest income of $1,496,000 (20%),
and improvements in fee income of $1,080,000 (124%) offset by increased loan
loss provisions of $328,000 (421%) and an increase in noninterest expenses of
$2,121,000 (35%). The increase in other income is primarily the result of
increased fees generated from service charges of $283,000, no further provision
for loss on the Bank's real estate subsidiary which was completely written off
last year and other income increases of $520,000 in subsidiary and investment
income, and gain on sales of SBA loans. The increase in noninterest expense
is primarily the result of the $286,000 one time expense for the severance
package previously discussed and an additional $175,000 in related expenses.
Other increases exist primarily in salary and benefit costs, premises,
occupancy and marketing costs related to growth of the Company and the Bank.
Many of the expense increases are the result of Bank additions of a Loan
Production Office (LPO) and two full service branch offices in late 1995
and throughout 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 nine month
period ended September 30, 1996 was .86%. This compares with .94% for the same
nine 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 12.5% for the nine
month period ended September 30, 1996 compared with 12.1% for the same nine
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 nine months
ended September 30, 1996 totaled $8,879,000 compared to $7,383,000 for the same
period in 1995, a $1,496,000 (20.3%) increase.
Total interest and fees on earning assets increased to $13,789,000 for the first
nine months of 1996, an increase of $2,184,000 (18.8%) over the same nine 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 $2,184,000 increase in interest income, $2,233,000 was the result
of increases in volume of interest-earning assets which is partially offset by
$49,000 as the result of decreased yields on those assets. Average interest-
earning assets for the first nine months of 1996 were $195,115,000 as compared
with $163,509,000 for the first nine months of 1995, a $31,606,000 (19.3%)
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 $4,910,000 in
1996 or an increase of $688,000 (16.3%) over the same nine month period in 1995.
Of the $688,000 increase, $653,000 was the result of increases in the volume of
liabilities and $35,000 is the result of higher rates paid on those
liabilities. Average interest-bearing liabilities were $163,509,000 for the
first nine months of 1996 as compared with $141,756,000 for the same nine month
period in 1995, a $21,763,000 (15.3%) increase.
The Company's net interest margin, the ratio of net interest income expressed as
a percent of average interest-earning assets was 6.06% for the nine month period
ended September 30, 1996 compared with 6.04% 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 Bank
generally seeks to maintain a balanced position whereby there is no significant
interest rate 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 change in net interest income may not, however, always follow the general
expectations 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.
The 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 market interest rates on the
Company's return on equity. Based upon the September 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, this
measure of interest rate risk indicates 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
8
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 nine month period of 1996 of
$406,000 compared to $78,000 in the same period in 1995 due to an increase in
non-performing loans. The Company's charge offs, net of recoveries, were
$115,000 for the nine month period ended September 30, 1996 compared with
$131,000 for the same nine month period in 1995. As of the period ending
September 30, 1996 the allowance for loan losses was $2,148,000 or 1.2% 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 September 30, 1996 impaired loans were measured using
the underlying value of collateral measurement method.
The Company had nonperforming loans at September 30, 1996 of $6,194,000 as
compared with $4,673,000 at December 31, 1995. Included in the September 30,
1996 and December 31, 1995 totals respectively, $5,509,000 and $4,626,000 were
loans on nonaccrual status and $685,000 and $224,000 were loans 90 day past due
that were not on nonaccrual status. 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 $500,000. Other forms of collateral such as inventory and
equipment secure the remaining nonperforming loans as of that date.
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 $330,000.
In addition, the Bank has purchased a portfolio of lease receivables in 1994
that as of September 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 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 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. The Bank has had $1,281,000 of these
receivables on non-accrual status since May 3, 1996. 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 $350,000 have been established for this
portfolio. These items are considered isolated incidences and are not
indicative of a continuing trend at this time.
9
Additionally as of September 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 27.9% of the allowance for loan losses
and total equity capital as of September 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 September 30, 1996 was as follows:
commercial loans (22%), agriculture loans (26%), real estate construction loans
(7%), real estate mortgage loans (31%) and consumer loans comprised 14% of the
portfolio. The largest segment within the agriculture portfolio is the Bank's
dairy loans. Dairy loans comprised 15% of the loan portfolio as September 30,
1996. The above referenced loan portfolio mix has not materially changed from
the end of the prior year. The change in consumer loans is primarily 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 September 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 9 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 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.
10
NONINTEREST INCOME--Total noninterest income increased by $1,080,000 (124.3%)
for the nine month period ended September 30, 1996 as compared with the same
period in 1995. Service charges on deposit accounts increased by $283,000
(42.8%), income from the sale of loans and real estate held for sale or
development increased by $143,000 (100%) and other income increased by $377,000
(77.7%). 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
$277,000 in provisions in the same nine 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 $277,000 for future
possible losses on the sale of certain real estate projects in the first nine
months of 1995. There are no write downs in the same nine month period of 1996
due to the complete write down of all MAID properties at the end of 1995.
NONINTEREST EXPENSE--Noninterest expenses increased by $2,121,000 (34.9%) for
the nine month period ended September 30, 1996 as compared with the same period
in 1995. Salaries and related benefits increased by $907,000 (28.8%),
occupancy expenses increased $131,000 (29.1%), equipment expenses increased
$178,000 (31.1%), marketing expenses increased by $105,000 or (57.0%),
professional fees increased by $339,000 (127.9%) and other expenses increased by
$589,000 (45.7%). The above increases were partially offset by $128,000 in
reduced assessment charges.
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
throughout 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 (FTE) employees
increased by 17 (14.9%) for the nine months ended September 30, 1996 as compared
with the same nine month period in 1995. The increase is due to the acquisition
of the Thrift's 18 FTE's and the office additions previously mentioned offset by
23 employees that accepted the voluntary seperation package offered in June
1996.
PROVISION FOR INCOME TAXES--The Bank's provision for income taxes was $820,000
for the nine month period ended September 30, 1996 as compared with $825,000
for the same nine month period in 1995. Effective tax rates were 37% and 39%
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 resulting in
anticipated credits of $60,000 for the year ending December 31, 1996 compared to
no credits for 1995. The level of credits are expected to increase in future
years.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996--Net income
for the three month period ended September 30, 1996 totaled $613,000, a increase
of $161,000 (35.6%) over the same three month period in 1995. This results in
earnings per share of $.35 and $.32 respectively. The increase in earnings in
1996 was primarily a result of strong asset growth and an improvement in the
Company's net interest income of $729,000 (27.7%) and improvements in fee income
of $469,000 (208.4%) offset by increased loan loss provisions of $96,000 (100%)
and an increase in noninterest expenses of $874,000 (41.4%). The increase in
other income is primarily the result of an increase in fees generated from
service charges of $114,000, no further provision for loss ($177,000 taken same
period last year) on the Bank's real estate subsidiary which was completely
written off last year and other income increases of $178,000. 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 purchase of the Thrift , addition of a Loan Production Office
(LPO) and two full service branch offices in late 1995 and throughout 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 September
30, 1996 was 1.0%. This compares with .96% for the same three month period in
1995.
11
NET INTEREST INCOME--Net interest income for the three months ended September
30, 1996 totaled $3,357,000 compared to $2,628,000 for the same period in 1995,
a $729,000 (27.7%) increase.
Total interest and fees on earning assets increased to $5,226,000 for the first
nine months of 1996, an increase of $1,149,000 (28.2%) 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 $1,149,000 increase in interest income, $466,000 was the
result of increases in volume and $683,000 as the result of increased yields on
those assets. Average interest-earning assets for the three months ended
September 30, 1996 were $187,202,000 as compared with $169,053,000 for the same
three months of 1995, a $18,149,000 (10.7%) increase.
Total interest expense increased to $1,869,000 for the first nine months of
1996, an increase of $420,000 (29%) over the same three month period in 1995.
Of the $420,000 increase, $427,000 was the result of increases in the volume of
liabilities which was partially offset by $7,000 as a result of lower rates
paid on those liabilities. Average interest-bearing liabilities were
$187,202,000 for the three months ended September 30, 1996 as compared with
$144,435,000 for the same period in 1995, a $42,767,000 (29.6%) increase.
The Company's net interest margin, the ratio of net interest income expressed as
a percent of average interest-earning assets was 6.0% for the three month period
ended September 30, 1996 compared with 6.2% 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 September
30, 1996 of $96,000 as compared to no provision in the same period in 1995. The
Company's charge offs, net of recoveries, were $15,000 for the three month
period ended September 30, 1996 as compared with $85,000 for the same period in
1995.
NONINTEREST INCOME--Total noninterest income increased by $469,000 (208.4%) for
the three month period ended September 30, 1996 as compared with the same period
in 1995. Service charges on deposit accounts increased by $114,000 (49.8%),
income from the sale of loans and real estate held for sale or development
increased by $67,000 (100%) and other income increased by $111,000 (64.2%). 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 $177,000 in
provisions in the same three month period in 1995.
NONINTEREST EXPENSE--Noninterest expenses increased by $874,000 (41.4%) for the
three month period ended September 30, 1996 as compared with the same period in
1995. Salaries and related benefits increased by $285,000 (25.0%), occupancy
expenses increased $79,000 (49.0%), equipment expenses increased $58,000 (28%),
marketing expenses increased by $21,000 or (29.2%), professional fees increased
by $179,000 (192.5%) and other expenses increased by $215,000 (45.7%). This is
in part offset by a reduction in Bank assessments of $37,000 (148%).
Many of the expense increases are the result of the purchase of the Thrift, the
addition of a Loan Production Office (LPO) and two full service branch offices
in late 1995 and throughout 1996 and the addition of Capital West Group, a
newly formed subsidiary of the holding company. On average, full time
equivalent employees increased by 15 (12.5%) for the three months ended
September 30, 1996 as compared with the same three month period in 1995.
PROVISION FOR INCOME TAXES--The Company's provision for income taxes was
$356,000 for the three month period ended September 30, 1996 as compared with
$289,000 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 commenced August 6, 1996 with
completion of the facility expected by summer 1997.
12
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 floor 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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Number Description
-------------- ----------
3.1 September 27, 1996 Amendment to Articles of
Incorporation
3.2 Revised Bylaws of Capital Corp of the West
3.2 Amendments to Bylaws-
section 2.8 (Incorporated by reference. From
1996 Proxy filed on or about May 20, 1996)
13
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
Sr. Vice President/ Chief Financial Officer
Dated: November 8, 1996
14