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, 1997
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 June 30, 1997 was 2,615,947. No shares of preferred stock, no par value,
were outstanding at June 30, 1997.
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 7
PART II--OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
1
CAPITAL CORP OF THE WEST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
06/30/97 12/31/96 06/30/96
-------- -------- --------
(In thousands)
ASSETS
Cash and noninterest-bearing deposits in other
banks $13,414 $12,982 $17,451
Time Deposits with other banks 266 3,101 0
Federal Funds Sold 7,775 3,735 575
Investment securities:
Available-for-sale securities, at fair value 42,747 43,378 41,211
Held-to-maturity securities at amortized cost,
market value of $11,324,000 at June 30, 1997 11,451 0 0
Mortgage loans held for sale 0 880 865
Loans, net of allowance for loan losses of $2,268,000 at
June 30, 1997, $2,792,000 at December 31, 1996; and
$2,064,000 at June 30, 1996 193,092 180,455 161,988
Interest receivable 2,041 1,879 1,799
Premises and equipment, net 9,429 6,266 4,827
Other assets 12,809 13,313 11,092
-------- -------- --------
Total assets $293,024 $265,989 $239,808
-------- -------- --------
-------- -------- --------
LIABILITIES
Deposits:
Noninterest-bearing demand $33,263 $39,157 $35,082
Negotiable orders of withdrawal 36,829 34,303 26,920
Savings 116,220 111,285 106,063
Time, under $100,000 49,047 42,053 39,548
Time, $100,000 and over 22,319 11,547 8,004
-------- -------- --------
Total Deposits 257,678 238,345 215,617
Federal funds purchased and securities sold 5,722 0 1,500
Short-term borrowings 8,467 110 0
Long-term borrowings 105 1,535 106
Accrued interest, taxes and other liabilities 88 5,025 3,258
-------- -------- --------
Total liabilities 272,060 245,015 220,481
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 15,000,000 shares
authorized, none outstanding 0 0 0
Common stock, no par value; 30,000,000 shares
authorized, 2,615,947 issued and outstanding at
June 30, 1997; 2,601,711 issued and outstanding
at December 31, 1996; and 2,599,557 issued
and outstanding at June 30, 1996 15,664 15,321 15,298
Retained earnings 5,273 5,722 4,514
Investment securities unrealized gains (losses), net 27 (69) (485)
-------- -------- --------
Total Shareholders' Equity 20,964 20,974 19,327
-------- -------- --------
Total Liabilities and Shareholders' Equity $293,024 $265,989 $239,808
-------- -------- --------
-------- -------- --------
see accompanying notes
2
CAPITAL CORP OF THE WEST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ending Six Months Ending
6/30/97 6/30/96 6/30/97 6/30/96
------------------ ------------------ ----------------- -------------------
(In Thousands Except for Per Share Data) (In Thousands Except for Per Share Data)
Interest Income
Interest and fees on loans $4,943 $3,647 $9,630 $7,067
Interest on investment securities
Taxable 917 589 1,727 1,304
Nontaxable 49 62 108 121
Interest on federal funds sold 47 15 92 71
-------- -------- -------- -------
Total Interest Income 5,956 4,313 11,557 8,563
Interest Expense
Deposits
Negotiable orders of withdrawal 80 64 158 127
Savings 1,150 1,025 2,272 2,061
Time, under $100,000 724 315 1,417 622
Time, $100,000 or more 193 91 299 185
Other 188 35 261 47
-------- -------- -------- -------
Total Interest Expense 2,335 1,530 4,407 3,042
Net Interest Income 3,621 2,783 7,150 5,521
Provision for loan losses 3,236 150 3,476 310
-------- -------- -------- -------
Net interest income after provision for loan losses 385 2,633 3,674 5,521
Other income
Service charges on deposit accounts 396 320 733 601
Income from real estate held for sale or development 504 68 511 76
Other 312 296 702 578
-------- -------- -------- -------
Total Other Income 1,212 684 1,946 1,255
Other Expenses
Salaries and related benefits 1,487 1,454 3,031 2,640
Bank premises and occupancy 297 184 576 341
Equipment 348 251 635 484
Professional fees 119 190 260 332
Marketing 152 106 311 196
Other 1,777 668 1,607 1,213
-------- -------- -------- -------
Total Other Expenses 3,180 2,853 6,420 5,206
Income (loss) before income taxes (1,583) 464 (800) 1,206
Provision (benefit) for income taxes (640) 168 (370) 463
-------- -------- -------- -------
Net Income (Loss) (943) 296 (430) 797
-------- -------- -------- -------
-------- -------- -------- -------
Net Income (Loss) Per Share $ (0.36) $ 0.13 $ (0.17) $ 0.36
-------- -------- -------- -------
-------- -------- -------- -------
See accompanying notes
3
CAPITAL CORP OF THE WEST
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
6 Months Ended 6 Months Ended
06/30/97 06/30/96
(In thousands)
--------------- --------------
Operating activities:
Net income $ (430) $ 797
Adjustments to reconcile net income to net
cash provided by operating
Provision for loan losses 3,476 310
Depreciation, amortization and accretion, net 713 609
Provision (benefit) for deferred income taxes (35) (59)
Gain on sale of premises and equipment 0 (80)
Net (increase) decrease in interest receivable
and other assets (656) (3,854)
Net decrease (increase) in mortgage loans held for sale 880 (364)
Net increase in deferred loan fees 63 3
Net increase in accrued interest payable and
other liabilities (2,686) 3,443
--------- --------
Net cash provided by operating activities 1,325 1,006
Investing activities:
Investment security purchases (24,520) (7,699)
Proceeds from maturities of investment securities 10,264 1,757
Proceeds from sales of investment securities 6,155 8,472
Proceeds from sales of commercial and
real estate loans 1,250 1,941
Net increase in loans (17,427) (32,327)
Purchases of premises and equipment (3,680) (1,054)
Construction of real estate held for
sale or development 0 (504)
Proceeds from sales of real estate held
for sale or development 1,050 135
--------- --------
Net cash (used) by investing activities (26,908) (29,279)
Financing activities:
Net increase in demand, NOW and savings deposits 1,567 3,783
Net increase in certificates of deposit 17,766 19,233
Net increase in other borrowings 10,398 0
Issuance of common stock for acquisition 0 3,969
Exercise of stock options and purchases for benefit plans 341 347
Cash in lieu of fractional shares (17) 0
--------- --------
Net cash provided by financing activities 30,055 27,332
Net increase (decrease) in cash and cash equivalents 4,472 (941)
Cash and cash equivalents at beginning of year 16,717 18,967
--------- --------
Cash and cash equivalents at end of quarter $21,189 $18,026
--------- --------
--------- --------
Supplementary Disclosure of noncash investing and
Financing activities:
Investment securities unrealized gains 190 1,306
See accompanying notes
4
CAPITAL CORP OF THE WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, DECEMBER 31, 1996 AND JUNE 30, 1996
(Unaudited)
GENERAL-COMPANY
Capital Corp of the West (the "Company" or "Capital Corp") is a bank
holding company incorporated under the laws of the State of California on
April 26, 1995. On November 1, 1995, the Company became registered as a bank
holding company, and is the holder of all of the capital stock of Country
Bank (the "Bank") and all of the capital stock of Town and Country Finance
and Thrift (the "Thrift"). During 1996 the Company formed Capital West
Group, a new subsidiary that engages in the financial institution advisory
business but is currently inactive. The Company's primary asset is the Bank
and the Bank is the Company's primary source of income. The Company's
securities consist of 30,000,000 shares of Common Stock, no par value and
10,000,000 shares of Preferred Stock. As of June 30, 1997 there were
2,615,947 common shares outstanding, held of record by approximately 1,300
shareholders. There were no preferred shares outstanding at June 30, 1997.
The Bank has two wholly owned subsidiaries, Merced Area Investment &
Development, Inc. ("MAID") and County Asset Advisors ("CAA"). CAA is
currently inactive. All references herein to the "Company" include the Bank,
and the Bank's subsidiaries, Capital West Group and the Thrift, unless the
context otherwise requires.
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, by the Federal Deposit
Insurance Corporation ("FDIC") up to applicable limits stated therein. Like
most state-chartered banks of its size in California, it is not a member of
the Federal Reserve System.
GENERAL-THRIFT
The Company acquired the Thrift on June 28, 1996 for a combination of
cash and stock with an aggregate value of approximately $5.8 million. The
Thrift is an industrial loan company with four offices. It specializes in
direct loans to the public and the purchase of financing contracts
principally from automobile dealerships and furniture stores. It was
originally incorporated in 1957. Its deposits (technically known as
investment certificates or certificates of deposit rather than deposits) are
insured by the FDIC up to applicable limits.
BANK'S INDUSTRY & MARKET AREA
The Bank engages in general commercial banking business primarily in
Merced, Tuolomne and Stanislaus Counties. The Bank has nine branch offices:
two in Merced with the branch located in north Merced currently designated as
the head office, and offices in Atwater, Turlock, Hilmar, Sonora, Los Banos,
5
and two offices in Modesto opened in late 1996. The Company's administrative
headquarters are located in three separate suites in the same office complex.
The administrative facilities also provides accommodations for the activities
of MAID, the Bank's wholly owned real estate development subsidiary. Although
approved to be a full service branch banking office, the administrative
headquarters facility is presently used solely as the Company's corporate
headquarters. Effective July 15, 1995 the Company entered into an agreement
to relocate its existing administrative office and an existing branch in
downtown Merced to a new facility in downtown Merced. Construction began in
the summer of 1996 and is expected to be complete in late summer of 1997.
The estimated construction cost of the new 29,000 square foot facility
including a parking structure is estimated at approximately $4.7 million. In
conjunction with the construction of the facility, the Merced Redevelopment
Agency has provided the Company with an interest-free loan in the amount of
$3.0 million. The loan, originally scheduled to mature on July 8, 1997, was
extended until October 1, 1997. For the interim period of extension, an
interest rate of 6% is being charged on the loan. It is anticipated that
upon completion of the facility, a permanent mortgage loan will be obtained
from an unaffiliated lender. The Thrift engages in general consumer lending
business primarily in Stanislaus, Fresno and Tulare counties from its main
office in Turlock; and branch offices located in Modesto, Visalia, and Fresno.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS.
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company
and its subsidiaries' financial condition, operating results, asset and
liability management, liquidity and capital resources. The following
discussion should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto.
FINANCIAL CONDITION
Total assets at June 30, 1997 were $293,024,000, an increase of
$27,035,000 or 10% compared with total assets of $265,989,000 at December 31,
1996, and an increase of $53,216,000 or 22% compared with total assets of
$239,808,000 at June 30, 1996. Net loans were $193,092,000 at June 30, 1997,
an increase of 12,637,000 or 7.6% compared with net loans of $180,455,000 on
December 31, 1996, and an increase of $31,104,000 or 19.2% compared with net
loans of $161,988,000 at June 30, 1996. The growth of the Company from June
30, 1996 to June 30, 1997 was primarily the result of the the opening of two
branch offices of County Bank within that period.
The allowance for loan losses was $2,268,000 at June 30, 1997,
representing a decrease of 18.8% of the allowance at December 31, 1996 but an
increase of 9.9% of the allowance at June 30, 1996. The allowance at June
30, 1997 represented 1.16% of total loans, compared with 1.52% of total
6
loans at December 31, 1996. Nonperforming loans at June 30, 1997 decreased
by $3,663,000 from December 31, 1996, moving from 3.04% of total loans to
.98% of total loans. In addition, the allowance for loan losses as a
percentage of nonperforming loans increased from 50.14% at December 31, 1996
to 119.06% at June 30, 1997.
Deposits were $257,678,000 at June 30, 1997, an increase of $19,333,000
or 8% compared with deposits of $238,345,000 at December 31, 1996, and an
increase of $42,061,000 or 20% compared with deposits of $215,617,000 at June
30, 1996.
Total shareholders' equity was $20,964,000 at June 30, 1997, a decrease
of $10,000 (less than 1%) from $20,974,000 at December 31, 1996, and an 8%
increase from $19,327,000 at June 30, 1996.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
OVERVIEW. For the six months ended June 30, 1997, the Company reported a
net loss of $430,000 compared with net income of $797,000 for the six months
ended June 30, 1996. Earnings (loss) per share were ($.17) and $.36,
respectively, after adjustments for a 5% stock dividend in August 1996 and a
three-for-two split in May 1997. The annualized return (loss) on average
assets was (.31%) for the first six months of 1997 compared with .78% for the
same six months in 1996. The Company's annualized return (loss) on average
equity was (3.97%) and 10.74% for the six months ended June 30, 1997 and
1996, respectively. The decreases in earnings per share, return on average
assets and return on average equity were primarily attributable to the
significant increase in the loan loss provision taken in the first six months
of 1997.
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. The difference between the two is net interest
income. Net interest income for the six months ended June 30, 1997 totaled
$7,150,000 compared with $5,521,000 for the same period in 1996, an increase
of $1,629,000 or 30%.
Total interest and fees on earning assets were $11,557,000 for the first
six months of 1997, an increase of $2,994,000 or 35% from $8,563,000 for the
same six months in 1996. The level of interest income is affected by changes
in volume of and rates earned on interest-earning assets. Interest-earning
assets consist primarily of loans, investment securities and federal funds
sold. The increase in interest income in the first six months of 1997 was
primarily the result of an increase in the volume of interest-earning assets.
Average interest-earning assets for the first six months of 1997 were
$245,765,000 compared with $185,694,000 for the first six months of 1996, an
increase of $60,071,000 or 32%.
Interest expense is a function of the volume of and the rates paid on
interest-bearing liabilities. Interest-bearing liabilities consist primarily
of certain deposits and borrowed funds. Total interest expense was
$4,407,000 for the six months ended June 30, 1997, compared with $3,042,000
for the six months ended June 30, 1996, an increase of $1,365,000 or 45%.
This increase was primarily the result of an increase in the volume of
interest-bearing liabilities. Average interest-bearing liabilities were
$219,612,000 for the first six months of 1997 compared with $160,500,000 for
the same six months in 1996, an increase of $59,112,000 or 37%.
The Company's net interest margin, the ratio of net interest income to
average interest-earning assets, was 5.83% for the six months ended June 30,
1997 compared with 6.06% for the same period in 1996. Net interest margin
provides a measurement of the Company's ability to employ funds profitably
during the period being measured. The Company's decrease in net interest
margin was primarily attributable to moderate change in the mix
interest-bearing liabilities. Certificate of deposits as a percentage of
interest-bearing liabilities increased from 19% for the six months ended June
30, 1996 to 29% for the six months ended June 30, 1997.
The following table presents condensed average balance sheet information
for the Company, together with interest rates earned and paid on the various
sources and uses of its funds for each of the periods indicated. Nonaccruing
loans are included in the calculation of the average balances of loans, but
the nonaccrued interest on such loans is excluded.
FOR THE SIX MONTHS ENDED
---------------------------------------------------------------------------------
JUNE 30, 1997 JUNE 30, 1996
----------------------------------- -----------------------------------
INTEREST RATES INTEREST RATES
AVERAGE INCOME / EARNED / AVERAG INCOME / EARNED /
BALANCE EXPENSE PAID BALANC EXPENSE PAID
------- ------- ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Assets
Federal funds sold $3,488 $92 5.29% $2,709 $71 5.26%
Taxable investment securities: (1) 50,080 1,727 6.92 38,174 1,304 6.85
Nontaxable investment securities 3,989 108 5.43 4,536 121 5.35
Loans, gross: (2) 188,208 9,630 10.26 131,358 7,067 10.32
------- ----- ----- ------- ----- -----
Total Earning Assets 245,765 $11,557 9.43 182,777 $8,563 9.40
------- ------
Allowance for loan losses (2,881) (1,794)
Cash and due from banks 10,998 10,103
Premises and equipment 8,150 4,350
Interest receivable and other assets 15,294 9,736
------ -----
Total Assets $277,326 $205,172
-------- --------
Liabilities and Shareholders' Equity
Interest-bearing demand deposits $34,769 $158 .91 $28,002 $127 .91%
Savings deposits 111,588 2,272 4.08 99,768 2,061 4.14
Time deposits 63,305 1,716 5.44 30,681 807 5.27
Other borrowed funds 9,950 261 5.26 1,665 47 5.66
----- --- ---- ----- -- ----
Total interest-bearing liabilities 219,612 $4,407 4.02 160,122 $3,042 3.81
------ ------
Noninterest-bearing demand deposits 32,166 28,748
Accrued interest, taxes and other
liabilities 3,877 699
Total liabilities 255,655 189,569
Shareholders' equity 21,671 15,603
------ ------
Total Liabilities and Shareholders'
Equity $277,326 $205,172
-------- --------
Net interest income $7,150 $5,521
------ ------
Net interest margin (3) 5.83% 6.06%
----- -----
- ------------------------------------------
(1) Interest on municipal securities is not computed on a tax-equivalent
basis.
(2) Amounts of interest earned includes loan fees of $670,000 and $443,000
for the periods included.
(3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
The following table sets forth, for the periods indicated, a summary of
the changes in average asset and liability balances and interest earned and
interest paid resulting from changes in average asset and liability balances
(volume) and changes in average interest rates and the total net change in
interest income and expenses. The changes in interest due to both rate and
volume have been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amount of the change in each.
SIX MONTHS ENDED JUNE 30, 1997
OVER SIX MONTHS ENDED
JUNE 30, 1996
------------------------------
INCREASE (DECREASE)
DUE TO CHANGE IN
------------------------------
AVERAGE AVERAGE
VOLUME RATE TOTAL
--------- -------- -------
INCREASE (DECREASE) IN INTEREST AND FEE INCOME:
Federal funds sold $ 20 $ 1 $ 21
Taxable investment securities 407 16 423
Nontaxable investment securities(1) (15) 2 (13)
Loans, gross 2,602 (39) 2,563
--------- -------- -------
Total 3,014 (20) 2,994
INCREASE (DECREASE) IN INTEREST EXPENSE:
Interest-bearing demand deposits 31 0 31
Savings deposits 240 (29) 211
Time deposits 883 26 909
Other borrowed funds 217 (3) 214
--------- -------- -------
Total 1,371 (6) 1,365
--------- -------- -------
--------- -------- -------
Total change in net interest income $1,643 ($14) $1,629
--------- -------- -------
--------- -------- -------
- --------------------------
(1) Interest on nontaxable securities is not computed on a tax-equivalent
basis.
NONINTEREST INCOME. Noninterest income increased by $691,000 or 55% to
$1,946,000 for the six months ended June 30, 1997 compared with $1,255,000 in
the same period in 1996. Service charges on deposit accounts increased by
$123,000 or 22%, income from the sale of real estate held for sale or
development increased by $445,000 and other income increased by $123,000 or
21%. The increases in service charges are primarily due to general growth of
the Company. The increase in income from the sale of real estate held for
sale or development was due to increased sales. In the second quarter of
1997 four finished lots and two parcels were sold. The primary reasons for
the increase in other income were increases from loan servicing income and
retail investment sales.
NONINTEREST EXPENSE. Noninterest expenses increased by $1,214,000 or 23% to
$6,420,000 for the six months ended June 30, 1997 compared with $5,206,000
for the same period in 1996. The primary components of noninterest expenses
were salaries and employee benefits, occupancy expenses, furniture and
equipment expenses, and other operating expenses. The following table
summarizes noninterest expenses for the six-month periods ended June 30, 1997
and 1996.
For the Six
Months Ended
June 30, 1997
----------------------
1997 1996
---------- ---------
Salaries and employee benefits $3,031 $2,640
Furniture and equipment 635 484
Occupancy expense 576 341
Marketing 311 196
Professional fees 260 332
Supplies 251 123
Regulatory assessments 35 21
Other 1,321 1,069
------- -------
Total $6,420 $5,206
------- -------
------- -------
For the six months ended June 30, 1997 compared with the six months ended
June 30, 1996, salaries and related benefits increased by $391,000 or 15%,
equipment expenses increased $151,000 or 31%, occupancy expenses increased
$235,000 or 69%, marketing expenses increased by $115,000 or 59% and other
expenses, including professional fees, supplies, and regulatory assessments,
increased by $322,000 or 21%. The expense increases were primarily the
result of expansion, including expenses associated with the acquisition and
operation of Town and Country (acquired in June 1996) and the opening of two
branch offices since June 1996.
PROVISION FOR INCOME TAXES. The Company recorded a $370,000 tax benefit
for the six months ended June 30, 1997 compared with a provision for income
taxes of $463,000 for the same six months in 1996. The benefit resulted from
the net losses attributable to the loss loan provisions of $3,476,000 and
related charge-offs of a real estate development loan of $3,458,000. Tax
rates were also affected by the purchase of limited partnership investments
in low-income affordable housing projects providing the investor with
affordable housing income tax credits. The Company had investments in these
partnerships of $2,700,000 as of June 30, 1997 and $1,700,000 as of June 30,
1996, resulting in tax credits of $70,000 and $30,000, respectively.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is an integral part of managing a banking
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 interest rates.
The Company considers its rate-sensitive assets to be those which either
contain a provision to adjust the interest rate periodically or mature within
one year. These assets include certain loans and investment securities and
federal funds sold. Rate-sensitive liabilities are those which allow for
periodic interest rate changes within one year and include maturing time
certificates, certain savings deposits and interest-bearing demand deposits.
The difference between the aggregate amount of assets and liabilities that
reprice within at various time frames is called the "gap." Generally, if
repricing assets exceed repricing liabilities in a time period the Company
would be deemed to be asset-sensitive. If repricing liabilities exceed
repricing assets in a time period the Company would be deemed to be
liability-sensitive. Generally, the Company seeks to maintain a balanced
position whereby there is no significant asset or liability sensitivity
within a one-year period 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 following tables set forth the interest rate sensitivity of the
Bank's interest-earning assets and interest-bearing liabilities as of June
30, 1997 and December 31, 1996, using the interest rate sensitivity gap
ratio. For purposes of the following table, as asset or liability is
considered rate-sensitive within a specified period when it can be repriced
or matures within the contractual terms.
AT JUNE 30, 1997
------------------------------------------------------------------------------------------------
AFTER 1
AFTER 3 YEAR BUT
WITHIN 3 BUT WITHIN WITHIN AFTER NONINTEREST-
MONTHS 12 MONTHS 5 YEARS 5 YEARS BEARING TOTAL
------ --------- -------- ------- ------- -----
(DOLLARS IN THOUSANDS)
ASSETS
Time deposits in other banks $ 167 $ 99 $ - $ - $ - $ 266
Federal funds sold 7,775 - - - - 7,775
Investment securities 1,859 5,706 12,456 34,177 - 54,198
Loans 123,332 37,258 23,430 11,340 - 195,360
Other interest-bearing assets - 3,210 - - - 3,210
-------- --------- -------- -------- --------- -------
Total earning assets 133,133 46,273 35,886 45,517 - 260,809
Noninterest-earning assets and
allowances for loan losses - - - - 32,215 32,215
-------- --------- -------- -------- --------- -------
Total assets $133,133 46,273 $35,886 $45,517 $32,215 293,024
LIABILITIES AND SHAREHOLDERS'
EQUITY
Savings, money market and NOW $ 153,049 $ - $ - $ - $ 33,263 $ 186,312
Time deposits 13,314 44,020 14,032 - - 71,366
Other interest-bearing liabilities 5,620 - 8,762 - - 14,382
Other liabilities and
shareholders' equity - - - - 20,964 20,964
-------- --------- -------- -------- --------- -------
Total liabilities and 171,983 44,020 22,794 - 54,227 293,024
-------- --------- -------- -------- ---------
Incremental gap (38,850) 2,253 13,092 45,517 $(22,012)
Cumulative gap $(38,850) $(36,597) $(23,505) $22,012
Cumulative gap as a % of earning
assets (14.9)% (14.0)% (9.0)% 8.4%
7
The Company was liability-sensitive with a negative cumulative one-year
gap of $36,597,000 or 14% of interest-earning assets at June 30, 1997. In
general, based upon the Company's mix of deposits, loans and investments,
increases in interest rates would be expected to result in a decrease in the
Company's net interest margin.
The interest rate gaps reported in the tables arise when assets are
funded with liabilities having different repricing intervals. Since these
gaps are actively managed and change daily as adjustments are made in
interest rate views and market outlook, positions at the end of any period
may not be reflective of the Company's interest rate sensitivity in
subsequent periods. Active management dictates that longer-term economic
views are balanced against prospects for short-term interest rate changes in
all repricing intervals. For purposes of the analysis above, repricing of
fixed-rate instruments is based upon the contractual maturity of the
applicable instruments. Actual payment patterns may differ from contractual
payment patterns. The change in net interest income may not always follow
the general expectations of an asset-sensitive or liability-sensitive balance
sheet during periods of changing rates, because interest rates earned or paid
may change by differing increments and at different times intervals for each
type of interest-sensitive asset and liability. As a result of these factors,
at any given time, the Company may be more sensitive or less sensitive to
changes in interest rates than indicated in the above tables. Greater
sensitivity would have a more adverse effect on net interest margin if market
interest rates were to increase, and a more favorable effect if rates were to
decrease.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the first six
months of 1997 was $3,476,000 compared with $310,000 in the six months ended
June 30, 1996. In the three months ended June 30, 1997, the Company made a
provision of $3,236,000 for loan losses and charged off a real estate
development loan with a balance of $3,458,000. After giving effect to the
provision and the charge-off, the allowance was $2,268,000 or 1.16% of total
loans. The write-off substantially reduced the company's non-performing
assets. At June 30, 1997, nonperforming assets totaled $2,322,000 or .79% of
total assets, nonperforming loans totaled $1,905,000 or .98% of total loans
and the allowance for loan losses totaled 119.06% of nonperforming loans. No
assurance can be given that nonperforming loans will not increase or that the
allowance for loan losses will be adequate to cover losses inherent in the
loan portfolio.
8
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans, loans 90 days or more
past due, restructured loans and other real estate owned.
Nonperforming loans are those which the borrower fails to perform in
accordance with the original terms of the obligation and include loans on
nonaccrual status, loans past due 90 days or more and restructured loans.
The company generally places loans on nonaccrual status and accrued but
unpaid interest is reserved against the current year's income when interest
or principal payments become 90 days or more past due unless the outstanding
principal and interest is adequately secured and, in the opinion of
management, is deemed in the process of collection. Interest income on
nonaccrual loans is recorded on a cash basis. Payments may be treated as
interest income or return of principal depending upon management's opinion of
the ultimate risk of loss on the individual loan. Cash payments are treated
as interest income where management believes the remaining principal balance
is fully collectible. Additional loans not 90 days past due may also be
placed on nonaccrual status if management reasonably believes the borrower
will not be able to comply with the the contractual loan repayment terms and
collection of principal or interest is in question.
A "restructured loan" is a loan on which interest accrues at a below
market rate or upon which certain principal has been forgiven so as to aid
the borrower in the final repayment of the loan, with any interest previously
accrued, but not yet collected, being reversed against current income.
Interest is reported on a cash basis until the borrower's ability to service
the restructured debt in accordance with its terms is established. The
Company has no restructured loans as of the dates indicated.
The following table summarizes the Company's nonperforming assets at the
dates indicated:
AT DECEMBER 31,
AT -----------------------------------------------
JUNE 30
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
Nonaccrual loans $ 1,568 $ 4,968 $ 4,626 $ 653 $ 1,019 $ 1,064
Accruing loans past due 90 days or more 337 600 224 46 64 145
------- ------- ------- ------- ------- -------
Total nonperforming loans 1,905 5,568 4,850 699 1,083 1,209
Other real estate owned 417 1,466 47 - - 676
------- ------- ------- ------- ------- -------
Total Nonperforming assets $ 2,322 $ 7,034 $ 4,897 $ 699 $ 1,083 $ 1,885
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
At June 30, 1997, nonperforming assets totaled $2,322,000 or .79% of
total assets, nonperforming loans totaled $1,905,000 or .98% of total loans
and the allowance for loan losses totaled 119.06% of nonperforming loans.
Nonperforming loans that were secured by first deeds of trust on real
property were $211,000 at June 30, 1997, $3,626,000 at December 31, 1996,
$3,286,000 at December 31, 1995 and $422,000 at December 31, 1994. Other
forms of collateral such as inventory and equipment secured the remaining
nonperforming loans as of each date. No assurance can be given that the
collateral securing the nonperforming loans will be sufficient to prevent
losses on such loans.
The decrease in nonperforming loans and nonperforming assets as of June 30,
1997 compared with their levels as of December 31, 1996, was due primarily to
the write-off of a commercial real estate loan with a balance of $3,458,000
(mentioned below) and the sale of one agricultural parcel previously acquired
through foreclosure. The increase in nonperforming assets as of December 31,
1996 from the level at December 31, 1995 was attributable primarily to a
commercial real estate loan and a purchased portfolio of lease receivables
being placed on nonaccrual status and two agricultural real estate properties
being acquired through foreclosure.
In late 1995, a commercial real estate development loan was placed on
nonaccrual status. This loan is secured by a second lien (subject to the
first lien of project related municipal development bonds and taxes and
assessments) on 10 improved commercial lots and one commercial building and a
second lien on two fully occupied commercial buildings in Sonora,
California, and is guaranteed by the principals of the borrowing entity. The
owner is developing the property as an office park. The Company had
specifically allocated $1,725,000 of its allowance for loan losses as of
March 31, 1997 to this loan. In the second quarter of 1997, the project
funded by the loan became involved in litigation among other parties, and
development was suspended for an undetermined period. Without the immediate
prospect for completion of the project, the Company made the judgement that
its collateral position, subordinate in large part to bonds used to finance
the project, should conservatively not be accorded any value and accordingly
charged off the entire balance of the loan of $3,458,000. The Company will
nonetheless vigorously pursue efforts to realize a potential recovery on the
loan.
County Bank purchased a portfolio of lease receivables in 1994. The
company that 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 Commission with participating in securities fraud. More
than 360 banks nationwide had acquired similar lease receivable contracts.
The Bank had $1,281,000 of these leases on nonaccrual status as of December
31, 1996. On February 12, 1997, County Bank signed a settlement agreement
in regards to this portfolio of leases that established a projected recovery
rate at 78.5% or approximately $1,006,000. On March 31, 1997, the Bank
charged off $275,000 against its allowance for loan losses and the remaining
balance of $1,006,000 remains on nonaccrual. The projected recovery may not
be achieved and is subject to uncertainties, including the risk that the
delinquency rate in the portfolio might increase, that information that has
been provided to the Company by third parties about the likelihood of
repayment may prove to be incorrect, that additional fraudulent leases may be
discovered in the portfolio or that administrative expenses of the bankruptcy
with priority over the Company may exceed estimates on which the recovery
projections are based. Any of these uncertainties could reduce, in part or
entirely, the amount that the Company recovers on the portfolio.
At June 30, 1997, the Company had $417,000 in one agricultural property
acquired through foreclosure in late 1996. This property is carried at the
lower of its estimated market value, as evidenced by an independent
appraisal, or the recorded investment in the related loan, less estimated
selling expenses. At foreclosure, if the fair market value of the real
estate is less than the Company's recorded investment in the related loan, a
charge is made to the allowance for loan losses. The Company expects to sell
this property during 1997. No assurance can be given that the Company will
sell such property in 1997 or at any time or the amount of which such
property might be sold.
In addition to property acquired through foreclosure, the Company has
investments in Merced County through MAID. MAID held two separate
projects for sale or development at June 30, 1997. These investments were
completely written off in 1995, although County Bank still retains title to
these properties. In the second quarter of 1997, two parcels and four lots
were sold for a pre-tax gain of $511,000.
The Bank closely monitors its loans classified "Substandard" or "Doubtful"
by the regulatory agencies. In March 1997, in response to a 1996 regulatory
examination, the Bank committed to reduce loans in the amount of $11,848,000
classified "Substandard" and "Doubtful" at December 2, 1996 to no more than
$8,550,000 by June 30, 1997 and to no more than $7,800,000 by December 2,
1997. Such loans totaled $10,362,000 at March 31, 1997 and $11,185,000 at
December 31, 1996. At June 30, 1997, such loans totaled $4,626,000.
Management defines impaired loans, regardless of past due status on
loans, as those on which principal and interest are not expected to be
collected under the original contractual loan repayment terms. An impaired
loan is charged off at the time management believes the collection process
has been exhausted. At June 30, 1997 and December 31, 1996, impaired loans
were measured based on the present value of future cash flows discounted at
the loan's effective rate, the loan's observable market price, or the fair
value of collateral if the loan is collateral-dependent. Impaired loans at
June 30, 1997 were $1,568,000 (all of which were also nonaccrual loans), on
account of which the Company had made provision to the allowance for loan
losses of $226,000.
Except for loans that are disclosed above, there were no assets as of June
30, 1997, where known information about possible credit problems of borrower
causes management to have serious doubts as to the ability of the borrower to
comply with the present loan repayment terms and which may become nonperforming
assets. Given the magnitude of the Company's loan portfolio, however, it is
always possible that current credit problems may exist that may not have been
discovered by management.
ALLOWANCE AND PROVISIONS FOR LOAN LOSSES
The Company maintains an allowance for loan losses at a level considered
by management to be adequate to cover the inherent risks of loss associated
with its loan portfolio under prevailing and anticipated economic conditions.
In determining the adequacy of the allowance for loan losses, management
takes into consideration growth trends in the portfolio, examination of
financial institution supervisory authorities, prior loan loss experience for
the Company, concentrations of credit risk, delinquency trends, general
economic conditions, the interest rate environment and internal and external
credit reviews. In addition, the risks management considers vary depending
on the nature of the loan. The normal risks considered by management with
respect to agricultural loans include the fluctuating value of the
collateral, changes in weather conditions and the availability adequate water
resources in the Company's local market area. The normal risks considered by
management with respect to real estate construction loans include fluctuation
in real estate values, the demand for improved commercial and industrial
properties and housing, the availability of permanent financing in the
Company's market area and borrowers' ability to obtain permanent financing.
The normal risks considered by management with respect to real estate
mortgage loans include fluctuations in the value of real estate.
Additionally, the Company relies on data obtained through independent
appraisal for significant properties to determine loss exposure on
nonperforming loans.
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 allowance for loan losses increased from $1,621,000 at December 31,
1994 to $2,268,000 at June 30, 1997, but it decreased as a percentage of
nonperforming loans from 232% to 119%, respectively, as of those dates.
In the second quarter of 1997, the Company made a provision for loan
losses of $3,236,000 and charged off a real estate development loan with a
balance of $3,458,000. After giving effect to the provision and the
charge-off, the allowance for loan losses was $2,268,000 or 1.16% of total
loans at June 30, 1997. The write-off substantially reduced the Company's
nonperforming assets.
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 provisions for loan losses in the first six months
of 1997 of $3,476,000 compared with $310,000 in the same period of 1996. The
increase was due to the implementation of a new methodology for determining
its allowance for loan losses (mentioned below) and the need to replenish the
allowance following the charge-off of a real estate development loan with a
balance of $3,458,000. See "--Nonperforming Assets." The Company made
provisions to the allowance of $1,513,000 in the year ended December 31, 1996
compared with $228,000 in 1995 and none in 1994. The increase in loan loss
provisions in 1996 was primarily due to increased reserves established for
the same commercial real estate development loan, reserves required for a
portfolio of lease receivables purchased in 1994 and, to a lesser extent,
reserves to support the general loan growth of the Company.
The Company's charge-offs, net of recoveries, were $4,000,000 for the six
months ended June 30, 1997 compared with $107,000 for the same six months in
1996. The increase in charge-offs was primarily due to the charge-off of
$3,458,000 for the real estate development loan previously mentioned and
$275,000 taken on the portfolio of lease receivables. The Company's charge-
offs, net of recoveries, were $570,000 in the year ended December 31, 1996
compared with $148,000 in 1995 and $126,000 in 1994. The increase in net
charge-offs for the year ended December 31, 1996 was primarily due to the
loss recognized on the foreclosure of a real estate secured agricultural
loan, the foreclosed real estate was sold in the second quarter of 1997.
9
As of June 30, 1997, the allowance for loan losses was $2,268,000 or
1.16% of total loans outstanding, compared with $2,792,000 or 1.52% of total
loans outstanding as of December 31, 1996 and $1,701,000 or 1.27% of total
loans outstanding as of December 31, 1995.
From 1992 to 1995, loan losses were relatively low and stable. In 1995
and 1996, the Company experienced loan problems and made provisions at levels
not previously experienced. In response to regulatory concerns over the
Bank's level of nonperforming assets, in March 1997, the Board of Directors
of County Bank adopted resolutions under which the Bank committed, among
other things, to maintain an adequate allowance for loan losses, to conduct a
review prior to and at each quarter of the adequacy of the allowance and to
document the basis for changes in the allowance.
As a result, the Company concluded that its historical method of determining
the appropriate levels for its allowance and provisions for loan losses
should be revised. The Company therefore adopted a new methodology of
determining the appropriate level of its allowance for loan losses. This
method, sometimes known as a migration analysis, applies relevant risk
factors to the entire loan portfolio, including nonperforming loans. The
methodology is based, in part, on the Bank's loan grading and classification
system. The Bank grades its loans through internal reviews and periodically
subjects loans to external reviews which then are assessed by the Bank's
audit committee. Credit reviews are performed on a monthly basis and the
quality grading process occurs on a quarterly basis. The "migration" of loans
from grade to grade is then tracked to help predict future losses and thus
more accurately set allowance levels. Risk factors applied to the performing
loan portfolio are based on the Company's past loss history considering the
current portfolio's characteristics, current economic conditions and other
relevant factors. General reserves are applied to various categories of
loans at percentages ranging up to 1.5% based on the Bank's assessment of
credit risks for each category. Risk factors are applied to the carrying
value of each classified loan: (i) loans internally graded "Watch" or
"Special Mention" carry a risk factor from 1.0% to 2.0%; (ii) "Substandard"
loans carry a risk factor from 3% to 40% depending on collateral securing the
loan, if any; (iii) "Doubtful" loans carry a 50% risk factor; and (iv) "Loss"
loans are charged off 100%. In addition, a portion of the allowance is
specially allocated to identified problem credits. The analysis also
includes reference to factors such as the delinquency status of the loan
portfolio, inherent risk by type of loans, industry statistical data,
recommendations made by the Company's regulatory authorities and outside loan
reviewers, and current economic environment. Important components of the
overall credit rating process are the asset quality rating process and the
internal loan review process.
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. In addition, there can be no
assurance that future economic or other factors will not adversely affect the
Company's borrowers, or that the Company's asset quality may deteriorate
through rapid growth, failure to enforce underwriting standards, failure to
maintain appropriate underwriting standards, failure to maintain an adequate
number of qualified loan personnel, failure to identify and monitor potential
problem loans or for other reasons, and thereby cause loan losses to exceed
the current allowance.
Interest income on loans on nonaccrual status during the six months ended
June 30, 1997, and the year ended December 31, 1996, that would have been
recognized if the loans had been current in accordance with their original
terms was approximately $223,000 and $497,000, respectively. In 1995, 1994,
1993 and 1992, the amounts of such interest income was not material.
The following table set forth an analysis of the allowance for loan losses
for the period indicated.
JUNE 30, DECEMBER 31,
-------------------- ----------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 2,792 $ 1,701 $ 1,701 $ 1,621 $ 1,747 $ 1,616 $ 1,699
Due to acquisition - 160 148 - - - -
Provision for possible loan losses 3,476 310 1,513 228 - 254 162
Loans Charged off
Commercial and agricultural 403 - - - - - -
Real estate - construction 3,456 - - - - - -
Consumer 278 27 140 63 42 83 109
--------- --------- --------- --------- --------- --------- ---------
Total Charge-off 4,137 128 658 223 248 300 359
Recoveries
Commercial and agricultural 103 16 27 66 99 145 87
Real estate - construction - - - - 8 - -
Real estate - mortgage - - - - - - -
Consumer 34 5 61 9 15 32 27
--------- --------- --------- --------- --------- --------- ---------
Total Recoveries 137 21 88 75 122 177 114
--------- --------- --------- --------- --------- --------- ---------
Net Charge-offs 4,000 107 570 148 126 123 245
--------- --------- --------- --------- --------- --------- ---------
Balance at end of period $ 2,268 $ 2,064 2,792 1,701 1,621 1,747 1,616
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Average loans outstanding, gross $ 188,208 $ 137,358 $ 157,098 $ 120,620 $ 110,690 $ 102,236 $ 91,458
Total loans at end of
period, gross $ 195,360 $ 164,052 $ 183,247 $ 133,736 $ 113,600 $ 107,124 $ 97,335
Net charge-offs / average
loans outstanding 2.13% 0.08% 0.36% 0.12% 0.11% 0.12% 0.27%
Allowance at end of
period / loans outstanding 1.16 1.26 1.52 1.27 1.43 1.63 1.66
Allowance / nonperforming loans 119.06 33.91 50.14 35.07 231.90 161.31 133.66
10
INVESTMENT PORTFOLIO
The following table sets forth the fair value of securities available
for sale and the book and market values of securities held for maturity at
the dates indicated.
AT DECEMBER 31,
---------------------------------------------------------------------
AT JUNE 30, 1997 1996 1995 1994
---------------- -------- -------- --------
BOOK MARKET BOOK MARKET BOOK MARKET BOOK MARKET
---- ------ ---- ------ ---- ------ ---- ------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
U.S.Treasury and U.S. Government
agency $ 5,673 $ 17,711 $ 22,521 $ 20,593
State and political subdivisions 3,379 4,271 4,297 -
Mortgage-backed securities 32,634 20,751 17,932 -
Other Securities 1,061 645 552 487
-------- ---------- ---------- --------
Total $ 42,747 $ 43,378 $ 45,302 $ 21,080
-------- ---------- ---------- --------
-------- ---------- ---------- --------
HELD TO MATURITY
U.S. Treasury and U.S. Government
agency $11,451 $11,324 - - $ 8,175 $ 7,989
State and political subdivisions - - - 6,571 6,567
-------- -------- ---------- ---------- --------- --------
Total $11,451 $11,324 - - $ 14,746 $ 14,556
-------- -------- ---------- ---------- --------- --------
-------- -------- ---------- ---------- --------- --------
The following table sets forth the maturities of the Company's investment
securities at June 30, 1997 and the weighted average yields of such
securities calculated on the basis of the cost and effective yields based on
the scheduled maturity of each security. Maturities of mortgage-backed
securities are stipulated in their respective contracts. However, actual
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call prepayment
penalties. Yields on municipal securities have not been calculated on a tax
equivalent basis.
11
AT JUNE 30, 1997
--------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN 10 YEARS AFTER 10 YEARS TOTAL
--------------- ----------------- --------------- --------------- -----
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
------ ----- ------ ----- ------ ----- ------ ----- ------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
U.S. Treasury and U.S. Government agency $- - $4,355 6.36% $998 7.12% $320 7.42% $5,673
State and political subdivisions 276 5.03% 2,799 5.38 304 4.22 - - 3,379
Mortgage-backed securities 168 7.21 375 8.62 530 8.33 31,561 7.21 32,634
Equity securities 1,061 - - - 1,061
------ ------ ------ ------ -------
Total $1,505 $7,529 $1,832 $31,881 $42,747
------ ------ ------ ------ -------
------ ------ ------ ------ -------
HELD TO MATURITY
U.S. Treasury and U.S. Government agency - - - - $7,051 6.94% $4,400 7.41% $11,451
------ ----- ------ ----- ------ ----- ------ ----- -------
------ ----- ------ ----- ------ ----- ------ ----- -------
In the above table, mortgage-backed securities are shown repricing at
the time of maturity rather than in accordance with their principal
amortization schedules. The Company does not own securities of a single
issuer whose aggregate book value is in excess of 10% of its total equity.
LOAN PORTFOLIO
The following table shows the composition of the Company's loan
portfolio at the dates indicated.
AT JUNE 30, AT DECEMBER 31,
----------- ------------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
--------------
Commercial $32,744 $27,857 $20,374 $15,229 $16,896 $24,094
Agricultural 39,886 43,929 45,187 40,598 38,029 32,997
Real Estate - Construction 9,315 13,923 12,006 11,726 9,143 7,131
Real Estate - Mortgage 67,181 57,098 42,128 34,743 32,984 21,338
Consumer 46,234 40,440 14,039 11,304 10,072 11,775
--------- --------- --------- --------- --------- ---------
Total $195,360 $183,247 $133,734 $113,600 $107,124 $97,335
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
12
The following tables show the maturity distribution of the loan
portfolio at June 30, 1997, and December 31, 1996, and the loan portfolio's
sensitivity to changes in interest rates.
AT JUNE 30, 1997
-------------------------------------------
WITHIN 1 AFTER 1 BUT AFTER 5
-------- ----------- -------
YEAR WITHIN 5 YEARS YEARS TOTAL
------- -------------- ------- --------
Commercial and agricultural
Loans with floating interest rates $43,556 $13,358 $2,535 $59,449
Loans with fixed interest rates 6,565 5,159 1,457 13,181
------- ------- ------- -------
Subtotal 50,121 18,517 3,992 72,630
------- ------- ------- -------
Real Estate - construction
Loans with floating interest rates 4,143 2,490 962 7,595
Loans with fixed interest rates 222 953 545 1,720
------- ------- ------- -------
Subtotal 4,365 3,443 1,507 9,315
------- ------- ------- -------
Real estate - mortgage 5,353 39,469 22,359 67,181
Consumer 25,105 20,166 963 46,234
------- ------- ------- -------
Total $84,944 $81,595 $28,821 $195,360
------- ------- ------- -------
------- ------- ------- -------
AT DECEMBER 31, 1996
-------------------------------------------
WITHIN 1 AFTER 1 BUT AFTER 5
-------- ----------- -------
YEAR WITHIN 5 YEARS YEARS TOTAL
------- -------------- ------- --------
Commercial and agricultural
Loans with floating interest rates $39,515 $20,150 $ 4,337 $ 64,002
Loans with fixed interest rates 630 6,116 1,038 7,784
------- -------- ------- --------
Subtotal 40,145 26,266 5,375 71,786
------- -------- ------- --------
Real estate - construction
Loans with floating interest rates 5,419 4,528 2,542 12,489
Loans with fixed interest rates 674 32 728 1,434
------- -------- ------- --------
Subtotal 6,093 4,560 3,270 13,923
------- -------- ------- --------
Real estate - mortgage 4,384 39,845 12,809 57,098
Consumer 3,909 33,192 3,339 40,440
------- -------- ------- --------
Total $54,531 $103,863 $24,793 $183,247
------- -------- ------- --------
------- -------- ------- --------
13
The following table summarizes a breakdown of the allowance for loan
losses by loan category and the allocation in each category as a percentage
of total loans in each category at the dates indicated:
June 30 December 31,
---------------- ------------------------------------
1997 1996 1995
---------------- ----------------- ----------------
Amount % Amount % Amount %
------- ----- ------- ------ ------- -----
Commercial, financial and agricultural $1,101 1.52% $ 840 1.17% $944 1.44%
Real estate - construction 265 2.84% 1,421 10.21% 708 5.90%
Real estate - mortgage 556 0.83% 219 0.38% - -
Consumer 346 0.75% 312 0.77% 49 0.35%
------- ----- ------- ------ ------- -----
Total $ 2,268 1.16% $ 2,792 1.52% $ 1,702 1.27%
------- ------- -------
------- ------- -------
14
OTHER INTEREST-BEARING ASSETS
The following table relates to other assets not disclosed above for the
dates indicated. This item consists of a salary continuation plan for the
Company's executive management and deferred retirement benefits for
participating board members. The plan is linked with the universal life
insurance policies for the salary continuation plan. Income from these
policies is reflected in noninterest income.
CASH 1997 1996 1995 1994
- ---- ------- ------- ------- -------
Cash surrender value of life insurance $ 3,210 $ 3,314 $ 1,290 $ 288
EXTERNAL FACTORS AFFECTING ASSET QUALITY
In the second quarter of 1997, the Company made a provision for
loan losses of $3,236,000 and charged off a real estate development loan with
a balance of $3,458,000. After giving effect to the provision and the
charge-off, the allowance for loan losses was $2,268,000 or 1.16% of total
loans at June 30, 1997. The write-off substantially reduced the Company's
nonperforming assets. At June 30, 1997, nonperforming assets totaled
$2,322,000 or .79% of total assets, nonperforming loans totaled $1,905,000 or
.98% of total loans and the allowance for loan losses totaled 119.06% of
nonperforming loans. No assurance can be given that nonperforming loans will
not increase or that the allowance for loan losses will be adequate to cover
losses inherent in the loan portfolio.
The economy in the Company's primary market area and the real estate
market in particular have suffered from the effects of a recession in the
first half of this decade. Some of the effects of the recession were
declines in property values and decreased demand for goods and services. In
addition, declines in defense and military expenditures resulted in a base
closure in the Company's service area. These conditions have had an adverse
effect on the ability of certain borrowers to perform under the original
terms of their obligations to the Company. The Company's lending focus
includes loans secured by real estate and loans to the agricultural industry.
Both of these types of loans have been adversely affected by market
conditions. The Company's level of nonperforming loans increased from
$699,000 at December 31, 1994, to $1,905,000 at June 30, 1997, and was as
high as $7,034,000 at December 31, 1996. The allowance for loan losses
increased from $1,621,000 at December 31, 1994 to $2,268,000 at June 30,
1997, but it decreased as a percentage of nonperforming loans from 232% to
119%, respectively, as of those dates.
California is prone to earthquakes and other natural disasters, including
floods and droughts. As recently as January of 1997, parts of the Company's
service area experienced severe flooding. The Company's properties and
substantially all of the real and personal property securing loans in the
Company's portfolio are located in California. Its agricultural customers
are dependent on consistent supplies of water for irrigation purposes. The
Company faces the risk that many of its borrowers may experience uninsured
property damage, sustained interruption of their businesses or loss of their
jobs from earthquakes, floods, droughts and other disasters. As a result of
these events, borrowers may be unable to repay their loans in accordance with
their terms and the collateral for such loans may decline significantly in
value. No assurance can be given that the allowance for loan losses will be
adequate to cover losses resulting from such natural disasters.
LIQUIDITY AND CAPITAL RESOURCES
In order to maintain adequate liquidity, the Company must have sufficient
resources available at all times to meet its cash flow requirements. The need
for liquidity in a banking institution arises principally to provide for
deposit withdrawals, the credit needs of its customers and to take advantage
of investment opportunities as they arise. A company may achieve desired
liquidity from both assets and liabilities. The Company considers cash and
deposits held in other banks, federal funds sold, other short term
investments, maturing loans and investments, payments of principal and
interest on loans and investments and potential loan sales as sources of
asset liquidity. Deposit growth and access to credit lines established with
correspondent banks and market sources of funds are considered by the Company
as sources of liability liquidity.
The Company reviews its liquidity position on a regular basis based
upon its current position and expected trends of loans and deposits. These
assets include cash and deposits in other banks, available-for-sale
securities and federal funds sold. The Company's liquid assets totaled
$64,202,000, $63,196,000 and $64,269,000 on June 30, 1997, December 31, 1996,
and December 31, 1995, respectively, and constituted 21.9%, 23.8% and 30.7%,
respectively, of total assets on those dates. Liquidity is also affected by
the collateral requirements of its public deposits and certain borrowings.
Total pledged securities were $21,963,000 at June 30, 1997 compared with
$16,678,000 at December 31, 1996 and $18,157,000 at December 31, 1995.
Although the Company's primary sources of liquidity include liquid
assets and a stable deposit base, the Company maintains lines of credit with
the Federal Reserve Bank of San Francisco, Federal Home Loan Bank of San
Francisco and Pacific Coast Bankers' Bank aggregating $12,822,000, of which
$5,105,000 was outstanding as of June 30, 1997 and $105,000 was outstanding
as of December 31, 1996. Management believes that the Company maintains
adequate amounts of liquid assets to meet its liquidity needs. The Company's
liquidity might be insufficient if deposit withdrawals were to exceed
anticipated levels. Deposit withdrawals can increase if a company experiences
financial difficulties or receives adverse publicity for other reasons, or if
its pricing, products or services are not competitive with those offered by
other institutions.
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 through retained earnings. The Company's shareholders'
equity decreased by $10,000 or less than 1% from December 31, 1996 to June
30, 1997. The decrease was attributable to a net loss for the six months
ended June 30, 1997 of $430,000, offset in part by an increase as a result of
stock option exercises of $133,000, stock purchases pursuant to the Company's
benefit plans of $208,000 and $96,000, and as a result of increases in
unrealized gains on investment securities. The Company's shareholders' equity
increased $5,881,000 in 1996. The increase in 1996 was the result issuance of
$3,969,000 in common stock in the acquisition of Town & Country, net income
for the year of $2,009,000, $208,000 in payments upon the exercise of stock
options and $162,000 in payments for the issuance of shares pursuant to
employee benefit plans. The increases were partially offset by a net
reduction in the net unrealized value in the available-for-sale investment
portfolio of $381,000 and cash payments of $86,000 paid in lieu of fractional
shares on stock dividends and for cash dividends.
Federal regulations establish guidelines for calculating risk-adjusted
capital ratios. These guidelines establish a systematic approach of assigning
risk weights to bank assets and off-balance sheet items making capital
requirements more sensitive to differences in risk profiles among banking
organizations. Under these regulations, banks and bank holding companies are
required to maintain a risk-based capital ratio of 8.0%; that is, "Tier 1"
plus "Tier 2" capital must equal at least 8% of risk-weighted assets plus
off-balance sheet items, and Tier 1 capital (primarily shareholders' equity)
must constitute at least 50% of qualifying capital. Tier 1 capital consists
primarily of shareholders' equity excluding good will, and Tier 2 capital
includes subordinated debt and, subject to a limit of 1.25% of risk-weighted
assets, the allowance for loan losses. It is the Company's intention to
maintain risk-based capital ratios at levels characterized as "well
capitalized" for banking organizations: Tier 1 risk-based capital of 6% or
above and total risk-based capital at 10% or above. As of June 30, 1997 and
December 31, 1996 the Company had Tier 1 risk-based capital ratios of 7.99%
and 9.04%, respectively, and total risk-based capital ratios of 8.97% and
10.20%, respectively. The decreases were due primarily to the increased loan
loss reserve provisions in the second quarter of 1997.
In addition, regulators have adopted a minimum leverage capital ratio
standard. This standard is designed to ensure that all financial
institutions, 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 institutions may be as low as 3%;
however, regulatory agencies have stated that most institutions should
maintain ratios at least 1 to 2 percentage points above the 3% minimum. It
is the Company's intention to maintain the leverage ratio for County Bank
above the 3% minimum for "well capitalized" banks. As of June 30, 1997 and
December 31, 1996, the Company's leverage capital ratio equaled 6.32% and
7.39%, respectively. The decrease was due primarily to the increased loan
loss reserve provisions in the second quarter of 1997.
In addition, in March 1997, in response to regulatory concerns about the
Bank's level of nonperforming assets, the Bank's Board of Directors adopted a
resolution to maintain a ratio of shareholder's equity to total assets of
6.75% upon reducing its loans classified as "Substandard" or "Doubtful" as of
December 2, 1996, from $11,800,000 to no more than $8,555,000 by June 30,
1997, and to maintain a ratio of at least 6.50% upon reducing such loans to
$7,800,000 by December 31, 1997.
At June 30, 1997, loans that were classified "Substandard" and "Doubtful"
as of December 2, 1996 were reduced to $4.6 million, below both the $8.6
million target level for June 30, 1997 and the $7.8 million target level for
December 31, 1997. Accordingly, the Bank's commitment is to maintain a total
equity to total assets ratio (based on period-end assets rather than average
assets) of no less than 6.50%. However, in the second quarter of 1997, the
Company incurred losses primarily as a result of making provisions of
$3,236,000 to the allowance for loan losses, which reduced the Bank's ratio
of total equity to total assets at June 30, 1997 to 6.15%, which was below
the 6.50% commitment. The Bank has discussed this situation with its
regulators, which have agreed to forbear from taking any action against the
Bank as a result of its failure to meet the capital ratio commitment. The
regulators have not waived or given forbearance on this commitment for the
Bank at September 30, 1997. No assurances can be given that any such waiver
or forbearances will be given in the future should the Ban fail to meet its
commitments in the future.
Failure to meet minimum capital requirements can trigger mandatory and
possibly additional discretionary actions by the regulators that, if
undertaken, could have a material effect on the Company's financial
statements and operations.
DEPOSITS
The following table sets forth the average balance and the average rate
paid for the major categories of deposits for the dates indicated.
For the
For the Year Ended December 31,
Six Months Ended ---------------------------------------------------------------------
June 30, 1997 1996 1995 1994
-------------------- -------------------- -------------------- ------------------
Amount % Amount % Amount % Amount %
--------- ------ --------- ------ --------- ------ --------- ------
(Dollars in thousands)
Noninterest bearing demand $ 32,166 - % $ 30,549 - % $ 26,478 -% 25,326 - %
Interest-bearing demand 32,768 0.91% $29,376 0.91% $ 26,192 0.91% 25,126 0.94%
Savings 111,588 4.08% 104,938 4.15% 91,509 4.60% 66,517 3.45%
Time deposits under $100,000 52,497 5.41% $ 34,408 5.26% 19,073 4.84% 27,259 3.82%
Time deposits $100,000 and over 10,808 5.56% 6,586 5.43% 6,358 5.17% 7,160 3.78%
--------- ----- --------- ----- --------- ----- --------- -----
Total Deposits $ 241,828 3.44% $ 205,857 3.87% $ 169,610 3.98% $ 151,388 3.05%
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
MATURITIES OF TIME CERTIFICATES OF DEPOSIT OF $ 100,000 OR MORE
Maturities of time certificates of deposit of $100,000 or more
outstanding at June 30, 1997 and December 31, 1996 are summarized as follows:
At June 30, 1997 At December 31, 1996
---------------- --------------------
(Dollars in thousands)
Three months or less $ 3,301 $ 2,840
Over three to six months 4,703 2,146
Over six to twelve months 9,500 3,383
Over twelve months 4,815 3,178
---------------- --------------------
Total $22,319 $ 11,547
---------------- --------------------
---------------- --------------------
15
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
At the annual meeting of stockholders held on May 8, 1997 the election of
directors was uncontested and all of management's nominees were elected as
directors.
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Number Description
- -------------- -----------
The following is a list of all exhibits required by Item 601 of Regulation
S-K to be filed as part of this Form 10-Q:
EXHIBIT
- -------------------------------------------------------------------------------
Exhibit
Number Exhibit
- -------------------------------------------------------------------------------
2.1 Branch Purchase and Assumption Agreement dated June 25,
1997 between County Bank and Bank of America (incorporated by
reference from exhibits filed in registration statement on
Form S-2, registration no. 333-31193 filed with the Commission
on July 14, 1997).
3.1 Articles of Incorporation (filed as Exhibit 3.1 of the
Company's September 30, 1996 Form 10Q filed with the SEC
on or about November 14, 1996).
3.2 Bylaws (filed as Exhibit 3.2 of the Company's
September 30, 1996 Form 10Q filed with the SEC on or
about November 14, 1996).
10.1 Lease Agreement for Downtown Merced Branch (filed as
exhibit 10.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference).
10.2 Lease Agreement for Administration Offices (filed as
exhibit 10.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference).
10.3 Lease Agreement Los Banos Branch (filed as exhibit
10.3 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.4 Architectural Agreement for Administrative Office
(filed as exhibit 10.4 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated
herein by reference).
10.5 Lease Agreement for Sonora Branch (filed as exhibit
10.5 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.6 1992 Stock Option Plan (filed as exhibit 10.6 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference).
10.7 Agreement and Plan of Acquisition dated as of March 22,
1996, between the Company and Town & Country Finance and
Thrift Company (filed as exhibit 2.1 to the Company's
Registration Statement on Form S-4 filed on April 3, 1996
(Registration No. 333-03174) and incorporated herein by
reference).
10.8 Employment Agreement between Thomas T. Hawker and
County Bank (filed as exhibit 10 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
16
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: August 12, 1997
17